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F ederal R eserve Bank OF DALLAS ROBERT D. M C T E E R , J R . DALLAS, TEXA S P R E S ID E N T AND C H IE F E X E C U T IV E 75265-5906 O F F IC E R March 12, 1997 Notice 97-24 TO: The Chief Executive Officer of each member bank and bank holding company in the Eleventh Federal Reserve District SUBJECT Final Rule on Regulation Y (Bank Holding Companies and Change in Bank Control) DETAILS The Board of Governors of the Federal Reserve System has announced revisions to Regulation Y (Bank Holding Companies and Change in Bank Control). The revisions are intended to improve the competitiveness of bank holding companies by eliminating unnecessary regulatory burden and operating restrictions and by streamlining the application and notice process. This final rule reflects a numberiof revisions in response to concerns, suggestions and information provided by commenters. In particular, the Board has changed in several respects the streamlined procedure governing bank acquisitions and has adopted a number of measures designed to broaden and improve public notice of acquisition proposals. These changes focus on assuring that interested persons will have a meaningful opportunity to provide the Board with information regarding acquisition proposals. The revisions are effective April 21, 1997. ATTACHMENT A copy of the Board’s notice as it appears on pages 9289-344, Vol. 62, No. 40, of the Federal Register dated February 28, 1997, is attached. 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 Intrastate (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) -2- MORE INFORMATION For more information, please contact Rob Jolley at (214) 922-6071. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, Friday February 28, 1997 Part III Federal Reserve System 12 CFR Part 225 Bank Holding Companies and Change in Bank Control (Regulation Y); Final Rule 9289 9290 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations FEDERAL RESERVE SYSTEM 12CFR Part 225 [Reg. Y; Docket Nos. R-0935; R-0936] Bank Holding Companies and Change in Bank Control (Regulation Y) Board of Governors of the Federal Reserve System. ACTION: Final rule. AGENCY: The Board has adopted comprehensive am endm ents to Regulation Y that improve the competitiveness of bank holding com panies by elim inating unnecessary regulatory burden and operating restrictions, and by streamlining the application/notice process. Among other revisions, the final rule incorporates a stream lined and expedited review process for bank acquisition proposals by well-run bank holding com panies w ith a num ber of modifications intended to broaden and improve public notice of bank acquisition proposals, to assure that the regulatory filing is m ade well w ithin the public comment period, and to better assure that proposals reviewed under the stream lined procedures do not raise issues u nder the statutory factors in the Bank Holding Company Act. The final rule also im plem ents the changes enacted in the Economic Growth and Regulatory Paperwork Reduction Act of 1996 that eliminate certain notice and approval requirem ents and streamline others that involve nonbanking proposals by wellrun bank holding companies. The final rale also includes a reorganized and expanded regulatory list of permissible nonbanking activities and removes a num ber of restrictions on those activities that are outmoded, have been superseded by Board order or do not apply to insured banks that conduct the same activity. In addition, the final rule incorporates several am endm ents to the tying restrictions, including removal of the regulatory extension of those restrictions to bank holding companies and their nonbank subsidiaries. A num ber of other changes have also been included to eliminate unnecessary regulatory burden and to streamline and m odernize Regulation Y, including changes to the provisions im plementing the Change in Bank Control Act and section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. EFFECTIVE DATE: April 21, 1997. SUMMARY: FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General Counsel (202/452-3583), Diane A. Koonjy, Senior Attorney (202/452 3274), Thomas R. Corsi, Senior Attorney (202/452-3275), Lisa R. Chavarria, Attorney (202/452-3904), Satish M. Kini, Attorney (202/452-3818), Gregory A. Baer, Managing Senior Counsel (202/ 452-3236), Legal Division; Molly Wassom, Assistant Director (202/452 2305), Sid Sussan, A ssistant Director (202/452-2638), Nicholas A. Kalambokidis, Project Manager (202/ 452-3830), David Reilly, Supervisory Financial Analyst (202/452-5214), Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System. For the hearing im paired only, Telecommunication Device for the Deaf (TDD), Dorothea Thom pson (202/452-3544), Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., W ashington, DC. SUPPLEMENTARY INFORMATION: Background and Summary o f Final Action On August 28,1996, the Board proposed com prehensive revisions to Regulation Y designed to eliminate unnecessary regulatory burden and paperwork, improve efficiency and eliminate unw arranted constraints on credit availability while faithfully im plem enting the statutory requirem ents that form the bases for Regulation Y. (61 FR 47242 (September 6, 1996)). The Board proposed these revisions after conducting the review of its regulations required by section 303 of the Riegle Community Development and Regulatory Improvement Act of 1994 (“Riegle A ct”). Regulation Y governs the corporate practices and nonbanking activities of bank holding companies, sets forth the procedures for a company to become a bank holding com pany and for a bank holding com pany to seek Federal Reserve System (“System ”) approval for a bank acquisition or a nonbanking proposal under the Bank Holding Company Act (“BHC Act”), im plem ents the prohibitions on tying, im plem ents the prior notice requirements of the Change in Bank Control Act (governing the acquisition of control of a bank or bank holding company by an individual) and section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (governing appointm ent of senior officers and directors of certain banks and bank holding companies), and im plem ents other provisions of law applicable to bank holding companies. The changes proposed by the Board to Regulation Y included removal of a num ber of restrictions on the permissible nonbanking activities of bank holding companies, expansion and reorganization of the regulatory list of permissible nonbanking activities, streamlining of the application/notice process, revisions to the tying rules, and streamlining of the procedures governing change in bank control notices and senior executive officer and director appointments. On September 30,1996, Congress, in the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (“Regulatory Relief A ct”), enacted several complementary changes to the BHC Act, prim arily reducing the burden associated w ith seeking approval of nonbanking proposals. On October 23, 1996, the Board proposed, on an interim basis, a definition of a well-capitalized bank holding company for purposes of the procedures enacted in the Regulatory Relief Act. (61 FR 56404 (November 1,1996)). The Board received over 300 comments regarding its proposal. The comments reflected the views and suggestions of a wide cross-section of interested persons, including bank holding companies, com m unity groups and representatives, trade associations, individuals, law firms, Congressional representatives, state and local government and supervisory officials, and others. The commenters enthusiastically supported the Board’s proposal to establish a streamlined procedure for well-run bank holding companies to engage in nonbanking activities and make nonbanking acquisitions, to remove unnecessary or outm oded restrictions on nonbanking activities, and to expand the regulatory list of permissible nonbanking activities. Commenters also applauded the proposed amendments to the tying provisions that would enhance the ability of banking organizations to provide customer discounts on services. In addition, commenters supported the proposed streamlining of the provisions governing a change in control of state member banks and bank holding companies and the appointm ent of new directors and senior executive officers. A significant num ber of commenters, representing primarily bank holding companies and banking industry trade associations and representatives, also strongly supported the Board’s proposal to establish a streamlined procedure for well-run bank holding companies to seek System approval to acquire additional banks w ithin certain limits. On the other hand, a large num ber of commenters, consisting prim arily of community representatives and groups, and individuals, strongly opposed any change to the Board’s current procedure Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations governing bank acquisitions, in general, and adoption of the Board’s proposed stream lined review process, in particular. After carefully reviewing the comments, the Board has adopted a final rule that largely incorporates the initiatives contained in its proposal. The Board has m ade a num ber of revisions in response to concerns, suggestions and inform ation provided by commenters. In particular, the Board has changed in several respects the stream lined procedure governing bank acquisitions and has adopted a num ber of measures designed to broaden and improve public notice of acquisition proposals. These changes focus on assuring that interested persons w ill have a meaningful opportunity to provide the Board w ith information regarding acquisition proposals. These and other changes adopted by the Board in response to concerns and suggestions raised by commenters are discussed in more detail below. A num ber of comments addressed matters that are better addressed in supervisory policy statements or guidelines governing specific activities or in the context of an individual proposal. Many other matters raised by commenters, including suggestions regarding venture capital and portfolio investm ent activities and the scope of a bank holding com pany’s authority to acquire shares of investm ent companies u nd er section 4(c)(7) of the BHC Act, w ere not addressed in the original proposal and rem ain under active review. Explanation of Final Rule A. Process fo r Seeking Approval o f B ank and N onbank A cquisitions The Board’s review of its current procedures for evaluating applications and notices identified two im portant principles that could be applied by the Board to reduce the burden associated w ith those procedures. One principle is th at well-run bank holding companies that meet objective and verifiable measures for each of the criteria set forth in the BHC Act should be able to expect little burden or delay from the approval process unless special circumstances demonstrate that a closer review is warranted. The other principle is that the application/notice process should focus on an analysis of the effects of the specific proposal and should not become a vehicle for comprehensively evaluating and addressing supervisory and compliance issues that can more effectively be addressed in the supervisory process. These principles guided the Board’s decision to propose both procedural and substantive changes to the application/ notice process in August 1996. In particular, the Board proposed to use the application/notice process as a gateway for identifying (and rejecting) organizations that do not have the resources or expertise to make an acquisition or conduct a particular activity, and to rely on the on-site inspection and supervisory process as the m ost effective way to determ ine if a particular organization is in fact managing its subsidiaries or conducting an approved activity in a safe and sound m anner and w ithin its authority. In addition, the Board proposed to establish a stream lined process for reviewing proposals by well-run bank holding companies and reducing the information required to be filed for proposals that qualify for the stream lined procedure. The Board also proposed a num ber of other revisions that w ould elim inate unnecessary burden from the application/notice process, including eliminating the pre acceptance procedure for all bank acquisition proposals, perm itting public notice of an acquisition proposal to be published up to 30 days before the final regulatory filing was subm itted to the System, and permitting the waiver of applications involving solely internal corporate reorganizations. The final rule adopted by the Board incorporates these proposed changes w ith a num ber of im portant modifications discussed below. 1. Streamlined Procedure The Board proposed a stream lined 15day notice procedure for proposals by w ell-capitalized and well-managed bank holding com panies w ith satisfactory or better performance ratings under the Community Reinvestment Act of 1977 (“CRA”) to acquire banks and nonbanking companies w ithin certain size limits. The Board’s original proposal retained the Board’s current requirements that public notice of all bank acquisitions be provided (both by new spaper and by Federal Register) and that the public be provided at least a 30day opportunity to submit comments to the System regarding a proposed bank acquisition. These notice and comment provisions applied equally to proposals that qualified for the streamlined procedure and to proposals reviewed under the normal 30/60-day procedures. Many commenters strongly supported the establishment of a streamlined procedure for proposals by well-run bank holding companies that do not raise significant issues. These commenters indicated that the current 9291 approval procedure is burdensom e and costly, particularly in the case of smaller acquisitions that do not raise any significant issue under the BHC Act. Commenters stated that the current process increases the risks an d costs associated w ith an acquisition by imposing unnecessary delay in consum m ating both bank and nonbank acquisition proposals. This delay also increases the potential for loss of key employees, customer relationships and franchise value. In addition, commenters argued that delay in approving clearly permissible transactions postpones the realization by the holding company and the com m unity of the benefits of the transaction and, in the case of a nonbanking proposal, puts bank holding com panies at a disadvantage in competing w ith unregulated entities vying for the same target company. Moreover, commenters indicated that the management, legal and other resources required to prepare an application/notice under the current procedures are significant. These commenters agreed that a stream lined procedure w ould reduce regulatory burden substantially by reducing the costs to bank holding com panies of preparing applications as well as the costs associated w ith the delay inherent in the regulatory review process. M any commenters also stated that these changes would improve the ability of bank holding companies to be competitive with unregulated entities in making nonbanking acquisitions and engaging de novo in permissible nonbanking activities. Several of these commenters urged the Board to take the additional step of reducing or eliminating the public comment period for proposals by banking organizations, or perm itting a safe-harbor from comments if the banking organization maintains satisfactory or better CRA performance ratings or the comment relates to a matter that was reviewed in the CRA examination. These commenters argued that neither the BHC Act nor the CRA requires that public notice be provided for bank acquisition proposals, and that comments on the CRA performance of insured institutions would be more effective if provided in the CRA examination process. These commenters also contended that the delay associated w ith the requirement that the Board consider all public comments under a more protracted procedure is costly and delays the ability of well-run organizations to pass on benefits of an acquisition to the affected communities. In addition, they argued that providing a safe harbor from public comments for 9292 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations organizations w ith satisfactory or better CRA performance ratings w ould provide an incentive for institutions to achieve better CRA performance ratings. On the other hand, a significant num ber of commenters, including various com m unity groups, believe that the current procedures for reviewing bank acquisition proposals work well and that no change to the current process is necessary. These commenters argued that the current 30/60-day procedure strikes an im portant balance betw een the banking industry’s need for regulatory action w ithin a lim ited period of time and the com m unity’s need to have a meaningful opportunity to discuss w ith the acquiring company the potential effects of a proposed bank acquisition and participate in the System review process. These commenters also expressed concern that the revisions proposed by the Board w ould weaken the review process for bank acquisition proposals by reducing the attention the System w ould pay to certain proposals, and w ould erode the ability of interested members of the public to provide information to the System for consideration in an analysis of the convenience and needs factor, the CRA performance record, and other aspects of a bank acquisition proposal. In addition, a num ber of these commenters argued that the Board should not adopt its proposed stream lined procedure for bank acquisition proposals by well-run bank holding com panies because the Regulatory Relief Act adopts stream lined procedures only for nonbanking proposals and indicates that Congress rejected applying a similar stream lined approach to reviewing bank acquisitions. The Board believes that it is im portant to address the concerns of both sets of commenters. The Board believes that it is sound public policy, in addition to being consistent w ith the Riegle Act, that the Board revise its application/ notice process to reduce any unnecessary regulatory costs and burdens associated w ith that process. At the same time, the Board believes that revisions to its application/notice process should not dim inish the quality of its review of transactions. In addition, the Board strongly believes that public participation in the application/notice process is im portant because it provides the Board w ith useful information, in particular, information regarding the effect of transactions on the relevant communities. As the Board noted in its original proposal, the Board reviews approximately 1,300 applications and notices each year under the BHC Act. W hile these proposals include some complex and large proposals, the overwhelming preponderance are relatively sim ple proposals that raise no issues u nder the statutory factors that the Board is required to consider. In more than 90 percent of the cases subm itted to the System, no public comment is submitted. Currently, these cases are largely considered and approved by the Reserve Banks under delegated authority in a process that involves a pre-acceptance period of on average 25 days and final action about 30 days following the date of acceptance of a filing. In these cases, the Board believes that there is room to revise the current review process to reduce paperwork and regulatory burden. The Board believes that this reduction in burden can be accom plished w ithout dim inishing the System’s review of the statutory factors in any case or the opportunity for the public to provide information to the System that is relevant to the statutory factors. Importantly, the Board is m aintaining the public notice and period for public comment that currently apply to bank acquisitions, including bank acquisitions reviewed under the stream lined procedures. Accordingly, the final rule adopts the stream lined review process originally proposed by the Board, w ith several im portant modifications. These changes are in response to specific concerns raised by commenters and are designed to provide earlier and broader public notice of acquisition proposals, better access to regulatory filings, and to assure that the public continues to have a meaningful opportunity to provide the System w ith relevant information regarding proposals subject to System review. The Board believes that adoption of a streamlined process for bank acquisitions as well as all of the other revisions proposed by the Board to Regulation Y are w ithin the authority of the Board under the current BHC Act and do not require statutory changes. The changes to the original proposal adopted in the final rule are discussed more fully below and include the following: * Tim ing o f Publication. The regulatory filing for a bank or nonbank acquisition proposal must be made w ithin 15 calendar days of publication of the request for comment on the proposal (as opposed to 7 days under the current procedure and 30 days under the original proposed revisions); * N ew M ethods o f Public Notice. In order to make public notice available earlier, a new list of all bank and nonbank acquisition proposals subject to System review will be prepared weekly and updated every 3 days, and m ade available to all interested parties using three methods: by mail (on a weekly basis), through a dedicated faxon-dem and facility (available 24 hours every day), and on the Board’s Internet Home Page; * Inform ation Regarding Convenience and Needs. The regulatory filing under the stream lined procedure w ill retain the current requirem ent that the filer briefly describe the proposed transaction and the parties to the transaction, and, in the case of a bank or thrift acquisition, w ill require (as under the current procedure) a brief discussion of the effects of the proposal on the convenience and needs of the com m unity and of steps that are being taken by the acquiring com pany to address weaknesses at insured institutions that have not received at least a satisfactory CRA performance rating; * Convenience and N eeds Standard. In the case of a bank or thrift acquisition, the standards for qualifying for the stream lined procedure have been m odified to require the acquiring bank holding com pany to show that the transaction is consistent w ith the convenience and needs standard in the BHC Act as well as requiring that the CRA performance rating of the lead insured institution and insured institutions w ith at least 80 percent of the assets of the acquiring bank holding company be satisfactory or better; * Tim ely Com m ents Require Full Consideration. A provision has been added specifying that a proposal filed under the streamlined procedure will be reviewed under the normal 30/60 day review process if a substantive written comment is received by the System during the public comment period; * Guidance in Defining Substantive Comments. A provision has been added describing generally the types of comments that w ould be considered substantive (this provision contemplates that the vast majority of comments that are now considered by the Board would continue to be reviewed by the Board); * Extensions to Obtain Filing. A provision has been added incorporating the Board’s current policy of exercising discretion, based on the facts and circumstances, to grant an extension of the public comment period of 1 to 15 days to an interested member of the public that has made a timely request for a copy of the regulatory filing on a proposal (this extension w ill not itself disqualify a proposal from consideration under the stream lined procedure); * Joint Extension Requests. A provision has been added reflecting the Board’s current policy of permitting a Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations reasonable extension of the public * contain the information prescribed in com m ent period w here the extension is the regulation. jointly requested by an interested The final rule also adopts the person and the applicant (for example, procedures established in the in order to perm it com pletion of Regulatory Relief Act regarding discussions betw een the applicant and nonbanking proposals. These provisions the interested person); and, elim inate the prior notice and approval * Size Lim itation. A size lim itation of requirements of the BHC Act for any bank holding company that meets the $7.5 billion on any individual qualifying criteria to engage de novo in acquisition that m ay qualify for the any nonbanking activity approved by stream lined procedures has been added as well as a lim itation of 15 percent of the Board by regulation. In addition, the the consolidated total capital of the Regulatory Relief Act established a stream lined 12-business day review acquiring com pany on the total process for proposals by w ell-run bank consideration that may be paid in the holding companies to acquire a case of the acquisition of a nonbanking company. company (other than an insured depository institution) engaged in U nder the new rule, bank and thrift permissible nonbanking activities or to acquisition proposals that m eet the engage de novo in nonbanking activities qualifying criteria in the regulation approved only by order. w ould be considered under a A company or proposal that does not stream lined procedure that allows System action 3 business days following qualify for the streamlined procedure w ould follow the current application the close of the public com m ent period. process, w hich provides for Reserve This stream lined review process w ill Bank action w ithin 30 days of filing and allow System action on a qualifying for Board action w ithin 60 days of filing. proposal typically betw een 18 and 21 In the event that the System determines calendar days after the regulatory filing that a proposal filed u nd er the is m ade w ith the System. In addition, streamlined procedure m ust be the regulatory filing required in these reviewed under the norm al 30/60-day cases includes less paperwork than under the current procedures. Cases that procedure, the final rule provides that the notice filed under the stream lined are complex, or that raise an issue of procedure w ould be accepted under the first impression, issues of safety and normal procedure and the normal soundness or other concerns, or that raise concerns regarding the effect of the procedure w ould be deem ed to have begun at the time the notice was filed proposal in the relevant com munities under the streamlined procedure. In will, as under the Board’s current rules cases that have been shifted from the and policies, receive more in-depth stream lined to the normal processing analysis. Moreover, the Board retains schedule, the Reserve Bank and the the ability to notify a bank holding Board w ould determine w hether company for any reason that the information supplem enting the stream lined notice procedure is not available and that the norm al 30/60-day stream lined filing is needed to address the relevant issues. As in any case, the procedure m ust be followed. System may request any additional The final rule eliminates unnecessary information during the processing delay in all bank acquisition proposals period necessary to resolve issues by elim inating the current pre related to the proposal. acceptance period. Elim ination of this period reduces the System review 2. Public Participation in Review process by an average of 25 days. The Process function of this pre-acceptance period was to collect information regarding the a. Public Notice specific proposal that may not be The original proposal retained the described in the original filing. The current requirement for public notice of Board’s experience in reviewing all acquisition proposals, including a nonbanking proposals (which are not full 30-day public comment period for subject to a pre-acceptance review bank acquisition proposals. As noted period) indicates that this period is not above, the final rule retains the current necessary and that the System is able to public notice requirement and 30-day request and obtain additional public comment period for bank information in a timely fashion during acquisition proposals, including the normal review period that begins proposals that qualify for the after acceptance of the regulatory filing. streamlined procedure. Public notice of The final rule allows the System to these proposals would continue to be continue to request additional given through newspaper publications information at any time and to return as in the affected communities and incom plete any filing that does not through publication in the Federal 9293 Register, as required under the Board’s current procedures. The Regulatory Relief Act am ended section 4 of the BHC Act to elim inate the requirem ent for public notice of certain nonbanking acquisition proposals by qualifying bank holding companies. The final rule im plem ents the statutory changes enacted by the Regulatory Relief Act. Public notice of all acquisitions of insured depository institutions, including savings associations, is still required, however, and w ould mirror the notice requirem ents applicable to bank acquisition proposals. In addition, public notice w ould continue to be required for nonbank proposals that do not qualify for the stream lined procedures under the Regulatory Relief Act, and for any proposal that involves a new activity that has not previously been determ ined by the Board to be closely related to banking. b. Steps To Improve Public Notice In connection with its revision of the current procedures, the Board will im plem ent three steps that are designed to improve the effectiveness and timeliness of the public notice of acquisition proposals. First, the Board w ill publish a new listing of all acquisition proposals subm itted for System approval under the BHC Act. This new docum ent will include all bank acquisition proposals that have been published for comment, w hether subm itted under the stream lined or normal procedures, as well as proposals to acquire a nonbanking company that require public notice. This new docum ent w ill be updated at least weekly and w ill indicate the applicant and target organization, the date that the public comment period closes, and the Reserve Bank to w hich public comments may be sent. The new docum ent will be a more comprehensive list of cases open to public comment than the current H-2 (which includes only application/ notices that have been filed w ith the System and does not generally indicate proposals that have been published for comment b u t not yet filed), and w ill be more quickly available than the current H -2 (which includes a list of Board and Reserve Bank final actions and other information that often requires a longer time to assemble). This docum ent will be available by mail. Second, to expedite distribution of this information, the Board will make the new docum ent available through a fax-on-demand call-in facility. This facility will be available 24 hours a day, 7 days a week, and will automatically fax a copy of the new docum ent to any 9294 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations caller. The inform ation available on the fax call-in facility w ill be updated at least every three business days. Third, the Board will make the new docum ent available on its Internet Home Page, along w ith other information, including a list of actions taken by the System on applications and notices. Thus, the Board’s Internet Home Page w ill include a list of all acquisition proposals requiring System approval u nd er the BHC Act that have been published for public comment. This list w ill identify the applicant, target organization, closing date for the public com m ent period, and the Reserve Bank to w hich comments may be submitted. This information, like the fax call-in information, w ill be updated at least every 3 business days to reflect the addition of new proposals. As a com plem ent to providing broader and earlier public notice, the Board w ill make regulatory filings more quickly available to the public. The System expects to make the public portion of all pending applications/ notices available to the public w ithin 3 business days of filing. c. Timing of Publication Several com menters supported allowing an applying bank holding company to publish notice of a proposal up to 30 days in advance of filing the required application/notice for System approval. This w ould permit publication at a time closer to the announcem ent date of a proposed acquisition. A large num ber of other commenters, however, suggested that permitting an applicant to publish notice 30 days before subm itting an application/notice to the System w ould effectively deprive the public of an opportunity to comm ent on the information contained in the filing. These commenters were particularly concerned that this would result in less informed comments and would force commenters to express concerns relating to factors, such as the effect of the proposal on the convenience and needs of the com m unity or CRA performance, w ithout reviewing the plans of an applicant to address these matters or discussing these plans w ith the applicant. In light of the comments, the Board has determ ined to adopt a revised approach that permits publication up to 15 days prior to the submission of the required filing. Under the Board’s current rules, publication may occur up to 7 days prior to submission of the application. Allowing a slightly earlier publication date w ill allow for a shorter regulatory process in cases that meet the criteria for expedited action w hile at the same time assuring that the required filing w ill be available to the public for a significant part of the public comment period. To address the possibility that a filing may not be subm itted during the first 15 days of the public com m ent period, the final rule incorporates the Board’s current policy that the Board may, in its discretion and based on the facts and circumstances, perm it an extension of the public comment period, of an appropriate length up to 15 days, for an interested person that makes a timely request for both a copy of the required regulatory filing and additional time to file a com m ent regarding a proposal. In considering w hether to grant a request for an extension, and the length of the extension to be granted, the Board has in the past and w ill continue to take into account such factors as w hen the proposal was announced and the regulatory filing made available to the public, w hen the request for the regulatory filing was made, and the specific reasons given by the requester for being unable to file a timely comment. A decision to grant an extension of the public com m ent period w ould n o t disqualify a proposal from action u nd er the stream lined procedure. d. Joint Requests To Extend the Comment Period A num ber of commenters argued that a shortened processing period would frustrate the ability of com m unity groups to conduct discussions w ith applicants in connection w ith a bank acquisition proposal regarding lending and other programs to help meet the convenience and needs of the • community. These commenters indicated that a shorter regulatory review period w ould truncate the period for these discussions and potentially force prem ature objections to acquisition proposals, especially in situations that involve the initial entry of a banking organization into the community. The Board believes that discussions between an insured institution and comm unity representatives for purposes of identifying and helping to serve the banking needs of the com m unity are appropriately and most effectively conducted throughout the year and should not be confined to the period w hen an acquisition proposal is under review. In the application/notice context, the Board has granted requests for an extension of the public comment period that were made jointly by an interested party and an applicant for the purpose of allowing completion of discussions regarding a matter, such as CRA performance or competitive divestitures, that is relevant to the statutory factors the Board m ust consider in reviewing the proposal. The final rule specifically incorporates this policy and states that a reasonable extension of the public com m ent period w ill be granted upon a joint request of an interested member of the public and the applicant. This type of extension will not disqualify an otherwise qualifying proposal from consideration under the stream lined procedure. e. Protested Cases The stream lined procedure proposed by the Board provided that the Board could require an applicant to follow the current 30 or 60 day procedure if the Board indicates to the applicant for any reason that the proposal does not qualify for the stream lined process. The Board also stated that it expected that proposals by well-run bank holding com panies w ould be disqualified only sparingly and in extraordinary situations. Among the situations identified by the Board as meriting review under the normal 30/60-day procedure is the situation where a tim ely substantive public comment is received by the System that raises an issue that cannot be resolved by the Reserve Bank under its delegated authority. A num ber of commenters argued that the Board should not disqualify a proposal from consideration under the streamlined process on the basis of a public comment regarding CRA or fair lending performance if the applicant organization’s insured depository institutions have satisfactory or better CRA performance ratings or if the comment relates to a matter that was reviewed in the CRA examination process. Other commenters argued that a proposal should not be disqualified from stream lined processing if a comment is submitted that relates to information that is available to the Board outside the application process (such as HMDA data) or a matter uniquely w ithin the Board’s expertise (such as financial, managerial or competitive matters), or if the commenter has not first attempted to discuss the concerns w ith the acquiring organization outside the approval process. On the other hand, a large number of community groups and representatives argued that the application/notice process provides an important opportunity for members of the public and representatives of affected com munities to provide information to the System relating to the impact of a proposal on the community. These Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations commenters argued that it is critical to preserve the ability of the public to have in put into the government review process and for the Board to take a close look at proposals that raise concern in the affected community. These commenters argued that the Board should indicate in the regulation that subm ission of a comment w ould trigger the normal 30/60-day processing period. The Board had indicated in its original proposal that the filing of a tim ely comment could trigger the normal review process, and has adopted the suggestion of commenters that this be specifically included in the rule. Thus, the final rule provides that the norm al 30/60-day process applies in any case in w hich a timely substantive com ment regarding a proposal is received by the System. A proposal that is considered under the normal process w ill be acted on as soon as the System completes its review of the proposal, w hich may be before expiration of the 30 or 60 day period. The final rule provides that a com ment will be considered tim ely if it is submitted in writing and is received by the appropriate Reserve Bank or by the Board before the expiration of the public comment period. A comment w ill be considered to be substantive unless the comment involves individual complaints, or raises frivolous, previously-considered or unsubstantiated claims, or irrelevant issues.1 The Board notes that under this standard the vast majority of comments that have in the past been considered by the Board w ill continue to be viewed as substantive and will continue to be reviewed by the Board. A comment that is delegable will be carefully weighed in the review process by the Reserve Bank and any action taken by the Reserve Bank is subject to review by the Board. The Reserve Bank may seek additional information necessary to evaluate any delegable comment and may refer a com ment for investigation to the appropriate federal banking agency or other relevant agency, if appropriate. f. Late Comments In its original proposal, the Board proposed to adhere to its current rules governing consideration of public comments, and to discontinue its practice of routinely considering comments, including supplem ental comments filed by a timely commenter, that are filed after the close of the public comment period. The Board’s Rules of Procedure currently provide that the 1 The Board will develop supervisory guidance identifying the limited types of comments that may be considered under delegated authority. Board is required to consider a comment involving an application or notice only if the com m ent is in writing and is received by the System prior to the expiration of the public comment period. A num ber of commenters argued that the Board should continue routinely to consider late comments. Many of these comments focused on the potential under the original proposal that the public comment period could expire prior to the time that the regulatory filing was m ade and that any comment based on the regulatory filing was, therefore, likely to be late. Other commenters contended that public notice of proposals and of the closing date of the comment period is not adequate under the current rule, and, consequently, that late comments should be accepted and considered. In addition, commenters argued that the approval process is an im portant opportunity for the com m unity to participate in the review of transactions that will directly affect the community, and that leeway should be given to the com m unity to subm it late comments. A num ber of com m unity groups indicated that discussions w ith applicants, particularly applicants entering a com m unity for the first time, often require substantial time and cannot always be completed during the public comment period. The Board believes that the public often provides the System w ith im portant information in connection w ith acquisitions subject to System review. Consequently, the Board has determ ined to provide public notice &nd a significant period for public comment for all bank acquisition proposals subject to System review under the BHC Act, including proposals that qualify for the stream lined procedures. As noted above, the Board has also taken a num ber of significant steps to improve the effectiveness of the public notice regarding bank acquisition proposals, including establishing a public listing focused on acquisitions that are subject to public comment and System review and making this list available by mail, Internet and fax. In addition, the Board has am ended its original proposal to assure that the regulatory filing w ill be submitted at least 15 days prior to the expiration of the public comment period, and has reiterated its policies regarding extensions of the public comment period to accommodate joint discussions between members of the public and applicants as well as timely requests for a regulatory submission that has been filed after the start of the public comment period. 9295 Moreover, the Board notes that the public may at any tim e subm it comments regarding the effectiveness of an insured depository institution in meeting the convenience and needs of the com m unity for consideration in connection w ith the on-site examination of the CRA performance of the institution. The CRA exam ination process involves a review of the actual lending performance of an institution and includes discussions by examiners w ith members of the public regarding the institution’s performance. Comments subm itted for consideration in the CRA exam ination process provide the most effective opportunity for the public to affect the CRA performance and CRA rating of any institution and provide a regularly re-occurring opportunity for public input. For these reasons, the Board has determined to adhere to its established rules regarding the filing of comments on proposals subject to System review. Accordingly, the Board w ill not consider comments, including supplem ental comments filed by a timely commenter, that are subm itted after the close of the public comment period and the filing of a late comment will not disqualify a proposal from review under the streamlined procedure. The Board continues to reserve the right to consider late comments at its discretion, but expects to exercise that discretion only in extraordinary circumstances. 