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F ederal R eserv e Bank
O F DALLAS
ROBERT
AND
February 18, 1993
D. M c T E E R , J R .
p re s id e n t
C H IE F E X E C U T IV E
DALLAS, TEXAS 75222
O F F IC E R
Notice 93-24
TO:
The Chief Executive O f f i c e r of each
member bank and o t h e r s concerned in
t h e Eleventh Federal Reserve D i s t r i c t
SUBJECT
E lig ib le S e c u ritie s A c tiv it ie s of
S e c t io n 20 S u b s i d i a r i e s o f Bank Holding Companies
DETAILS
The Federal Reserve Board has approved an a l t e r n a t i v e method t o
a d j u s t t h e 10 p e r c e n t revenue t e s t l i m i t i n g i n e l i g i b l e s e c u r i t i e s a c t i v i t i e s
o f S e c t io n 20 s u b s i d i a r i e s of bank holding companies. The a l t e r n a t i v e method
i s e f f e c t i v e immediately and i s designed t o accommodate f o r changes in t h e
l e v e l and s t r u c t u r e o f i n t e r e s t r a t e s s i n c e t h e revenue t e s t was l a s t examined
in September 1989 and t o p re s e r v e t he same l e v e l of a c t i v i t y .
Se c ti on 20 o f t h e G1 ass -St ea gal l Act p r o h i b i t s a member bank from
being a f f i l i a t e d with a company t h a t i s "engaged p r i n c i p a l l y " in u n d er wr it i ng
and d e a l i n g in bank i n e l i g i b l e s e c u r i t i e s . The c u r r e n t t e s t r e g a r d i n g whether
a company i s engaged p r i n c i p a l l y in such a c t i v i t i e s i s based on t h e company’ s
revenue earned from i n e l i g i b l e and t o t a l s e c u r i t i e s a c t i v i t i e s . The a l t e r n a
t i v e t e s t w i l l index revenue to i n t e r e s t r a t e changes, comparing c u r r e n t
i n t e r e s t r a t e s f o r v a ri o u s p o r t f o l i o d u r a t i o n s , with r a t e s o f c orre spondi ng
d u r a t i o n s in September 1989. A company can e l e c t t o use e i t h e r t h e o r i g i n a l
10 p e r c e n t revenue s t an da rd or t h e a l t e r n a t i v e indexed revenue t e s t f o r
purposes o f c a l c u l a t i n g compliance.
ATTACHM
ENT
Attached i s a copy o f t h e Board’ s n o t i c e and th e d i s s e n t i n g s t a t e
ment o f Governors Mullins and Angel 1.
M
ORE INFORMATION
For more i nf o r m at i o n, p l e a s e c o n t a c t Basil Asaro a t (214) 922-6066.
For a d d i t i o n a l c opies o f t h i s Bank’ s n o t i c e , p l e a s e c o n t a c t t h e Publi c A f f a i r s
Department a t (214) 922-5254.
S i n c e r e l y y o u rs ,
'fe te /' B.
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intraslate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE SYSTEM
Order Approving Modifications to Section 20 Orders To Allow
Use of Alternative Index Revenue Test To Measure Compliance with
the 10 Percent Limit on Bank-Ineligible Securities Activities
Beginning in 1987 the Board has approved, under section
4(c)(8) of the Bank Holding Company Act (12 U.S.C. § 1843(c)(8)),
applications by a number of bank holding companies to establish
separate subsidiaries ("section 20 subsidiaries") to underwrite
and deal in securities that a bank may not underwrite or deal in
directly ("ineligible s e c u r i t i e s " ) I n
order to ensure
compliance with section 2 0 of the Glass-Steagall Act, which
prohibits a member bank from being affiliated with a company that
is "engaged principally" in underwriting and dealing in
s e c u r i t i e s , the Board found that a section 20 subsidiary's
underwriting and dealing in ineligible securities may not be a
substantial activity of the subsidiary.
In particular, the Board
provided that the amount of revenue the subsidiary may derive in
any quarter from such ineligible securities activities may not
exceed 10 percent of the total revenue of the subsidiary for that
quarter, when revenue is averaged over a rolling 8-quarter
period.
I.
PROPOSED MODIFICATIONS TO THE 10 PERCENT REVENUE LIMIT
On July 23, 1992, the Board requested public comment on
two methods for creating an alternative to the 10 percent revenue
E.g . . Citicorp. 73 Federal Reserve Bulletin 473 (1987);
J .P .Morgan & C o .. 75 Federal Reserve Bulletin 192 (1989). As of
December 31, 1S92, 30 bank holding companies are authorized under
section 4(c)(8) to underwrite and deal in ineligible securities.