3. Information Requirements For transactions that qualify for the streamlined procedure, the Board proposed to reduce substantially the information required to be filed w ith the System. For example, the Board proposed to eliminate the requirem ent that the applicant subm it financial information otherwise available to the System and the requirem ent that the applicant provide competitive data in cases that meet the Board’s and the Department of Justice’s policies. Many commenters applauded the reduction in information requirem ents for proposals that meet the criteria for streamlined processing. Commenters noted that the costs of preparing an application/notice are often substantial and argued that these costs are unnecessary in cases that meet objective criteria and do not raise any regulatory issue. Commenters believed that the savings would be substantial from reducing the paperwork associated with applications and notices. A num ber of other commenters expressed concern that elim ination of certain information requirements from the regulatory filing w ould reduce the 9296 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations ability of the System adequately to review a proposal and of commenters to assess the consequences of the proposal for the com m unities involved. In particular, a large num ber of com menters objected to elim inating the portion of the current application that requires an applicant to explain the effect of a bank acquisition on the convenience and needs of the affected com munities. Commenters found this inform ation especially helpful in understanding the effect of a proposal by an organization located outside the com m unity to make its initial entry into the community. The original proposal retained the requirem ent that applicants briefly describe the proposed transaction and the institutions involved, as well as the type of funding proposed. The final rule continues to require this information. As an initial matter, the Board believes that very little additional information is needed to evaluate the financial, managerial and competitive factors regarding the types of non complex proposals that qualify for stream lined processing. The System already receives, through reports and examinations, substantial information regarding the financial and managerial resources of bank holding companies and their subsidiaries. In addition, in order to qualify for the streamlined procedure, the proposal m ust meet objective competitive criteria designed to assure that the proposal does not raise an issue under those factors. The Board agrees w ith commenters that the information regarding the effect of a proposal on the convenience and needs of affected com munities currently provided by an acquiring bank holding com pany in its regulatory submission is new information relevant to the System ’s decision on the proposal that may not otherwise be available. Bank holding companies currently provide a brief description of the effects of an acquisition proposal on the convenience and needs of affected com m unities in the regulatory filing. The Board’s experience has been that the description provided in the initial application is useful and is not burdensome. Accordingly, the Board has determ ined to retain the requirem ent that, as part of its initial filing for approval, an applicant briefly explain the effect of a proposal on the convenience and needs of the affected communities. As under the current application/notice procedure, this explanation may contain a discussion of the CRA performance record of the acquiring organization and any actions that the organization proposes to take in order to help address the credit and other banking needs of the affected com munities. In addition, the final rule requires the applicant to outline the steps the organization is taking to address weaknesses in the CRA performance of insured depository institution subsidiaries of the acquiring holding company that have received a less than satisfactory CRA performance rating. The Board currently requests this inform ation in the application process and believes this information is im portant for evaluating the ability of an acquiring organization to meet the convenience and needs of com munities in w hich a bank or savings association acquisition is proposed. A holding com pany m ay satisfy this information requirem ent by filing copies of information prepared for the primary federal banking supervisor of the relevant institution, other documents already prepared by the organization, or a summary of the steps taken and being implemented. The final rule also modifies, in certain respects, the information related to the financial, managerial and competitive factors that m ust be provided. These changes require lim ited information regarding the funding of an acquisition, certain pro form a financial information regarding the acquiring bank holding company and financial information regarding any nonbanking company that is proposed to be acquired. In addition, lim ited inform ation regarding proposed new m anagement is requested in certain cases. The final rule also clarifies the information needed for a new principal shareholder of a bank holding company to fulfill the notice requirem ent of the Change in Bank Control Act in connection w ith a transaction that is reviewed under the streamlined procedures of section 3 of the BHC Act. In connection w ith nonbanking proposals, the final rule modifies the requirement that market index information be submitted in every case in light of the fact that competition in many nonbanking activities is broad and is m easured on a national or regional basis that often makes calculation of market indexes burdensom e and unnecessary. The rule requires instead a brief description of the competitive effects of the proposal in the relevant market and, in markets that are local in nature, a list of major competitors. It is expected that the Board or the appropriate Reserve Bank would indicate to an applicant w hen market index information is necessary. Finally, the rule requires a bank holding company that seeks approval under the stream lined procedure for a nonbanking proposal to describe briefly the public benefits of the proposal. 4. Criteria To Qualify for Stream lined Procedures Many commenters lauded the use of objective criteria for identifying proposals that w ould qualify for stream lined review. These commenters found reliance on criteria that identify well-run bank holding com panies to be a constructive m ethod of rewarding organizations that are well run and encouraging other organizations to take steps to m eet these criteria. A significant num ber of commenters also generally agreed that the standards proposed by the Board w ould establish appropriate levels for identifying proposals that clearly meet the statutory factors that the Board m ust consider under the BHC Act. As discussed below, m any other commenters expressed concern that establishing a stream lined procedure based on objective criteria w ould result in too little analysis of proposals under the stream lined procedure. A large num ber of commenters also argued that it is inappropriate to rely on CRA performance ratings as qualifying criteria for the convenience and needs standard. The Board has adopted several modifications to the qualifying criteria to address concerns raised by commenters. a. Definition of W ell-Capitalized and Well-Managed Bank Holding Companies In connection w ith its interim im plem entation of the Regulatory Relief Act,2 the Board proposed to define a “well-capitalized bank holding com pany” for purposes of determining qualification for the stream lined procedure as any bank holding company that: * Maintains a total risk-based capital ratio of 10.0 percent or greater and a Tier 1 risk-based capital ratio of 6.0 percent or greater, on a consolidated basis both before and immediately following consum m ation of the proposal; * Maintains either a Tier 1 leverage ratio of 4.0 percent or greater or, if the bank holding company has a composite examination rating of 1 or has im plem ented the risk-based capital measure for market risk, a Tier 1 2 The Board specifically requested comment on the definition of well-capitalized bank holding company in connection with enactment of the Regulatory Relief Act. Because the definition is contained in Regulation Y, the Board considered comments regarding that proposed definition in connection with this overall revision of Regulation Y. Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations leverage ratio of 3.0 percent or greater, on a consolidated basis both before and im m ediately following consum m ation of the proposal; and * Is not subject to any w ritten agreement, order, capital directive, asset m aintenance requirement, or prom pt corrective action directive to m eet or m aintain a higher capital level for any capital measure. Commenters generally supported these levels for defining a wellcapitalized bank holding company. Commenters noted that the risk-based levels parallel the level at w hich an insured bank is considered to be wellcapitalized for purposes of various provisions of federal law. Most commenters that addressed these requirem ents agreed that the leverage ratio can be an inexact measure of capital adequacy for m any bank holding companies, particularly for holding com panies that engage in significant nonbanking activities or for bank holding companies that have significant trading portfolios and feegenerating off-balance sheet activities. Accordingly, a num ber of commenters requested that the Board elim inate or further reduce the leverage requirement. Large domestic banking organizations contended that the arguments for adopting a lower leverage ratio for defining a well-capitalized bank holding company than is used in defining a w ell-capitalized bank—nam ely that the leverage ratio is an inexact measure in certain situations—also militate for elim ination of the leverage ratio. Foreign banks in particular assert that adoption of a leverage requirem ent w ould violate the principle of national treatment and w ould exclude strong and well-capitalized foreign banking organizations from the streamlined procedure because a leverage ratio is not required under the Capital Accord developed by the Basle Committee on Banking Regulations and Supervisory Practices (“Basle Capital A ccord”) and, consequently, is not applicable to banks in many foreign countries. Smaller bank holding companies, on the other hand, argued that the leverage ratio should be applicable to all organizations equally. These organizations argued that elim inating or adopting a lower leverage standard w ould create an advantage for large organizations in making acquisitions. The Board believes that, in the lim ited context of determining the qualifying criteria for the stream lined procedure, reliance on the risk-based capital ratios is sufficient. As noted above, the riskbased levels adopted are the same levels required in defining a well-capitalized bank. The final rule does not establish a m inim um leverage ratio for a bank holding company to qualify for the streamlined procedures because, as noted above and in the Board’s original proposal, the leverage ratio is an inexact measure in certain situations. The Board has thus determined to apply a definition that applies equally to all organizations, regardless of size, origin or composition of balance sheet. The Board retains the ability to disqualify any organization from using the stream lined procedure if any financial or other factor, including the organization’s leverage ratio, indicates that a closer review of the proposal is appropriate. The leverage ratio continues to be a criterion in defining w hether an insured depository institution subsidiary of the holding company is well-capitalized. To qualify for the stream lined procedure, a bank holding company m ust m eet the risk-based capital levels on a consolidated basis. The Board generally will not apply these definitions to interm ediate-tier bank holding companies involved in the transaction. The procedure allows the Board to notify a bank holding company that it should follow the normal 30/60day procedure if the System has concern about the financial strength of an interm ediate-tier bank holding company that, for example, is itself an operating company or that contains significant debt. Several commenters argued that the Board should adopt a process for granting exceptions to the capital requirements where the applicant can demonstrate that capital ratios do not adequately indicate the financial strength of the organization. In light of the other changes that have been adopted, the Board does not believe that a special exceptions process is necessary or appropriate. The capital criteria are based on internationally accepted risk-based standards, and are for the lim ited purpose of identifying companies that qualify for a stream lined review process. Banking organizations that do not qualify u nder these criteria are still perm itted to make acquisitions and engage in permissible nonbanking activities by following the normal 30/60 review process. As noted above, the standard of 10 percent total risk-based capital and 6 percent Tier 1 risk-based capital applies to all organizations, including foreign banking organizations, seeking to take advantage of the streamlined procedures. In its request for comment, the Board specifically requested comment on ways in which the qualifying criteria should be defined for foreign banking organizations in 9297 order to assure national treatm ent of foreign banking organizations under the stream lined procedures. Based on these comments, the final rule includes a num ber of provisions specifically applicable to foreign banking organizations. Several commenters argued that, for purposes of determ ining w hether a foreign banking organization meets the capital levels necessary to qualify for the stream lined procedure, a foreign banking organization should be perm itted to use the definition of capital adopted by the home country of the foreign banking organization. For foreign banking organizations from countries that have adopted capital standards in all respects consistent with the Basle Capital Accord, the Board generally agrees that this permits the least burdensom e approach to applying equivalent standards. Accordingly, the final rule provides that, for purposes of determining w hether a foreign banking organization meets the capital ratios described above for a well-capitalized bank holding company, a foreign banking organization may use the capital terms and definitions of its home country provided that those standards are consistent in all respects with the Basle Capital Accord. If the home country has not adopted those standards, the foreign banking organization may use the streamlined procedures if it obtains from the Board a prior determ ination that its capital is equivalent to the capital that w ould be required of a U.S. banking organization for these purposes. The Regulatory Relief Act provides that, for purposes of determining qualification for the streamlined procedures for nonbanking proposals, U.S. branches and agencies of foreign banking organizations are considered banks and m ust meet the capital and managerial standards applicable to U.S. banks. The Board recognizes that branches and agencies are a part of the foreign banking organization and that capital is not allocated separately tc a branch or agency. Accordingly, for purposes of determining the qualification for the streamlined procedures, the final rule deems the capital ratios of U.S. branches and agencies of foreign banking organizations to be the same as the capital level of the foreign banking organization. For purposes of determining w hether a foreign banking organization meets the managerial definition for the stream lined procedures, the final rule requires that: (1) The largest U.S. branch, agency or depository institution controlled by the foreign bank have 9298 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations received at least a “ satisfactory” com posite exam ination rating from its U.S. banking supervisor; (2) U.S. branches, agencies and depository institutions representing at least 80 percent of the U.S. risk-weighted assets controlled by the foreign banking organization at such offices have received at least a “ satisfactory” com posite exam ination rating from the U.S. banking supervisors; and (3) the overall rating of the foreign banking organization’s com bined U.S. operations is at least “satisfactory.” Further, no branch, agency or depository institution may have received one of the two lowest com posite ratings at its most recent exam ination. In addition, as with dom estic bank holding companies, no U.S. branch, agency or insured depository institution may be subject to an asset maintenance agreement w ith its chartering or licensing authority. Under the final rule, the System may disqualify any banking organization, including a foreign banking organization, from using the stream lined procedure for any appropriate reason, including if inform ation from the primary supervisor of a domestic bank or home country supervisor for a foreign bank indicates that a more in-depth review of proposals involving that organization is warranted. The final rule also retains the requirem ent that, in order to qualify for the stream lined procedure for bank acquisition proposals, a foreign banking organization m ust m eet the home country supervision and information sufficiency requirem ents of the BHC Act. Several commenters requested clarification of the types of supervisory actions that w ould disqualify a bank holding company from using the stream lined procedures. In this regard, the Regulatory Relief Act provides that, for purposes of the streamlined nonbanking procedures contained in that Act, a bank holding company may not be subject to certain types of adm inistrative enforcement proceedings. The final rule clarifies that a bank holding company may not use the stream lined procedures for any nonbanking proposal or any bank acquisition proposal if any formal order, including a cease and desist order, w ritten agreement, capital directive, asset maintenance agreement or other order or directive, is outstanding or any formal administrative action is pending against the bank holding company or any of its insured depository institutions. The System may, if appropriate, require a bank holding com pany to follow the normal 30/60day procedure if an informal action, such as a m em orandum of understanding or supervisory letter, pending against the bank holding com pany or any affiliate indicates that a more in-depth review is appropriate. The Regulatory Relief Act permits exclusion of recently acquired insured depository institutions under certain circumstances in determ ining w hether a bank holding com pany is well-managed. This exclusion has been adopted in the final rule for purposes of determ ining a bank holding com pany’s qualification for the stream lined procedures for bank acquisition proposals as well as for nonbanking proposals. The Regulatory Relief Act also perm its the Board to adjust the level of insured depository institutions that m ust meet the well-managed definition for purposes of the stream lined nonbanking procedures, so long as the level adopted by the Board is consistent w ith safety and soundness and the purposes of the BHC Act. For purposes of the stream lined nonbanking procedures, the Board had proposed that the parent bank holding company, the lead insured depository institution and insured depository institutions controlling at least 80 percent of the insured depository institution assets of the holding com pany be well-managed (rather than 90 percent as in the Regulatory Relief Act). In addition, no insured depository institution controlled by the bank holding company (other than a recently acquired institution, subject to the limitations discussed above) m ay have received one of the 2 lowest com posite examination ratings. As noted above, commenters addressing this issue were largely in favor of this definition. The Board believes that, in the lim ited context of determining the availability of the stream lined procedures, the definition proposed and adopted in the final rule, and in particular, the level of insured depository institutions that m ust be well-managed, w ill adequately identify organizations that merit a more in-depth review and is a definition that is consistent w ith safety and soundness and the purposes of the BHC Act. The Board notes that the Board retains the authority and discretion to require any organization to follow the normal procedures if appropriate. b. Competitive Criteria A few commenters suggested that the Board am end the competitive criteria by eliminating or raising the qualifying threshold levels of the HerfindahlH irschman Index (“HHI”), by increasing or eliminating the market share test, and by allowing a bank holding company to meet the competitive criteria after making divestitures. The Board has determ ined not to change its formulation of the competitive standard for the stream lined procedures. The competitive criteria proposed and adopted by the Board reflect the HHI thresholds above w hich a bank acquisition proposal comes under close scrutiny by the Department of Justice (“DOJ”) u nd er the DOJ’s Horizontal Merger Guidelines as applied to bank acquisitions, and by the Board under its existing delegation rules. In conducting a competitive analysis, both the Board and the courts have found the resulting market share to be an im portant indicator of the competitive effects of a proposal. Finally, divestitures to address competitive issues are not a normal event and typically indicate a transaction that requires an evaluation of information and factors beyond what may be accomplished in a streamlined procedure. c. Convenience and Needs Many commenters objected to the use of the CRA exam ination rating as a m easure of w hether a proposal would m eet the convenience and needs of the com m unities affected by a bank acquisition proposal. These commenters argued that CRA performance ratings are often outdated, are as a rule too high and, at best, represent an average of an institution’s overall performance. These commenters also argued that reliance on CRA ratings would am ount to a safeharbor for virtually all institutions, and w ould represent a step that Congress considered and rejected in adopting the Regulatory Relief Act. In addition, commenters objected that use of these criteria w ould eliminate an in-depth review of the convenience and needs standard in all but protested cases. Commenters also objected to permitting an organization w ith up to 20 percent of its assets in institutions w ith unsatisfactory CRA performance ratings to take advantage of streamlined procedures. Other commenters argued that CRA ratings provide the most reliable indicator of an institution’s record of helping to meet the credit and other banking needs of the institution’s existing communities and represent a strong indicator of the institution’s willingness and ability to meet the banking needs of new communities. Several of these commenters also contended that reliance on CRA performance ratings as a criterion for stream lined processing of acquisition proposals w ould encourage organizations to meet and maintain satisfactory performance levels. Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations After review of the comments, the Board has determ ined to am end the criteria for qualifying for the stream lined procedure. The criteria adopted require that the record show that the proposal is consistent w ith the convenience and needs standard under the BHC Act and that the acquiring organization have satisfactory or outstanding performance ratings under the CRA at its lead insured depository institution and insured institutions representing at least 80 percent of the organization’s banking assets. As noted above, the Board has determ ined to retain the portion of the current regulatory filing in w hich the applicant describes the effect of the proposal on the convenience and needs of the affected communities. The System w ould evaluate this information as well as other information available to the System, including CRA performance ratings, in determ ining w hether a proposal meets the convenience and needs factor in connection w ith the System ’s review of the proposal. The Board continues to believe that the CRA performance rating is a valuable and im portant m easure of the record and ability of an applicant to m eet the convenience and needs of a community, and the Board w ould, as currently, give significant weight to that performance record in the stream lined process. The Board believes that it may adopt the stream lined procedures as am ended w ithout any statutory changes to the BHC Act. The provisions under consideration by Congress in connection w ith the Regulatory Relief Act would have taken additional steps, including elim inating any public notice and opportunity for comment on bank acquisition proposals and eliminating consultation w ith the primary supervisor for the banks involved in the transaction. d. Size The Board proposed to lim it to 35 percent of the acquiring holding com pany’s assets the aggregate am ount of bank and nonbanking assets that may be acquired during a 12-month period using the stream lined procedures. This aggregate lim it w ould be calculated by reference to transactions approved under the stream lined procedure and w ould not include transactions that are reviewed under the normal 30/60-day process. Several commenters argued that the 35 percent asset test w ould allow very significant proposals by large bank holding com panies to be considered under the stream lined procedures, including mergers among institutions that rank among the ten largest banking organizations in the United States. These commenters contended that transactions that are large in absolute terms always require in-depth agency review. A few other commenters argued, on the other hand, that it was im portant to assure that the stream lined procedures are available to acquisition proposals by large bank holding companies because acquisitions by these institutions allow the benefits of reduced regulatory costs to be shared by a larger num ber of consumers. These commenters suggested that the Board expand the size criteria in various ways. Still other commenters argued that the size restriction w ould disproportionately limit transactions by small bank holding com panies. These commenters contended that a higher lim it should be established for small organizations because the objective criteria proposed by the Board are particularly effective in identifying transactions that w ould not raise statutory issues for small bank holding companies. In addition to these comments, the Board considered that the Regulatory Relief Act applies a limit on nonbanking acquisitions of 10 percent of the acquiring bank holding com pany’s assets, unless the Board finds that a higher lim it is consistent w ith safety and soundness and the purposes of the BHC Act. The Regulatory Relief Act also includes a lim it of 15 percent of the holding com pany’s consolidated Tier 1 capital on the gross consideration that may be paid by a bank holding company in a nonbanking acquisition that is reviewed u n der the stream lined procedures contained in that Act. In view of these comments and enactment of the Regulatory Relief Act, the Board has m ade two am endm ents to the size criterion originally proposed. First, the Board has adopted an absolute limit of $7.5 billion to the size of an individual acquisition that may be reviewed u nder the stream lined procedures. This limit w ould require an in-depth review—on the basis of size alone—of any com bination between organizations w ithin approximately the one-hundred largest bank holding com panies or involving nonbanking companies w ith a significant am ount of assets. The second change to the size criterion involves adoption of a limit on the gross consideration that may be paid in a nonbanking acquisition by a bank holding com pany under the streamlined process. As noted above, this lim it was included in the Regulatory Relief Act. The Board believes that, in the context of a nonbanking acquisition, a measure 9299 based on consideration paid often represents a better test of the potential impact of a proposal on the financial resources of the acquiring organization than a test based on the am ount of assets acquired because nonbanking acquisitions often involve the purchase of expertise and fee-based businesses that do not involve significant assets. As noted above, the Regulatory Relief Act adopted a limit of 10 percent of assets on the size of any individual nonbanking acquisition that may occur under the stream lined procedures. The Regulatory Relief Act allows the Board, by regulation, to adopt an asset size lim it that exceeds the 10 percent limit if the Board determines that a different percentage is consistent w ith safety and soundness and the purposes of the BHC Act. The Board has determ ined to adopt its proposed 35 percent limit. The size limit adopted by the Board takes account of the aggregate size of all acquisitions—both bank and nonbank acquisitions—reviewed u nder the streamlined procedures over a period of time that approximates the supervisory examination schedule for m ost banking organizations. This aggregate lim it allows better monitoring of the overall growth of an organization than does an individual transaction limit. As noted above, the Board has also adopted an absolute lim it of $7.5 billion on any individual acquisition that may be reviewed under the stream lined procedure, as w ell as a lim it on the am ount of consideration that may be paid in a nonbanking acquisition. The Board has also retained the ability to require review of any transaction using the normal 30/60-day process if w arranted for safety and soundness or other reasons. The Board believes that, in view of these other lim itations, the aggregate 35 percent size limit is consistent w ith safety and soundness and the purposes of the BHC Act. The Board has determ ined not to raise the size of its proposed exception from the growth lim it for smaller bank holding companies. The Board proposed to permit a qualifying bank holding company to make acquisitions w ithout regard to the 35 percent of asset limitation so long as the total assets of the bank holding company rem ained below $300 million on a pro form a basis. The Board believes that it is im portant to m onitor rapid growth in the relative size of an organization and that an examination rating may not accurately reflect the financial and managerial strength of an organization that has grown significantly since the last examination was conducted. The Board also notes that a significant 9300 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations num ber of acquisitions by smaller bank holding com panies that exceed the growth lim it are likely to continue to qualify for the norm al 30-day delegated action procedure. e. Notice to Primary Bank Supervisor In the case of the acquisition of a bank, the BHC Act requires that the prim ary supervisor for the bank to be acquired be given 30 calendar days in w hich to submit comments on the transaction. A similar provision was enacted in the Regulatory Relief Act that requires 30 days notice to be given to the Director of the Office of Thrift Supervision of a proposal by a bank holding company to acquire a savings association. Financial, managerial, legal, safety and soundness, and other concerns that are know n to the prim ary bank supervisor generally are shared w ith the System through ongoing arrangements for sharing supervisory information. Similarly, the System and the Office of Thrift Supervision regularly coordinate efforts and share information. Consequently, in practice, the primary supervisor generally allows the notice period regarding an application to expire w ithout filing comments. To im plem ent this statutory requirement, the final rule requires the appropriate Reserve Bank to provide notice of each bank acquisition proposal to the primary supervisor for the relevant banks and of each savings association acquisition to the Director of OTS. The final rule allows the System to act on any proposal that qualifies for the streamlined procedure even though the period for obtaining comments from the primary supervisor has not expired. The final rule provides, however, that the System’s action is subject to revocation if the prim ary supervisor objects to a transaction w ithin the relevant notice period. Because bank acquisition proposals may not be consum m ated for at least 15 days after System action—w hich is the m inim um post-approval period perm itted by statute to allow DOJ review of a bank acquisition—it is expected that the notice period for the prim ary supervisor w ill expire prior to consum m ation of a bank acquisition proposal. In the case of thrift acquisitions, the OTS is working w ith the Board to streamline the comment process. 5. Preacceptance Review Period The Board proposed to elim inate the current period prior to acceptance of a regulatory filing regarding a bank acquisition proposal during w hich the Reserve Bank reviews the informational sufficiency of the filing. Instead, the Board proposed to accept immediately any subm ission that contains the inform ation specified in the rule for the proposed type of transaction. This change eliminates a pre-acceptance period that typically averages 25 days. W hile commenters were generally in favor of this change, a num ber of com menters objected that elim ination of the pre-acceptance period w ould reduce the ability of the System to obtain information needed to evaluate properly the merits of a proposal. The Board disagrees. The elim ination of the pre acceptance period does not in any way dim inish the ability of the System at any tim e to request, or the responsibility of the applicant/notificant to provide, additional relevant information needed to evaluate a proposal. In addition, the Board has retained the right to return as incom plete any submission that does not contain the information specified in the regulation or appropriate form. The Board had previously eliminated a similar pre-acceptance period that applied to nonbanking acquisitions. The Board’s experience w ith elim ination of the pre-acceptance period for nonbanking acquisitions has indicated that a similar period is not necessary for bank acquisition proposals. 6. Hart-Scott-Rodino Act One commenter expressed concern w hether bank and nonbanking acquisitions approved under the Board’s stream lined procedures w ould be exempt from the notification requirements of section 7A of the Clayton Act. Section 7A of the Clayton Act, as added by the Hart-Scott-Rodino A ntitrust Improvements Act of 1976 (15 U.S.C. 18A) (“HSR Act”), requires that persons contem plating certain mergers and acquisitions provide notice of the transaction to the Federal Trade Commission (“FTC”) and the DOJ. The HSR Act, however, specifically provides an exemption from these filing requirem ents for transactions that require agency approval under section 3 of the BHC Act (i.e., the acquisition of shares or control of a bank or bank holding company). In addition, the HSR Act provides an exemption for transactions that require agency approval under section 4 of the BHC Act (i.e., the acquisition by a bank holding company of a nonbanking company) if the acquiring company provides to the FTC and DOJ copies of all information filed w ith the Board. The Board believes that the stream lined procedures under Regulation Y continue to satisfy the requirem ent for an exemption from the HSR Act for both bank and nonbanking acquisitions. The streamlined procedures represent a more stream lined procedure for obtaining System approval for the acquisition of a bank or bank holding company under section 3 or the acquisition of a nonbanking company u nd er section 4 of the BHC Act. As provided in the HSR Act, bank holding com panies w ould continue to be required to file w ith the DOJ and FTC the information subm itted to the Board in connection w ith a nonbanking acquisition. The staff of the DOJ and FTC have informally agreed w ith this position. 7. Conditional Approval The Board has authority to impose conditions in connection w ith its action on any proposal, and has in fact im posed conditions that address safety and soundness, CRA, conflicts of interest, and competitive issues in a num ber of prior cases. The final rule incorporates this policy in order to make clear that this authority is available in connection with action on any case, including a case that qualifies for the stream lined procedure. 8. Waiver Process The Board’s current regulation permits bank holding com panies to seek a waiver of the application filing requirem ent under the BHC Act for transactions that involve the acquisition of stock of a bank for an instant in time as part of a bank-to-bank merger reviewed by another federal banking agency under the Bank Merger Act. The Board proposed three changes to this portion of the regulation. First, the Board proposed to reduce the period for its review of waiver requests to 10 days from 30 days. Second, the Board proposed to specify in the regulation the information that m ust be provided w ith a waiver request. Third, the Board proposed to make the waiver process available for certain internal corporate reorganizations. Commenters discussing this proposal generally supported these changes. Several commenters suggested that the Board make waivers automatic and eliminate the filing and review requirem ent altogether. Another commenter argued, on the other hand, that the Board should not allow the waiver of any application and should require application filings in every case. The Board continues to believe that the waiver process represents a sensible reduction in duplication of regulatory review of proposals that are subject to review under identical standards in two different federal statutes. Accordingly, the Board has determ ined to retain the waiver process w ith the changes proposed. The Board believes that a 10- Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations day review process is adequate and necessary to allow the System to identify any aspect of the proposal that m ay have a material effect on the bank holding com pany or otherw ise fall outside the purview of the federal banking agency that is reviewing the merits of the underlying transaction. The Board also believes that, as a general matter, corporate reorganizations (such as the formation of a w holly ow ned interm ediate-tier holding company, the merger of w holly owned holding companies, and the transfer of a bank from one part of an organization to another part of the same organization) do not generally require agency review. In each case, the bank holding company already has System approval to control and operate the banks involved in the transaction. In these cases, the Board agrees with comm enters that a waiver should be automatic. The supervisory process provides the Board w ith ample authority and opportunity to address concerns that may arise from internal corporate reorganizations. Accordingly, the Board has adopted its proposal to extend the waiver process to internal corporate reorganizations and has made these waivers available w ithout any filing requirem ent.3 9. Small Bank Holding Company Policy Statement As published in the proposed revision to Regulation Y, the Board’s policy statem ent on one-bank holding companies was revised to generalize its applicability beyond the formation of a bank holding com pany to include acquisitions by qualifying small bank holding companies, to reduce the burden in the applications process, to incorporate previously informal policies that evolved since the original publication of the statement, and to remove obsolete language. Specifically, the Board proposed to perm it small bank holding com panies whose subsidiary banks are well managed and w ell-capitalized and w hose proposals result in parent com pany debt to equity of less than 1.0:1, to be eligible for stream lined processing. These companies w ould also be perm itted to pay dividends under certain conditions that are more clearly defined than in the existing statement. Proposals involving higher parent com pany leverage or a bank in less-than-satisfactory condition w ould be subjected to a focused review 3 Under the final rule, the waiver process is not available for transactions by a holding company that is organized in mutual form or for transactions that occur outside the United States. These cases typically raise a variety of issues that require review in the application/notice process. of the parent-level debt servicing ability, or other issue presented, under the Board’s normal procedures. These organizations w ould also be restricted from paying dividends until their leverage was reduced to a 1.0:1 level and the organization is otherwise in satisfactory condition. The final statem ent incorporates several changes that further reduce burden and make the policy statement more consistent w ith the general revisions to Regulation Y. It also incorporates suggestions from commenters and further clarifies the statement. The major substantive change eliminates a disparity betw een larger and smaller bank holding com panies in qualifying for the Board’s stream lined procedures. The final statem ent incorporates the requirem ent that, to qualify for the new stream lined procedure, banks controlling 80 percent of the organization m ust be wellmanaged and w ell-capitalized, as opposed to the requirem ent in the previous version of the statement that all banks meet these criteria. To address concern about the availability of the stream lined procedures to small bank holding companies that have not yet received an inspection rating, the final rule permits any unrated bank holding company, including a small bank holding company, to be eligible for stream lined processing as long as its subsidiary bank(s) are well-capitalized and w ell rated and the bank holding company obtains a determ ination from the System that the company qualifies for the streamlined procedures. Several commenters urged the Board to raise the $150 m illion size limit to qualify as a small bank holding company. The Board has determ ined not to raise this level at this time. The Board is concerned that an increase in the availability of higher levels of debt w ithout consolidated capital requirements w ould raise overall risks to the banking system, including increased risk to the Bank Insurance Fund, w ithout sufficient offsetting public benefits. The statement was also reformatted to make it more understandable and several technical and conforming changes have been adopted. 10. One-Bank Holding Company Formations The Board proposed a num ber of modifications to the stream lined notice procedure governing proposals by existing shareholders of a bank to establish a bank holding company. To qualify for this procedure under current 9301 rules, the shareholders of the bank m ust acquire at least 80 percent of the shares of the new bank holding company in substantially the same proportion as the shareholders’ bank ow nership, all shareholders m ust certify that the shareholders are not subject to any supervisory or adm inistrative action, and the bank holding company must identify the shareholders of the new bank holding company. The Board proposed to reduce the percentage of the bank holding company that m ust be ow ned by shareholders of the bank from 80 to 67 percent and to require only the principal shareholders (i.e., shareholders owning in excess of 10 percent of the bank holding company) to certify that they are not subject to any supervisory or administrative action. In addition, the Board proposed to elim inate the publication requirem ent for this category of bank holding company formation because no publication is required for these transactions under the Riegle Act and because no regulatory purpose is served by requiring publication of these transactions, w hich represent only a corporate reorganization. Only two commenters addressed these proposed revisions. Both supported the revisions and stated that the changes w ould help reduce unnecessary burden on individuals forming small bank holding companies. Accordingly, the Board has adopted the proposed changes in the final rule. B. Explanation o f Proposed Changes to the N onbanking Provisions 1. General Review and Updating of Nonbanking Activities Section 4(c)(8) of the BHC Act generally provides that a bank holding company may engage in, or acquire shares of a company engaged in, activities that the Board has determined, after notice and opportunity for comment, “to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.” The Board may make this determ ination by order or by regulation. The Board has to date determ ined by regulation that 24 activities are “closely related to banking” and has determined by individual order that a num ber of additional activities are also “closely related to banking.” Once the Board has determ ined— either by regulation or by order—that an activity is “closely related to banking,” the Board need not make that determ ination again in subsequent cases. Review of subsequent cases is limited to determining w hether the 9302 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations conduct of the nonbanking activity by the applying bank holding company w ould result in public benefits that outweigh the potential adverse effects (the “proper incident” test). The list of nonbanking activities contained in Regulation Y (the “laundry list”) is intended to serve the purpose of providing a convenient and detailed list of most of the activities that the Board has found to be closely related to banking and therefore permissible for bank holding companies. The Regulation Y laundry list also designates the activities that may be approved by the Reserve Banks under delegated authority, although the Board has delegated authority for Reserve Banks to act on proposals involving a num ber of activities approved by order during intervals between modifications of Regulation Y. The Board has adopted its proposed reorganization and revision of the list of permissible nonbanking activities contained in Regulation Y. Commenters generally agreed that reorganizing the list into categories of functionally related activities w ould make the list easier to understand and make it easier for bank holding companies to obtain approval to engage in related activities. The Board intends that this new organization of the laundry list perm it a bank holding com pany to obtain approval at one time to engage in all of the activities on the laundry list, all activities listed in a functional category, or, at the holding com pany’s choosing, any specific activity w ithin a category. As explained above, the Board has also am ended Regulation Y to incorporate the changes enacted in the Regulatory Relief Act that eliminate the prior approval requirem ent for well-run bank holding companies that propose to engage de novo in nonbanking activities that have been perm itted by regulation. This change will significantly reduce regulatory burden and improve the ability of well-run bank holding companies to respond quickly to changes in the m arketplace by eliminating the requirement that these companies obtain System approval prior to commencing de novo an activity perm itted by regulation. This change w ill also permit a well-run bank holding company, w ithout any prior notice or Board approval, to commence immediately any activity that is currently on the laundry list, any activity that has been added to the regulatory list of perm issible activities in this final rule, and any new activity that is added to the regulatory laundry list in the future, provided that the bank holding company meets the qualifying criteria at the time the nonbanking activity is commenced. A bank holding company that does not qualify under the final rule m ay file a notice seeking approval to engage in any or all activities contained on the laundry list, as reorganized in this final rule. The Board has also adopted a stream lined procedure for well-run bank holding companies to obtain System approval to make nonbanking acquisitions that fall w ithin the size limits noted above. This stream lined procedure is also available for proposals to engage de novo in nonbanking activities that have been perm itted only by order. As explained more fully below, the Board has am ended the regulatory list of permissible activities to include nonbanking activities that previously have been determ ined by order to be closely related to banking. Among the activities that have been included are: (1) Riskless principal transactions; (2) private placement services; (3) foreign exchange trading for a bank holding com pany’s ow n account; (4) dealing and related activities in gold, silver, platinum and palladium; (5) employee benefits consulting; (6) career counseling services; (7) asset management, servicing and collection activities; (8) acquiring and resolving debt-in-default; (9) printing and selling checks; and (10) providing real-estate settlement services. In addition, the Board has broadened the scope of permissible derivatives and foreign exchange activities to assure that bank holding companies may conduct these activities to the same degree as banks. As explained below, the final rule also removes several restrictions on these activities that apply to bank holding com panies but do not apply to banks that conduct these activities. 2. Removal of Restrictions Governing Permissible Activities The Board has determ ined to remove a significant num ber of restrictions currently contained in the regulation that are outmoded, have been superseded by Board order, or do not apply to insured depository institutions that conduct the same activity. The removal of these restrictions from the regulation does not affect the Board’s determ ination that each activity contained on the laundry list is so closely related to banking as to be a proper incident thereto. A detailed discussion of the restrictions that have been removed is contained in subsections (3), (5) and (6), or the section below explaining “Restrictions Removed from Permissible Nonbanking Activities.” The Board has determ ined to grant relief from these conditions to all bank holding com panies authorized to conduct each activity, w ithout the need for a specific filing by any individual bank holding company. Henceforth, a bank holding company authorized to conduct an activity on the revised laundry list may conduct that activity subject to the limitations retained in this final rule and to other applicable laws. This relief extends only to the restrictions described as being removed in subsections (3), (5) or (6), or the section below explaining “Restrictions Removed from Permissible Nonbanking Activities.” In particular, the relief does not extend to commitments or conditions that relate to the financial resources of a particular bank holding company or its subsidiaries, or to commitments or conditions that relate to the risk management polices of the organization, periods for divestiture of im perm issible assets or shares, or other commitments or conditions that are not discussed in subsections (3), (5), or (6) or the section below explaining “Restrictions Removed from Permissible Nonbanking Activities.” Bank holding companies that have com mitted to comply w ith restrictions not described in those sections as being rem oved may in writing request a determ ination that the condition or commitment is no longer appropriate. In granting this relief, the Board notes that some of the conditions removed from activities on the Regulation Y laundry list involve restrictions imposed under other laws and regulations, such as the federal securities laws or the Commodity Exchange Act. The Board’s action does not relieve any bank holding company of its obligation to conduct each activity in accordance w ith relevant state and federal law governing the activity. Other restrictions that have been removed describe good business practice but are not required to define the lawful scope of permissible activity. The Board will continue through the inspection process to monitor carefully the conduct of nonbanking activities by individual bank holding companies and reserves the right to impose any condition on the nonbanking activities or operations of any bank holding company as appropriate to assure that the activity is conducted in a safe and sound m anner and w ithin the authority granted by the Board. 3. Revision of Policy Statement Governing Investment Advisory Activities The Board proposed to remove four restrictions contained in its 1972 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations interpretive rule regarding the investm ent advisory activities of bank holding companies w ith respect to m utual funds and other investment com panies. These restrictions prohibit a bank holding com pany from: * Owning any snares of a m utual fund advised by the bank holding company; * Lending to a m utual fund advised by the bank holding company; * Accepting shares of a m utual fund that the holding company advises as collateral for any loan to a customer for the purpose of purchasing those m utual fund shares; and * Serving as an investm ent adviser to an investm ent company or m utual fund that has a nam e that is similar to, or a variation of, the nam e of the bank holding company or any of its subsidiary banks. These restrictions are intended to ensure that a bank holding company does not control a m utual fund in violation of the Glass-Steagall Act, as well as to mitigate potential conflicts of interests and the potential for customer confusion about the uninsured nature of investm ent company shares. The Board had previously removed a prohibition on a bank holding company purchasing, as a fiduciary, shares of a m utual fund advised by the holding company as well as restrictions contained in a staff letter (the “ Sovran letter”) on the sale of m utual funds by employees of a holding company and its affiliates. As the Board noted in its proposal, existing statutory provisions appear adequate to address concerns about the ow nership of shares of a m utual fund by the bank holding company. In particular, the investment limitations of section 4 of the BHC Act appear adequate to mitigate potential conflicts of interests that could result from removal of the investment restriction and lim it the ability of a bank holding com pany to acquire more than 5 percent of the voting shares of or to control a m utual fund it advises. Removal of the two lending restrictions w ould perm it bank holding companies and their affiliates to make certain loans to the extent permissible under applicable federal or state law. For example, federal law permits insured banks, w ithin limits, to make loans to a m utual fund advised by the bank, and the federal securities laws govern the extension of credit by any broker/dealer to a customer to purchase shares of a m utual fund. The System expects that extensions of credit by the holding company to a m utual fund or to a customer w ho uses the shares as collateral for the loan w ould be done on a safe and sound basis. The Board proposed to replace the fourth restriction w ith a provision perm itting similar nam es so long as: (1) The investm ent com pany nam e is not identical to that of the holding company or an affiliated insured depository institution; (2) the investm ent company nam e does not include the term “bank,” ; and (3) the holding com pany or investm ent com pany discloses to customers in writing the role of the holding com pany as an adviser to the investm ent company and that shares of the investm ent com pany are not federally insured and are not obligations of or guaranteed by any insured depository institution. The SEC permits an investm ent com pany to have a nam e similar to that of an insured depository institution provided that the investment com pany makes a num ber of disclosures that advise customers that the investm ent com pany is not federally insured or guaranteed by the insured depository institution.4 M any commenters strongly supported these proposed revisions. Commenters stated that these changes w ould remove restrictions addressed more directly by other provisions of law and would allow bank holding com panies to compete on a more equal basis w ith other investm ent advisors. Several comm enters urged the Board to allow an investm ent company advised by a bank holding company to have a name identical to that of the bank holding com pany so long as the name is not identical to that of any subsidiary bank of the holding company. These commenters also contended that the Board’s disclosure requirem ents in this area are duplicative and therefore should be eliminated. A small num ber of other commenters objected that the Board’s proposal w ould cause increased confusion among customers regarding the nature of uninsured investment products. After review of the comments, the Board believes that the proposed revisions to the interpretive rule are appropriate, and has adopted the revisions as proposed. The revised name restriction will allow increased flexibility in the marketing of investm ent companies advised by bank holding companies, and enhance the ability of bank holding companies to compete w ith other bank and nonbankaffiliated investment advisers. At the same time, the lim itation on identical names and on the use of the word “bank,” w hen coupled w ith the disclosure requirements, should substantially mitigate the potential for 4 Letter of May 13,1993, [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) Paragraph 76,683. 9303 customer confusion about the u n insured nature of investm ent company shares. The Board believes that the disclosure requirem ents also continue to be appropriate to address the potential for customer confusion in situations in w hich the holding com pany or its affiliates advise a m utual fund and the sale of the m utual fund shares is not covered by the disclosure provisions of the Interagency Statement on Retail Sales of Nondeposit Investment Products. The disclosure requirements are increasingly proving to be an effective m ethod for addressing potential customer confusion and do not appear to be onerous. 4. Procedures for Determining the Permissibility of Nonbanking Activities The Board has adopted two provisions to Regulation Y to ease the burden associated w ith determining the authorization and scope of permissible nonbanking activities. First, the regulation specifically reflects the fact that the Board may, on its own initiative, begin a proceeding to find that an activity is perm issible for bank holding companies, as the Board did in the case of many of the earlier nonbanking activities. As required by the BHC Act, the Board w ould provide public notice that it is considering the permissibility of a given activity and w ould provide an opportunity for public comment. The Board expects to consider amending the laundry list, for example, as new activities are authorized for banks, as experience w ith a narrowly defined activity indicates that the activity should be more broadly defined, or as developments occur in technology or the marketplace for financial products and services. The System will actively track market developments as well as decisions that authorize banks to conduct new activities and evaluate adding these activities to the laundry list even if an individual request has not yet been made to engage in these activities. Several commenters urged the Board to add a provision limiting the processing period for evaluating proposals regarding the perm issibility of a particular new activity, m uch as the Board has proposed for determ ining the scope of a currently permissible activity. On the other hand, other commenters argued that the Board should seek public comment on all proposals involving the permissibility of new activities or the scope of currently permissible nonbanking activities. The BHC Act, as am ended by the Regulatory Relief Act, requires that the 9304 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 5. Nonbanking Activities That Are Board provide notice and opportunity for public com m ent prior to determ ining Incidental to a Permissible Activity that an activity is closely related to The Board has adopted its proposal to banking. The Regulatory Relief Act perm it a subsidiary of a bank holding elim inated the requirem ent that the company engaged in financial data Board provide an opportunity for a processing or m anagement consulting formal hearing regarding the activities, as an incidental activity, to perm issibility of an activity. The final derive up to 30 percent of its annual rule reflects both of these statutory revenue from nonfinancial data actions. In particular, the final rule processing or m anagement consulting retains the provision currently in services, respectively. Commenters Regulation Y for public notice and discussing this aspect of the proposal opportunity for com m ent in connection strongly supported this proposal and w ith consideration of the permissibility contended that bank holding companies of a new activity, and elim inates the engaged in data processing and requirem ent for a hearing. The Board m anagement consulting activities have retains discretion to order a formal or substantial expertise in these areas that informal hearing regarding the allow them safely and soundly to perm issibility of an activity w here a provide these services involving hearing may be useful in resolving nonfinancial data or nonfinancial disputes of fact regarding an activity. customers. In addition, several Because of the complexity of m any of commenters argued that bank holding the issues raised in determ ining the com panies currently are at a permissibility of a new activity, the competitive disadvantage in providing Board has determ ined not to establish a data processing and management specific lim it on the time for evaluating consulting services and in hiring these proposals. employees because of the strict The Board has am ended the limitations tying these services to regulation to establish a stream lined financial data and financial consulting. procedure outside the application A num ber of commenters argued that process through w hich any bank the Board should perm it a greater holding company or other interested am ount of incidental activity, some person may request an advisory opinion arguing for no limit. Two commenters from the Board that a particular argued, on the other hand, that bank variation on an activity is permissible holding companies should not be under an existing authorization and is perm itted to engage in any nonfinancial not deemed to be a new activity. The data processing because the commenters Board w ould issue an advisory opinion believed that the benefits of access to w ithin 45 days, and make this opinion the Federal discount w indow and the available and applicable to all similarly paym ents system and the unique situated bank holding companies. At the products that banks can provide time the Board reviews an activity, the combine to give bank holding Board w ould determ ine w hether it is companies and banks an unfair appropriate to perm it bank holding advantage in competing with companies to engage in this activity nonfinancial firms to provide w ithout additional approval (as, for nonfinancial products and services, example, a variation of one or more including firms owned by women and previously authorized activities) or to minorities. require bank holding companies to After considering the comments, the obtain approval prior to conducting the Board has adopted the revisions to the activity (because, for example, the data processing and management activity does not fall w ithin a previously consulting provisions as proposed. The approved activity or category or Board believes that these revisions are involves special risks or concerns). As necessary to allow bank holding noted above, w ell-run bank holding companies to compete effectively in companies may, w ithout prior Board providing financial data processing and approval, engage de novo in any activity management consulting services. added to the regulatory laundry list. The strict limitations on providing Commenters agreed that these two non-financial data processing and procedures should make it easier for management consulting activities that were previously applied to bank holding bank holding companies to participate in marketplace developments in companies inhibit the ability of bank permissible nonbanking activities. In holding com panies effectively to addition, these procedures will compete w ith other providers w ho often combine financial and nonfinancial eliminate a num ber of applications that are currently filed by bank holding products. In a number of recent cases com panies that are uncertain about the reviewed by the Board, for example, the scope of permissible activities. record has indicated that it is common practice for a software provider to integrate financial data processing software and nonfinancial data processing software in the same package. Similarly, commenters indicated that it is comm on for management consultants to provide advice on general m atters in connection w ith providing advice on financial, accounting and sim ilar matters. The strict limitations have also reduced the ability of bank holding companies to attract the most qualified employees— w ho often have expertise, clients, proprietary rights, and interests—that span financial and nonfinancial matters. The Board believes that its proposed limit—30 percent of the revenue derived from permissible financial data processing activities, and 30 percent of the revenue derived from permissible financial management consulting services, respectively—represents a reasonable level of incidental activity that assures that the bank holding com pany is significantly involved in financial data processing or m anagem ent consulting.5 The Board does not believe that this lim ited participation w ill permit bank holding companies an unfair competitive advantage over other providers of data processing or m anagement consulting services. As the Board and the industry gain experience in data processing and m anagem ent consulting activities, the Board w ill review and adjust the level of incidental activities as appropriate. 6. Expanded Exception for Acquisitions of Lending Assets in the Ordinary Course of Business The Board proposed to revise the regulatory language permitting a bank holding company, w ithout additional approval, to acquire lending assets from a third party in the ordinary course of business. The Board currently permits a bank holding company, w ithout additional approval, to acquire assets of an office of another company related to making, acquiring or servicing loans so long as the bank holding company and the transaction meet certain qualifications. Among the qualifications are that the assets relate to consumer or mortgage lending, and that the acquired assets represent the lesser of $25 million or 25 percent of the consumer lending, mortgage banking or industrial banking assets of the acquiring bank holding company. The office m ust also be 5 In the data processing area, this 30 percent basket would not include revenue derived from the use of excess capacity or the sale of general purpose hardware that is currently permitted in accordance with the Board’s regulation and policies governing those activities. Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations located in the geographic area served by the bank holding company. The Board has revised this provision in three ways. First, since the Board no longer limits the geographic scope of its approval to engage in nonbanking activities, this restriction has been removed. Second, the scope of the exception has been broadened to perm it the acquisition of assets related to any lending activity. Third, the threshold limits have been raised to perm it the acquisition of assets representing up to the lesser of $100 m illion or 50 percent of the lending assets of the bank holding company. Commenters generally favored the modifications proposed by the Board for expanding the scope and size of transactions that could be conducted in the ordinary course of business under this exception. The proposed broadening of the exception would elim inate an unnecessary approval requirem ent and paperwork for transactions that are relatively small and represent the ordinary course of business. 7. Consummation Period for Certain Proposals The Board had originally proposed to eliminate the requirem ent that a bank holding company exercise its authority to engage de novo in a nonbanking activity w ithin one year of receiving System approval. While several commenters expressed support for this approach, the final rule does not include a specific provision adopting this change for two reasons. First, since the date of the original proposal, the Regulatory Relief Act elim inated altogether the prior approval requirem ent for well-run bank holding companies that choose to engage de novo in nonbanking activities permissible by regulation. This statutory change eliminates a substantial portion of the cases that w ould have benefitted by the proposal to elim inate the consum m ation period. Second, the Board may, w ithout any regulatory change, adjust the consum m ation period on a case-by-case basis. The Board believes this is a more appropriate approach in cases that do not qualify for the statutory exception in the Regulatory Relief Act. C. Explanation o f the Restrictions Rem oved From Permissible Nonbanking Activities As noted above, the Board has removed restrictions contained in the current regulation that are outmoded, have been superseded by Board order or w ould not apply to an insured depository institution conducting the same activity. The lim itations that rem ain are necessary to establish a definition of the perm itted activity or to prevent circum vention of another statute, such as the Glass-Steagall Act. The following discussion explains, by functional group of activities, the restrictions that the Board has elim inated as well as certain limitations that the Board has retained. In several areas, the Board expects to develop supervisory policy statements to address potential adverse effects that may be associated w ith certain activities. The Board may seek comment on those supervisory policy statements as appropriate. 1. Extending Credit and Servicing Loans Lending activities are already broadly defined and contain no restrictions. Permissible lending activities include the types of lending activities that were previously listed by way of example in Regulation Y, such as lending activities conducted by consumer, mortgage, commercial, factoring, and credit card companies. Removal of those specific examples from the proposed rule was intended to make clear that making, acquiring, brokering and servicing all types of loans or extensions of credit are considered permissible lending activities, and elim ination of these examples from the final rule does not dim inish the scope of the activity or the perm issibility of those examples of lending activities. Nevertheless, at the request of a num ber of commenters, factoring has been re-included as an example of a permissible lending activity. 2. Activities Related to Extending Credit A new category has been added authorizing activities that the Board determines to be usual in connection w ith making, acquiring, brokering or servicing loans or other extensions of credit. W ithout limiting the scope of this activity, the category lists a num ber of activities that the Board has previously determ ined are related to credit extending activities, including, by way of example, credit bureau, collection agency, appraisal, asset management, check guarantee, and realestate settlement activities. Restrictions governing disclosures to customers, tying, preferential treatment of customers of affiliates, disclosure of confidential customer information w ithout customer consent and similar restrictions previously contained in Regulation Y have been removed from these activities. These restrictions do not apply to banks that conduct these activities and, to the extent these restrictions are appropriate, supervisory 9305 guidance on the conduct of the activity w ill be developed. Several commenters requested that the Board eliminate all restrictions governing the acquisition of debt in default, in particular, the requirement that the period for disposing of shares or assets securing debt in default be calculated as of the date the defaulted debt is acquired. The Board believes the three restrictions adopted in the regulation are necessary to define the scope of the activity and to assure that the activity remains the acquisition of debt rather than an impermissible acquisition of securities or other assets. The requirem ent regarding the calculation of the period for disposing of the underlying shares or assets subjects the activity to the same limitations that apply under the terms of the BHC Act to the acquisition of shares or assets in satisfaction of a debtpreviously-contracted. During this period, the holding company may divest the property or, as in the case of any debt that has been previously contracted, restructure the debt. 3. Leasing Personal or Real Property The changes to the leasing provision have been adopted as proposed. Specifically, the regulation removes a num ber of restrictions from the two types of leasing activities permissible for bank holding companies, full-payout leasing and high residual value leasing,6 including the following restrictions: * The lease m ust serve as the functional equivalent of an extension of credit (permissible high residual value leasing may not be the functional equivalent of an extension of credit); * The property m ust be acquired only for a specific leasing transaction; * Leased property must be re-leased or sold w ithin 2 years of the end of each lease; * The m axim um lease term may not exceed 40 years; and * No leased property may be held for more them 50 years. Commenters favored removal of these restrictions and noted that removal of these restrictions from the regulation w ould perm it bank holding companies 6 A full-payout lease is the functional equivalent of an extension of credit and relies primarily on rental payments and tax benefits to recover the cost of the leased property and related financing costs. High residual value leasing may involve significant reliance on the expected residual value of the leased property—on average, under 50 percent, but in some cases, up to the full original cost of leased property—to recoup the cost of the leased property and related financing costs. Under the current regulation, bank holding companies may provide full-payout leases for any type of personal property or real property, and may make high residual value leases only for personal property. 9306 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations greater flexibility to acquire property in quantity in the expectation of leasing activities and w ould allow more flexibility in selling or re-leasing property at the expiration of a lease. It is expected that supervisory guidance w ould be developed to address potential issues arising from removal of the restrictions. The provision limiting to 100 percent of the initial acquisition cost the am ount of reliance that may be placed on the residual value of leased personal property has also been removed. This lim it does not apply to national bank leasing activities. While commenters favored removal of the requirem ent that the estim ated residual value of real property be lim ited to 25 percent of the value of the property at the time of the initial lease, this restriction was retained in order to distinguish real property leasing from real estate developm ent and investment activities. Two other requirements were retained: (1) That the lease be non operating, and (2) that the initial lease term be at least 90 days. These requirem ents w ere developed in the course of litigation regarding the leasing activities of national banks, and were relied on by the courts in distinguishing bank leasing activities from general property rental and real estate developm ent businesses. The requirem ent that a lease be non operating is also a statutory requirem ent limiting the high residual value leasing activities of national banks. The regulation has been modified at the request of commenters to clarify that, as a general matter, the requirem ent that a lease be non operating m eans that the bank holding com pany may not itself (or through a subsidiary) repair, operate, m aintain or service the equipm ent or property being leased during the lease term. The Board has applied this interpretation since 1974 in order to help distinguish bank holding company leasing activities from general commercial activities. A more detailed definition of a nonoperating lease in the automobile rental context, w hich was developed in litigation and adopted by the courts, has also been retained. The regulation provides that, in either case, a bank holding company is perm itted to arrange for a third party to provide these repair and other services in connection with a lease. 4. Operating Nonbank Depository Institutions This category permits ow nership of a savings association and an industrial loan company. The proposed regulation retains the restrictions in the BHC Act that the institution not be operated as a rule permits bank holding com panies to provide retail customers w ith investm ent advice concerning derivatives transactions an d to provide discretionary investm ent advice regarding derivatives transactions to institutional or retail custom ers as an investment adviser, com m odity trading advisor, or otherwise. This includes 5. T rust Company Functions providing discretionary investm ent The current regulation limits the advice to any person regarding contracts deposit-taking and lending activities of relating to financial or nonfinancial trust companies. These limitations are assets. The conduct of these activities already encom passed in the requirem ent would, of course, be subject to the in the BHC Act that the trust company requirements of applicable law, not be a “bank” for purposes of the BHC including applicable state and federal Act and have, therefore, been deleted lav/s governing fiduciary activities or from the regulation. advisory activities. The final rule perm its bank holding 6. Financial and Investm ent Advisory companies to engage in any Activities combination of permissible nonbanking Like the initial proposal, the final rule activities listed in Regulation Y. groups together all investm ent and Accordingly, bank holding companies financial advisory activities and broadly may provide financial and investm ent perm its acting as investm ent or advice (including discretionary financial adviser to any person, w ithout investment advice) together w ith restriction. W ithout limiting the breadth permissible agency transactional of the advisory authority, the rule also services, investment or trading lists specific examples of certain types transactions as principal, or any other of investm ent or financial advice, listed activities. Supervisory guidance counseling and related services that may be developed, as needed, to address previously had been separately conflicts of interest that may arise from authorized. These examples are: providing certain services in * Advising an investm ent company combination. and sponsoring, organizing and The final rule also deletes restrictions managing a closed-end investment in the areas of tax-planning, taxcompany; preparation and consum er counseling * Furnishing general economic services that prohibited bank holding information and forecasts; companies from promoting specific * Providing financial advice products and services and from regarding mergers and similar corporate obtaining or disclosing confidential transactions; customer information w ithout the * Providing advice regarding custom er’s consent. These restrictions commodities and derivatives do not apply to banks that engage in transactions; and these activities. * Providing consum er educational The commenters addressing this courses and providing tax-planning and activity strongly supported the tax-preparation. consolidation of the various advisory The final rule removes the few activities, the expansion of permissible restrictions that have in the past been advisory activities, and the removal of im posed by the Board on financial and existing restrictions im posed by the investm ent advisory activities. These Board on these activities. These restrictions do not apply to banks that commenters argued that the provision of provide investm ent advisory services. all types of financial and investment Specifically, the final rule removes advice is w ithin the expertise of banking the restriction that discretionary organizations and, therefore, closely investm ent advice be provided only to related to banking. institutional customers, thereby Several commenters requested further allowing bank holding companies to guidance on the scope of permissible manage retail custom er accounts outside advisory activities and urged the of the trust departm ent of an affiliated inclusion of examples of additional bank (to the extent otherwise permitted specific types of advisory activities, by law). This activity w ould continue to such as advisory activities related to real be governed by the fiduciary principles estate, in order to clarify the in relevant state law. Moreover, the final permissibility of these activities. Other commenters requested clarification that 7 The BHC Act contains an exception from the the use of examples did not im ply that definition of “bank” for industrial loan companies advisory activities that are om itted from and savings associations that meet requirements the list of examples are not permissible. listed in the BHC Act. “ban k ” for purposes of the BHC A c t7 and that the activities of the institution conform to the relevant statutory provisions of the BHC Act. As noted above, by the terms of the Regulatory Relief Act, the operation of a savings association requires prior System approval. Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations As noted above and in the original ' proposal, the final rule includes any investm ent or financial advisory activity w ithout restriction. The examples included in the final rule are not intended in any way to limit the scope of the financial and investm ent advisory activity. The examples are illustrative rather than exclusive examples of permissible advisory activities, and have been retained to recognize that certain advisory activities have been specifically approved u nder other provisions of Regulation Y and continue to be permissible. Some commenters suggested revisions to the proposal’s description of certain examples. In response to these comments, the final rule clarifies that the provision regarding advice on mergers, acquisitions and other transactions includes “other similar transactions.” At the suggestion of several commenters, the final rule has been revised to clarify the permissibility of providing investm ent advice regarding transactions w ith respect to any transactions in foreign exchange, swaps and similar transactions, commodities, and forwards contracts, futures, options, options on futures, and similar instruments. Several commenters noted that there currently is uncertainty regarding the jurisdiction of the CFTC over some transactions involving foreign exchange. The final rule is not affected by the scope of CFTC jurisdiction. The Board intends that references to transactions “ in foreign exchange” throughout the regulation include transactions in foreign exchange, options on foreign exchange, futures on foreign exchange, options on futures on foreign exchange, swaps in foreign exchange, and similar foreign exchange-related instrum ents. A bank holding company must, of course, comply w ith the rules of any other federal or state agency to the extent that the bank holding company conducts an activity subject to that agency’s jurisdiction, as determ ined by the relevant statute, agency rule or court decision. 7. Agency Transactional Services for Customer Investments The final rule reorganizes into a single functional category the various transactional services that a bank holding company may provide as agent. This category includes securities brokerage activities, private placement activities, riskless principal activities, execution and clearance of derivatives contracts, foreign exchange execution services, and other transactional services. a. Securities Brokerage Activities The current regulation differentiates betw een securities brokerage services provided alone (i.e., discount brokerage services) and securities brokerage services provided in combination w ith investm ent advisory services (i.e., fullservice brokerage activities). The final rule permits securities brokerage w ithout distinguishing between discount and full-service brokerage activities. U nder the current regulation, bank holding companies providing fullservice brokerage services m ust make certain disclosures to customers regarding the uninsured nature of securities and may not disclose confidential custom er information w ithout the custom er’s consent. These requirem ents were deleted in the proposal. The Board sought comment on w hether elim ination of these restrictions from the regulation w ould lead to adverse effects, including customer confusion about the uninsured nature of non-deposit investm ent products sold through bank holding companies. Several commenters opposed the elim ination of the disclosure requirem ents in the regulation, contending that the interagency policy statement and SEC regulations are not providing adequate consumer protection. A num ber of commenters, however, supported the elim ination of the disclosure requirements in the regulation on the basis that these requirements were duplicative of requirements contained in the interagency policy statement and SEC regulations. The final rule deletes the disclosure requirements. The disclosure requirem ents—along w ith a num ber of other requirem ents that specifically address the potential for customer confusion, training requirements, suitability requirements and other matters—are already contained in an interagency policy statement that governs the sale of securities and other non-deposit investm ent products on bank premises as well as in rules adopted by the SEC. In addition, similar disclosure requirem ents are required by the Board’s policy statement governing the sale by bank holding companies of shares of m utual funds and other investm ent companies that the bank holding company advises. Recent supervisory experience indicates that banking organizations and their affiliates, in general, are becoming more effective in implementing the regulatory disclosure requirements and that customers are becoming 9307 increasingly aware that investm ent products purchased at banking organizations and their affiliates are not federally insured. Moreover, the Board and the SEC have adequate supervisory authority to ensure that bank holding com panies comply w ith the regulatory disclosure requirem ents. To the extent that disclosures to customers are appropriate in areas not covered by the regulatory policy statements or SEC regulations, the Board w ill consider w hether to develop supervisory guidance, on an interagency basis where appropriate. b. Riskless Principal Activities The Board recently reduced the restrictions that govern riskless principal activities.8 The restrictions that were retained were designed to ensure that bank holding com panies do not avoid the Glass-Steagall Act provisions by classifying underw riting and dealing activities as riskless principal activities. The restrictions that the proposal retained prohibit: * Selling bank-ineligible securities at the order of a customer w ho is the issuer or in a transaction in w hich the bank holding company has an agreement to place the securities of the issuer; * Acting as riskless principal in any transaction involving a bank-ineligible security for w hich the bank holding com pany or an affiliate makes a market; * Acting as riskless principal for any bank-ineligible security carried in the inventory of the bank holding company or any affiliate; and * Acting as riskless principal on behalf of any U.S. affiliate that engages in bank-ineligible securities underw riting or dealing activities or any foreign affiliate that engages in securities underw riting or dealing activities outside the U.S. The Board requested comment on w hether these restrictions, and in particular the second and third restrictions, are necessary to assure com pliance w ith the Glass-Steagall Act. The majority of commenters discussing the riskless principal activity argued for the deletion of all four restrictions, contending that none of the restrictions are necessary to ensure that a nonbanking subsidiary does not engage in underw riting or dealing through its riskless principal transactions and that any concern in this regard w ould be addressed by a requirement that the subsidiary not hold itself out as a dealer w ith respect to any security. Several commenters noted that the restrictions w ould prohibit riskless principal 8 The B ank o f New York Company, Inc., 82 Federal Reserve Bulletin 748 (1996). 