12 U.S.C. § 377.
test.The
Board took this action in response to historically
unusual changes in the level and structure of interest rates,
which have distorted the revenue test as a measure of the
relative importance of ineligible securities activities in a
manner that was not anticipated when the Board established the 10
percent limit in September 1989.
The Board noted that short-term
interest rates had declined sharply in recent months but that
there had been very little corresponding decline in longer term
rates, producing an unusually wide difference between short- and
long-term rates.
In its request for public comment, the Board noted that
since eligible securities-/ tend to be shorter term than
ineligible securities, recent revenue data suggested that the
current unusually sharp increase in the steepness of the yield
curve has caused the revenue earned by at least some section 20
subsidiaries from holding eligible securities to decline in
relation to ineligible revenue, even though the relative
proportion of eligible and ineligible securities activities beihg
conducted by these subsidiaries has remained essentially
unchanged.
Thus, the Board found that this decline in the
eligible revenue base of section 20 subsidiaries could be
attributed to extraordinary factors beyond the control of the
57 Federal Register 33507.
-/ Bank-eligible or "eligible" securities are those
securities that a national bank may underwrite or deal in
pursuant to 12 U.S.C. S 24(7), and include obligations of the
United States, and obligations of states and their political
subdivisions.
subsidiary rather than to an increase in the relative importance
of its ineligible activities.
Accordingly, the Board stated that
the results produced by the revenue test, due to their dependence
on interest rates, may not be as reliable as the Board had
anticipated when the 10 percent limit was established.
The Board proposed two alternatives to the current
revenue test designed to take into account the current unforeseen
alteration in historic interest rate relationships.
First, the
Board proposed that current interest and dividend revenue from
eligible and ineligible securities could be adjusted to
approximate the revenue that would have been derived if interest
rate conditions were those that existed in September 1989.
Under
this proposed modification, current interest and dividend revenue
for each quarter would be increased or decreased by an adjustment
factor provided by the Board according to the average duration of
a subsidiary's eligible and ineligible securities portfolios.
The adjustment factor would represent the ratio of interest rates
on Treasury securities in September 1989 to average interest
rates on Treasury securities in the most recent quarter for
obligations having that particular duration.
On July 29, 1992,
as supplemental information to the request for public comment,
the Board published a table of adjustment factors based on
interest rates prevailing in the second quarter of 1992 that
could be used under the proposed indexing method.
Second, the Board proposed an alternative test under
which compliance with the current 10 percent limit would be
computed based on assets rather than revenue.
II.
ADOPTION OF ALTERNATIVE INDEXED REVENUE TEST
After review of relevant information, the Board has
decided to modify its section 20 orders to allow section 20
subsidiaries to measure compliance with the "engaged principally"
test in section 20 on the basis of an indexed revenue test, as
described in the request for public comment.
To use the indexed
revenue test as an alternative to the current revenue test
section 20 subsidiaries must notify the Federal Reserve of such
an election and may not alter that election for two years.
Compliance with the Glass-Steaaall Act
The Board believes that measuring compliance with the
"engaged principally" standard based on a test that indexes
revenues according to interest rate conditions prevailing when
the current 10 percent revenue test was adopted is fully
consistent with section 20 of the Glass-Steagall Act.
As noted
above, the Board in 1987 concluded that a bank affiliate would
not be "engaged principally" in ineligible securities activities
for purposes of section 20 if those activities are not
Under the proposed asset-based test, a section 20
subsidiary would be viewed as in compliance with section 2 0 for
any quarter if the average daily assets held in connection with
underwriting and dealing in ineligible securities for that
quarter, when added to the average daily assets held in
connection with ineligible securities activities for the previous
seven quarters, does not exceed 10 percent of the average daily
total assets of the subsidiary for that quarter and the previous
seven quarters.
-
5
-
"substantial" relative to other activities of the subsidiary,
i.e.. do not exceed 10 percent of the subsidiary's total
a c t i v i t i e s . T h i s view was upheld by the courts.2/
Although the statutorily-imposed "engaged principally"
limitation on ineligible activities represents a "hard and fast
limit" that may not be administratively modified,£/ nothing in
section 20 itself dictates what criteria must be used to
determine compliance with that limit.
Indeed, the statutory term
"engaged principally" is "intrinsically ambiguous."-/
Thus,
the statute gives the Board discretion in selecting the criteria
for determining when ineligible securities activities become
substantial.
In the Board's view, the proposed indexed revenue test
is consistent with the language and purposes of section 20 and is
a permissible means to measure compliance with the "engaged
principally" standard set forth in that section.
When the
revenue limit was initially established, the Board found that
revenue is an appropriate factor for assessing whether a section
£/ Bankers Trust New York Corp.. 73 Federal Reserve
Bulletin 139, 140-45 (1986); Citicorp, supra. 73 Federal Reserve
Bulletin at 481-86.
- t Securities Industry Association v. Board of Governors.
839 F.2d 47, 62-67 (2d Cir.), cert, denied. 486 U.S. 1059 (1988);
Securities Industry Association v. Board of Governors. 847 F.2d
890, 894-99 (D.C. Cir. 1988).
-/ Securities Industry Association v. Board of Governors.
839 F .2d at 68.
-/ I d .. at 63; see Securities Industry Association v. Board
of Governors. 847 F.2d at 894.
-
6
-
20 subsidiary is engaged principally in ineligible activities
because revenue is an "objective and meaningful measure of the
importance of the activity to the enterprise as a whole and
reflects the level of risk involved in the activity."^/
As
noted above, the 10 percent revenue limit has been judicially
upheld as a reasonable interpretation of the language of section
20.
As explained below, the proposed indexing modification is
designed to treat current interest and dividend revenue as if
such revenue had been earned under interest rate conditions that
prevailed in September 1989, when the existing 10 percent revenue
limit was established.
There can be no reasonable dispute that
the 10 percent revenue limit, as applied under those interest
rate conditions, is consistent with the terms and purposes of the
"engaged principally" test.
Indexed Revenue Test as an Appropriate Measure of Substantial
Activity
The Board finds that the proposed indexed revenue test
is a reasonably reliable method for measuring the substantiality
of ineligible securities activities in light of the current
highly unusual interest rate structure.
First, it is not
disputed that the size of the recent decline in short-term
interest rates as compared to the decline in long-term rates is
historically significant, and has resulted in a steepness of the
yield curve that is highly unusual.
The comments also confirm
that current interest rate conditions have, at least for some
Bankers Trust New York Corporation. 73 Federal Reserve
Bulletin at 145; Citicorp. 73 Federal Reserve Bulletin at 484.
-
7
-
section 20 subsidiaries, caused an artificial decline in the
eligible revenue base and that this in turn has made the revenue
test a less reliable indicator of the relative mix of eligible
and ineligible activities than the Board had anticipated when the
10 percent limit was adopted in 1989.
The commenters also do not contest that the method
proposed by the Board of indexing eligible and ineligible
revenue, which adjusts revenue based on comparable rates on
Treasury securities based for categories of average portfolio
duration, will reasonably approximate what current revenue would
be if the interest rate conditions prevailing in 1989 exist
during the current quarter.
For this reason, the Board finds no merit in the
allegations of commenter the Securities Industry Association (the
"SIA") that the indexed revenue test would permit the ineligible
securities activities of section 20 subsidiaries to become
substantial in violation of section 20.
Rather than allowing the
relative level of ineligible securities activities to increase,
as the SIA asserts, the index formula represents a more refined
method for measuring whether a section 20 subsidiary has exceeded
the level of ineligible activity that the Board believed to be
substantial when it set the 10 percent limit . ^
—/ The Board also finds without merit the SIA's concerns
that under the current revenue test some section 20 subsidiaries
have made incursions into underwriting markets traditionally
dominated by nonbank firms.
Although the Board initially imposed
a separate market share test because of perceived weaknesses in
using revenue alone as the sole measure of "engaged principally"
(continued...)
-
8
-
The Board also finds that the fact that the current
unusual yield curve may have an impact on only some section 20
subsidiaries does not preclude the adoption of the indexed
revenue test, since the Board believes that the current test does
in fact produce less reliable results than the indexed adjustment
for those companies.
The Proposed Alternative Asset-Based Test
The Board does not find it necessary at this time to
decide whether to adopt the proposed alternative asset-based test
because the Board is unable to determine satisfactorily at this
time the potential practical effect of such a test.
Continued Use of Current Revenue Test
Many banking organizations that commented on the
proposed modifications to the 10 percent limit stated that the
proposed indexing of the current revenue test, which would adjust
revenue according to the duration of the eligible and ineligible
securities portfolio, would impose additional costly and
burdensome recordkeeping and compliance requirements.