9308 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations transactions on b ehalf of a section 20 affiliate even if this affiliate was not the underw riter or dealer for the security in question. These commenters m aintained that this w ould pu t bank holding companies w ith section 20 affiliates at a competitive disadvantage. Several commenters also suggested that the Board perm it riskless principal transactions in the primary market generally. Some of these commenters specifically urged the Board to allow bank holding com panies to act as riskless principal for the sale of commercial paper in the prim ary market because com mercial paper tends to have short m aturities. The final rule retains the requirement that riskless principal transactions be conducted in the secondary market. The Board has determ ined, however, to elim inate all but two restrictions in the final rule. The final rule retains the first proposed restriction, w hich prohibits a bank holding company from using its riskless principal authority to sell bankineligible securities at the order of a custom er w ho is the issuer or in a transaction in w hich the bank holding company has an agreement to place the securities of the issuer. This restriction, as well as the requirem ent that the transactions be conducted in the secondary market, is designed to distinguish riskless principal activities from private placem ent and underw riting or dealing activities. This classification of riskless principal transactions does not prevent bank holding com panies from engaging pursuant to other authority in permissible private placem ent activities or in underw riting and dealing activities, both of w hich perm it transactions in the primary market and w ith an issuer. The Board has also determ ined to revise the second restriction to focus on transactions involving a bank-ineligible security for w hich the bank holding company or any affiliate acts as underw riter (during the underw riting period and for 30 days thereafter) or dealer. This revision narrows the scope of the restriction w hile addressing the Board’s concern that a nonbanking subsidiary not use its riskless principal authority to engage in underw riting or dealing activities. As modified, this provision also addresses the concerns covered by the third and fourth restrictions. Consequently, the final rule deletes the last two restrictions in the proposal. c. Private Placem ent Activities The Board proposed to add private placem ent activities to the laundry list, using the definition of private placem ent activities adopted by the SEC and the federal securities laws. The proposal removed all but one restriction that had been im posed by Board order on the conduct of this activity. That restriction prohibits a bank holding com pany from purchasing for its own account securities that it is placing and from holding in inventory unsold portions of securities it is attem pting to place. Among the restrictions that the proposal removes from the conduct of private placem ent activities are prohibitions on: * Extending credit that enhances the m arketability of a security being placed; * Lending to an issuer for the purposes of covering the funding lost through the unsold portion of securities being placed; * Lending to the issuer for the purpose of repurchasing securities being placed; * Acquiring securities through an account for w hich the bank holding com pany has fiduciary authority; * Providing advice to any purchaser regarding a security the bank holding com pany is placing; and * Placing securities w ith any noninstitutional investors (the SEC rules allow sales to institutional investors and up to 35 non-institutional investors). None of these restrictions have been applied to national banks that conduct private placement activities. The Board sought comment on w hether any of these restrictions must be retained to address potential adverse effects, including potential conflicts of interest or custom er confusion, or to assure fulfillment of fiduciary duties. The commenters discussing private placem ent activities strongly supported the removal of these restrictions from private placem ent activities. Several comments urged the Board, however, not to adopt the definition of private placement in the federal securities statutes, contending that such definition is too restrictive. The final rule, as the proposal, defines private placement in accordance w ith the Securities Act of 1933 (1933 Act) and the rules of the SEC. For purposes of including private placem ent activities on the laundry list, the Board believes it is reasonable to look to the definition of private placement adopted by the SEC, the primary federal regulator of securities activities, and the distinctions the SEC has drawn between private placem ent and underw riting or dealing activities. This definition does not limit bank holding companies from seeking to engage in other securities activities pursuant to Board order. One commenter also requested that the definition of private placem ent be broadened to include private resales of securities to institutional buyers and private placem ents of securities of registered investm ent companies. The final rule w ould perm it private resales of privately placed securities if the transaction is conducted in accordance w ith the requirem ents of the 1933 Act and the rules of the SEC, the bank holding company acts only as agent for such private resales by th ird parties, and the bank holding com pany neither purchases for its own account securities that it is placing nor holds in inventory unsold portions of securities it is attem pting to place. This w ould not include acting as a dealer w ith respect to resales of privately placed securities, an activity that bank holding companies m ay seek to engage in pursuant to Board order. Similarly, the final rule would perm it bank holding com panies to act as agent for the private placem ent of securities issued by any company, including an investm ent company, to the extent that these private placements are conducted in accordance w ith the requirem ents of the 1933 Act and the SEC rules and the Board’s restrictions on purchasing or inventorying such securities. Some commenters also recommended that the Board remove the prohibition on a bank holding company purchasing or repurchasing the securities it places. Several of these commenters contended that such purchases should be permissible if the com pany made the decision to purchase the securities for its own account sim ultaneously w ith or after, and separate from, the decision to engage in the private placement. One com menter m aintained that a company engaged in private placem ent activities should be perm itted to invest in the securities being placed so long as it had a bona fid e expectation of and m ade a bona fid e effort in placing the securities. The final rule retains the proposal’s restriction on purchasing or repurchasing the securities that are privately placed. The Board believes this restriction is appropriate to prevent a bank holding company from classifying as private placem ent activities its securities underwriting activities, w hich are governed by the Glass-Steagall Act and the Board’s section 20 decisions. The final rule does not contain a lim itation on the am ount of a particular issue of securities that a company may place w ith an affiliate. As the Board noted w hen it first authorized a bank holding company to place securities w ith an affiliate, banks privately place securities w ith affiliates and no Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations particular supervisory problem appears to have arisen from these investments.9 The Board continues to recognize the increased potential for certain conflicts of interests if affiliates purchase a substantial portion of an issue of securities placed by an affiliate. In this regard, insured depository institutions that purchase securities privately placed by an affiliate m ust com ply w ith section 23B of the Federal Reserve Act as well as the limitations in the Glass SteagallAct relating to the purchase of investm ent securities. The Board expects that nonbank affiliates that purchase these securities will do so in accordance with appropriate internal policies and procedures. d. Futures Commission M erchant Activities i. In General The current regulation authorizes bank holding companies to execute and clear derivatives on certain financial instrum ents on major exchanges, subject to a num ber of restrictions. The Board has, by order, broadened this authority in two key respects. First, the Board has by order perm itted bank holding companies to execute and clear derivative contracts on a broad range of nonfinancial commodities. Second, the Board has perm itted bank holding com panies to clear derivative contracts w ithout sim ultaneously providing execution services, and to provide execution services w ithout also providing clearing services. Commenters strongly favored modification of the current regulation to reflect these Board orders. As noted above, the final rule removes the restriction in the current regulation prohibiting a bank holding company from providing foreign exchange transactional services in the same subsidiary that provides advice regarding foreign exchange. Banks are not subject to this restriction. The final rule also w ould permit a bank holding company to perform perm issible futures comm ission m erchant (“FCM”) activities through a section 20 subsidiary. The final rule permits a nonbanking subsidiary to act as an FCM regarding any exchange-traded futures contract and options on a futures contract based on a financial or nonfinancial commodity. The final rule also deletes the restriction that a bank holding company not act as an FCM on any exchange unless the rules of the exchange have been reviewed by the Board. All U.S. commodities exchanges '‘ J.P. Morgan & C om pany Inc., 76 Federal Reserve Bulletin 26, 28 (1990) are supervised by the CFTC and a review by the Federal Reserve System of the rules of an exchange, w hether domestic or foreign, w ould not be the most effective m ethod for addressing the safety of conducting FCM activities on the exchange. A more effective m ethod for addressing the risks of FCM activities—w hether on domestic or foreign exchanges—is through the on site inspection and supervision of the risk management systems of the bank holding company. Accordingly, the Board w ould use the supervisory process, w hich includes regular inspections of the holding company and its affiliates, to address concerns about the effectiveness of the holding com pany’s risk m anagem ent systems. The final rule removes several other requirements, including that the FCM subsidiary: * Time stam p all orders and execute them in chronological order; * Not trade for its ow n account; * Not extend margin credit to customers; and * M aintain adequate capital. The CFTC has not found it necessary to prohibit FCMs from trading for their own account, and removal of that restriction from the Board’s regulation allows an FCM affiliated w ith a bank holding com pany to compete on the same basis as an FCM not affiliated w ith a holding company. Experience has not indicated that the affiliation of an FCM w ith a bank holding com pany itself increases the risks or conflicts that could arise from the com bination of FCM and proprietary trading activities. Conduct in the other areas listed above is addressed in rules of the CFTC or the relevant self-regulatory organizations, w hich are applicable to any FCM. Like the initial proposal, the final rule retains the requirements of the current regulation that a bank holding company conduct its FCM activities through a separately incorporated subsidiary [i.e., not through the parent bank holding company). The proposal retained the requirem ent of the current regulation that the subsidiary not become a member of an exchange that requires the parent bank holding company also to become a member of the exchange. The purpose of this restriction was to lim it the bank holding com pany’s exposure to contingent obligations u nder the loss sharing rules of exchange clearinghouses in order to preserve the holding com pany’s ability to serve as a source of strength to its subsidiary insured depository institutions. The Board invited comment, however, on w hether this restriction was appropriate and on w hether the Board’s concern could be addressed more effectively by 9309 an alternative restriction, such as a requirem ent that the parent bank holding company not provide a guarantee of non-proprietary trades conducted by an FCM subsidiary. Most commenters that discussed FCM activities supported the alternative restriction as sufficient to address a bank holding com pany’s potential exposure to contingent obligations under loss sharing rules of clearinghouses and to establish clear parameters for a bank holding com pany’s involvement on an exchange or clearing association. Four commenters suggested that bank holding companies be given the option of choosing w hich restriction is more suitable to business conducted on a particular exchange. If a choice m ust be made between a prohibition against membership or against a guarantee of non-proprietary trades, these commenters generally preferred the latter, noting that holding company m embership is a prerequisite on a num ber of exchanges for receiving reductions in fees or other benefits. Based on its experience and a review of the comments, the Board has determined that an alternative restriction that prohibits the parent bank holding company from guaranteeing or otherwise becoming liable for n o n proprietary trades conducted by or through its FCM subsidiary more effectively addresses the Board’s concern about a parent bank holding com pany’s exposure to an exchange’s or clearinghouse’s loss sharing rules than the current provision limiting the holding com pany’s membership on an exchange. This alternative restriction effectively protects the parent bank holding company from potential exposure from customer trades and open-ended contingent liability under loss sharing rules w hile recognizing that most exchanges require a parent to guarantee proprietary trades. Accordingly, the final rule revises the regulation to prohibit the parent bank holding company from guaranteeing or otherwise becoming liable to an exchange or clearinghouse for trades other than those conducted by the subsidiary for its own account or for the account of an affiliate. The final rule eliminates the existing prohibition on an FCM subsidiary becoming a member of an exchange that requires the parent bank holding company also to become a member. Other commenters requested confirmation that an FCM subsidiary may, as an incidental activity, provide various futures-related financing to customers, such as financing to cover margin obligations. Lending is a 9310 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations perm issible activity for bank holding com panies, and the final rule w ould not prohibit perm issible lending activities in com bination w ith FCM activities. This perm its an FCM ow ned by a bank holding com pany to compete on the same terms w ith an FCM that is not affiliated w ith a bank holding company. The Board notes, however, that some exchanges prohibit FCMs from providing margin financing, and CFTC rules require full capitalization for any extensions of credit to customers. An FCM controlled by a bank holding com pany m ust continue to abide by the rules of the CFTC and any exchange on w hich the FCM is a member or trades. Several com menters requested clarification that the authority for an FCM subsidiary to become a m em ber of an exchange included authority to open an office in the country were the exchange is located. In addition, several com menters requested clarification that the expanded FCM activities perm itted under Regulation Y also w ould be perm itted under the Board’s Regulation K. Regulation Y currently provides, and the final rule continues to provide, that a nonbanking company perm itted under section 4(c)(8) of the BHC Act to engage in a nonbanking activity may open offices outside the United States to conduct that same activity unless the bank holding com pany has not received approval to conduct the activity outside the United States. A bank holding company that currently has authority to engage in FCM activities on a geographically lim ited basis may, if it qualifies for the stream lined procedures, conduct these activities de novo outside the U.S. through direct offices of its 4(c)(8) affiliate w ithout further approval. The scope of FCM and other activities that fall under Regulation K w ill be considered by the Board in connection w ith its review of Regulation K. exposure to traders that execute trades them selves or through third parties. In particular, these restrictions prevent a bank holding com pany from clearing trades executed by exchange locals or m arket makers. In 1991, the Board rejected a proposal by a bank holding com pany to engage in clearing trades for exchange locals and market makers because of concerns about the inability of the bank holding company to monitor and control its credit exposures during the trading day. The Board found that the activity was closely related to banking, but believed that the potential adverse effects of conducting the activity outweighed the potential public benefits.10 The Board sought comment on w hether these two restrictions on the conduct of clearing-only activities by bank holding com panies should be retained. The Board also invited com m ent on w hether and how bank holding companies are able to monitor and lim it adequately the potential exposure from conducting these activities. Commenters w ho discussed FCM activities strongly supported the removal of these two restrictions on clearing-only activities in favor of the Board relying on on-site examination and supervision of a clearing subsidiary’s risk management systems for m onitoring and managing its credit exposures. Commenters m aintained that the Board’s restrictions are not necessary in light of the risk m anagem ent tools currently available to clearing firms. They contended that clearing firms can effectively monitor and lim it their potential credit exposures through various risk management procedures, including: establishm ent of trading limits for each customer; adjustm ent of such limits based on market conditions and ongoing credit evaluations; monitoring of customer market risk, trading exposure ii. Clearing-Only Activities and compliance w ith trading limits; The Board has by order perm itted assessment and collection of initial and bank holding com panies to clear trades m aintenance performance bond or that the FCM has not executed itself, margin; and paym ent of gains and and the final rule incorporates this collection of losses associated w ith open activity in the laundry list. The proposal positions through a mark-to-market retained two restrictions currently process on both an intra-day and endim posed by Board order. These of-day basis. restrictions: (1) Prohibit the clearing Commenters explained that all subsidiary from serving as the primary exchanges provide clearing members or qualifying clearing firm for a w ith com plete information regarding customer; and (2) require the clearing trades cleared through that m em ber’s subsidiary to have a contractual right to account at the end of the trading day, decline to clear any trade that the w hich thereby limits a clearing FCM’s subsidiary believes poses unacceptable exposure to a client to the trading risks (a so-called “give-up” agreement). transactions on that day. Commenters The Board adopted these restrictions to ensure that the clearing subsidiary of 10 Stichting Prioriteit A B N AMRO Holding, 77 Federal Reserve Bulletin 189 (1991). a bank holding com pany could limit its noted that technological improvements have enabled a growing num ber of exchanges to develop systems that collect and report intra-day trade m atching information. Commenters also noted that, in m any markets, a clearing firm can, pursuant to exchange rules or contractual arrangements, advise an executing broker that it w ill not accept further trades of that customer. In agreements w ith customers, clearing brokers also typically reserve the right to liquidate a custom er’s position if the required margin is not posted promptly. Commenters added that potential exposure is further mitigated by various exchange rules relating to position limits, and large trading position reporting. In addition, commenters contended that oversight by the CFTC or the SEC, w hich includes capital, reporting, performance bond and margin, and recordkeeping requirem ents, assists in monitoring the management of risks associated w ith acting as a primary clearing firm, including clearing trades executed by exchange locals and market makers. In light of these comments, the final rule deletes the proposal’s restrictions relating to primary clearing or qualifying firm activities and customer “give-up” agreements.11 Examiners w ill assess and supervise FCM policies, procedures and practices relating to clearing-only activities, taking into consideration the nature of the FCM’s clients, the particular exchanges through w ith the subsidiary provides clearing services, and the related risks involved. It is expected that the Board w ould develop supervisory guidance on management of risks involved in clearing-only activities. e. Other Transactional Services The proposal added a provision allowing a bank holding company to provide transactional services for customers involving any derivative or foreign exchange transaction that a bank holding company is perm itted to conduct for its own account. Commenters supported the inclusion of these activities on the regulatory laundry list. Inclusion of this activity is not intended to lim it the securities brokerage, FCM, private placement or riskless principal activities perm itted u nd er the final rule. 11 A com m enter requested that the Board clarify in the regulation that the securities brokerage activity perm itted in Regulation Y encompasses clearing apart from executing trades in securities. Both the current and final rule perm it securities brokerage activities broadly, including executingw ithout-clearing and clearing-without-executing trades in securities. The final rule specifies this. Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations Several commenters suggested that • the scope of this provision be expanded to include acting as a broker w ith respect to forward contracts based on financial and nonfinancial com modities, regardless of w hether the bank holding com pany could invest in or trade such instrum ent as principal. The com m enters contended that providing brokerage services, as agent, to custom ers w ith respect to forward contracts on either financial or nonfinancial com m odities should not be dependent on w hether the bank holding com pany may take a principal position in the contract. In view of these comments, the final rule clarifies that a bank holding com pany may act as a broker w ith respect to forward contracts based on a financial or nonfinancial com m odity that also serves as the basis for an exchange-traded futures contract. This perm its a bank holding company to act as agent in a forward contract that involves the same com m odities and assessm ent of risk that underlay the perm issible FCM activities of bank holding companies w ithout extending this authority to forward contracts for the delayed sale of commercial products (such as automobiles, consum er products, etc.) or real estate. Several commenters requested that acting as a commodity pool operator (“CPO”), including acting as the general partner of a partnership that invests in commodities as well as futures and options on financial and nonfinancial commodities, be added to the list of permissible activities. The commenters noted that the Board recently perm itted by order a bank holding company to act as a CPO, subject to a num ber of lim itations.’2 Although some proposals to act as a CPO may involve a com bination of perm issible activities, certain proposals raise supervisory issues and open-end pool structures may raise Glass-Steagall Act issues. In addition, some proposals raise questions about the proper treatm ent of the CPO’s interest in the com m odity pool for capital adequacy purposes.13 These issues can be evaluated more effectively on a case-by-case basis through the application review process. Accordingly, the Board has determ ined 12 See The Bessem er Group, Incorporated, 82 Federal Reserve Bulletin 569 (1996). 13For example, the lim itations in the case cited above included a requirem ent to consolidate, for regulatory capital purposes, the assets and liabilities of subsidiary partnerships for w hich a wholly ow ned subsidiary of the bank holding com pany w ould serve as a general partner. The subsidiary partnerships were to em ploy leverage (including margin debt and short sales) in making investments. 9311 8. Investment or Trading Transactions as Principal The final rule, as the proposal, incorporates decisions by the Board that perm it bank holding companies broadly to invest as principal in derivatives on financial and nonfinancial commodities. The proposal w ould allow a bank holding company to invest or trade as principal in a derivative contract on a financial or nonfinancial comm odity or index of commodities, so long as any one of three conditions is met: * The underlying asset is a permissible investm ent for state member banks; * The derivative contract requires cash settlement; or * The derivative contract allows for assignment, term ination or offset prior to expiration and the bank holding company makes every reasonable effort to avoid delivery. Some commenters were concerned that the proposal as w orded w ould not include trading as principal in derivatives based on or linked to bank ineligible securities, such as certain equity index swaps or equity index futures contracts, an activity that the Board has approved by order. The final rule clarifies that a bank holding com pany may trade as principal a derivatives contract on an index of rates, prices or the value of any financial or nonfinancial asset or group of assets, so long as the contract requires cash settlement. This does not include acting as a dealer in options based on indexes of bank-ineligible securities w hen the options are traded on securities exchanges. These options are securities for purposes of federal securities laws and are bank-ineligible securities for purposes of the Glass-Steagall Act.14 Similarly, activities authorized by this rule do not include acting as a dealer in any other instrum ents that are bankineligible securities for purposes of section 20. Thus, dealing in securities, including acting as a market-maker, specialist or registered options trader on an exchange, would be governed by the Board’s orders regarding bank-ineligible securities underw riting and dealing activities. Under the final rule, the three alternative conditions w ould not apply to derivative contracts based on an index, but would apply to all other derivative contracts. Several commenters suggested that an additional alternative be added that perm its trading as principal in a derivative contract that involves an asset that is a perm issible investm ent for a national bank or for a bank holding company. The final rule adopts a provision that would include any other instrum ents approved by the Board. In addition, some commenters requested clarification that the alternative conditions apply only to a bank holding com pany’s trading activities and not to investm ents for the com pany’s ow n account. Other commenters m aintained that trading for a bank holding com pany’s own account should not be viewed as a nonbanking activity subject to section 4(c)(8) but as a servicing activity u n der section 4(c)(1)(C) of the BHC Act. Bank holding companies have increasingly proposed to acquire companies engaged in, or to engage through an existing subsidiary in, derivatives trading and investm ent activities that w ould be beyond the scope of investm ent or trading activities encom passed w ithin the bank servicing exem ption.15 The addition of proprietary trading activities to the regulation clarifies the perm issibility of this activity as a separate business activity. The final rule, as the proposal, also includes authority that the Board has previously granted by order permitting bank holding companies to buy, sell and store gold, silver, platinum and palladium bullion, coins, bars and rounds. To enable the regulation to remain current with relevant regulatory pronouncem ents regarding the permissible activities of banks, several commenters suggested that the proposed list of metals be expanded to include copper (recently perm itted for national banks) and any other permissible investments for national banks or bank holding companies. In view of these comments, the final rule adds copper and includes any other metal approved by the Board. Some commenters requested that the Board add to the regulatory laundry list underw riting and dealing to a limited extent in certain m unicipal revenue bonds, one-to-four family mortgagerelated securities, consum er receivable securities, and commercial paper because the Board, by order, has perm itted these activities. Several com menters also urged the Board to add accepting delivery of com modities to the list of activities because national banks may take delivery of physical com modities by w arehouse receipt or “pass-through delivery” to another party w hen hedging financial exposures 14 See Swiss B ank Corporation, 82 Federal Reserve Bulletin 685 n. 8 (1996). 15 E.g., Sw iss B ank Corporation, 81 Federal Reserve Bulletin 185 (1995). not to add acting as a CPO as a separate activity on the laundry list at this time. 9312 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations arising from otherwise permissible activities. The final rule does not expand the laundry list to include these activities because these activities raise issues involving risk management policies and procedures that are more appropriately addressed through the application review process. In this regard, the Board believes that, at this time, all proposals to engage de novo or to make an initial acquisition of a com pany engaged in corporate debt an d/or equity securities underw riting and dealing activities should be review ed under the normal procedures, an d not under the streamlined procedures. This w ill allow the System to conduct a review of the riskm anagem ent systems of the bank holding com pany in connection w ith the initial entry of a bank holding com pany into this activity. Bank holding companies that have already received Board approval to engage in these broad securities activities may acquire companies engaged in these activities if the bank holding company and the proposed acquisition qualify for the stream lined procedure, unless the System notifies the company that the norm al procedure should be used. 9. M anagement Consulting and Counseling Activities The current regulation authorizes bank holding companies to provide management consulting services on any m atter to any depository institution or affiliate of a depository institution. The rule has been expanded in two respects. First, bank holding companies may provide management consulting services regarding financial, economic, accounting, or audit matters to any company. These are Financial activities th at are directly related to the activities and expertise of bank holding com panies. Commenters discussing this issue agreed that this activity is closely related to banking for purposes of section 4(c)(8) of the BHC Act. Second, for the reasons explained above, the final rule perm its a bank holding company to derive up to 30 percent of its management consulting revenue from management consulting services provided to any customer on any matter. As noted above, commenters discussing this activity strongly supported this provision as necessary to perm it bank holding com panies to attract and retain the most qualified personnel, and to compete effectively against unregulated com panies that offer a broad array of management consulting services to customers of bank holding com panies. For the reasons explained above, the Board has determ ined not to raise the 30 percent limit on this basket of perm itted incidental activities at this time, and w ill m onitor the scope and nature of these activities. Two restrictions have been retained governing interlocks w ith and investm ents in client companies. While several commenters argued for removal of these restrictions, the Board continues to believe that these lim its are necessary in the context of management consulting arrangements in order to ensure that a bank holding com pany does not exercise control over a client com pany through a management consulting contract and to prevent conflicts of interest. These restrictions do not lim it the ability of a bank holding com pany to provide m anagem ent consulting services to an affiliate, w hich is a servicing activity perm itted u nder section 4(c)(1)(C) of the BHC Act. 10. Support Services This category includes courier services (other than armored car services) and printing checks and related documents. Both services are included in the laundry list as they were authorized by the Board, w ithout change. 11. Insurance Agency and U nderwriting Activities The insurance provisions reflect the detailed restrictions on insurance activities of bank holding companies specified in the BHC Act. The current regulation has not been changed. Several commenters urged the Board to take a variety of steps to authorize broader insurance activities. The Board w ill continue to consider these suggestions in light of the specific terms of the BHC Act. 12. Community Development Activities The current regulation permits bank holding com panies to make equity and debt investments in corporations and projects designed prim arily to promote com m unity welfare. The Board has adopted its proposal clarifying that this activity includes providing advisory and related services to com m unity developm ent programs. The Board has perm itted these advisory services by order. 13. Money Orders, Savings Bonds and Traveler’s Checks The current regulation limits the sale and issuance of money orders and sim ilar consum er paym ent instrum ents to instrum ents w ith a face value of less than $1,000. The Board has by order authorized this activity for paym ent instrum ents of any face amount. Accordingly, the limitation on the face am ount of these instrum ents has been removed. 14. Data Processing Activities The current regulation broadly authorizes bank holding companies to provide data processing and data transm ission services by any technological means so long as the data processed or furnished are financial, banking, or economic. The final rule clarifies that a bank holding company may render advice to anyone on processing and transmitting banking, financial and economic data. The following two restrictions on permissible data processing activities have been deleted: * All data processing services must be provided pursuant to a w ritten agreement w ith the third party that describes and limits the services; and * Data processing facilities m ust be designed, marketed and operated for processing and transmitting financial, banking, or economic data. As explained above, the data processing activity has also been revised to permit bank holding com panies to derive up to 30 percent of their data processing revenues from processing and transm itting data that are not financial, banking, or economic. As explained above, most commenters addressing this activity strongly supported all of these changes and, in particular, the proposal to perm it the conduct of some nonfinancial data processing activities as an incident to financial data processing activities. D. Changes to Tying Restrictions The Board has adopted significant am endm ents to its rules regarding tying arrangements. The am endm ents remove Board-imposed tying restrictions on bank holding companies and their nonbank subsidiaries; create exceptions from the statutory restriction on bank tying arrangements to allow banks greater flexibility to package products w ith their affiliates; and establish a safe harbor from the tying restrictions for certain foreign transactions. These am endm ents are designed to enhance com petition in banking and nonbanking products and allow banks and their affiliates to provide more efficient and lower-cost service to customers. Section 106 of the BHC Act Am endm ents of 1970 contains five restrictions intended to prohibit anti competitive behavior by banks: Two prohibit tying arrangements; two prohibit reciprocity arrangements; and one prohibits exclusive dealing arrangem ents.16 The tying restrictions, 16 12 U.S.C. §1972. Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations w hich have the greatest effect on , industry practices, prohibit a bank from restricting the availability or varying the consideration for one product or service (the “tying p ro duct”) on the condition that a custom er purchase another product or service offered by the bank or by any of its affiliates (the “tied produ ct”). A lthough section 106 applies only w hen a bank offers the tying product, the Board in 1971 extended these special restrictions to bank holding com panies and their nonbank subsidiaries.17 Section 106 was adopted in 1970 w hen Congress expanded the authority of the Board to approve proposals by bank holding com panies to engage in nonbanking activities. Section 106 was based on congressional concern that bank s’ unique role in the economy, in particular their pow er to extend credit, w ould allow them to create a com petitive advantage for their affiliates in the new, nonbanking markets that they were being allowed to enter.18 Congress therefore im posed special lim itations on tying by banks— restrictions beyond those im posed by the antitrust laws. Section 106 is a broader prohibition, unlike the antitrust laws, a plaintiff in action under section 106 need not show that: (1) the seller has m arket pow er in the market for the tying product; (2) the tying arrangement has had an anti-competitive effect in the m arket for the tied product; or (3) the tying arrangement has had a substantial effect on interstate commerce. The Board has authority to grant exceptions to section 106 and, in the past few years, has used its exemptive authority to allow banking organizations to package their products w hen doing so w ould benefit the organization and its customers w ithout anti-competitive effects. For example, the Board has allowed arrangements that included discounts on brokerage services and other products based on a custom er’s relationship w ith the bank or bank holding company. The final rule w ould b uild on this recent history by perm itting broader categories of packaging arrangements that also do not raise the concerns that section 106 was intended to address. 1. Rescind the Board’s Regulatory Extension of the Statute As noted above, the Board has by regulation extended the restrictions of section 106 to bank holding companies and their nonbank subsidiaries as if they w ere banks. This extension was adopted 17 36 FR 10777 (June 3,1971). 18 See S. Rep. No. 1084, 91st Cong., 2d Sess. (1970). at the same tim e that the Board approved by regulation the first laundry list of nonbanking activities under section 4(c)(8) of the BHC Act, apparently as a prophylactic measure addressed at potential anti-com petitive practices by companies engaging in nonbanking activities.19 As noted in the pream ble to the proposed rule, the Board has gained extensive experience w ith bank holding com panies, their nonbank affiliates, and the markets in w hich they operate. Based on this experience, the Board has concluded that these nonbank com panies do not possess the market power over credit or other unique com petitive advantages that Congress assumed th at banks enjoyed in 1970. Accordingly, the Board has decided that applying the special bank anti-tying rules to such companies is no longer justified. A ny com petitive problems that might arise w ould be isolated cases, better addressed not through a special blanket prohibition but rather through the same general antitrust laws that bind the non-bank-affiliated com petitors of these entities. Commenters discussing the tying proposal overwhelm ingly supported the Board’s proposal to rescind its regulatory extension of the anti-tying rules to nonbanks. Commenters noted that, in rescinding its rule, the Board w ould not be granting an “exception” to section 106, w hich never envisioned that nonbank affiliates w ould be covered by the special anti-tying rules applicable to banks, but rather returning the coverage of the statute to that intended by Congress. Commenters argued that the proposed rescission would benefit banking organizations and the public by perm itting bank holding companies and their nonbank subsidiaries to package products and services more flexibly—particularly in packages w ith products and services of bank affiliates—thereby enabling the provision of more efficient and lowercost products and services to their business and retail customers. Commenters also generally agreed that removal of these special restrictions on bank holding com panies and their nonbank subsidiaries w ould elim inate a 19 In recent years, the Board has enacted limited relief from the anti-tying restrictions on nonbanks within bank holding com pany structures. For example, the Board has perm itted a nonbanking subsidiary to offer discounts on products and services based on the custom er’s obtaining some other product or service from that subsidiary or another nonbank affiliate. 12 CFR 225.7(b)(3). However, even w ith this relief, tying between a bank holding com pany or its nonbank subsidiary and an affiliated bank has rem ained restricted, as has any tying arrangem ent not limited to the offering of a discount. 9313 competitive disadvantage by allowing them the same freedom to package products that their non-bank-affiliated competitors currently enjoy. Some of these com menters noted that the Sherm an Act w ould continue to prohibit bank holding companies and their subsidiaries from engaging in any tying arrangement that had an anti competitive effect. Only two commenters opposed the Board’s proposal to rescind the regulatory extension of bank anti-tying rules to nonbank affiliates.20 One commenter, a law firm representing a nonbanking corporation, opposed the Board’s proposal to free nonbank affiliates from the special tying rules applicable to banks, as well as the other proposed changes to the anti-tying regulation. This commenter stated that the proposed changes should not be adopted w ithout a com prehensive study of their potential ramifications. The com menter also m aintained that the Board’s regulatory extension of the antitying rules to nonbank affiliates is consistent w ith the legislative history of section 106, w hich evinced concern over possible unfair business practices of nonbank affiliates as well as banks themselves. In addition, the commenter questioned w hether the general antitrust laws and the nature of the com petition faced by banking organizations w ould be adequate to prevent unfair or anti competitive practices, and w hether the proposal w ould produce efficiency, lower costs, and fair com petition between banking and nonbanking organizations.21 A nother law firm, representing a group of insurance industry trade associations, also opposed the Board’s proposal to remove the special antitying rules applicable to nonbank 20 In addition, a com m unity group generally opposed the Board’s proposed changes to the tying rules on the basis of concerns about relationships between banks and their consum er finance company affiliates. These concerns focused on fair lending and equal credit opportunity, appropriate disclosure of referral fees and other matters, and com pliance w ith various consum er lending statutes and regulations. The Board does not believe, and this com m enter has provided no basis for concluding, that the anti-tying statute or regulations are intended to address or have the effect of addressing these concerns. Moreover, these concerns are already addressed by separate statutes and regulations, including the Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and Real Estate Settlement Procedures Act of 1974. 21 With respect to fair com petition between banking and nonbanking organizations, the commenter asserted that banking organizations have an inherent competitive advantage from being able to conduct the business of banking. This commenter also noted the increasing concentration of resources w ithin the banking industry itself, and indicated that the existing anti-tying rules may have contributed to the competitive vitality of the markets in w hich nonbank affiliates operate. 9314 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations affiliates. This com m enter m aintained that the bank anti-tying rules should continue to apply to nonbank affiliates because these affiliates may appear to the public to be indistinguishable from the banks them selves and because the same public policy concern regarding ban ks’ pow er over credit warrants the extension of the prophylactic rule for banks to entities having an affiliate relationship w ith banks.22 The Board does not believe that these concerns warrant retention of special anti-tying rules for nonbank affiliates of banks. In particular, the Board’s experience as regulator and supervisor of banks, bank holding com panies, and their subsidiaries provides an adequate basis for judgments about the com petitive nature of markets in w hich banking organizations operate. Commenters have not provided evidence to the contrary or proposed specific subjects for further study. Moreover, commenters opposing the proposal have produced no evidence that the antitrust rules and the nature of the nonbanking markets in w hich bank affiliates operate w ould not be sufficient to prevent unfair or anti-com petitive practices, or that the proposed liberalization of the Board’s tying rules w ould not yield efficiencies and corresponding lower costs for customers. The Board does not believe, and comm enters have provided no basis for concluding, that affiliation w ith a bank creates a com petitive advantage w arranting the application of special bank anti-tying rules to nonbank affiliates.23 Finally, w hile the legislative 22 T his com m enter also advanced several argum ents for not rescinding these rules w ith respect to packaged offerings that include insurance products, specifically: (1) That such packaging arrangements m ay violate state insurance law s that prohibit insurance agents from offering rebates on the sale of insurance products; and (2) that perm itting insurance prem ium paym ents as part of a discount package may sim ilarly violate state anti rebate and insurance advertising laws, and could result in custom er confusion and a conflict w ith the Interagency Statement on Retail Sales of N ondeposit Investment Products. The com m enter also argued that the proposal could enable banks to coerce customers to purchase insurance in order to obtain a loan, and that perm itting a com bination of insured deposit and uninsured investm ent products in a single package could obscure the differences between these products and produce confusion among customers of banking organizations. 23The Board also notes that these com m enters have not provided any reason to conclude that an increased concentration of resources in the banking industry itself warrants an extension of anti-tying rules to the nonbanking markets in w hich bank affiliates operate. O ther m atters raised by com m enters also provide no basis for extending the special bank anti-tying rules to nonbank affiliates. The Board does not believe that the rescission of this extension or other aspects of the proposed rule would preem pt state laws regarding insurance or other matters. Furtherm ore, concerns about possible customer history of section 106 may evince concern w ith the competitive practices of banks and their affiliates, the statute itself clearly applies only to tying by banks themselves. For the foregoing reasons, the Board is rescinding its extension of bank antitying rules to bank holding companies and their nonbank subsidiaries. 