For
example, a number of banking organizations stated that their
section 2 0 subsidiaries do not have in place computer systems to
calculate the duration of all of the securities in their
portfolio on a regular basis.
(. .. continued)
(Bankers Trust New York Corporation. 73 Federal Reserve Bulletin
at 146), the market share test was rejected by the court on
judicial review as inconsistent with the statute and a revenueonly measure was upheld.
Securities Industry Association v.
Board of Governors. 839 F,2d at 67-68.
Accordingly, the Board believes that it is appropriate
to allow section 20 subsidiaries the option of continuing to use
the current unadjusted revenue test to measure compliance with
the "engaged principally" standard.
Each existing section 20
subsidiary that elects to use the indexed revenue test for the
current quarter shall notify the relevant Federal Reserve Bank of
this fact within 30 days of publication of this order.
Thereafter, any existing section 20 subsidiary that elects to use
the indexed revenue test shall notify the appropriate Reserve
Bank no later than 3 0 days prior to the beginning of the calendar
quarter during which the indexed test will be used.
Upon making
this selection, the subsidiary will be required to continue using
the indexed revenue test for a period of at least two years.
After such a period, the subsidiary may change its compliance
measurement if it chooses.
The Board believes that it is
necessary to require a section 20 subsidiary to continue to
comply with the test that it chooses for a set period of time in
order to guard against potential manipulation that may occur
should a subsidiary be permitted to continually switch between
the two alternative tests.
Operation of the Indexed Revenue Test
As with the current revenue test, under the indexed
revenue test a subsidiary will be in compliance with section 20
for any quarter if adjusted revenue from ineligible securities
underwriting and dealing activities for that quarter, when added
to the adjusted revenue from ineligible securities activities for
-
10
-
the seven previous quarters, do not exceed 10 percent of adjusted
total gross revenues of the subsidiary for that quarter and the
previous seven quarters.
Under the indexing method, current revenue will be
adjusted by a series of factors supplied by the Board that vary
according to the average duration of the securities portfolio of
the section 20 subsidiary.
For each category of average duration
the adjustment factor represents the ratio of interest rates in
September 1989 on Treasury securities to the average interest
rates in the most recent quarter.
These adjustment factors will
then be applied to current interest and dividend revenue.
To use the indexing method in conjunction with the
tables to be provided for any given quarter, a section 20
subsidiary must adhere to the following procedure.
1.
The subsidiary calculates the average duration of
its eligible assets and of its ineligible assets.-^/
2.
The subsidiary determines the appropriate
adjustment factor corresponding to the duration of the eligible
and ineligible assets from the table of adjustment factors
published by the Board for that quarter.
— / In the proposal for modifications of the 10 percent
revenue limit, the Board noted that computation of duration on a
daily basis appeared to be the most appropriate method, since
interest and dividends are earned on securities held as of the
end of the day.
Several commenters said that daily computation
of duration would be unduly burdensome and suggested monthly or
quarterly computation.
After considering the comments as well as
other facts of record, the Board is requiring that section 20
subsidiaries that choose to use the indexing method compute
duration on a weekly basis.
-
3.
11
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The subsidiary adjusts its current interest and
dividend revenue from its eligible and its ineligible activities
by the appropriate adjustment factors.
4.
The subsidiary adds the adjusted eligible and
ineligible interest and dividend revenue to the other types of
revenue earned by the subsidiary to calculate an adjusted ratio
of ineligible to total revenue for that quarter.
Several commenters have raised various technical
questions with regard to the method for computing average
duration of assets for purposes of this formula.
Specifically,
the Board is aware that there may be diversity of opinion with
respect to calculating duration of certain securities, such as
obligations containing explicit options
g j , callable
__
securities) and those with imbedded options (e^. a . .
collateralized mortgage obligations ("CMOs") with prepayment
options).
To ensure uniformity, the Board's staff will attempt
to address these issues in revising the FR Y-20 and in responding
to specific inquiries.
To reduce burden and ensure uniform treatment, the
staff has been directed, to the extent possible, to rely on
regulatory precedent in addressing these types of issues.
For
example, callable bonds would be considered to have a maturity
equivalent to the first call date.-^/
Alternatively,
it would
be proper, where feasible, to use the methodology contained in
See Municipal Securities Rulemaking Board Rule G-15,
Customer Confirmations.
-
12
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the Federal Financial Institutions Examination Council policy
statement on investments ( L . £j_, the so-called "stress test") to
J*
calculate appropriate duration for CMOs and similar
products .-1^/
With regard to the timing of the Board's publication of
the table of adjustment factors, the Board intends to publish the
table applicable to each quarter at the beginning of that quarter
based on average interest rates prevailing during the immediately
prior quarter.
Although the use of prior quarter rates will not
necessary produce adjustments that directly mirror the interest
rate conditions likely to be faced by section 2 0 subsidiaries in
the coming quarter, the differences in rates from quarter to
quarter are unlikely to be highly significant, and publication of
the applicable adjustment factors at the beginning of the quarter
should provide for greater predictability in meeting the limits.
A table of the factors that will be used to adjust revenue earned
during the first quarter of 1993 is attached to this Order.
The Board recognizes that some section 2 0 subsidiaries
do not currently have available sufficient prior data related to
the duration of their assets to initially measure compliance with
an indexed revenue test over past quarters.
Accordingly, while
the Board will retain the eight-quarter rolling average method of
measuring compliance with the "engaged principally" test, the
indexed revenue test will be implemented on a prospective basis
See Federal Reserve Regulatory Service, pages 3-484.8
through 3-484.11.
13
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only.
-
Accordingly, to determine compliance with the indexed
revenue test during the first two-year period after election of
this test, adjusted revenues from ineligible securities
activities for each quarter during this two-year period, when
added to the adjusted revenues from ineligible securities
activities for each previous quarter during the period, may not
exceed 10 percent of the section 20 subsidiary's adjusted total
gross revenues for that quarter and all previous quarters during
the initial two-year period.
After the end of the initial two-
year period, compliance would be measured on the rolling eightquarter average basis described above.
The Board is in the process of modifying the FR Y-20
(Financial Statements for a Bank Holding Company Subsidiary
Engaged in Ineligible Securities Underwriting and Dealing)
instructions and reporting form to take into account the adoption
of an indexed revenue test.
The FR Y-2 0 is used by the Board to
collect data for off-site monitoring of compliance with the
Board's revenue test and certain Board conditions, and monitoring
of general financial condition.
Other comments
Two commenters cite recent allegations that some
banking organizations unlawfully tied credit services with
investment banking services offered by their section 20
subsidiaries and assert that adoption of the proposed adjustment
would increase the possibility for illegal tying.
However, as
explained above, this proposal is not designed to expand
ineligible activities and allegations of illegal tying are
currently under review by Board staff.
Prpcedwral-jgsueg
The SIA, in initially commenting on the Board's
proposal, requested that the Board extend the original comment
period by 90 days and hold a public hearing to discuss the
proposal.
The SIA also requested that the Board disclose the
data on operations of section 20 subsidiaries upon which the
Board relied in proposing the alternative tests.
The SIA
believed that access to such data is essential in order to allow
it to adequately assess the proposal.
The Board does not believe that it is necessary to
extend the comment period or hold a public hearing on this
proposal.
The Board previously held a public hearing on defining
the term "engaged principally" in section 20 of the GlassSteagall Act in connection with the Board's first section 20
order in Citicorp.
This interpretation is only a modest
procedural adjustment, however, and does not involve the major
policy issues the Board faced in initially allowing bank holding
companies to engage in ineligible securities underwriting and
dealing.
In addition, the Board has generally only held public
hearings on matters when written submissions are an inadequate
means for the public to express an opinion on a proposal.
The
Board believes that in this case, written submissions have been
an adequate means for the public to comment on the proposal.
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15
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As for the data to which the SIA requested access, it
appears that the release of data on the level of ineligible
securities activities for a specific section 20 subsidiary would
not be warranted.
The Board and other federal agencies generally
do not disclose to the public commercial or financial information
about a person that could harm that person's competitive position
in the marketplace.^/
In this case, data about the
composition of the portfolios of various section 20 subsidiaries
could be potentially harmful to the competitive position of these
subsidiaries, since their competitors could learn the relative
mix of their eligible and ineligible activities and whether the
ineligible activities might have to be curtailed because of the
10 percent limit.
The Board notes that the factual circumstances
that prompted the decision to modify the current revenue test,
the current unusual interest rate conditions, are a matter of
public record.
In addition, in order to assist the section 20
subsidiaries and the public in assessing how the indexed revenue
.
test would operate m
*
*
practice, the Board has published a sample
table of adjustment factors, based on historic interest rate
data, that could be used in applying the indexed revenue test.
A final procedural issue relates to the process under
which a section 20 subsidiary may change its method of compliance
with the "engaged principally" test.