2. Retain Limited Prohibition on Tying Arrangements Involving Electronic Benefit Transfer Services In the proposed rule, the Board sought com m ent on w hether it should retain its regulatory extension of the statute for purposes of one type of tying arrangement. Section 825(a)(3) of the Personal Responsibility and Work O pportunity Reconciliation Act of 1996, signed into law on August 22, 1996, am ended the Food Stamp Act of 1977 to prohibit tying the availability of electronic benefit transfer services to other point-of-sale services. Enforcement of the Food Stamp Act is assigned to the Secretary of Agriculture.24 Banks, bank holding companies, and nonbank subsidiaries of bank holding com panies were exempted from the statute, apparently because they were already restricted by section 106 (in the case of banks) and the Board’s regulation (in the case of bank holding com panies and their nonbank subsidiaries). Thus, unless the Board were to retain a restriction on bank holding companies and their nonbank subsidiaries, they w ould be the only com panies not subject to a special restriction on tying of electronic benefit transfer services. Commenters either supported or expressly did not object to this lim ited retention of a special anti-tying rule for electronic benefit transfer services. Commenters acknowledged that the principle of competitive equality underlying the general rescission of special anti-tying rules for nonbank entities dictated retention of the special rules in this lim ited context. The Board has decided to retain this restriction. 3. Treat Inter-affiliate Tying Arrangements the Same as Intra-bank A rrangements Section 106 contains an explicit exception (the “statutory traditional confusion are effectively addressed through more direct m eans such as the Interagency Statement on Retail Sales of Nondeposit Investment Products. T he Board also notes that section 106 would continue to prohibit banks from using their power over credit to induce customers to purchase insurance products. 24104 Pub. L. 193, 110 Stat. 2105; 7 U.S.C. § 2016(i)(ll). bank product exception”) that perm its a bank to tie any product or service to a loan, discount, deposit, or trust service offered by that bank.25 For example, a bank could condition the use of its messenger service on a custom er’s maintaining a deposit account at the bank. Although the statutory traditional bank product exception appears to have been effective in preserving traditional relationships between a custom er and bank, the exception is lim ited in an im portant way: it does not extend to transactions involving products offered by affiliates. The Board has adopted a “regulatory traditional bank product exception” that generally extends the statutory exception to transactions involving affiliates. However, the Board placed two restrictions on the regulatory exception. First, the Board required that both products involved in the tying arrangement be traditional bank products. Second, the Board required that the arrangement consist of discounting the tying product rather than restricting its availability. However, as noted in the preamble to the proposed rule, Congress decided not to apply these two restrictions to the statutory traditional bank product exception for intra-bank transactions, and it is difficult to argue that inter affiliate transactions pose any greater risk of anti-competitive behavior than those intra-bank transactions. Moreover, Congress has already extended the statutory traditional bank product exception to cover inter-affiliate transactions, w ithout restriction, for savings associations and their affiliates.26 For these reasons, the Board proposed elim inating the above restrictions so that any tying arrangement w ithin a banking organization w ould be perm issible if the tied product is a loan, discount, deposit, or trust service. Commenters discussing this proposal overwhelmingly supported this aspect of the proposal, agreeing w ith the Board that there is no reason to subject inter affiliate tying arrangements to restrictions that are not applicable to intra-bank arrangements. Three comm enters raised general objections to the elim ination of these restrictions. These objections were sim ilar to those advanced against the proposed rescission of the tying rules applicable to nonbank affiliates. The Board notes that, because insurance products are not among the traditional bank products listed in the statute or the rule, this aspect of the proposal w ould not « 1 2 U.S.C. 1972(1)(A). “ 12 U.S.C. 1464(q)(l)(A). Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations enhance a banking organization’s ability to leverage possible m arket pow er in other product markets to engage in anti com petitive behavior in insurance markets. A substantial num ber of com m enters urged the Board to adopt an expanded definition of the “traditional bank pro ducts” w hich may be tied to other offerings u n d e r the statutory and regulatory exceptions. Some of these com m enters proposed a specific list of additional products—such as foreign exchange, interest rate swaps and other derivative products, and investm ent advisory services—to be exem pted by the rule. Other commenters proposed a more general approach for expanding this definition: for example, exempting products authorized as part of the business of banking u n der relevant chartering laws. Others urged the Board to exempt all bu t a lim ited set of tying arrangements from the statutory restrictions—for example, by covering only transactions w here the tying product is a consum er or small business loan.27 The Board believes that these suggestions w arrant serious consideration, b ut intends to study this issue and provide notice and seek com m ent before adopting any changes not suggested in the proposed rule. For the foregoing reasons, the Board has decided to adopt the extension of the traditional bank product exception as proposed. 4. Extend the E xpanded Regulatory “Traditional Bank Product” Exception to Reciprocity Arrangements As noted above, section 106 prohibits not only tying arrangements but also reciprocity arrangements (conditioning the availability of or varying the consideration for one product on the providing of another by the customer).28 Like the tying prohibition, the prohibition on reciprocity arrangements contains an exception intended to preserve traditional banking relationships. The exception provides that a bank may condition the availability of a product or service on the custom er’s providing to the bank some product or service “related to and usually provided in connection w ith ” a loan, discount, deposit, or trust service.29 The Board noted in the proposed rule that it had received only one request to extend this exception, and comm enters confirmed that these 27 Some com m enters also suggested that the Board issue interpretations to clarify the scope of the statutory list of four traditional bank products. 2812 U.S.C. 1972(1)(C) and (D). 2912 U.S.C. 1972(1)(C). types of reciprocity arrangements are not common in the industry. Like the statutory traditional bank product exception to the tying prohibition, this exception to the reciprocity prohibition does not apply to inter-affiliate transactions, and, in the proposed rule, the Board proposed to extend the statutory exception for traditional banking relationships to cover such inter-affiliate transactions. For reasons similar to those advanced w ith respect to the extension of the statutory exception for tying arrangements, most commenters discussing this aspect of the proposal strongly supported the extension of perm itted reciprocity arrangements, w hile a small num ber of commenters opposed this aspect of the proposal. The opposing comments did not raise any objections specific to reciprocity arrangements. For the foregoing reasons, and because the Board does not believe that inter-affiliate reciprocity arrangements pose any greater anti-competitive threat than sim ilar intra-bank arrangements perm itted by Congress, the Board is adopting substantially as proposed the extension of the statutory exception for certain reciprocity arrangements. The Board has decided to make technical changes to the proposed exception to make clear that the regulatory exception is co-extensive w ith the statutory exception. 5. Coverage of Foreign Transactions Under Section 106 In response to a request that the Board clarify w hether section 106 restricts foreign transactions, the Board sought comm ent on w hether it should establish a “safe harbor” w ith respect to some set of foreign transactions. In particular, the Board sought com ment on w hether the safe harbor should define “foreign transactions” according to the location of the customer, the location of the market where any potential anti competitive effects w ould occur, or some other factor. Federal legislation is presum ed to apply only w ithin the territorial jurisdiction of the United States, unless the legislation clearly expresses a contrary intent on the part of Congress. No such intent is evident in section 106.30 However, determ ining w hether a series of transactions has sufficient connection to the United States to trigger section 106 can be a difficult process. The proposed safe harbor was intended to provide certainty with respect to a defined set of transactions. 30 See Gushi Bros. Co. v. B ank o f Guam, 28 F.3d 1535,1542-43 (9th Cir. 1994). 9315 Thus, the proposed safe harbor was not intended to be an interpretation of section 106, as some transactions outside the safe harbor may not be covered by the statute. Commenters addressing this issue overwhelmingly supported the creation of a safe harbor. Commenters argued that a safe harbor w ould provide needed certainty to banking organizations operating abroad and perm it these organizations to compete w ith foreign firms. One comm enter noted that U.S. banks sometimes cannot participate in lending syndicates dom inated by foreign banks because the loan agreement contains conditions that w ould violate section 106. Furthermore, in some countries it is customary for a financial advisor or credit provider to link services in formulating proposals and a U.S. bank’s inability to do so places it at a competitive disadvantage. In terms of how the safe harbor w ould be defined, commenters strongly urged that the locus of the custom er be determinative. Commenters uniformly rejected any test based on the locus of any anti-competitive effects, on two grounds. First, such a test assumes that there w ill be anti-competitive effects from the tying arrangements, w hich is by definition true in the case of a Sherman Act violation but not necessarily true in the case of a violation of the per se prohibition on tying in section 106. Second, determ ining where a transaction has its effect can be a difficult process yielding no clear answer, and the test would therefore leave substantial uncertainty in terms of compliance. Some commenters also urged the Board to exempt transactions to finance projects located outside the United States and transactions w ith foreign branches of U.S. companies. A small num ber of commenters objected generally to this proposed change to the tying rules w ithout providing any specific reason w hy a safe harbor for foreign transactions should not be adopted. One commenter m aintained that a safe harbor was not necessary because relevant case law had provided sufficient clarity and certainty w ith respect to this question. For the reasons advanced by commenters, the Board is adopting a “safe harbor” from the anti-tying rules for transactions w ith corporate customers that are incorporated or otherwise organized, and have their principal place of business, outside the United States, or w ith individuals who are citizens of a foreign country and are not resident in the United States. However, the safe harbor would not protect tying arrangements where the 9316 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations custom er is a U.S.-incorporated division of a foreign company. Furtherm ore, the safe harbor w ould not shelter a transaction from other antitrust laws if they were otherwise applicable. The Board agrees w ith commenters that some transactions with U.S. persons may be so foreign in nature, because of the location of either the project that is the subject of the transaction or the custom er’s office that is entering into the transaction, that they do not raise the competitive concerns that section 106 or the antitrust laws w ere designed to address. The Board also believes, however, that m any such foreign-based transactions do have com petitive im plications in the United States—for example, w here a U.S. corporation seeks financing for a project abroad, and the bank seeks to tie this financing to an affiliate’s U.S. securities underw riting services—and the Board does not believe that commenters have provided an adequate and clear basis for excluding such transactions from any “ safe harbor” for foreign transactions w ith U.S. persons. 6. Technical Changes The Board also is adopting a definition of “bank” for purposes of the anti-tying rules to clarify that any exem ptions afforded to banks generally also w ould be applicable to credit card and other lim ited purpose institutions and to United States branches and agencies of foreign banks.31 E. Other Changes 1. Filings U nder the Change in Bank Control Act The final rule, as the proposal, reorganizes, clarifies, and simplifies the portion of Regulation Y that im plem ents the Change in Bank Control Act (“CIBC A ct”). The final rule attem pts to harm onize the scope and procedural requirem ents of the Board’s regulation im plem enting the CIBC Act w ith those of the other federal banking agencies an d to reduce any unnecessary regulatory burden. In particular, the final rule reduces regulatory burden by reducing from two to one the num ber of times a person m ust receive perm ission under the CIBC Act to acquire shares of the same state member bank or bank holding company. Specifically, the final rule eliminates the current requirem ent that all persons 31 O ne com m enter urged that the safe harbor for combined-balance discounts be clarified by specifying that products offered by an affiliate of the bank may be included as eligible products. The Board notes that the proposed and final rule refer to “ products specified by the bank” , and do not contain any lim itation w ith respect to the entity offering the product. w ho have received authorization to control in excess of 10 percent, but less than 25 percent, of the voting shares of a member bank or bank holding com pany file a second notice before acquiring control of 25 percent or more of the voting shares of the institution. The Board has determ ined that this new rule will apply to any person who currently controls 10 percent (but less th an 25 percent) of the shares of a state m em ber bank or bank holding com pany w ith Board approval under the CIBC Act, unless the approval granted to the person specifically lim ited the am ount of shares that the person may control or the person is otherw ise notified in writing by the System that additional approval is required. In future cases in w hich a person appears to have sufficient financial resources to acquire more than 10 percent, but less than 100 percent of the shares of a bank, the System may limit the approval granted on a case-by-case basis by requiring further review of the financial resources of the person as appropriate. Commenters that discussed the CIBC Act proposal supported the proposed revisions. In particular, these com menters endorsed the elim ination of the requirem ent to file a second notice to the Board upon exceeding 25 percent ow nership of a member bank or bank holding company w hen a prior notice to acquire in excess of 10 percent had been filed and approved by the Board. Commenters also supported the proposal to clarify certain terms used in the CIBC Act portion of the rule. The final rule adds definitions of key terms to clarify the scope of the regulation. In particular, the final rule defines the terms acting in concert and im m ediate fam ily, and includes specific presum ptions of concerted action, to clarify the rule and to provide guidance to acquirors. In addition, the final rule incorporates current Board practice that the acquisition of a loan in default that is secured by voting securities of a state mem ber bank or bank holding company is presum ed to be an acquisition of the underlying securities. The final rule also reduces regulatory burden on persons w hose ow nership percentages increase as the result of an action outside the control of the person, such as a redem ption of voting securities by the issuing bank or a sale of shares by a third party. In these situations, the proposal w ould permit the person affected by the bank or third party action to file a notice w ithin 90 calendar days after the transaction occurs, provided that the acquiring person does not reasonably have advance knowledge of the triggering transaction. In addition, the final rule provides for more flexible tim ing for new spaper announcem ents of filings under the CIBC Act by perm itting notificants to publish the announcem ent up to 15 calendar days before subm itting the filing. The new spaper notice requirem ent also is m odified to elim inate the requirem ent that the notice include a statem ent of the percentage of shares proposed to be acquired. Finally, the final rule adds a new section reflecting the stock loan reporting requirem ents in section 205 of the Federal Deposit Insurance Corporation Improvem ent Act as am ended by section 2226 of the Regulatory Relief Act. Before the passage of the Regulatory Relief Act, all financial institutions were required to file reports docum enting credit outstanding by the institution and its affiliates w hen the credit was secured by 25 percent or more of any class of voting securities of an insured depository institution. The Regulatory Relief Act limits this requirem ent to credit outstanding by foreign banks and their affiliates. One commenter suggested that the Board require any person participating in a proxy solicitation to obtain prior approval under the CIBC Act and urged broadening the definition of persons w ho w ould be deem ed to be acting in concert (and thus required to join in a CIBC Act filing) to include persons soliciting proxies. This commenter also suggested that the institution that is the target of a proxy solicitation be granted standing as a party to a CIBC Act filing, be furnished copies of all filings, and be perm itted to subm it comments. The Board has not adopted these suggestions. The Board has long held, and a federal court has agreed, that the CIBC Act is not automatically triggered by the formation of a group for the purpose of acquiring proxies for voting shares and that private parties do not have legal standing to challenge agency action under the CIBC Act.32 The final rule provides for public notice of all CIBC Act filings (unless imm ediate or expeditious action is required) and perm its any private party to submit comments for Board consideration. This approach is in keeping w ith the purpose of the CIBC Act, w hich is to perm it the federal banking agencies to review changes in the ow nership of banks and bank holding companies and is not intended to be a m echanism for private 32 See Citizen First Bancorp, Inc. v. Harreld, 559 F.Supp. 867 (1982). Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations parties to frustrate contested acquisitions. 2. Notices of Changes in Directors and Senior Executive Officers In addition to the BHC Act and the CIBC Act, Regulation Y im plem ents section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, w hich requires a state member bank or bank holding com pany (together, “regulated in stitu tion s”) to give prior notice to the System before changing directors or senior executive officers u n der certain circumstances. The final rule has been modified in light of am endm ents to section 914 enacted by the Regulatory Relief Act and in cooperation w ith the staffs of the other federal financial institutions supervisory agencies, in an attem pt to develop uniform procedures for requiring and reviewing section 914 notices. As am ended, section 914 no longer requires prior notice from regulated institutions chartered for less than two years or regulated institutions that underw ent a change in control w ithin two years. Accordingly, provisions in the proposed rule relating to these circumstances as triggering a section 914 notice have been deleted from the final rule. Section 914 also was am ended by the Regulatory Relief Act to perm it the System to extend the 30-day prior notice period for an additional period not to exceed 60 days. The Board expects to continue to process most section 914 notices w ithin 30 days and the final rule retains the 30-day prior notice period. In special circumstances, such as an incomplete adm inistrative record, the final rule perm its the System to extend the prior notice period for an additional 60 days as provided in section 914 after notifying the regulated institution or individual filing the notice of the extension and the reason for not processing the notice w ithin 30 days. In all waiver requests, the final rule continues to require that all information required to be filed u nder the rule be provided w ithin the tim e period specified by the System. The final rule also adopts the System’s current practice of granting individuals w ho are not proposed by m anagement and who are elected as new directors of regulated institutions an autom atic waiver of the 30-day prior notice requirem ent in order to serve immediately as board members. To qualify for an automatic waiver, the individual m ust also provide the System w ith all information required to be filed under the rule w ithin two business days after the individ ual’s election. The System may issue a notice of disapproval w ithin 30 days after a waiver request is granted or the election of an individual serving pursuant to an automatic waiver. One com m enter argued that the automatic waiver procedures should require an individual to resign as a director after a notice of disapproval has been issued by the System. While disapproval w ould require the individual to resign as a director, the final rule does not incorporate the suggestion because the System has sufficient enforcement authority under applicable law to remove a disapproved director from the board. The final rule also makes other changes, such as modifications to the appeal procedure for a disapproved notice, that are intended to clarify the proposed rule. 3. Other Changes The Board received three comments requesting that the Board expand its proposed presum ption exempting testam entary trusts from the definition of “ com pany” so as to exempt inter vivos (or living) trusts. Inter vivos trusts are trusts that are established by individuals during their lifetime to facilitate estate planning. The Board, on a case-by-case basis, has applied criteria similar to the criteria proposed in Regulation Y in determining w hether an inter vivos trust is a “com pany” for purposes of the BHC Act. Accordingly, the final rule has been expanded to presum e that an inter vivos trust is exempt from the definition of “ com pany” if the trust meets the criteria in the final rule and is not otherwise found to be a business trust or company. The final rule also amends the time lim it in w hich a trust m ust term inate to reflect that the BHC Act permits certain trusts to extend for 25 years. The final rule also reduces from 30 to 15 the num ber of days notice required before a large stock redem ption by a bank holding company, permits small bank holding companies to make stock redem ptions w ithout prior notice if the holding com pany meets certain leverage and capital requirements, and perm its bank holding companies to take account of intervening new issues of stock in com puting w hen a stock redem ption notice m ust be filed. In addition, the final rule adopts the changes enacted in the Regulatory Relief Act to the period for divesting certain shares acquired in satisfaction of a debt previously contracted. These changes perm it the Board to extend the divestiture period, under certain circumstances, to a period of up to 10 years. 9317 Moreover, the final rule deletes the provisions im plem enting section 2(g)(3) of the BHC Act, w hich have been repealed by the Regulatory Relief Act. The Board has also deleted references in Regulation Y to lim itations on asset growth im posed on certain institution by the Competitive Equality Banking Act of 1987 (Pub. L. 100-86, 101 Stat 552) because these limitations were removed by section 2304 of the Regulatory Relief Act. Finally, the final rule adopts the proposed definitions of “class of voting securities” and “im m ediate family” and includes several other technical changes. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act, the Board is required to conduct an analysis of the effect on small institutions of the revisions to Regulation Y. As of September 30, 1996, the num ber of bank holding com panies totalled 5,250.33 The following chart provides a distribution, based on asset size, for those companies. Asset size category (M=million) Less than $150M .. $150M-$300M ..... Greater than $300M ................ Number of bank hold ing compa nies Percent of bank hold ing com pany as sets 3,874 677 34 5.2 3.2 699 91.6 The com prehensive revision to Regulation Y is intended to eliminate unnecessary b urden for all bank holding companies, including smaller banking organizations. Included in the revision are expedited application/notice procedures w ith m inim al information requirem ents for well-rated and wellrun bank holding companies. The vast majority of bank holding companies w ould qualify to use the stream lined procedures, and it is estimated that more than 50 percent of the applications/notices reviewed by the Federal Reserve System during 1995 w ould have qualified for the new stream lined procedures. The revisions also include a reorganization and streamlining of the regulatory laundry list of permissible nonbanking activities, 33 Financial top-tier dom estic bank holding companies. Excludes m iddle-tier bank holding companies, and foreign bank holding com panies that are not required to file a Y -9 report w ith the Federal Reserve System. 34 Bank holding com panies w ith consolidated assets of less than $150 m illion are not required to file financial regulatory reports on a consolidated basis. Assets for th is group are estimated based on reports filed by the parent com panies and subsidiaries. 9318 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations the removal of unnecessary and outm oded regulatory restrictions, and a waiver of filing requirem ents for bank acquisitions th at are in-substance bankto-bank mergers. These changes apply to all bank holding com panies and w ill be particularly helpful to small bank holding companies. The revisions include a num ber of other changes applicable to smaller organizations in particular. These changes include a special exception for small bank holding com panies w ith assets of less th an $300 m illion from the aggregate size lim it applying to the use of the expedited application procedures, an update of the small bank holding com pany policy statem ent that applies to bank holding com panies w ith assets of less than $150 m illion and reduces burden for qualifying small bank holding companies, reduction of the thresholds for qualification for stream lined formation of new bank holding com panies, reduction in the filing requirem ents under the Change in Bank Control Act, and addition of a new exception for small bank holding com panies from the prior approval requirem ents regarding stock redem ption proposals. These and the other changes described above are explained in more detail in the Supplem entary Information portion of this document. The Board expects that the final rule will result in a significant reduction in regulatory filings, in the paperwork burden and processing time associated w ith regulatory filings, and in the costs associated w ith complying w ith the regulation, thereby improving the ability of all bank holding companies, including small organizations, to conduct business on a more costefficient basis. Paperwork Reduction Act In accordance w ith the Paperwork Reduction Act of 1995 (44 U.S.C. Ch. 3506; 5 CFR part 1320 A ppendix A .l), the Board review ed the rule under the authority delegated to the Board by the Office of Management and Budget. The Federal Reserve may not conduct or sponsor, and an organization is not required to respond to, the following information collections unless it displays a currently valid OMB control number. The OMB control num bers are indicated below. The collection of information requirem ents in this regulation are found in 12 CFR 225.11,12 CFR 225.12, 12 CFR 225.14, 12 CFR 225.17, 12 CFR 225.23,12 CFR 225.24, 12 USC 1817(j) and 1831(i), 12 CFR 225.73, 12 CFR 225.4, and 12 CFR 225.3(a). This information is required to evidence com pliance w ith the requirem ents of the Bank Holding Company Act, the Change in Bank Control Act and provisions of the Federal Deposit Insurance Act. The respondents are for-profit financial institutions and other corporations, including small businesses, and individuals. The Board received no com m ents that specifically addressed burden estimates. The streamlining of applications to acquire banks and nonbanking companies by institutions that meet the qualifying criteria should result in a significant reduction in burden for respondents that file the A pplication for Prior Approval To Become a Bank Holding Company, or for a Bank Holding Company To Acquire an A dditional Bank or Bank Holding Company (FR Y-3; OMB No. 7100 0171). Approxim ately 196 respondents file the FR Y-3 annually pursuant to section 3(a)(1) of the Bank Holding Company Act (Act) and 303 respondents file annually the FR Y-3 pursuant to section 3(a)(3) and 3(a)(5) of the Act. The current burden per response is 48.5 hours and 59.0 hours, respectively, for a total estimated annual burden of 27,383 hours. U nder the rule, it is estimated that at least 50 percent of these respondents, or a total of 249 respondents for both types of applications, w ould meet the criteria to qualify for the filing of a stream lined application. The average num ber of hours per response for proposed applications of each type is estimated to decrease to 2.5 hours. Therefore the total am ount of annual burden is estimated to be 14,343.5 hours. Based on an hourly cost of $50, the annual cost to the public under the revision is estimated to be $717,175, w hich represents an estimated cost reduction of $651,975 from the estim ated annual cost to the public of $1,369,150 under the current rule. The final rule should result in a significant reduction in regulatory burden by elim inating the prior review and approval requirements for well-run bank holding com panies to engage de novo in nonbanking activities that are permissible by Board regulation; streamlining the application process to engage de novo in nonbanking activities that are permissible only by Board order and to acquire nonbanking companies; and permitting bank holding companies to obtain approval at one tim e to engage in a preauthorized list of nonbanking activities. Thus, respondents that file the A pplication for Prior Approval To Engage Directly or Indirectly in Certain Nonbanking Activities (FR Y-4; OMB No. 7100-0121) w ill experience a significant reduction in costs. Approxim ately 362 respondents file the FR Y -4 annually to meet application requirem ents, and 114 respondents file to meet notification requirements. The current burden per response is 59.0 hours and 1.5 hours, respectively, for a total estimated annual burden of 21,529 hours. Under the rule it is estimated that at least 50 percent of these respondents w ould m eet the criteria to qualify either for elim ination or for the filing of a stream lined application, representing 181 applications and 57 notifications. The average num ber of hours per response for the required post consum m ation notice is 0.5 hours and for the required stream lined notice is 1.5 hours. Therefore the total am ount of annual burden is estim ated to be 11.121.5 hours. Based on an hourly cost of $50, the annual cost to the public u nd er the revision is estimated to be $556,075, w hich represents an estimated cost reduction of $520,375 from the current estimated annual cost to the public of $1,076,450 under the current rule. The elim ination of the requirement that a person w ho has already received Board approval under the Change in Bank Control Act obtain additional approvals to acquire additional shares of the same bank or bank holding company should result in a significant reduction in burden for respondents that file the Notice of Change in Bank Control (FR 2081; OMB No. 7100-0134). Approxim ately 300 respondents file the FR 2081 annually to meet the notification requirements of change in control, 280 respondents file to m eet the requirem ents for notice of a change in director or senior executive officer, and 1000 respondents file to meet requirem ents to report certain biographical and financial information. The current burden per response for each requirem ent is 30.0 hours, 2.0 hours, and 4.0 hours, respectively, for a total estimated annual burden of 13,560 hours. Under the rule it is estimated that 50 percent fewer notifications of change in control will be filed for an annual total of 150 responses. The estimated num ber of filings to meet the other two requirem ents and the estimated average hours per response for each requirement rem ains unchanged. Therefore the total am ount of annual burden is estimated to be 9,060 hours. Based on an hourly cost of $20, the total annual cost to the public under the revision is estimated to be $181,200, w hich represents an estim ated cost reduction of $90,000 from the current estim ated annual cost to the public of $271,200 under the current rule. The allowance for bank holding com panies to take account of Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations intervening new issues of stock in com puting w hen a stock redem ption notice m ust be filed and the exem ption provided to small bank holding com panies that m eet certain leverage and capital requirem ents should result in a significant reduction in burden for respondents th at file the Notice of Proposed Stock Redem ption (FR 4008; OMB No. 7100-0131). Approxim ately 50 respondents file the FR 4008 annually. The current burden per response is 15.5 hours, for a total estim ated annual burden of 775 hours. Under the rule it is estim ated that 50 percent fewer notifications w ill be filed for an annual total of 25 responses and the estim ated average hours per response rem ains unchanged. Therefore the total am ount of annual burden is estim ated to be 387.5 hours. Based on an hourly cost of $30, the total annual cost to the public under the revision is estim ated to be $11,625, w hich represents a cost reduction of $11,625 from the current estim ated cost to the public of $23,250 under the current rule. The streamlining of application requirem ents are not expected to change the ongoing annual burden associated w ith the A pplication for a Foreign Organization to Become a Bank Holding Company (FR Y -lf; OMB No. 7100— 0119). Approxim ately 2 respondents file the FR Y - l f annually. The current burden per response is 77 hours for a total estim ated annual burden of 144 hours. Based on an hourly cost of $20, the annual cost to the public is estim ated to be $3,080. All inform ation contained in these collections of inform ation are available to the public unless the respondent can substantiate that disclosure of certain inform ation w ould result in substantial competitive harm or am unw arranted invasion of personal privacy or w ould otherwise qualify for an exem ption under the Freedom of Information Act. The Federal Reserve has a continuing interest in the p ublic’s opinions of our collections of information. At any time, comments regarding the burden estimate, or any other aspect of this collection of information, including suggestions for reducing the burden may be sent to; Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets, NW., W ashington, DC 20551; and to the Office of Management and Budget, Paperwork Reduction Project (7100-0196), W ashington, DC 20503. List o f Subjects in 12 CFR Part 225 Administrative practice and procedure, Banks, banking, Federal Reserve System, Holding Companies, 9319 (c) Scope—(1) Subpart A contains general provisions and definitions of terms used in this regulation. (2) Subpart B governs acquisitions of bank or bank holding company securities and assets by bank holding com panies or by any com pany that will PART 225—BANK HOLDING become a bank holding com pany as a COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) result of the acquisition. (3) Subpart C defines and regulates 1. The authority citation for part 225 the nonbanking activities in w hich bank continues to read as follows: holding companies and foreign banking Authority: 12 U.S.C. 1817(j)(13), 1818, organizations may engage directly or 1831i, 1 8 3 1 p - l, 1843(c)(8), 1844(b), 1972(1), through a subsidiary. The Board’s 3106, 3108, 3310, 3 3 3 1 -3 3 5 1 , 3907, and Regulation K governs certain 3909. nonbanking activities conducted by foreign banking organizations and 2. Subpart A is revised to read as follows: certain foreign activities conducted by bank holding com panies (12 CFR part Subpart A— General Provisions 211, International Banking Operations). Sec. (4) Subpart D specifies situations in 225.1 Authority, purpose, and scope. w hich a company is presum ed to 225.2 Definitions. control voting securities or to have the 225.3 Adm inistration. pow er to exercise a controlling 225.4 Corporate practices. 225.5 Registration, reports, and inspections. influence over the management or 225.6 P enalties for violations. policies of a bank or other company; 225.7 Exceptions to tying restrictions sets forth the procedures for making a control determination; and provides Subpart A—General Provisions rules governing the effectiveness of divestitures by bank holding companies. § 225.1 Authority, purpose, and scope. (5) Subpart E governs changes in bank (a) A uthority. This p a r t 1 (Regulation control resulting from the acquisition by Y) is issued by the Board of Governors individuals or companies (other than of the Federal Reserve System (Board) bank holding companies) of voting under section 5(b) of the Bank Holding securities of a bank holding com pany or Company Act of 1956, as am ended (12 state member bank of the Federal U.S.C. 1844(b)) [BHC Act); sections 8 Reserve System. and 13(a) of the International Banking (6) Subpart F specifies the limitations Act of 1978 (12 U.S.C. 3106 and 3108); that govern com panies that control sosection 7(j)(13) of the Federal Deposit called nonbank banks and the activities Insurance Act, as am ended by the of nonbank banks. Change in Bank Control Act of 1978 (12 (7) Subpart G prescribes m inim um U.S.C. 1817(j)(13)) [Bank Control Act)-, standards that apply to the performance section 8(b) of the Federal Deposit of real estate appraisals and identifies Insurance Act (12 U.S.C. 1818(b)); transactions that require state certified section 914 of the Financial Institutions appraisers. Reform, Recovery and Enforcement Act (8) Subpart H identifies the of 1989 (12 U.S.C. 1831i); section 106 of circumstances w hen w ritten notice m ust the Bank Holding Com pany Act be provided to the Board prior to the A m endm ents of 1970 (12 U.S.C. 1972); appointm ent of a director or senior and the International Lending officer of a bank holding company and Supervision Act of 1983 (Pub. L. 98 establishes procedures for obtaining the 181, title IX). The BHC Act is codified required Board approval. at 12 U.S.C. 1841, et seq. (9) A p p en d ix A to the regulation (b) Purpose. The principal purposes of contains the Board’s Risk-Based Capital this part are to: Adequacy Guidelines for bank holding (1) Regulate the acquisition of control companies. of banks by companies and individuals; (10) A p p e n d ix B contains the Board’s (2) Define and regulate the Capital Adequacy Guidelines for nonbanking activities in w hich bank measuring leverage for bank holding holding com panies and foreign banking com panies and state member banks. organizations w ith U nited States (11) A p p en d ix C contains the Board’s operations may engage; and policy statement governing small bank (3) Set forth the procedures for holding companies. securing approval for these transactions (12) A p p en d ix D contains the Board’s and activities. Capital Adequacy Guidelines for 1 Code of Federal Regulations, title 12, chapter II, measuring tier 1 leverage for bank holding companies. part 225. Reporting and recordkeeping requirements, Securities. For the reasons set out in the preamble, the Board am ends 12 CFR part 225 as follows: 9320 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations (13) A p p e n d ix E contains the Board’s Capital Adequacy Guidelines for m easuring market risk of bank holding com panies. includes a foreign banking organization. For the purposes of subpart B of this part, bank holding co m pany includes a foreign banking organization only if it owns or controls a bank in the United §225.2 Definitions. States. Except as modified in this regulation (d)(1) C om pany includes any bank, or unless the context otherwise requires, corporation, general or lim ited the terms used in this regulation have partnership, association or similar the same m eaning as set forth in the organization, business trust, or any relevant statutes. other trust unless by its term s it m ust (a) A ffiliate means any company that term inate either w ithin 25 years, or controls, is controlled by, or is under w ithin 21 years and 10 m onths after the com m on control with, another death of individuals living on the company. effective date of the trust. (b)(1) B ank means: (2) C om pany does not include any (1) An insured bank as defined in organization, the majority of the voting section 3(h) of the Federal Deposit securities of w hich are ow ned by the Insurance Act (12 U.S.C. 1813(h)); or U nited States or any state. (ii) An institution organized under the (3) Testam entary trusts exem pt. laws of the U nited States w hich both: Unless the Board finds that the trust is (A) Accepts dem and deposits or being operated as a business trust or deposits that the depositor may company, a trust is presum ed not to be w ithdraw by check or sim ilar means for a com pany if the trust: paym ent to third parties or others; and (i) Terminates w ithin 21 years and 10 (B) Is engaged in the business of m onths after the death of grantors or making commercial loans. beneficiaries of the trust living on the (2) B ank does not include those effective date of the trust or w ithin 25 institutions qualifying under the years; exceptions listed in section 2(c)(2) of the (ii) Is a testam entary or inter vivos BHC Act (12 U.S.C. 1841(c)(2)). trust established by an individual or (c)(1) Bank holding com pany means individuals for the benefit of natural any company (including a bank) that persons (or trusts for the benefit of has direct or indirect control of a bank, natural persons) w ho are related by other them control that results from the blood, marriage or adoption; ow nership or control of: (iii) Contains only assets previously (1) Voting securities held in good faith owned by the individual or individuals in a fiduciary capacity (other than as w ho established the trust; provided in paragraphs (e)(2)(ii) and (iii) (iv) Is not a Massachusetts business of this section) w ithout sole trust; and discretionary voting authority, or as (v) Does not issue shares, certificates, otherwise exem pted under section or any other evidence of ownership. 2(a)(5)(A) of the BHC Act; (4) Q ualified lim ited partnerships (ii) Voting securities acquired and exem pt. Company does not include a held only for a reasonable period of time qualified lim ited partnership, as defined in connection w ith the underw riting of in section 2(o)(10) of the BHC Act. securities, as provided in section (e)(1) Control of a bank or other 2(a)(5)(B) of the BHC Act; company means (except for the (iii) Voting rights to voting securities purposes of subpart E of this part): acquired for the sole purpose and in the (i) Ow nership, control, or power to course of participating in a proxy vote 25 percent or more of the solicitation, as provided in section outstanding shares of any class of voting 2(a)(5)(C) of the BHC Act; securities of the bank or other company, (iv) Voting securities acquired in directly or indirectly or acting through satisfaction of debts previously one or more other persons; contracted in good faith, as provided in (ii) Control in any m anner over the section 2(a)(5)(D) of the BHC Act, if the election of a majority of the directors, securities are divested w ithin two years trustees, or general partners (or of acquisition (or such later period as individuals exercising similar functions) the Board m ay perm it by order); or of the bank or other company; (v) Voting securities of certain (iii) The pow er to exercise, directly or institutions ow ned by a thrift institution indirectly, a controlling influence over or a trust company, as provided in the managem ent or policies of the bank sections 2(a)(5)(E) and (F) of the BHC or other company, as determ ined by the Act. Board after notice and opportunity for (2) Except for the purposes of hearing in accordance w ith § 225.31 of § 225.4(b) of this subpart and subpart E subpart D of this part; or of this part, or as otherwise provided in (iv) Conditioning in any m anner the this regulation, bank holding com pany transfer of 25 percent or more of the outstanding shares of any class of voting securities of a bank or other company up on the transfer of 25 percent or more of the outstanding shares of any class of voting securities of another bank or other company. (2) A bank or other com pany is deemed to control voting securities or assets owned, controlled, or held, directly or indirectly: (i) By any subsidiary of the bank or other company; (ii) In a fiduciary capacity (including by pension and profit-sharing trusts) for the benefit of the shareholders, members, or employees (or individuals serving in sim ilar capacities) of the bank or other com pany or any of its subsidiaries; or (iii) In a fiduciary capacity for the benefit of the bank or other com pany or any of its subsidiaries. (f) Foreign banking organization and qualifying foreign banking organization have the same meanings as provided in § 211.21(n) and § 211.23 of the Board’s Regulation K (12 CFR 211.21(n) and 211.23). (g) Insured depository institution includes an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)) and a savings association. (h) Lead insured depository institution means the largest insured depository institution controlled by the bank holding company as of the quarter ending immediately prior to the proposed filing, based on a com parison of the average total risk-weighted assets controlled during the previous 12m onth period by each insured depository institution subsidiary of the holding company. (i) M anagem ent official means any officer, director (including honorary or advisory directors), partner, or trustee of a bank or other company, or any employee of the bank or other company w ith policy-making functions. (j) N onbank bank means any institution that: (1) Became a bank as a result of enactment of the Competitive Equality A m endm ents of 1987 (Pub. L. 100-86), on the date of enactment (August 10, 1987); and (2) Was not controlled by a bank holding company on the day before the enactm ent of the Competitive Equality Am endm ents of 1987 (August 9,1987). (k) O utstanding shares means any voting securities, but does not include securities ow ned by the United States or by a company w holly owned by the United States. (1) Person includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations syndicate, sole proprietorship, unincorporated organization, or any other form of entity. (m) Savings association means: (1) Any federal savings association or federal savings bank; (2) Any building and loan association, savings and loan association, homestead association, or cooperative bank if such association or cooperative bank is a member of the Savings Association Insurance Fund; and (3) Any savings bank or cooperative that is deem ed by the director of the Office of Thrift Supervision to be a savings association under section 10(1) of the Home Owners Loan Act. (n) Shareholder—(1) Controlling shareholder means a person that owns or controls, directly or indirectly, 25 percent or more of any class of voting securities of a bank or other company. (2) Principal shareholder means a person that owns or controls, directly or indirectly, 10 percent or more of any class of voting securities of a bank or other company, or any person that the Board determ ines has the power, directly or indirectly, to exercise a controlling influence over the m anagem ent or policies of a bank or other company. (0) Subsidiary means a bank or other company that is controlled by another company, and refers to a direct or indirect subsidiary of a bank holding company. An indirect subsidiary is a bank or other com pany that is controlled by a subsidiary of the bank holding company. (p) United States m eans the United States and includes any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, and the Virgin Islands. (q)(l) Voting securities means shares of common or preferred stock, general or lim ited partnership shares or interests, or similar interests if the shares or interest, by statute, charter, or in any manner, entitle the holder: (1) To vote for or to select directors, trustees, or partners (or persons exercising sim ilar functions of the issuing company); or (ii) To vote on or to direct the conduct of the operations or other significant policies of the issuing company. (2) Nonvoting shares. Preferred shares, lim ited partnership shares or interests, or sim ilar interests are not voting securities if: (i) Any voting rights associated w ith the shares or interest are lim ited solely to the type custom arily provided by statute w ith regard to matters that would significantly and adversely affect the rights or preference of the security or other interest, such as the issuance of additional am ounts or classes of senior securities, the modification of the terms of the security or interest, the dissolution of the issuing company, or the paym ent of dividends by the issuing com pany w hen preferred dividends are in arrears; (ii) The shares or interest represent an essentially passive investm ent or financing device and do not otherwise provide the holder w ith control over the issuing company; and (iii) The shares or interest do not entitle the holder, by statute, charter, or in any m anner, to select or to vote for the selection of directors, trustees, or partners (or persons exercising similar functions) of the issuing company. (3) Class o f voting shares. Snares of stock issued by a single issuer are deem ed to be the same class of voting shares, regardless of differences in dividend rights or liquidation preference, if the shares are voted together as a single class on all matters for w hich the shares have voting rights other than matters described in paragraph (o)(2)(i) of this section that affect solely the rights or preferences of the shares. (r) W ell-capitalized-[l) B ank holding com pany. In the case of a bank holding com pany,2 well-capitalized means that: (1) On a consolidated basis, the bank holding company m aintains a total riskbased capital ratio of 10.0 percent or greater, as defined in A ppendix A of this part; (ii) On a consolidated basis, the bank holding company m aintains a Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined in A ppendix A of this part; and (iii) The bank holding com pany is not subject to any w ritten agreement, order, capital directive, or prom pt corrective action directive issued by the Board to meet and m aintain a specific capital level for any capital measure. (2) Insured depository institution. In the case of an insured depository institution, well-capitalized means that the institution m aintains at least the capital levels required to be “wellcapitalized” u nder the capital adequacy regulations or guidelines applicable to the institution that have been adopted by the appropriate federal banking agency for the institution under section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o). 9321 (3) Foreign banks—(i) Standards applied. For purposes of determ ining w hether a foreign banking organization qualifies under paragraph (r)(l) of this section: (A) A foreign banking organization w hose home country supervisor, as defined in § 211.21 of the Board’s Regulation K (12 CFR 211.21), has adopted capital standards consistent in all respects w ith the Capital Accord of the Basle Committee on Banking Supervision (Basle Accord) may calculate its capital ratios under the home country standard; and (B) A foreign banking organization whose home country supervisor has not adopted capital standards consistent in all respects w ith the Basle Accord shall obtain a determ ination from the Board that its capital is equivalent to the capital that w ould be required of a U.S. banking organization under paragraph (r)(l) of this section. (ii) Branches and agencies. For purposes of determining, under paragraph (r)(l) of this section, w hether a branch or agency of a foreign banking organization is w ell-capitalized, the branch or agency shall be deem ed to have the same capital ratios as the foreign banking organization. (s) W ell-managed—(1) In general. A company, insured depository institution, or branch or agency of a foreign banking organization is wellm anaged if: (1) At its most recent inspection or exam ination or subsequent review by the appropriate federal banking agency for the company or institution, the company or institution received: (A) At least a satisfactory com posite rating; and (B) At least a satisfactory rating for management and for compliance, if such a rating is given; or (ii) In the case of a company or insured depository institution that has not received an examination rating, the Board has determined, after a review of the managerial and other resources of the company or depository institution, that the company or institution qualifies for the stream lined procedures in this subpart, and subparts B and C of this part. (2) Foreign banking organizations. A foreign banking organization shall qualify under this paragraph if the com bined operations of the foreign banking organization in the United States have received at least a satisfactory composite rating at the most recent annual assessment. 2 For purposes of this subpart and subparts B and C of this part, a bank holding com pany w ith consolidated assets un der $150 m illion that is subject to the Small Bank Holding Company Policy Statement in A ppendix C of this part w ill be § 225.3 Administration. deemed to be “well-capitalized” if the bank holding (a) Delegation o f authority. Designated com pany meets the requirem ents for expedited/ Board members and officers and the waived processing in A ppendix C. 9322 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations Federal Reserve Banks are authorized by paragraph (b)(6) of this section, a bank the Board to exercise various functions holding com pany shall give the Board prescribed in this regulation and in the prior w ritten notice before purchasing Board’s Rules Regarding Delegation of or redeem ing its equity securities if the A uthority (12 CFR part 265) and the gross consideration for the purchase or Board’s Rules of Procedure (12 CFR part redem ption, w hen aggregated w ith the 262). net consideration paid by the company (b) Appropriate Federal Reserve Bank. for all such purchases or redem ptions In adm inistering this regulation, unless during the preceding 12 m onths, is a different Federal Reserve Bank is equal to 10 percent or more of the designated by the Board, the appropriate com pany’s consolidated net worth. For Federal Reserve Bank is as follows: the purposes of this section, “net (1) For a bank holding company (or a consideration” is the gross com pany applying to become a bank consideration paid by the company for holding company): the Reserve Bank of all of its equity securities purchased or the Federal Reserve district in w hich the redeem ed during the period m inus the com pany’s banking operations are gross consideration received for all of its principally conducted, as measured by equity securities sold during the period. total domestic deposits in its subsidiary (2) Contents o f notice. Any notice banks on the date it becam e (or w ill under this section shall be filed w ith the become) a bank holding company; appropriate Reserve Bank and shall (2) For a foreign banking organization contain the following information: that has no subsidiary bank and is not (i) The purpose of the transaction, a subject to paragraph (b)(1) of this description of the securities to be section: the Reserve Bank of the Federal purchased or redeemed, the total Reserve district in w hich the total assets num ber of each class outstanding, the of the organization’s United States gross consideration to be paid, and the branches, agencies, and commercial terms and sources of funding for the lending com panies are the largest as of transaction; the later of January 1,1980, or the date (ii) A description of all equity it becomes a foreign banking securities redeem ed w ithin the organization; preceding 12 months, the net (3) For an individual or company consideration paid, and the terms of any submitting a notice under subpart E of debt incurred in connection w ith those this part: The Reserve Bank of the transactions; and Federal Reserve district in w hich the (iii) (A) If the bank holding company banking operations of the bank holding has consolidated assets of $150 million company or state member bank to be or more, consolidated pro form a riskacquired are principally conducted, as based capital and leverage ratio m easured by total domestic deposits on calculations for the bank holding the date the notice is filed. com pany as of the most recent quarter, and, if the redem ption is to be debt § 225.4 Corporate practices. funded, a parent-only pro form a balance (a) B ank holding com pany policy and operations. (1) A bank holding company sheet as of the most recent quarter; or (B) If the bank holding company has shall serve as a source of financial and consolidated assets of less than $150 managerial strength to its subsidiary million, a pro form a parent-only balance banks and shall not conduct its sheet as of the most recent quarter, and, operations in an unsafe or unsound if the redem ption is to be debt funded, manner. (2) W henever the Board believes an one-year income statement and cash flow projections. activity of a bank holding com pany or (3) A cting on notice. W ithin 15 control of a nonbank subsidiary (other calendar days of receipt of a notice than a nonbank subsidiary of a bank) constitutes a serious risk to the financial under this section, the appropriate Reserve Bank shall either approve the safety, soundness, or stability of a transaction proposed in the notice or subsidiary bank of the bank holding com pany and is inconsistent w ith sound refer the notice to the Board for decision. If the notice is referred to the banking principles or the purposes of Board for decision, the Board shall act the BHC Act or the Financial on the notice w ithin 30 calendar days Institutions Supervisory Act of 1966, as am ended (12 U.S.C. 1818(b) et seq.), the after the Reserve Bank receives the notice. Board may require the bank holding (4) Factors considered in acting on com pany to term inate the activity or to notice, (i) The Board may disapprove a term inate control of the subsidiary, as provided in section 5(e) of the BHC Act. proposed purchase or redem ption if it (b) Purchase or redem ption b y bank finds that the proposal w ould constitute holding com pany o f its own securities— an unsafe or unsound practice, or would violate any law, regulation, Board order, (1) Filing notice. Except as provided in directive, or any condition im posed by, or w ritten agreement with, the Board. (ii) In determ ining w hether a proposal constitutes an unsafe or unsound practice, the Board shall consider w hether the bank holding com pany’s financial condition, after giving effect to the proposed purchase or redem ption, meets the financial standards applied by the Board u nd er section 3 of the BHC Act, including the Board’s Capital Adequacy Guidelines (Appendix A of this part) and the Board’s Policy Statement for Small Bank Holding Companies (Appendix C of this part). (5) Disapproval and hearing, (i) The Board shall notify the bank holding com pany in writing of the reasons for a decision to disapprove any proposed purchase or redem ption. W ithin 10 calendar days of receipt of a notice of disapproval by the Board, the bank holding com pany may subm it a w ritten request for a hearing. (ii) The Board shall order a hearing w ithin 10 calendar days of receipt of the request if it finds that material facts are in dispute, or if it otherwise appears appropriate. Any hearing conducted under this paragraph shall be held in accordance w ith the Board’s Rules of Practice for Formal Hearings (12 CFR part 263). (iii) At the conclusion of the hearing, the Board shall by order approve or disapprove the proposed purchase or redem ption on the basis of the record of the hearing. (6) Exception fo r well-capitalized bank holding com panies. A bank holding company is not required to obtain prior Board approval for the redem ption or purchase of its equity securities under this section provided: (i) Both before and im m ediately after the redem ption, the bank holding company is well-capitalized; (ii) The bank holding com pany is well-managed; and (iii) The b ank holding company is not the subject of any unresolved supervisory issues. (c) Deposit insurance. Every bank that is a bank holding com pany or a subsidiary of a bank holding company shall obtain Federal Deposit Insurance and shall rem ain an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)). (d) A cting as transfer agent, m unicipal securities dealer, or clearing agent. A bank holding company or any nonbanking subsidiary that is a “bank,” as defined in section 3(a)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(6)), and that is a transfer agent of securities, a m unicipal securities dealer, a clearing agency, or a Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations participant in a clearing agency (as those term s are defined in section 3(a) of the Securities Exchange Act (15 U.S.C. 78c(a)), shall be subject to §§ 208.8 (f)-(j) of the Board’s Regulation H (12 CFR 208.8 (f)-(j)) as if it were a state m em ber bank. (e) Reporting requirem ent fo r credit secured b y certain bank holding com pany stock. Each executive officer or director of a bank holding company the shares of w hich are not publicly traded shall report annually to the board of directors of the bank holding com pany the outstanding am ount of any credit that was extended to the executive officer or director and that is secured by shares of the bank holding company. For purposes of this paragraph, the terms “executive officer” and “director” shall have the meaning given in § 215.2 of Regulation O (12 CFR 215.2). (f) Suspicious activity report. A bank holding com pany or any nonbank subsidiary thereof, or a foreign bank that is subject to the BHC Act or any nonbank subsidiary of such foreign bank operating in the United States, shall file a suspicious activity report in accordance w ith the provisions of § 208.20 of the Board’s Regulation H (12 CFR 208.20). §225.5 Registration, reports, and inspections. (a) Registration o f bank holding com panies. Each company shall register w ithin 180 days after becoming a bank holding com pany by furnishing inform ation in the m anner and form prescribed by the Board. A company that receives the Board’s prior approval under subpart B of this part to become a bank holding com pany may complete this registration requirem ent through submission of its first annual report to the Board as required by paragraph (b) of this section. (b) Reports o f bank holding com panies. Each bank holding company shall furnish, in the m anner and form prescribed by the Board, an annual report of the com pany’s operations for the fiscal year in w hich it becomes a bank holding company, and for each fiscal year during w hich it remains a bank holding company. Additional information and reports shall be furnished as the Board may require. (c) Exam inations and inspections. The Board may examine or inspect any bank holding company and each of its subsidiaries and prepare a report of their operations and activities. W ith respect to a foreign banking organization, the Board may also examine any branch or agency of a foreign bank in any state of the United 9323 provided to itself pu rsuant to section 106(b)(1)(C) of the Bank Holding Company Act A m endm ents of 1970 (12 U.S.C. 1972(1)(CJ). (2) Safe harbor fo r com bined-balance discounts. Vary the consideration for any product or package of products based on a custom er’s m aintaining a combined m inim um balance in certain products specified by the bank (eligible products), if: § 225.6 Penalties for violations. (i) The bank offers deposits, and all (a) Criminal and civil penalties. (1) such deposits are eligible products; and Section 8 of the BHC Act provides criminal penalties for w illful violation, (ii) Balances in deposits count at least and civil penalties for violation, by any as m uch as nondeposit products tow ard company or individual, of the BHC Act the m inim um balance. or any regulation or order issued under (3) Safe harbor fo r foreign it, or for making a false entry in any transactions. Engage in any transaction book, report, or statement of a bank w ith a customer if that customer is: holding company. (i) A corporation, business, or other (2) Civil money penalty assessments person (other than an individual) that: for violations of the BHC Act shall be m ade in accordance w ith subpart C of (A) Is incorporated, chartered, or the Board’s Rules of Practice for otherwise organized outside the United Hearings (12 CFR part 263, subpart C). States; and For any w illful violation of the Bank (B) Has its principal place of business Control Act or any regulation or order outside the U nited States; or issued under it, the Board may assess a civil penalty as provided in 12 U.S.C. (ii) An individual w ho is a citizen of a foreign country and is not resident in 1817(j)(15). (b) Cease-and-desist proceedings. For the United States. any violation of the BHC Act, the Bank (c) Lim itations on exceptions. Any Control Act, this regulation, or any exception granted pursuant to this order or notice issued thereunder, the section shall term inate upon a finding Board may institute a cease-and-desist by the Board that the arrangement is proceeding in accordance w ith the resulting in anti-competitive practices. Financial Institutions Supervisory Act The eligibility of a bank to operate of 1966, as am ended (12 U.S.C. 1818(b) under any exception granted pursuant et seq.). to this section shall term inate upon a finding by the Board that its exercise of § 225.7 Exceptions to tying restrictions. this authority is resulting in anti (a) Purpose. This section establishes competitive practices. exceptions to the anti-tying restrictions of section 106 of the Bank Holding (d) Extension o f statute to electronic Company Act Am endm ents of 1970 (12 benefit transfer services. A bank holding U.S.C. 1971,1972(1)). These exceptions company or nonbank subsidiary of a are in addition to those in section 106. bank holding com pany that provides The section also restricts tying of electronic benefit transfer services shall electronic benefit transfer services by be subject to the anti-tying restrictions bank holding companies and their applicable to such services set forth in nonbank subsidiaries. section 7(i)(ll) of the Food Stamp Act (b) Exceptions to statute. Subject to of 1977 (7 U.S.C. 2016(i)(ll)). the limitations of paragraph (c) of this (e) For purposes of this section, bank section, a bank may: has the meaning given that term in (1) Extension to affiliates o f statutory section 106(a) of the Bank Holding exceptions preserving traditional Company Act A m endm ents of 1970 (12 banking relationships. Extend credit, U.S.C. 1971), but shall also include a lease or sell property of any kind, or United States branch, agency, or furnish any service, or fix or vary the commercial lending company consideration for any of the foregoing, subsidiary of a foreign bank that is on the condition or requirem ent that a subject to section 106 pursuant to customer: (i) Obtain a loan, discount, deposit, or section 8(d) of the International Banking Act of 1978 (12 U.S.C. 3106(d)), and any trust service from an affiliate of the com pany made subject to section 106 by bank; or section 4(f)(9) or 4(h) of the BHC Act. (ii) Provide to an affiliate of the bank 3. Subpart B is revised to read as some additional credit, property, or service that the bank could require to be follows: States and may examine or inspect each of the organization’s subsidiaries in the United States and prepare reports of their operations and activities. The Board shall rely, as far as possible, on the reports of exam ination m ade by the prim ary federal or state supervisor of the subsidiary bank of the bank holding com pany or of the branch or agency of the foreign bank. 9324 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations Subpart B— Acquisition of Bank Securities or Assets Sec. 225.11 Transactions requiring Board approval. 225.12 Transactions not requiring Board approval. 225.13 Factors considered in acting on bank acquisition proposals. 225.14 Expedited action for certain bank acquisitions by well-run bank holding com panies. 225.15 Procedures for other bank acquisition proposals. 225.16 Public notice, com m ents, hearings, and other provisions governing applications and notices. 225.17 N otice procedure for one-bank hold in g com pany formations. Subpart B—Acquisition of Bank Securities or Assets §225.11 Transactions requiring Board approval The following transactions require the Board’s prior approval u n der section 3 of the Bank Holding Company Act except as exempted under § 225.12 or as otherwise covered by § 225.17 of this subpart: (a) Formation o f bank holding com pany. Any action that causes a bank or other company to become a bank holding company. (b) A cquisition o f subsidiary bank. Any action that causes a bank to become a subsidiary of a bank holding company. (c) Acquisition o f control o f bank or bank holding com pany securities. (1) The acquisition by a bank holding com pany of direct or indirect ownership or control of any voting securities of a bank or bank holding company, if the acquisition results in the com pany’s control of more than 5 percent of the outstanding shares of any class of voting securities of the bank or bank holding company. (2) An acquisition includes the purchase of additional securities through the exercise of preemptive rights, but does not include securities received in a stock dividend or stock split that does not alter the bank holding com pany’s proportional share of any class of voting securities. (d) Acquisition o f bank assets. The acquisition by a bank holding company or by a subsidiary thereof (other than a bank) of all or substantially all of the assets of a bank. (e) Merger o f bank holding companies. The merger or consolidation of bank holding companies, including a merger through the purchase of assets and assum ption of liabilities. (f) Transactions b y foreign banking organization. Any transaction described in paragraphs (a) through (e) of this section by a foreign banking organization that involves the acquisition of an interest in a U.S. bank or in a bank holding company for w hich application w ould be required if the foreign banking organization were a bank holding company. § 225.12 Transactions not requiring Board approval. The following transactions do not require the Board’s approval under § 225.11 of this subpart: (a) A cquisition o f securities in fiduciary capacity. The acquisition by a bank or other company (other than a trust that is a company) of control of voting securities of a bank or bank holding com pany in good faith in a fiduciary capacity, unless: (1) The acquiring bank or other com pany has sole discretionary authority to vote the securities and retains this authority for more than two years; or (2) The acquisition is for the benefit of the acquiring bank or other company, or its shareholders, employees, or subsidiaries. (b) A cquisition o f securities in satisfaction o f debts previously contracted. The acquisition by a bank or other com pany of control of voting securities of a bank or bank holding com pany in the regular course of securing or collecting a debt previously contracted in good faith, if the acquiring bank or other company divests the securities w ithin two years of acquisition. The Board or Reserve Bank may grant requests for up to three oneyear extensions. (c) Acquisition o f securities by bank holding com pany with m ajority control. The acquisition by a bank holding company of additional voting securities of a bank or bank holding company if more than 50 percent of the outstanding voting securities of the bank or bank holding com pany is lawfully controlled by the acquiring bank holding company prior to the acquisition. (d) A cquisitions involving bank mergers and internal corporate reorganizations—(1) Transactions subject to B ank Merger Act. The merger or consolidation of a subsidiary bank of a bank holding company w ith another bank, or the purchase of assets by the subsidiary bank, or a similar transaction involving subsidiary banks of a bank holding company, if the transaction requires the prior approval of a federal supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)) and does not involve the acquisition of shares of a bank. This exception does not include: (i) The merger of a nonsubsidiary bank and a nonoperating subsidiary bank formed by a company for the purpose of acquiring the nonsubsidiary bank; or (ii) Any transaction requiring the Board’s prior approval under § 225.11(e) of this subpart. The Board may require an application under this subpart if it determines that the merger or consolidation w ould have a significant adverse impact on the financial condition of the bank holding company, or otherwise requires approval u nder section 3 of the BHC Act. (2) Certain acquisitions subject to B ank Merger A ct. The acquisition by a bank holding company of shares of a bank or com pany controlling a bank or the merger of a company controlling a bank w ith the bank holding company, if the transaction is part of the merger or consolidation of the bank w ith a subsidiary bank (other than a nonoperating subsidiary bank) of the acquiring bank holding company, or is part of the purchase of substantially all of the assets of the bank by a subsidiary bank (other than a nonoperating subsidiary bank) of the acquiring bank holding company, and if: (i) The bank merger, consolidation, or asset purchase occurs simultaneously w ith the acquisition of the shares of the bank or bank holding company or the merger of holding companies, and the bank is not operated by the acquiring bank holding company as a separate entity other than as the survivor of the merger, consolidation, or asset purchase; . (ii) The transaction requires the prior approval of a federal supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)); (iii) The transaction does not involve the acquisition of any nonbank company that w ould require prior approval under section 4 of the BHC Act (12 U.S.C. 1843); (iv) Both before and after the transaction, the acquiring bank holding company meets the Board’s Capital Adequacy Guidelines (Appendixes A, B, C, D, and E of this part); (v) At least 10 days prior to the transaction, the acquiring bank holding com pany has provided to the Reserve Bank w ritten notice of the transaction that contains: (A) A copy of the filing m ade to the appropriate federal banking agency under the Bank Merger Act; and (B) A description of the holding com pany’s involvement in the transaction, the purchase price, and the source of funding for the purchase price; and (vi) Prior to expiration of the period provided in paragraph (d)(2)(v) of this section, the Reserve Bank has not Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations informed the bank holding company that an application under § 225.11 is required. (3) Internal corporate reorganizations. (i) Subject to paragraph (d)(3)(ii) of this section, any of the following transactions performed in the United States by a bank holding company: (A) The merger of holding com panies that are subsidiaries of the bank holding company; (B) The formation of a subsidiary holding com p any ;1 (C) The transfer of control or ow nership of a subsidiary bank or a subsidiary holding company between one subsidiary holding com pany and another subsidiary holding company or the bank holding company. (ii) A transaction described in paragraph (d)(3)(i) of this section qualifies for this exception if: (A) The transaction represents solely a corporate reorganization involving companies and insured depository institutions that, both preceding and following the transaction, are lawfully controlled and operated by the bank holding company; (B) The transaction does not involve the acquisition of additional voting shares of an insured depository institution that, prior to the transaction, was less than majority ow ned by the bank holding company; (C) The bank holding company is not organized in m utual form; and (D) Both before and after the transaction, the bank holding company meets the Board’s Capital Adequacy Guidelines (Appendixes A, B, C, D, and E of this part). (e) Holding securities in escrow. The holding of any voting securities of a bank or bank holding company in an escrow arrangement for the benefit of an applicant pending the Board’s action on an application for approval of the proposed acquisition, if title to the securities and the voting rights remain w ith the seller and paym ent for the securities has not been m ade to the seller. (f) Acquisition o f foreign banking organization. The acquisition of a foreign banking organization where the foreign banking organization does not directly or indirectly own or control a bank in the U nited States, unless the acquisition is also by a foreign banking organization and otherwise subject to § 225.11(f) of this subpart. 1 In the case of a transaction that results in the formation or designation of a new bank holding company, the new bank holding com pany must complete the registration requirem ents described in §225.5. § 225.13 Factors considered in acting on bank acquisition proposals. (a) Factors requiring denial. A s specified in section 3(c) of the BHC Act, the Board may not approve any application u nder this subpart if: Cl) The transaction w ould result in a monopoly or w ould further any com bination or conspiracy to monopolize, or to attem pt to monopolize, the business of banking in any part of the United States; (2) The effect of the transaction may be substantially to lessen com petition in any section of the country, tend to create a monopoly, or in any other m anner be in restraint of trade, unless the Board finds that the transaction’s anti-competitive effects are clearly outw eighed by its probable effect in meeting the convenience and needs of the community; (3) The applicant has failed to provide the Board w ith adequate assurances that it w ill make available such information on its operations or activities, and the operations or activities of any affiliate of the applicant, that the Board deems appropriate to determ ine and enforce compliance w ith the BHC Act and other applicable federal banking statutes, and any regulations thereunder; or (4) In the case of an application involving a foreign banking organization, the foreign banking organization is not subject to com prehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country, as provided in § 211.24(c)(l)(ii) of the Board’s Regulation K (12 CFR 211.24(c)(1)(h)). (b) O ther factors. In deciding applications u n der this subpart, the Board also considers the following factors w ith respect to the applicant, its subsidiaries, any banks related to the applicant through common ownership or management, and the bank or banks to be acquired: (1) Financial condition. Their financial condition and future prospects, including w hether current and projected capital positions and levels of indebtedness conform to standards and policies established by the Board. (2) Managerial resources. The competence, experience, and integrity of the officers, directors, and principal shareholders of the applicant, its subsidiaries, and the banks and bank holding companies concerned; their record of com pliance w ith laws and regulations; and the record of the applicant and its affiliates of fulfilling any com m itm ents to, and any conditions im posed by, the Board in connection w ith prior applications. 9325 (3) Convenience and needs o f com m unity. The convenience and needs of the communities to be served, including the record of performance under the Community Reinvestm ent Act of 1977 (12 U.S.C. 2901 et seq.) and regulations issued thereunder, including the Board’s Regulation BB (12 CFR part 228). (c) Interstate transactions. The Board may approve any application or notice u nd er this subpart by a bank holding com pany to acquire control of all or substantially all of the assets of a bank located in a state other th an the home state of the bank holding company, w ithout regard to w hether the transaction is prohibited under the law of any state, if the transaction complies w ith the requirements of section 3(d) of the BHC Act (12 U.S.C. 1842(d)). (d) Conditional approvals. The Board may impose conditions on any approval, including conditions to address competitive, financial, managerial, safety and soundness, convenience and needs, compliance or other concerns, to ensure that approval is consistent w ith the relevant statutory factors and other provisions of the BHC Act. § 225.14 Expedited action for certain bank acquisitions by well-run bank holding companies. (a) Filing o f notice—(1) Inform ation required and public notice. A s an alternative to the procedure provided in § 225.15, a bank holding com pany that meets the requirements of paragraph (c) of this section may satisfy the prior approval requirements of § 225.11 in connection w ith the acquisition of shares, assets or control of a bank, or a merger or consolidation betw een bank holding companies, by providing the appropriate Reserve Bank w ith a w ritten notice containing the following: (i) A certification that all of the criteria in paragraph (c) of this section are met; (ii) A description of the transaction that includes identification of the companies and insured depository institutions involved in the transaction 2 and identification of each banking market affected by the transaction; 2 If, in connection w ith a transaction u n der this subpart, any person or group of persons proposes to acquire control of the acquiring bank holding company for purposes of the Bank Control Act or § 225.41, the person or group of persons may fulfill the notice requirem ents of the Bank Control Act and § 225.43 by providing, as part of the subm ission by the acquiring bank holding com pany under this subpart, identifying and biographical information required in paragraph (6)(A) of the Bank Control Act (12 U.S.C. 1817(j)(6)(A)), as well as any financial or other information requested by the Reserve Bank under § 225.43. 9326 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations (iii) A description of the effect of the transaction on the convenience and needs of the com m unities to be served and of the actions being taken by the bank holding com pany to improve the CRA performance of any insured depository institution subsidiary that does not have at least a satisfactory CRA performance rating at the tim e of the transaction; (iv) Evidence that notice of the proposal has been published in accordance w ith § 225.16(b)(1); (v)(A) If the bank holding company has consolidated assets of $150 m illion or more, an abbreviated consolidated pro form a balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro form a risk-based capital ratios for the acquiring bank holding com pany as of the m ost recent quarter, and a description of the purchase price and the terms and sources of funding for the transaction; (B) If the bank holding com pany has consolidated assets of less than $150 million, a pro form a parent-only balance sheet as of the m ost recent quarter showing credit and debit adjustments that reflect the proposed transaction, and a description of the purchase price, the terms and sources of funding for the transaction, and the sources and schedule for retiring any debt incurred in the transaction; (vi) If the bank holding company has consolidated assets of less than $300 million, a list of and biographical information regarding any directors or senior executive officers of the resulting bank holding com pany that are not directors or senior executive officers of the acquiring bank holding company or of a company or institution to be acquired; (vii) For each insured depository institution whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital and total capital of the institution on a pro form a basis; and (viii) The market indexes for each relevant banking m arket reflecting the pro form a effect of the transaction. (2) Waiver o f unnecessary inform ation. The Reserve Bank may reduce the information requirem ents in paragraph (a)(l)(v) through (viii) of this section as appropriate. (b)(1) A ction on proposals under this section. The Board or the appropriate Reserve Bank shall act on a proposal subm itted under this section or notify the bank holding com pany that the transaction is subject to the procedure in § 225.15 w ithin 5 business days after the close of the public com ment period. The Board and the Reserve Bank shall not approve any proposal under this section prior to the third business day following the close of the public com m ent period, unless an emergency exists that requires expedited or immediate action. The Board may extend the period for action under this section for up to 5 business days. (2) A cceptance o f notice in event expedited procedure not available. In the event that the Board or the Reserve Bank determines after the filing of a notice under this section that a bank holding company may not use the procedure in this section and m ust file an application under § 225.15, the application shall be deem ed accepted for purposes of § 225.15 as of the date that the notice was filed under this section. (c) Criteria fo r use o f expedited procedure. The procedure in this section is available only if: (1) W ell-capitalized organization—(i) B ank holding com pany. Both at the time of and immediately after the proposed transaction, the acquiring bank holding company is well-capitalized; (ii) Insured depository institutions. Both at the tim e of and immediately after the proposed transaction: (A) The lead insured depository institution of the acquiring bank holding com pany is well-capitalized; (B) W ell-capitalized insured depository institutions control at least 80 percent of the total risk-weighted assets of insured depository institutions controlled by the acquiring bank holding company; and (C) No insured depository institution controlled by the acquiring bank holding company is undercapitalized; (2) W ell-managed organization, (i) Satisfactory exam ination ratings. At the time of the transaction, the acquiring bank holding company, its lead insured depository institution, and insured depository institutions that control at least 80 percent of the total riskweighted assets of insured depository institutions controlled by the holding com pany are well-managed; (ii) No poorly m anaged institutions. No insured depository institution controlled by the acquiring bank holding company has received 1 of the 2 lowest composite ratings at the later of the institution’s most recent examination or subsequent review by the appropriate federal banking agency for the institution; (iii) R ecently acquired institutions excluded. Any insured depository institution that has been acquired by the bank holding company during the 12- m onth period preceding the date on w hich w ritten notice is filed under paragraph (a) of this section may be excluded for purposes of paragraph (c)(2)(ii) of this section i f : (A) The bank holding company has developed a plan acceptable to the appropriate federal banking agency for the institution to restore the capital and m anagement of the institution; and (B) All insured depository institutions excluded under this paragraph represent, in the aggregate, less than 10 percent of the aggregate total riskw eighted assets of all insured depository institutions controlled by the bank holding company; (3) Convenience ana needs criteria— (i) Effect on the com m unity. The record indicates that the proposed transaction w ould m eet the convenience and needs of the com m unity standard in the BHC Act; and (ii) Established CRA perform ance record. At the time of the transaction, the lead insured depository institution of the acquiring bank holding company and insured depository institutions that control at least 80 percent of the total risk-weighted assets of insured institutions controlled by the holding company have received a satisfactory or better composite rating at the most recent exam ination under the Comm unity Reinvestment Act; (4) Public com m ent. No com m ent that is timely and substantive as provided in § 225.16 is received by the Board or the appropriate Reserve Bank other than a comment that supports approval of the proposal; (5) Com petitive criteria—(i) Competitive screen. W ithout regard to any divestitures proposed by the acquiring bank holding company, the acquisition does not cause: (A) Insured depository institutions controlled by the acquiring bank holding company to control in excess of 35 percent of market deposits in any relevant banking market; or (B) The Herfindahl-Hirschman index to increase by more than 200 points in any relevant banking m arket w ith a post-acquisition index of at least 1800; and (ii) D epartm ent o f Justice. The Department of Justice has not indicated to the Board that consum m ation of the transaction is likely to have a significantly adverse effect on competition in any relevant banking market; (6) Size o f acquisition—(i) In general—(A) Lim ited Growth. Except