The Board's Regulation Y
requires a notice to be filed with the Board to alter a
nonbanking activity in any material respect from that considered
111
See, e.g., 5 U.S.C. § 552(b)(4).
-
16
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by the Board in acting on the application to engage in the
activity.^/
As noted above, the Board views the changes
adopted to the revenue test as procedural adjustments to account
for distortion caused by changes in interest rates.
It is not
the Board's intention, and the Board does not believe, that its
action will materially alter the activity of engaging in
ineligible securities underwriting and dealing for those section
20 subsidiaries that choose to adopt an indexed revenue test.
Accordingly, the Board will not require a section 20 subsidiary
that adopts the indexed revenue test to file a formal notice
pursuant to Regulation Y before making this change, but merely to
notify the relevant Federal Reserve Bank of the test it is
choosing to measure its compliance with the "engaged principally"
standard.
III.
RAISING THE PERCENTAGE LIMITATION
A large number of commenters who favored adjusting the
current revenue test also suggested that the Board raise the
current percentage limitation from 10 percent to as high as 25
percent.
Because this suggestion goes beyond the scope of the
Board's current proposal, no action is now being taken with
respect to the 10 percent limit.
IV.
CONCLUSION
Accordingly, for the reasons and subject to the
conditions set forth in this Order, the Board concludes that the
proposed indexed revenue test, as an alternative to the existing
1$/
12 CFR 225.23(b)(3).
10 percent revenue limit on the ineligible securities activities
of section 20 subsidiaries, is consistent with section 20 of the
Glass-Steagall Act.
Accordingly, the Board modifies its prior
section 20 orders to permit section 20 subsidiaries to use this
indexed revenue test under the conditions prescribed in this
Order.
This
modification applies to all section 20 subsidiaries
and is effective immediately.
This
in any other
way
underwriting
and dealing granted by
modification does not effect
the authorizations to engage in securities
the Board in its prior
section 20 Orders and is subject to the Board's continuing
authority to reexamine limitations on such activities established
on section 20 subsidiaries in these prior Orders.
By order of the Board of Governors,-^/ effective
January 26, 1993.
William W. Wiles
Secretary of the Board
H I Voting for this action: Chairman Greenspan and
Governors Kelley, LaWare, Lindsey and Phillips.
Voting against
this action:
Governors Mullins and Angell.
M s s e n t l n g Statement of Governors Mullins and Anoell
We believe that the indexed revenue test is an unduly
complex and burdensome solution to the problem it is intended to
address, i.e.. the unreliability of the current 10 percent
revenue limit on the ineligible securities activities of section
20 subsidiaries due to the unusual structure of interest rates at
the present.
As indicated by many of the comments on this
proposal, the indexed revenue test will impose extensive new
recordkeeping and reporting obligations.
Rather than merely fine-tuning the current test, we
believe that a more fundamental and efficient approach to this
problem is appropriate.
In light of the unreliability of the
current revenue test, the Board should directly consider an
increase in the 10 percent level.
As the Board's Order
recognizes, the specific limits of the statutory directive that a
section 20 subsidiary not be engaged principally, or
substantially, in ineligible securities activities are by no
means precise.
Therefore, the Board has, in our judgment, a
considerable degree of latitude in selecting the appropriate
quantitative level for applying the engaged principally standard.
The Board selected the 10 percent level without the
benefit of the recent experience with unanticipated interest rate
relationships, which have now shown the unreliability of the
current test.
Moreover, the Board has now had considerable
experience in reviewing the overall operations of the section 20
subsidiaries, and in light of this experience we believe that it
is now appropriate to revisit the issue of the proper measure for
determining whether a section 20 subsidiary is engaged
principally in ineligible securities activities.
In our view,
addressing the issue of whether an increase in the quantitative
level of activity should be permitted to take into account this
recent experience would be consistent with the basic objectives
of the Glass-Steagall Act.
January 26, 1993
Factors to Adjust Interest Income
(ratio of interest rates in September 1989
to fourth quarter 1992)
Duration
Months
l
3
6
12
2
3
4
5
6
7
10
20
30
2.70
2.52
2.42
2.30
1.83
1.62
1.43
1.35
1.28
1.25
1.14
1 .03
0. 97
Note:
Adjustment factors were calculated using secondarymarket quotes of the yields on Treasury bills for durations
of three, six. and twelve months and on STRIPs, or zerocoupon Treasury securities, for durations two years and
greater.
Data are averages of Wednesday observations.
@FedFRASER