as provided in paragraph (c)(6)(ii) of this section, the sum of the aggregate riskw eighted assets to be acquired in the proposal and the aggregate risk- Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations w eighted assets acquired by the acquiring bank holding com pany in all other qualifying transactions does not exceed 35 percent of the consolidated risk-weighted assets of the acquiring bank holding company. For purposes of this paragraph other qualifying transactions m eans any transaction approved under this section or § 225.23 during the 12 m onths prior to filing the notice under this section; and (B) Individual size lim itation. The total risk-weighted assets to be acquired do not exceed $7.5 billion; (ii) Sm all bank holding com panies. Paragraph (c)(6)(i)(A) of this section shall not apply if, immediately following consum m ation of the proposed transaction, the consolidated risk-weighted assets of the acquiring bank holding company are less than $300 million; (7) Supervisory actions. During the 12-month period ending on the date on w hich the bank holding company proposes to consum m ate the proposed transaction, no formal adm inistrative order, including a w ritten agreement, cease and desist order, capital directive, prom pt corrective action directive, asset m aintenance agreement, or other formal enforcement action, is or was outstanding against the bank holding company or any insured depository institution subsidiary of the holding company, and no formal adm inistrative enforcement proceeding involving any such enforcement action, order, or directive is or was pending; (8) Interstate acquisitions. Boardapproval of the transaction is not prohibited under section 3(d) of the BHC Act; (9) Other supervisory considerations. Board approval of the transaction is not prohibited under the informational sufficiency or comprehensive hom e country supervision standards set forth in section 3(c)(3) of the BHC Act; and (10) Notification. The acquiring bank holding company has not been notified by the Board, in its discretion, prior to the expiration of the period in paragraph (b)(1) of this section that an application under § 225.15 is required in order to perm it closer review of any financial, managerial, competitive, convenience and needs or other matter related to the factors that m ust be considered under this part. (d) C om m ent by prim ary banking supervisor—(1) Notice. Upon receipt of a notice under this section, the appropriate Reserve Bank shall prom ptly furnish notice of the proposal and a copy of the information filed pursuant to paragraph (a) of this section to the primary banking supervisor of the insured depository institutions to be acquired. (2) C om m ent period. The primary banking supervisor shall have 30 calendar days (or such shorter tim e as agreed to by the primary banking supervisor) from the date of the letter giving notice in w hich to subm it its views and recom m endations to the Board. (3) A ction subject to supervisor’s com m ent. Action by the Board or the Reserve Bank on a proposal under this section is subject to the condition that the prim ary banking supervisor not recom m end in writing to the Board disapproval of the proposal prior to the expiration of the comment period described in paragraph (d)(2) of this section. In such event, any approval given under this section shall be revoked and, if required by section 3(b) of the BHC Act, the Board shall order a hearing on the proposal. (4) Emergencies. Notw ithstanding paragraphs (d)(2) and (d)(3) of this section, the Board may provide the prim ary banking supervisor w ith 10 calendar days’ notice of a proposal under this section if the Board finds that an emergency exists requiring expeditious action, and may act during the notice period or w ithout providing notice to the primary banking supervisor if the Board finds that it m ust act im m ediately to prevent probable failure. (5) Primary banking supervisor. For purposes of this section and § 225.15(b), the prim ary banking supervisor for an institution is: (i) The Office of the Comptroller of the Currency, in the case of a national banking association or District bank; (ii) The appropriate supervisory authority for the State in w hich the bank is chartered, in the case of a State bank; (iii) The Director of the Office of Thrift Supervision, in the case of a savings association. (e) Branches and agencies o f foreign banking organizations. For purposes of this section, a U.S. branch or agency of a foreign banking organization shall be considered to be an insured depository institution. A U.S. branch or agency of a foreign banking organization shall be subject to paragraph (c)(3)(ii) of this section only to the extent it is insured by the Federal Deposit Insurance Corporation in accordance w ith section 6 of the International Banking Act of 1978 (12 U.S.C. 3104). § 225.15 Procedures for other bank acquisition proposals. (a) Filing application. Except as provided in § 225.14, an application for the Board’s prior approval under this 9327 subpart shall be governed by the provisions of this section and shall be filed w ith the appropriate Reserve Bank on the designated form. (b) N otice to prim ary banking supervisor. Upon receipt of an application under this subpart, the Reserve Bank shall prom ptly furnish notice and a copy of the application to the prim ary banking supervisor of each bank to be acquired. The primary supervisor shall have 30 calendar days from the date of the letter giving notice in w hich to submit its views and recom m endations to the Board. (c) A ccepting application for processing. W ithin 7 calendar days after the Reserve Bank receives an application under this section, the Reserve Bank shall accept it for processing as of the date the application was filed or return the application if it is substantially incomplete. Upon accepting an application, the Reserve Bank shall immediately send copies to the Board. The Reserve Bank or the Board may request additional information necessary to complete the record of an application at any time after accepting the application for processing. (d) A ction on applications—(1) Action under delegated authority. The Reserve Bank shall approve an application under this section w ithin 30 calendar days after the acceptance date for the application, unless the Reserve Bank, upon notice to the applicant, refers the application to the Board for decision because action under delegated authority is not appropriate. (2) Board action. The Board shall act on an application under this subpart that is referred to it for decision w ithin 60 calendar days after the acceptance date for the application, unless the Board notifies the applicant that the 60day period is being extended for a specified period and states the reasons for the extension. In no event may the extension exceed the 91-day period provided in § 225.16(f). The Board may, at any time, request additional information that it believes is necessary for its decision. § 225.16 Public notice, comments, hearings, and other provisions governing applications and notices. (a) In general. The provisions of this section apply to all notices and applications filed under § 225.14 and §225.15. (b) Public notice—(1) Newspaper publication—(i) Location o f publication. In the case of each notice or application subm itted under § 225.14 or § 225.15, the applicant shall publish a notice in a new spaper of general circulation, in 9328 Federal Register / Vol*. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations the form and at the locations specified in § 262.3 of the Rules of Procedure (12 CFR 262.3); (ii) Contents o f notice. A new spaper notice u nder this paragraph shall provide an opportunity for interested persons to com m ent on the proposal for a period of at least 30 calendar days; (iii) Tim ing o f publication. Each new spaper notice published in connection w ith a proposal u nder this paragraph shall be published no more than 15 calendar days before and no later than 7 calendar days following the date that a notice or application is filed w ith the appropriate Reserve Bank. (2) Federal Register notice. (i) Publication by Board. Upon receipt of a notice or application u n der § 225.14 or § 225.15, the Board shall prom ptly publish notice of the proposal in the Federal Register and shall provide an opportunity for interested persons to comment on the proposal for a period of no more than 30 days; (ii) R equest fo r advance publication. A bank holding company may request that, during the 15-day period prior to filing a notice or application under § 225.14 or § 225.15, the Board publish notice of a proposal in the Federal Register. A request for advance Federal Register publication shall be m ade in writing to the appropriate Reserve Bank and shall contain the identifying information prescribed by the Board for Federal Register publication; (3) Waiver or shortening o f notice. The Board may waive or shorten the required notice periods under this section if the Board determ ines that an emergency exists requiring expeditious action on the proposal, or if the Board finds that im m ediate action is necessary to prevent the probable failure of an insured depository institution. (c) Public com m ent—(1) Tim ely com m ents. Interested persons may submit inform ation and comments regarding a proposal filed u nd er this subpart. A com ment shall be considered timely for purposes of this subpart if the comment, together w ith all supplem ental information, is submitted in writing in accordance w ith the Board’s Rules of Procedure and received by the Board or the appropriate Reserve Bank prior to the expiration of the latest public com m ent period provided in paragraph (b) of this section. (2) Extension o f com m ent period—(i) In general. The Board may, in its discretion, extend the public comment period regarding any proposal submitted under this subpart. (ii) Requests in connection with obtaining application or notice. In the event that an interested person has requested a copy of a notice or application subm itted u n der this subpart, the Board may, in its discretion and based on the facts and circumstances, grant such person an extension of the com m ent period for up to 15 calendar days. (iii) Joint requests by interested person and acquiring com pany. The Board w ill grant a joint request by an interested person and the acquiring bank holding company for an extension of the comment period for a reasonable period for a purpose related to the statutory factors the Board m ust consider under this subpart. (3) Substantive com m ent. A comment w ill be considered substantive for purposes of this subpart unless it involves individual com plaints, or raises frivolous, previously-considered or w holly unsubstantiated claims or irrelevant issues. (d) N otice to A ttorney General. The Board or Reserve Bank shall immediately notify the United States Attorney General of approval of any notice or application under § 225.14 or §225.15. (e) Hearings. As provided in section 3(b) of the BHC Act, the Board shall order a hearing on any application or notice under § 225.15 if the Board receives from the primary supervisor of the bank to be acquired, w ithin the 30day period specified in § 225.15(b), a w ritten recom m endation of disapproval of an application. The Board may order a formal or informal hearing or other proceeding on the application or notice, as provided in § 262.3(i)(2) of the Board’s Rules of Procedure. Any request for a hearing (other than from the primary supervisor) shall comply with § 262.3(e) of the Rules of Procedure (12 CFR 262.3(e)). (f) A pproval through failure to act— (1) Ninety-one day rule. An application or notice under § 225.14 or § 225.15 shall be deemed approved if the Board fails to act on the application or notice w ithin 91 calendar days after the date of submission to the Board of the complete record on the application. For this purpose, the Board acts w hen it issues an order stating that the Board has approved or denied the application or notice, reflecting the votes of the members of the Board, and indicating that a statement of the reasons for the decision w ill follow promptly. (2) Complete record. For the purpose of computing the com m encem ent of the 91-day period, the record is complete on the latest of: (i) The date of receipt by the Board of an application or notice that has been accepted by the Reserve Bank; (ii) The last day provided in any notice for receipt of comments and hearing requests on the application or notice; (iii) The date of receipt by the Board of the last relevant material regarding the application or notice that is needed for the Board’s decision, if the material is received from a source outside of the Federal Reserve System; or (iv) The date of completion of any hearing or other proceeding. (g) Exceptions to notice and hearing requirements. (1) Probable bank failure. If the Board finds it m ust act imm ediately on an application or notice in order to prevent the probable failure of a bank or bank holding company, the Board may modify or dispense w ith the notice and hearing requirements of this section. (2) Emergency. If the Board finds that, although immediate action on an application or notice is not necessary, an emergency exists requiring expeditious action, the Board shall provide the prim ary supervisor 10 days to submit its recommendation. The Board may act on such an application or notice w ithout a hearing and may modify or dispense w ith the other notice and hearing requirements of this section. (h) Waiting period. A transaction approved under § 225.14 or § 225.15 shall not be consum m ated until 30 days after the date of approval of the application, except that a transaction may be consummated: (1) Immediately upon approval, if the Board has determ ined under paragraph (g) of this section that the application or notice involves a probable bank failure; (2) On or after the 5th calendar day following the date of approval, if the Board has determ ined under paragraph (g) of this section that an emergency exists requiring expeditious action; or (3) On or after the 15th calendar day following the date of approval, if the Board has not received any adverse comments from the United States Attorney General relating to the competitive factors and the Attorney General has consented to the shorter waiting period. §225.17 Notice procedure for one-bank holding company formations. (a) Transactions that qualify under this section. An acquisition by a company of control of a bank may be consumm ated 30 days after providing notice to the appropriate Reserve Bank in accordance w ith paragraph (b) of this section, provided that all of the following conditions are met: (1) The shareholder or shareholders w ho control at least 67 percent of the shares of the bank will control, im m ediately after the reorganization, at Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations least 67 percent of the shares of the holding com pany in substantially the same proportion, except for changes in shareholders’ interests resulting from the exercise of dissenting shareholders’ rights under state or federal la w ;3 (2) No shareholder, or group of shareholders acting in concert, will, following the reorganization, ow n or control 10 percent or more of any class of voting shares of the bank holding company, unless that shareholder or group of shareholders was authorized, after review u n der the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the appropriate federal banking agency for the bank, to own or control 10 percent or more of any class of voting shares of the ban k ;4 (3) The bank is adequately capitalized (as defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o)); (4) The bank received at least a composite “satisfactory” rating at its most recent examination, in the event that the bank was examined; (5) At the tim e of the reorganization, neither the bank nor any of its officers, directors, or principal shareholders is involved in any unresolved supervisory or enforcement matters with any appropriate federal banking agency; (6) The com pany demonstrates that any debt that it incurs at the tim e of the reorganization, and the proposed means of retiring this debt, w ill not place un due burden on the holding company or its subsidiary on a pro form a b asis;5 (7) The holding company w ill not, as a result of the reorganization, acquire control of any additional bank or engage in any activities other than those of managing and controlling banks; and (8) During this period, neither the appropriate Reserve Bank nor the Board objected to the proposal or required the filing of an application under § 225.15 of this subpart. 3 A shareholder of a bank in reorganization will be considered to have the same proportional interest in the holding com pany if the shareholder interest increases, on a pro rata basis, as a result of either the redem ption of shares from dissenting shareholders by the bank or bank holding company, or the acquisition of shares of dissenting shareholders by the rem aining shareholders. 4 This procedure is not available in cases in w hich the exercise of dissenting shareholders’ rights would cause a com pany that is not a bank holding com pany (other than the com pany in formation) to be required to register as a bank holding company. This procedure also is not available for the formation of a bank holding com pany organized in m utual form. 5 For a banking organization w ith consolidated assets, on a p roform a basis, of less than $150 m illion (other than a banking organization that will control a de novo bank), this requirem ent is satisfied if the proposal complies w ith the Board’s policy statement on small bank holding companies (Appendix C of this part). (b) Contents o f notice. A notice filed under this paragraph shall include: (1) Certification by the notificant’s board of directors that the requirem ents of 12 U.S.C. 1842(a)(C) and this section are met by the proposal; (2) A list identifying all principal shareholders of the bank prior to the reorganization and of the holding com pany following the reorganization, an d specifying the percentage of shares held by each principal shareholder in the bank and proposed to be held in the new holding company; (3) A description of the resulting management of the proposed bank holding company and its subsidiary bank, including: (i) Biographical information regarding any senior officers and directors of the resulting bank holding com pany w ho were not senior officers or directors of the bank prior to the reorganization; and (ii) A detailed history of the involvem ent of any officer, director, or principal shareholder of the resulting bank holding com pany in any adm inistrative or criminal proceeding; and (4) Pro form a financial statements for the holding company, and a description of the amount, source, and terms of debt, if any, that the bank holding company proposes to incur, and information regarding the sources and tim ing for debt service and retirement. (c) A cknow ledgm ent o f notice. W ithin 7 calendar days following receipt of a notice under this section, the Reserve Bank shall provide the notificant w ith a w ritten acknowledgment of receipt of the notice. This w ritten acknowledgment shall indicate that the transaction described in the notice may be consum m ated on the 30th calendar day after the date of receipt of the notice if the Reserve Bank or the Board has not objected to the proposal during that time. (d) A pplication required upon objection. The Reserve Bank or the Board may object to a proposal during the notice period by providing the bank holding company w ith a written explanation of the reasons for the objection. In such case, the bank holding company may file an application for prior approval of the proposal pursuant to § 225.15 of this subpart. 4. Subpart C is revised to read as follows: 9329 Subpart C— Nonbanking Activities and Acquisitions by Bank Holding Companies Sec. 225.21 Prohibited nonbanking activities and acquisitions; exem pt bank holding com panies. 225.22 Exempt nonbanking activities and acquisitions. 225.23 Expedited action for nonbanking proposals by well-run bank holding com panies. 225.24 Procedures for other nonbanking proposals. 225.25 Hearings, alteration of activities, and other matters. 225.26 Factors considered in acting on nonbanking proposals. 225.27 Procedures for determ ining scope o f nonbanking activities. 225.28 List o f perm issible nonbanking activities. Subpart C—Nonbanking Activities and Acquisitions by Bank Holding Companies §225.21 Prohibited nonbanking activities and acquisitions; exempt bank holding companies. (a) Prohibited nonbanking activities and acquisitions. Except as provided in § 225.22 of this subpart, a bank holding company or a subsidiary may not engage in, or acquire or control, directly or indirectly, voting securities or assets of a com pany engaged in, any activity other than: (1) Banking or managing or controlling banks and other subsidiaries authorized under the BHC Act; and (2) An activity that the Board determines to be so closely related to banking, or managing or controlling banks as to be a proper incident thereto, including any incidental activities that are necessary to carry on such an activity, if the bank holding company has obtained the prior approval of the Board for that activity in accordance w ith the requirem ents of this regulation. (b) E xem pt bank holding com panies. The following bank holding companies are exem pt from the provisions of this subpart: (1) Fam ily-owned com panies. Any company that is a “ company covered in 1970” (as defined in section 2(b) of the BHC Act), more than 85 percent of the voting securities of w hich was collectively owned on June 30,1968, and continuously thereafter, by members of the same family (or their spouses) who are lineal descendants of common ancestors. (2) Labor, agricultural, and horticultural organizations. Any company that was on January 4 , 1977, both a bank holding company and a labor, agricultural, or horticultural organization exempt from taxation 9330 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations un der section 501 of the Internal Revenue Code (26 U.S.C. 501(c)). (3) C om panies granted hardship exem ption. Any bank holding com pany that has controlled only one bank since before July 1,1968, and that has been granted an exem ption by the Board un der section 4(d) of the BHC Act, subject to any conditions im posed by the Board. (4) Companies granted exem ption on other grounds. Any company that acquired control of a bank before December 10,1982, w ithout the Board’s prior approval u nder section 3 of the BHC Act, on the basis of a narrow interpretation of the term dem and deposit or com m ercial loan, if the Board has determ ined that: (i) Coverage of the company as a bank holding company under this subpart w ould be unfair or represent an unreasonable hardship; and (ii) Exclusion of the company from coverage under this part is consistent w ith the purposes of the BHC Act and section 106 of the Bank Holding Company Act Am endm ents of 1970 (12 U.S.C. 1971, 1972(1)). The provisions of § 225.4 of subpart A of this part do not apply to a company exempt under this paragraph. (1) The bank holding company or its subsidiaries in connection w ith their activities as authorized by law, including services that are necessary to fulfill commitments entered into by the subsidiaries w ith third parties, if the bank holding company or servicing com pany complies w ith the Board’s published interpretations and does not act as principal in dealing w ith third parties; and (2) The internal operations of the bank holding company or its subsidiaries. Services for the internal operations of the bank holding company or its subsidiaries include, but are not limited to: (i) Accounting, auditing, and appraising; (ii) Advertising and public relations; (iii) Data processing and data transm ission services, data bases, or facilities; (iv) Personnel services; (v) Courier services; (vi) Holding or operating property used w holly or substantially by a subsidiary in its operations or for its future use; (vii) Liquidating property acquired from a subsidiary; (viii) Liquidating property acquired from any sources either prior to May 9, 1956, or the date on w hich the company § 225.22 Exempt nonbanking activities and became a bank holding company, acquisitions. w hichever is later; and (a) Certain de novo activities. A bank (ix) Selling, purchasing, or holding company may, either directly or underw riting insurance, such as blanket indirectly, engage de novo in any bond insurance, group insurance for nonbanking activity listed in § 225.28(b) employees, and property and casualty (other than operation of an insured insurance. depository institution) w ithout ^ (c) Safe deposit business. A bank obtaining the Board’s prior approval if holding company or nonbank subsidiary the bank holding company: may, w ithout the Board’s prior (1) Meets the requirem ents of approval, conduct a safe deposit paragraphs (c) (1), (2), and (6) of business, or acquire voting securities of §225.23; a company that conducts such a (2) Conducts the activity in business. com pliance w ith all Board orders and (d) Nonbanking acquisitions not regulations governing the activity; and requiring prior Board approval. The (3) W ithin 10 business days after Board’s prior approval is not required commencing the activity, provides under this subpart for the following w ritten notice to the appropriate acquisitions: Reserve Bank describing the activity, (1) DPC acquisitions, (i) Voting identifying the com pany or companies securities or assets, acquired by engaged in the activity, and certifying foreclosure or otherwise, in the ordinary that the activity w ill be conducted in course of collecting a debt previously accordance w ith the Board’s orders and contracted (DPC property) in good faith, regulations and that the bank holding if the DPC property is divested w ithin com pany meets the requirements of two years of acquisition. paragraphs (c) (1), (2), and (6) of (ii) The Board may, upon request, §225.23. extend this two-year period for up to (b) Servicing activities. A bank three additional years. The Board may holding company may, w ithout the perm it additional extensions for up to 5 Board’s prior approval under this years (for a total of 10 years), for shares, subpart, furnish services to or perform real estate or other assets where the holding company demonstrates that services for, or establish or acquire a com pany that engages solely in each extension would not be servicing activities for: detrimental to the public interest and either the bank holding com pany has m ade good faith attem pts to dispose of such shares, real estate or other assets or disposal of the shares, real estate or other assets during the initial period w ould have been detrim ental to the company. (iii) Transfers of DPC property w ithin the bank holding company system do not extend any period for divestiture of the property. (2) Securities or assets required to be divested by subsidiary. Voting securities or assets required to be divested by a subsidiary at the request of an examining federal or state authority (except by the Board u nder the BHC Act or this regulation), if the bank holding com pany divests the securities or assets w ithin two years from the date acquired from the subsidiary. (3) Fiduciary investm ents. Voting securities or assets acquired by a bank or other company (other than a trust that is a company) in good faith in a fiduciary capacity, if the voting securities or assets are: (i) Held in the ordinary course of business; and (ii) Not acquired for the benefit of the company or its shareholders, employees, or subsidiaries. (4) Securities eligible fo r investm ent by national bank. Voting securities of the kinds and am ounts explicitly eligible by federal statute (other than section 4 of the Bank Service Corporation Act, 12 U.S.C. 1864) for investm ent by a national bank, and voting securities acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the BHC Act and interpretations of the Comptroller of the Currency under section 5136 of the Revised Statutes (12 U.S.C. 24(7)). (5) Securities or property representing 5 percent or less o f a com pany. Voting securities of a company or property that, in the aggregate, represent 5 percent or less of the outstanding shares of any class of voting securities of a company, or that represent a 5 percent interest or less in the property, subject to the provisions of 12 CFR 225.137. (6) Securities o f investm ent com pany. Voting securities of an investment company that is solely engaged in investing in securities and that does not own or control more than 5 percent of the outstanding shares of any class of voting securities of any company. (7) A ssets acquired in ordinary course o f business. Assets of a company acquired in the ordinary course of business, subject to the provisions of 12 CFR 225.132, if the assets relate to activities in w hich the acquiring company has previously received Board Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations approval u nd er this regulation to engage. (8) A sset acquisitions by lending com pa ny or industrial bank. Assets of an office(s) of a company, all or substantially all of w hich relate to making, acquiring, or servicing loans if: (1) The acquiring com pany has previously received Board approval u nd er this regulation or is not required to obtain prior Board approval under this regulation to engage in lending activities or industrial banking activities; (ii) The assets acquired during any 12m onth period do not represent more than 50 percent of the risk-weighted assets (on a consolidated basis) of the acquiring lending com pany or industrial bank, or more than $100 million, w hichever am ount is less; (iii) The assets acquired do not represent more than 50 percent of the selling com pany’s consolidated assets that are devoted to lending activities or industrial banking business; (iv) The acquiring com pany notifies the Reserve Bank of the acquisition w ithin 30 days after the acquisition; and (v) The acquiring company, after giving effect to the transaction, meets the Board’s Capital Adequacy Guidelines (Appendix A of this part), and the Board has not previously notified the acquiring com pany that it may not acquire assets under the exem ption in this paragraph. (e) A cquisition o f securities by subsidiary banks—(1) N ational bank. A national bank or its subsidiary may, w ithout the Board’s approval under this subpart, acquire or retain securities on the basis of section 4(c)(5) of the BHC Act in accordance w ith the regulations of the Comptroller of the Currency. (2) State bank. A state-chartered bank or its subsidiary may, insofar as federal law is concerned, and w ithout the Board’s prior approval under this subpart: (i) Acquire or retain securities, on the basis of section 4(c)(5) of the BHC Act, of the kinds and am ounts explicitly eligible by federal statute for investment by a national bank; or (ii) Acquire or retain all (but, except for directors’ qualifying shares, not less than all) of the securities of a company that engages solely in activities in w hich the parent bank may engage, at locations at w hich the bank may engage in the activity, and subject to the same limitations as if the bank were engaging in the activity directly. (f) A ctivities and securities o f new bank holding com panies. A company that becomes a bank holding company may, for a period of two years, engage in nonbanking activities and control voting securities or assets of a nonbank subsidiary, if the bank holding com pany engaged in such activities or controlled such voting securities or assets on the date it became a bank holding company. The Board may grant requests for u p to three one-year extensions of the twoyear period. (g) G randfathered activities and securities. Unless the Board orders divestiture or term ination under section 4(a)(2) of the BHC Act, a “company covered in 1970,” as defined in section 2(b) of the BHC Act, may: (1) Retain voting securities or assets and engage in activities that it has lawfully held or engaged in continuously since June 30,1968; and (2) Acquire voting securities of any new ly formed com pany to engage in such activities. (h) Securities or activities exem pt under Regulation K. A bank holding com pany may acquire voting securities or assets and engage in activities as authorized in Regulation K (12 CFR part 9331 (A) If the bank holding com pany has consolidated assets of $150 m illion or more, an abbreviated consolidated pro form a balance sheet for the acquiring bank holding com pany as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, consolidated pro form a risk-based capital ratios for the acquiring bank holding company as of the most recent quarter, a description of the purchase price and the terms and sources of funding for the transaction, and the total revenue and net income of the company to be acquired; (B) If the bank holding company has consolidated assets of less than $150 million, a pro form a parent-only balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction, a description of the purchase price and the terms and sources of funding for the transaction and the sources and schedule for retiring any debt incurred in the transaction, and the total assets, off-balance sheet items, revenue and net 2 1 1 ). income of the company to be acquired; (C) For each insured depository § 225.23 Expedited action for certain nonbanking proposals by well-run bank institution whose Tier 1 capital, total holding companies. capital, total assets or risk-weighted (a) Filing o f notice—(1) Inform ation assets change as a result of the transaction, the total risk-weighted required. A bank holding company that assets, total assets, Tier 1 capital and meets the requirem ents of paragraph (c) of this section may satisfy the notice total capital of the institution on a pro form a basis; requirem ent of this subpart in (iv) Identification of the geographic connection w ith the acquisition of markets in w hich com petition w ould be voting securities or assets of a company affected by the proposal, a description engaged in nonbanking activities that of the effect of the proposal on the Board has perm itted by order or competition in the relevant markets, a regulation (other than an insured depository institution) >, or a proposal to list of the major competitors in that market in the proposed activity if the engage de novo, either directly or affected m arket is local in nature, and, indirectly, in a nonbanking activity that if requested, the market indexes for the the Board has perm itted by order or by regulation, by providing the appropriate relevant market; and (v) A description of the public Reserve Bank w ith a w ritten notice benefits that can reasonably be expected containing the following: to result from the transaction. (i) A certification that all of the (2) W aiver o f unnecessary criteria in paragraph (c) of this section inform ation. The Reserve Bank may are met; reduce the information requirements in (ii) A description of the transaction paragraphs (a)(1) (iii) and (iv) of this that includes identification of the section as appropriate. companies involved in the transaction, (b)(1) A ction on proposals under this the activities to be conducted, and a section. The Board or the appropriate com mitment to conduct the proposed activities in conformity w ith the Board’s Reserve Bank shall act on a proposal submitted under this section, or notify regulations and orders governing the the bank holding com pany that the conduct of the proposed activity; transaction is subject to the procedure (iii) If the proposal involves an in § 225.24, w ithin 12 business days acquisition of a going concern: following the filing of all of the information required in paragraph (a) of 1A bank holding com pany may acquire voting this section. securities or assets of a savings association or other insured depository institution that is not a bank by (2) A cceptance o f notice i f expedited using the procedures in § 225.14 of subpart B if the procedure n o t available. If the Board or bank holding com pany and the proposal qualify the Reserve Bank determines, after the under that section as if the savings association or filing of a notice under this section, that other institution were a bank for purposes of that section. a bank holding company may not use 9332 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations the procedure in this section and m ust file a notice u n der § 225.24, the notice shall be deem ed accepted for purposes of § 225.24 as of the date that the notice w as filed u nd er this section. (c) Criteria fo r use o f expedited procedure. The procedure in this section is available only if: (1) W ell-capitalized organization—(i) B ank holding com pany. Both at the time of and im m ediately after the proposed transaction, the acquiring bank holding company is well-capitalized; (ii) Insured depository institutions. Both at the tim e of and immediately after the transaction: (A) The lead insured depository institution of the acquiring bank holding com pany is well-capitalized; (B) W ell-capitalized insured depository institutions control at least 80 percent of the total risk-weighted assets of insured depository institutions controlled by the acquiring bank holding company; and (C) No insured depository institution controlled by the acquiring bank holding com pany is undercapitalized; (2) W ell-managed organization—(i) Satisfactory exam ination ratings. At the time of the transaction, the acquiring bank holding company, its lead insured depository institution, and insured depository institutions that control at least 80 percent of the total riskw eighted assets of insured depository institutions controlled by such holding company are well-managed; (ii) No poorly m anaged institutions. No insured depository institution controlled by the acquiring bank holding com pany has received 1 of the 2 lowest composite ratings at the later of the institution’s most recent exam ination or subsequent review by the appropriate federal banking agency for the institution. (iii) R ecently acquired institutions excluded. Any insured depository institution that has been acquired by the bank holding company during the 12m onth period preceding the date on w hich w ritten notice is filed under paragraph (a) of this section may be excluded for purposes of paragraph (c)(2)(ii) of this section if: (A) The bank holding company has developed a plan acceptable to the appropriate federal banking agency for the institution to restore the capital and management of the institution; and (B) All insured depository institutions excluded under this paragraph represent, in the aggregate, less than 10 percent of the aggregate total riskweighted assets of all insured depository institutions controlled by the bank holding company; (3) Perm issible activity, (i) The Board has determ ined by regulation or order th at each activity proposed to be conducted is so closely related to banking, or managing or controlling banks, as to be a proper incident thereto; and (ii) The Board has not indicated that proposals to engage in the activity are subject to the notice procedure provided in §225.24; (4) Com petitive criteria—(i) Com petitive screen. In the case of the acquisition of a going concern, the acquisition, w ithout regard to any divestitures proposed by the acquiring bank holding company, does not cause: (A) The acquiring bank holding com pany to control in excess of 35 percent of the market share in any relevant market; or (B) The Herfindahl-Hirschm an index to increase by more than 200 points in any relevant market w ith a post acquisition index of at least 1800; and (ii) Other com petitive factors. The Board has not indicated that the transaction is subject to close scrutiny on competitive grounds; (5) Size o f acquisition—(i) In general—(A) Lim ited growth. Except as provided in paragraph (c)(5)(ii) of this section, the sum of aggregate riskw eighted assets to be acquired in the proposal and the aggregate riskw eighted assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the consolidated risk-weighted assets of the acquiring bank holding company. For purposes of this paragraph, “other qualifying transactions” means any transaction approved u nder this section or § 225.14 during the 12 months prior to filing the notice under this section; (B) Consideration paid. The gross consideration to be paid by the acquiring bank holding com pany in the proposal does not exceed 15 percent of the consolidated Tier 1 capital of the acquiring bank holding company; and (C) Individual size lim itation. The total risk-weighted assets to be acquired do not exceed $7.5 billion; (ii) Sm all bank holding companies. Paragraph (c)(5)(i)(A) of this section shall not apply if, immediately following consum m ation of the proposed transaction, the consolidated risk-weighted assets of the acquiring bank holding company are less than $300 million; (6) Supervisory actions. During the 12-month period ending on the date on w hich the bank holding company proposes to consummate the proposed transaction, no formal administrative order, including a w ritten agreement, cease and desist order, capital directive, prom pt corrective action directive, asset m aintenance agreement, or other formal enforcement order is or was outstanding against the bank holding company or any insured depository institution subsidiary of the holding company, and no formal adm inistrative enforcement proceeding involving any such enforcement action, order, or directive is or was pending; and (7) N otification. The bank holding com pany has not been notified by the Board, in its discretion, prior to the expiration of the period in paragraph (b) of this section that a notice under § 225.24 is required in order to perm it closer review of any potential adverse effect or other matter related to the factors that must be considered under this part. (d) Branches and agencies o f foreign banking organizations. For purposes of this section, a U.S. branch or agency of a foreign banking organization shall be considered to be an insured depository institution. § 225.24 Procedures for other nonbanking proposals. (a) Notice required fo r nonbanking activities. Except as provided in § 225.22 and § 225.23, a notice for the Board’s prior approval under § 225.21(a) to engage in or acquire a company engaged in a nonbanking activity shall be filed by a bank holding company (including a company seeking to become a bank holding company) with the appropriate Reserve Bank in accordance w ith this section and the Board’s Rules of Procedure (12 CFR 262.3). (1) Engaging de novo in listed activities. A bank holding company seeking to commence or to engage de novo, either directly or through a subsidiary, in a nonbanking activity listed in § 225.28 shall file a notice containing a description of the activities to be conducted and the identity of the company that will conduct the activity. (2) Acquiring com pany engaged in listed activities. A bank holding company seeking to acquire or control voting securities or assets of a company engaged in a nonbanking activity listed in § 225.28 shall file a notice containing the following: (i) A description of the proposal, including a description of each proposed activity, and the effect of the proposal on competition among entities engaging in each proposed activity in each relevant market w ith relevant market indexes; (ii) The identity of any entity involved in the proposal, and, if the notificant proposes to conduct the activity through Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations an existing subsidiary, a description of bank holding com pany to conduct, a the existing activities of the subsidiary; com m itm ent to com ply w ith all the (iii) A statem ent of the public benefits conditions and lim itations established that can reasonably be expected to result by the Board governing the activity; and from the proposal; (ii) The information required in (iv) If tne bank holding company has paragraphs (a)(1) or (a)(2) of this section, consolidated assets of $150 m illion or as appropriate. more: (b) N otice provided to Board. The (A) Parent com pany and consolidated Reserve Bank shall im m ediately send to pro form a balance sheets for the the Board a copy of any notice received acquiring bank holding company as of under paragraphs (a)(2) or (a)(3) of this the most recent quarter showing credit section. (c) N otice to public—(1) Listed and debit adjustm ents that reflect the proposed transaction; activities and activities approved by (B) Consolidated pro form a risk-based order—(i) In a case involving an activity capital and leverage ratio calculations listed in § 225.28 or previously for the acquiring bank holding company approved by the Board by order, the as of the most recent quarter; and Reserve Bank shall notify the Board for (C) A description of the purchase publication in the Federal Register price and the terms and sources of immediately upon receipt by the funding for the transaction; Reserve Bank of: (v) If the bank holding company has (A) A notice under this section; or consolidated assets of less them $150 (B) A w ritten request that notice of a million: proposal u n der this section or § 225.23 (A) A pro form a parent-only balance be published in the Federal Register. sheet as of the most recent quarter Such a request may request that Federal show ing credit and debit adjustments Register publication occur up to 15 that reflect the proposed transaction; calendar days prior to subm ission of a and notice u n der this subpart. (B) A description of the purchase (ii) The Federal Register notice price and the terms and sources of published under this paragraph shall funding for the transaction and, if the invite public comment on the proposal, transaction is debt funded, one-year generally for a period of 15 days. (2) N ew activities—(i) In general. In income statement and cash flow projections for the parent company, and the case of a notice under this subpart involving an activity that is not listed in the sources and schedule for retiring § 225.28 and that has not been any debt incurred in the transaction; (vi) For each insured depository previously approved by the Board by institution whose Tier 1 capital, total order, the Board shall send notice of the capital, total assets or risk-weighted proposal to the Federal Register for assets change as a result of the publication, unless the Board transaction, the total risk-weighted determines that the notificant has not assets, total assets, Tier 1 capital and dem onstrated that the activity is so total capital of the institution on a pro closely related to banking or to form a basis; and managing or controlling banks as to be (vii) A description of the management a proper incident thereto. The Federal expertise, internal controls and risk Register notice shall invite public m anagement systems that will be comment on the proposal for a utilized in the conduct of the proposed reasonable period of time, generally for activities; and 30 days. (viii) A copy of the purchase (ii) Time fo r publication. The Board agreements, and balance sheet and shall send the notice required under this income statements for the most recent paragraph to the Federal Register quarter and year-end for any company w ithin 10 business days of acceptance to be acquired. by the Reserve Bank. The Board may (3) Engaging in or acquiring com pany extend the 10-day period for an to engage in unlisted activities. A bank additional 30 calendar days upon notice holding company seeking to engage de to the notificant. In the event notice of novo in, or to acquire or control voting a proposal is not published for securities or assets of a company comment, the Board shall inform the engaged in, any activity not listed in notificant of the reasons for the § 225.28 shall file a notice containing decision. the following: (d) A ction on notices—(1) Reserve (i) Evidence that the proposed activityBank action—(i) In general. W ithin 30 is so closely related to banking or calendar days after receipt by the managing or controlling banks as to be Reserve Bank of a notice filed pursuant a proper incident thereto, or, if the to paragraphs (a)(1) or (a)(2) of this Board previously determ ined by order section, the Reserve Banks shall: that the activity is permissible for a (A) Approve the notice; or 9333 (B) Refer the notice to the Board for decision because action u nd er delegated authority is not appropriate. (ii) Return o f incom plete notice. W ithin 7 calendar days of receipt, the Reserve Bank may return any notice as informationally incom plete that does not contain all of the information required by this subpart. The return of such a notice shall be deem ed action on the notice. (iii) N otice o f action. The Reserve Bank shall prom ptly notify the bank holding company of any action or referral under this paragraph. (iv) Close o f public com m en t period. The Reserve Bank shall not approve any notice under this paragraph (d)(1) of this section prior to the third business day after the close of the public comment period, unless an emergency exists that requires expedited or im m ediate action. (2) Board action—(i) Internal schedule. The Board seeks to act on every notice referred to it for decision w ithin 60 days of the date that the notice is filed w ith the Reserve Bank. If the Board is unable to act w ithin this period, the Board shall notify the notificant and explain the reasons and the date by w hich the Board expects to act. (ii) Extension o f required period fo r action—(A) In general. The Board may extend the 60-day period required for Board action u nder paragraph (d)(2)(i) of this section for an additional 30 days upon notice to the notificant. (B) Unlisted activities. If a notice involves a proposal to engage in an activity that is not listed in § 225.28, the Board may extend the period required for Board action under paragraph (d)(2)(i) of this section for an additional 90 days. This 90-day extension is in addition to the 30-day extension period provided in paragraph (d)(2)(ii)(A) of this section. The Board shall notify the notificant that the notice period has been extended and explain the reasons for the extension. (3) Requests fo r additional inform ation. The Board or the Reserve Bank may modify the inform ation requirements under this section or at any time request any additional information that either believes is needed for a decision on any notice under this section. (4) Tolling o f period. The Board or the Reserve Bank may at any tim e extend or toll the time period for action on a notice for any period w ith the consent of the notificant. § 225.25 Hearings, alteration of activities, and other matters. (a) Hearings—(1) Procedure to request hearing. Any request for a hearing on a 9334 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations notice u nd er this subpart shall comply w ith the provisions of 12 CFR 262.3(e). (2) D eterm ination to h old hearing. The Board m ay order a formal or informal hearing or other proceeding on a notice as provided in 12 CFR 262.3(i)(2). The Board shall order a hearing only if there are disputed issues of material fact that cannot be resolved in some other manner. (3) Extension o f period fo r hearing. The Board may extend the tim e for action on any notice for such tim e as is reasonably necessary to conduct a hearing and evaluate the hearing record. Such extension shall not exceed 91 calendar days after the date of submission to the Board of the complete record on the notice. The procedures for com putation of the 91-day rule as set forth in § 225.16(f) apply to notices under this subpart that involve hearings. (b) A pproval through failure to act. (1) Except as provided in paragraph (a) of this section or § 225.24(d)(4), a notice under this subpart shall be deem ed to be approved at the conclusion of the period that begins on the date the complete notice is received by the Reserve Bank or the Board and that ends 60 calendar days plus any applicable extension and tolling period thereafter. (2) Complete notice. For purposes of paragraph (b)(1) of this section, a notice shall be deem ed complete at such time as it contains all inform ation required by this subpart and all other information requested by the Board or the Reserve Bank. (c) N otice to expand or alter nonbanking activities—(1) De novo expansion. A notice u nd er this subpart is required to open a new office or to form a subsidiary to engage in, or to relocate an existing office engaged in, a nonbanking activity that the Board has previously approved for the bank holding com pany under this regulation, only if: (1) The Board’s prior approval was limited geographically; (ii) The activity is to be conducted in a country outside of the United States and the bank holding com pany has not previously received prior Board approval under this regulation to engage in the activity in that country; or (iii) The Board or appropriate Reserve Bank has notified the com pany that a notice under this subpart is required. (2) A ctivities outside U nited States. With respect to activities to be engaged in outside the United States that require approval under this subpart, the procedures of this section apply only to activities to be engaged in directly by a bank holding com pany that is not a qualifying foreign banking organization, or by a nonbank subsidiary of a bank holding com pany approved u nd er this subpart. Regulation K (12 CFR part 211) governs other international operations of bank holding companies. (3) Alteration o f nonbanking activity. Unless otherw ise perm itted by the Board, a notice under this subpart is required to alter a nonbanking activity in any material respect from that considered by the Board in acting on the application or notice to engage in the activity. (d) Emergency savings association acquisitions. In the case of a notice to acquire a savings association, the Board may modify or dispense w ith the public notice and hearing requirem ents of this subpart if the Board finds that an emergency exists that requires the Board to act im m ediately and the primary federal regulator of the institution concurs. §225.26 Factors considered in acting on nonbanking proposals. (a) In general. In evaluating a notice under § 225.23 or § 225.24, the Board shall consider w hether the notificant’s performance of the activities can reasonably be expected to produce benefits to the public (such as greater convenience, increased competition, and gains in efficiency) that outweigh possible adverse effects (such as undue concentration of resources, decreased or unfair com petition, conflicts of interest, and unsound banking practices). (b) Financial and managerial resources. Consideration of the factors in paragraph (a) of this section includes an evaluation of the financial and managerial resources of the notificant, including its subsidiaries and any company to be acquired, the effect of the proposed transaction on those resources, and the management expertise, internal control and riskmanagement systems, and capital of the entity conducting the activity. (c) Competitive effect o f de novo proposals. Unless the record demonstrates otherwise, the com mencem ent or expansion of a nonbanking activity de novo is presum ed to result in benefits to the public through increased competition. (d) Denial fo r lack o f inform ation. The Board may deny any notice subm itted under this subpart if the notificant neglects, fails, or refuses to furnish all information required by the Board. (e) Conditional approvals. The Board may impose conditions on any approval, including conditions to address permissibility, financial, managerial, safety and soundness, competitive, compliance, conflicts of interest, or other concerns to ensure that approval is consistent w ith the relevant statutory factors and other provisions of the BHC Act. § 225.27 Procedures for determining scope of nonbanking activities. (a) A dvisory opinions regarding scope o f previously approved nonbanking activities—(1) R equest fo r advisory opinion. Any person m ay submit a request to the Board for an advisory opinion regarding the scope of any permissible nonbanking activity. The request shall be subm itted in writing to the Board and shall identify the proposed parameters of the activity, or describe the service or product that will be provided, and contain an explanation supporting an interpretation regarding the scope of the permissible nonbanking activity. (2) Response to request. The Board shall provide an advisory opinion w ithin 45 days of receiving a w ritten request under this paragraph. (b) Procedure fo r consideration o f new activities—(1) Initiation o f proceeding. The Board may, at any time, on its own initiative or in response to a written request from any person, initiate a proceeding to determ ine w hether any activity is so closely related to banking or managing or controlling banks as to be a proper incident thereto. (2) Requests fo r determ ination. Any request for a Board determ ination that an activity is so closely related to banking or managing or controlling banks as to be a proper incident thereto, shall be subm itted to the Board in writing, and shall contain evidence that the proposed activity is so closely related to banking or managing or controlling banks as to be a proper incident thereto. (3) Publication. The Board shall publish in the Federal Register notice that it is considering the permissibility of a new activity and invite public comment for a period of at least 30 calendar days. In the case of a request subm itted u nder paragraph (b) of this section, the Board m ay determ ine not to publish notice of the request if the Board determines that the requester has provided no reasonable basis for a determ ination that the activity is so closely related to banking, or managing or controlling banks as to be a proper incident thereto, and notifies the requester of the determination. (4) Com m ents and hearing requests. Any comment and any request for a hearing regarding a proposal under this section shall com ply w ith the provisions of § 262.3(e) of the Board’s Rules of Procedure (12 CFR 262.3(e)). Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations § 225.28 List of permissible nonbanking • activities. management, servicing, and collection 2 of assets of a type that an insured (a) Closely related nonbanking depository institution m ay originate and activities. The activities listed in own, if the company does not engage in real property m anagem ent or real estate paragraph (b) of this section are so closely related to banking or managing brokerage services as part of these services. or controlling banks as to be a proper (vii) A cquiring debt in default. incident thereto, and may be engaged in Acquiring debt that is in default at the by a bank holding company or its tim e of acquisition, if the company: subsidiary in accordance w ith the (A) Divests shares or assets securing requirem ents of this regulation. (b) Activities determ ined by regulation debt in default that are not permissible investm ents for bank holding to be perm issible—(1) Extending credit companies, w ithin the tim e period cind servicing loans. Making, acquiring, required for divestiture of property brokering, or servicing loans or other extensions of credit (including factoring, acquired in satisfaction of a debt previously contracted under issuing letters of credit and accepting § 225.12(b);3 drafts) for the com pany’s account or for (B) Stands only in the position of a the account of others. creditor and does not purchase equity of (2) A ctivities related to extending obligors of debt in default (other than credit. Any activity usual in connection equity that may be collateral for such w ith making, acquiring, brokering or debt); and servicing loans or other extensions of (C) Does not acquire debt in default credit, as determ ined by the Board. The Board has determ ined that the following secured by shares of a bank or bank holding company. activities are usual in connection with (viii) Real estate settlem ent servicing. making, acquiring, brokering or Providing real estate settlem ent servicing loans or other extensions of services.4 credit: (3) Leasing personal or real property. (i) Real estate and personal property Leasing personal or real property or appraising. Performing appraisals of real acting as agent, broker, or adviser in estate and tangible and intangible leasing such property if: personal property, including securities. (i) The lease is on a nonoperating (ii) Arranging com m ercial real estate basis;5 equity financing. Acting as intermediary (ii) The initial term of the lease is at for the financing of commercial or least 90 days; industrial incom e-producing real estate (iii) In the case of leases involving real by arranging for the transfer of the title, property: control, and risk of such a real estate (A) At the inception of the initial project to one or more investors, if the lease, the effect of the transaction will bank holding company and its affiliates yield a return that w ill compensate the do not have an interest in, or participate in managing or developing, a real estate 2 Asset management services include acting as agent in the liquidation or sale of loans and project for w hich it arranges equity collateral for loans, including real estate and other financing, and do not promote or assets acquired through foreclosure or in sponsor the developm ent of the satisfaction of debts previously contracted. property. 3 For this purpose, the divestiture period for property begins on the date that the debt is (iii) Check-guaranty services. acquired, regardless of w hen legal title to the A uthorizing a subscribing m erchant to property is acquired. accept personal checks tendered by the 4 For purposes of this section, real estate m erchant’s customers in paym ent for settlement services do not include providing title goods and services, and purchasing insurance as principal, agent, or broker. 5 The requirem ent that the lease be on a from the m erchant validly authorized nonoperating basis m eans that the bank holding checks that are subsequently com pany may not, directly or indirectly, engage in dishonored. operating, servicing, m aintaining, or repairing (iv) Collection agency services. leased property during the lease term. For purposes of the leasing of automobiles, the requirem ent that Collecting overdue accounts receivable, the lease be on a nonoperating basis means that the either retail or commercial. bank holding company may not, directly or (v) Credit bureau services. indirectly: (1) Provide servicing, repair, or M aintaining information related to the m aintenance of the leased vehicle during the lease term; (2) purchase parts and accessories in bulk or credit history of consumers and for an individual vehicle after the lessee has taken providing the information to a credit delivery of the vehicle; (3) provide the loan of an grantor w ho is considering a borrow er’s automobile during servicing of the leased vehicle; application for credit or who has (4) purchase insurance for th e lessee; or (5) provide for the renewal of the vehicle’s license merely as extended credit to the borrower. (vi) A sset m anagem ent, servicing, and a service to the lessee where the lessee could renew the license without authorization from the lessor. collection activities. Engaging under The bank holding company may arrange for a third contract w ith a third party in asset party to provide these services or products. 9335 lessor for not less than the lessor’s full investm ent in the property plus the estimated total cost of financing the property over the term of the lease from rental payments, estim ated tax benefits, and the estim ated residual value of the property at the expiration of the initial lease; and (B) The estim ated residual value of property for purposes of paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of the acquisition cost of the property to the lessor. (4) Operating nonbank depository institutions—(i) Industrial banking. Owning, controlling, or operating an industrial bank, Morris Plan bank, or industrial loan company, so long as the institution is not a bank. (ii) Operating savings association. Owning, controlling, or operating a savings association, if the savings association engages only in deposittaking activities, lending, and other activities that are permissible for bank holding companies under this subpart C. (5) Trust com pany functions. Performing functions or activities that may be performed by a trust company (including activities of a fiduciary, agency, or custodial nature), in the m anner authorized by federal or state law, so long as the com pany is not a bank for purposes of section 2(c) of the Bank Holding Company Act. (6) Financial and investm en t advisory activities. Acting as investm ent or financial advisor to any person, including (without, in any way, limiting the foregoing): (i) Serving as investm ent adviser (as defined in section 2(a)(20) of the Investment Company Act of 1940,15 U.S.C. 80a-2(a)(20)), to an investm ent company registered under that act, including sponsoring, organizing, and managing a closed-end investm ent company; (ii) Furnishing general economic information and advice, general economic statistical forecasting services, and industry studies; (iii) Providing advice in connection w ith mergers, acquisitions, divestitures, investments, joint ventures, leveraged buyouts, recapitalizations, capital structurings, financing transactions and similar transactions, and conducting financial feasibility stu d ies;6 (iv) Providing information, statistical forecasting, and advice w ith respect to any transaction in foreign exchange, swaps, and similar transactions, 6 Feasibility studies do not include assisting management with the planning or marketing for a given project or providing general operational or management advice. 9336 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations commodities, and any forward contract, option, future, option on a future, and sim ilar instrum ents; (v) Providing educational courses, and instructional m aterials to consum ers on individual financial managem ent matters; and (vi) Providing tax-planning and taxpreparation services to any person. (7) A gency transactional services fo r custom er investm ents—(i) Securities brokerage. Providing securities brokerage services (including securities clearing and/or securities execution services on an exchange), w hether alone or in com bination w ith investm ent advisory services, and incidental activities (including related securities credit activities and custodial services), if the securities brokerage services are restricted to buying and selling securities solely as agent for the account of customers and do not include securities underw riting or dealing. (ii) Riskless principal transactions. Buying and selling in the secondary market all types of securities on the order of customers as a “riskless prin cipal” to the extent of engaging in a transaction in w hich the company, after receiving an order to buy (or sell) a security from a customer, purchases (or sells) the security for its own account to offset a contem poraneous sale to (or purchase from) the customer. This does not include: (A) Selling bank-ineligible securities 7 at the order of a custom er that is the issuer of the securities, or selling bankineligible securities in any transaction w here the com pany has a contractual agreement to place the securities as agent of the issuer; or (B) Acting as a riskless principal in any transaction involving a bankineligible security for w hich the com pany or any of its affiliates acts as underw riter (during the period of the underw riting or for 30 days thereafter) or dealer.8 (iii) Private placem ent services. Acting as agent for the private placem ent of securities in accordance w ith the requirements of the Securities Act of 1933 (1933 Act) and the rules of the Securities and Exchange 7 A bank-ineligible security is any security that a State member bank is not perm itted to underwrite or deal in under 12 U.S.C. 24 and 335. 8 A com pany or its affiliates may not enter quotes for specific bank-ineligible securities in any dealer quotation system in connection w ith the com pany’s riskless principal transactions; except that the com pany or its affiliates may enter “ bid” or “ ask” quotations, or publish “ offering w anted ” or “ bid w anted ” notices on trading systems other than NASDAQ or an exchange, if the com pany or its affiliate does not enter price quotations on different sides of the market for a particular security during any two-day period. Commission, if the company engaged in the activity does not purchase or repurchase for its own account the securities being placed, or hold in inventory unsold portions of issues of these securities. (iv) Futures com m ission m erchant. Acting as a futures commission m erchant (FCM) for unaffiliated persons in the execution, clearance, or execution and clearance of any futures contract and option on a futures contract traded on an exchange in the United States or abroad if: (A) The activity is conducted through a separately incorporated subsidiary of the bank holding company, w hich may engage in activities other than FCM activities (including, but not lim ited to, permissible advisory and trading activities); and (B) The parent bank holding company does not provide a guarantee or otherwise become liable to the exchange or clearing association other than for those trades conducted by the subsidiary for its own account or for the account of any affiliate. (v) Other transactional services. Providing to customers as agent transactional services w ith respect to swaps and similar transactions, any transaction described in paragraph (b)(8) of this section, any transaction that is permissible for a state member bank, and any other transaction involving a forward contract, option, futures, option on a futures or similar contract (whether traded on an exchange or not) relating to a commodity that is traded on an exchange. (8) Investm ent transactions as principal—(i) Underwriting and dealing in governm ent obligations and m oney m arket instrum ents. Underwriting and dealing in obligations of the United States, general obligations of states and their political subdivisions, and other obligations that state member banks of the Federal Reserve System may be authorized to underw rite and deal in under 12 U.S.C. 24 and 335, including banker’s acceptances and certificates of deposit, under the same limitations as w ould be applicable if the activity were performed by the bank holding com pany’s subsidiary member banks or its subsidiary nonm em ber banks as if they were member banks. (ii) Investing and trading activities. Engaging as principal in: (A) Foreign exchange; (B) Forward contracts, options, futures, options on futures, swaps, and similar contracts, w hether traded on exchanges or not, based on any rate, price, financial asset (including gold, silver, platinum , palladium , copper, or any other metal approved by the Board), nonfinancial asset, or group of assets, other than a bank-ineligible security,9 if: (J) A state member bank is authorized to invest in the asset underlying the contract; (2) The contract requires cash settlement; or (3) The contract allows for assignment, termination, or offset prior to delivery or expiration, and the company makes every reasonable effort to avoid taking or making delivery; and (C) Forward contracts, options,10 futures, options on futures, swaps, and similar contracts, w hether traded on exchanges or not, based on an index of a rate, a price, or the value of any financial asset, nonfinancial asset, or group of assets, if the contract requires cash settlement. (iii) Buying and selling bullion, and related activities. Buying, selling and storing bars, rounds, bullion, and coins of gold, silver, platinum , palladium , copper, and any other metal approved by the Board, for the com pany’s own account and the account of others, and providing incidental services such as arranging for storage, safe custody, assaying, and shipment. (9) M anagem ent consulting and counseling activities—(i) M anagement consulting. (A) Providing management consulting advice:11 (J) On any matter to unaffiliated depository institutions, including commercial banks, savings and loan associations, savings banks, credit unions, industrial banks, Morris Plan banks, cooperative banks, industrial loan companies, trust companies, and branches or agencies of foreign banks; (2) On any financial, economic, accounting, or audit matter to any other company. (B) A company conducting management consulting activities under this subparagraph and any affiliate of such company may not: 9 A bank-ineligible security is any security that a state member bank is not perm itted to underwrite or deal in under 12 U.S.C. 24 and 335. 10This reference does not include acting as a dealer in options based on indices of bankineligible securities w hen the options are traded on securities exchanges. These options are securities for purposes of the federal securities laws and bankineligible securities for purposes of section 20 of the Glass-Steagall Act, 12 U.S.C. 337. Similarly, this reference does not include acting as a dealer in any other instrum ent that is a bank-ineligible security for purposes of section 20. A bank holding company may deal in these instrum ents in accordance with the Board’s orders on dealing in bank-ineligible securities. 11 In performing this activity, bank holding com panies are not authorized to perform tasks or operations or provide services to client institutions either on a daily or continuing basis, except as necessary to instruct the client institution on how to perform such services for itself. See also the Board’s interpretation of bank management consulting advice (12 CFR 225.131). Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations (J) O w n or control, directly or indirectly, more than 5 percent of the voting securities of the client institution; and (2) Allow a management official, as defined in 12 CFR 212.2(h), of the com pany or any of its affiliates to serve as a m anagem ent official of the client institution, except w here such interlocking relationship is permitted pursuant to an exem ption granted under 12 CFR 212.4(b) or otherwise perm itted by the Board. (C) A com pany conducting 'm anagement consulting activities may provide management consulting services to customers not described in paragraph (b)(9)(i)(A)(i) of this section or regarding matters not described in paragraph (b)(9)(i)(A)(2) of this section, if the total annual revenue derived from those management consulting services does not exceed 30 percent of the com pany’s total annual revenue derived from management consulting activities. (ii) Em ployee benefits consulting services. Providing consulting services to employee benefit, com pensation and insurance plans, including designing plans, assisting in the im plem entation of plans, providing adm inistrative services to plans, and developing employee com m unication programs for plans. (iii) Career counseling services. Providing career counseling services to: (A) A financial organization12 and individuals currently em ployed by, or recently displaced from, a financial organization; (B) Individuals w ho are seeking em ploym ent at a financial organization; and (C) Individuals w ho are currently employed in or who seek positions in the finance, accounting, and audit departm ents of any company. (10) Support services—(i) Courier services. Providing courier services for: (A) Checks, commercial papers, docum ents, and written instrum ents (excluding currency or bearer-type negotiable instruments) that are exchanged among banks and financial institutions; and (B) A udit and accounting media of a banking or financial nature and other business records and docum ents used in processing such m edia.13 12Financial organization refers to insured depository institution holding com panies and their subsidiaries, other than nonbanking affiliates of diversified savings and loan holding com panies that engage in activities not permissible under section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1842(c)(8)). 13 See also the Board’s interpretation on courier activities (12 CFR 225.129), w hich sets forth conditions for bank holding com pany entry into the activity. 9337 (ii) Printing and selling M ICR-encoded (A) Has a population not exceeding 5,000 (as show n in the preceding item s. Printing and selling checks and decennial census); or related docum ents, including corporate (B) Has inadequate insurance agency image checks, cash tickets, voucher facilities, as determ ined by the Board, checks, deposit slips, savings after notice and opportunity for hearing. w ithdraw al packages, and other forms (iv) Insurance-agency activities that require Magnetic Ink Character conducted on M ay 1, 1982. Engaging in Recognition (MICR) encoding. (11) Insurance agency and any specific insurance-agency a c tiv ity 17 underwriting—(i) Credit insurance. if the bank holding company, or Acting as principal, agent, or broker for subsidiary conducting the specific insurance (including hom e mortgage activity, conducted such activity on redem ption insurance) that is: May 1,1982, or received Board approval (A) Directly related to an extension of to conduct such activity on or before credit by the bank holding com pany or May 1,1982.18 A bank holding company any of its subsidiaries; and or subsidiary engaging in a specific (B) Limited to ensuring the repaym ent insurance agency activity under this of the outstanding balance due on the clause may: extension of c r e d it14 in the event of the (A) Engage in such specific insurance death, disability, or involuntary agency activity only at locations: unem ploym ent of the debtor. (1) In the state in w hich the bank (ii) Finance com pany subsidiary. holding company has its principal place Acting as agent or broker for insurance of business (as defined in 12 U.S.C. directly related to an extension of credit 1842(d)); by a finance c o m p an y 15 that is a (2) In any state or states im m ediately subsidiary of a bank holding company, adjacent to such state; and if: (3) In any state in w hich the specific (A) The insurance is lim ited to insurance-agency activity was ensuring repaym ent of the outstanding conducted (or was approved to be balance on such extension of credit in conducted) by such bank holding the event of loss or damage to any company or subsidiary thereof or by any property used as collateral for the other subsidiary of such bank holding extension of credit; and company on May 1,1982; and (B) The extension of credit is not more (B) Provide other insurance coverages than $10,000, or $25,000 if it is to that may become available after May 1, finance the purchase of a residential 1982, so long as those coverages insure m anufactured h o m e 16 and the credit is against the types of risks as (or Eire secured by the home; and otherwise functionally equivalent to) (C) The applicant commits to notify coverages sold or approved to be sold on borrowers in writing that: May 1,1982, by the bank holding (1) They are not required to purchase company or subsidiary. such insurance from the applicant; (v) Supervision o f retail insurance (2) Such insurance does not insure agents. Supervising on behalf of any interest of the borrower in the insurance underw riters the activities of collateral; and retail insurance agents w ho sell: (3) The applicant will accept more (A) Fidelity insurance and property comprehensive property insurance in and casualty insurance on the real and place of such single-interest insurance. personal property used in the operations (iii) Insurance in sm all towns. of the bank holding company or its Engaging in any insurance agency subsidiaries; and activity in a place where the bank (B) Group insurance that protects the holding company or a subsidiary of the employees of the bank holding company bank holding company has a lending or its subsidiaries. office and that: 14Extension o f credit includes direct loans to borrowers, loans purchased from other lenders, and leases of real or personal property so long as the leases are nonoperating and full-payout leases that m eet the requirem ents of paragraph (b)(3) of this section. 15Finance com pany includes all non-deposittaking financial institutions that engage in a significant degree of consum er lending (excluding lending secured by first mortgages) and all financial institutions specifically defined by individual states as finance com panies and that engage in a significant degree of consum er lending. 16These limitations increase at the end of each calendar year, beginning with 1982, by the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers published by the Bureau of Labor Statistics. 17Nothing contained in this provision shall preclude a bank holding com pany subsidiary that is authorized to engage in a specific insuranceagency activity under this clause from continuing to engage in the particular activity after merger with an affiliate, if the merger is for legitimate business purposes and prior notice has been provided to the Board. 18 For the purposes of this paragraph, activities engaged in on May 1,1982, include activities carried on subsequently as the result of an application to engage in such activities pending before the Board on May 1,1982, and approved subsequently by the Board or as the result of the acquisition by such com pany pursuant to a binding written contract entered into on or before May 1, 1982, of another com pany engaged in such activities at the time of the acquisition. 9338 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations (vi) Sm all bank holding com panies. Engaging in any insurance-agency activity if the bank holding company has total consolidated assets of $50 m illion or less. A bank holding company performing insurance-agency activities under this paragraph may not engage in the sale of life insurance or annuities except as provided in paragraphs (b)(ll) (i) and (iii) of this section, and it may not continue to engage in insurance-agency activities pursuant to this provision more than 90 days after the end of the quarterly reporting period in w hich total assets of the holding company and its subsidiaries exceed $50 million. (vii) Insurance-agency activities conducted before 1971. Engaging in any insurance-agency activity performed at any location in the U nited States directly or indirectly by a bank holding company that was engaged in insuranceagency activities prior to January 1, 1971, as a consequence of approval by the Board prior to January 1,1971. (12) C om m unity developm ent activities—(i) Financing a nd investm ent activities. Making equity and debt investments in corporations or projects designed prim arily to promote com m unity welfare, such as the economic rehabilitation and developm ent of low-income areas by providing housing, services, or jobs for residents. (ii) A dvisory activities. Providing advisory and related services for programs designed prim arily to promote com m unity welfare. (13) M oney orders, savings bonds, and traveler’s checks. The issuance and sale at retail of money orders and similar consumer-type paym ent instruments; the sale of U.S. savings bonds; and the issuance and sale of traveler’s checks. (14) Data processing, (i) Providing data processing and data transmission services, facilities (including data processing and data transm ission hardware, software, documentation, or operating personnel), data bases, advice, and access to such services, facilities, or data bases by any technological means, if: (A) The data to be processed or furnished are financial, banking, or economic; and (B) The hardware provided in connection therew ith is offered only in conjunction w ith software designed and marketed for the processing and transm ission of financial, banking, or economic data, and w here the general purpose hardw are does not constitute more than 30 percent of the cost of any packaged offering. (ii) A company conducting data processing and data transmission activities may conduct data processing and data transm ission activities not described in paragraph (b)(14)(i) of this section if the total annual revenue derived from those activities does not exceed 30 percent of the com pany’s total annual revenues derived from data processing and data transmission activities. 5. Subpart D is am ended as follows: §225.31 [Amended] (A) Section 225.31, paragraph (d)(2)(ii), is am ended by removing the words “as defined in 12 CFR 206.2(k)”; and § 225.32 [Removed] (B) Section 225.32 is removed. 6. Subpart E is revised to read as follows: Subpart E— Change in Bank Control Sec. 225.41 Transactions requiring prior notice. 225.42 Transactions not requiring prior notice. 225.43 Procedures for filing, processing, publishing, and acting on notices. 225.44 Reporting of stock loans. Subpart E—Change in Bank Control §225.41 notice. Transactions requiring prior (a) Prior notice requirement. Any person acting directly or indirectly, or through or in concert w ith one or more persons, shall give the Board 60 days’ w ritten notice, as specified in § 225.43 of this subpart, before acquiring control of a state member bank or bank holding company, unless the acquisition is exempt under § 225.42. (b) Definitions. For purposes of this subpart: (1) Acquisition includes a purchase, assignment, transfer, or pledge of voting securities, or an increase in percentage ow nership of a state member bank or a bank holding company resulting from a redem ption of voting securities. (2) Acting in concert includes knowing participation in a joint activity or parallel action towards a common goal of acquiring control of a state member bank or bank holding company w hether or not pursuant to an express agreement. (3) Im m ediate fa m ily includes a person’s father, mother, stepfather, stepmother, brother, sister, stepbrother, stepsister, son, daughter, stepson, stepdaughter, grandparent, grandson, granddaughter, father-in-law, mother-inlaw, brother-in-law, sister-in-law, sonin-law, daughter-in-law, the spouse of any of the foregoing, and the person’s spouse. (c) Acquisitions requiring prior notice—(1) Acquisition o f control. The acquisition of voting securities of a state member bank or bank holding company constitutes the acquisition of control under the Bank Control Act, requiring prior notice to the Board, if, im m ediately after the transaction, the acquiring person (or persons acting in concert) w ill own, control, or hold with power to vote 25 percent or more of any class of voting securities of the institution. (2) Rebuttable presum ption o f control. The Board presum es that an acquisition of voting securities of a state m ember bank or bank holding company constitutes the acquisition of control under the Bank Control Act, requiring prior notice to the Board, if, immediately after the transaction, the acquiring person (or persons acting in concert) w ill own, control, or hold w ith power to vote 10 percent or more of any class of voting securities of the institution, and if: (i) The institution has registered securities u nder section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781); or (ii) No other person will own, control, or hold the pow er to vote a greater percentage of that class of voting securities immediately after the transaction.1 (d) Rebuttable presum ption o f concerted action. The following persons shall be presum ed to be acting in concert for purposes of this subpart: (1) A company and any controlling shareholder, partner, trustee, or management official of the company, if both the company and the person own voting securities of the state member bank or bank holding company; (2) An individual and the ind ividual’s immediate family; (3) Companies under common control; (4) Persons that are parties to any agreement, contract, understanding, relationship, or other arrangement, w hether w ritten or otherwise, regarding the acquisition, voting, or transfer of control of voting securities of a state member bank or bank holding company, other than through a revocable proxy as described in § 225.42(a)(5) of this subpart; (5) Persons that have made, or propose to make, a joint filing under sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and the rules promulgated 1 If two or more persons, not acting in concert, each propose to acquire simultaneously equal percentages of 10 percent or more of a class of voting securities of the state member bank or bank holding company, each person m ust file prior notice to the Board. Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations thereunder by the Securities and Exchange Commission; and (6) A person and any trust for w hich the person serves as trustee. (e) A cquisitions o f loans in default. The Board presum es an acquisition of a loan in default that is secured by voting securities of a state member bank or bank holding company to be an acquisition of the underlying securities for purposes of this section. (f) Other transactions. Transactions other than those set forth in paragraph (c) of this section resulting in a person’s control of less than 25 percent of a class of voting securities of a state member bank or bank holding com pany are not deemed by the Board to constitute control for purposes of the Bank Control Act. (g) R ebuttal o f presum ptions. Prior notice to the Board is not required for any acquisition of voting securities under the presum ption of control set forth in this section, if the Board finds that the acquisition will not result in control. The Board shall afford any person seeking to rebut a presum ption in this section an opportunity to present views in writing or, if appropriate, orally before its designated representatives at an informal conference. the procedures and receiving approval to acquire voting securities of the institution under this subpart, or in connection w ith an application approved u nder section 3 of the BHC Act (12 U.S.C. 1842; §225.11 of subpart B of this part) or section 18(c) of the Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)); (3) A cquisitions subject to approval under BHC A ct or Bank Merger Act. Any acquisition of voting securities subject to approval under section 3 of the BHC Act (12 U.S.C. 1842; § 225.11 of subpart B of this part), or section 18(c) of the Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)); (4) Transactions exem pt under BHC Act. Any transaction described in sections 2(a)(5), 3(a)(A), or 3(a)(B) of the BHC Act (12 U.S.C. 1841(a)(5), 1842(a)(A), and 1842(a)(B)), by a person described in those provisions; (5) Proxy solicitation. The acquisition of the power to vote securities of a state member bank or bank holding company through receipt of a revocable proxy in connection w ith a proxy solicitation for the purposes of conducting business at a regular or special meeting of the institution, if the proxy terminates w ithin a reasonable period after the meeting; (6) Stock dividends. The receipt of § 225.42 Transactions not requiring prior voting securities of a state member bank notice. or bank holding company through a (a) E xem pt transactions. The stock dividend or stock split if the following transactions do not require proportional interest of the recipient in notice to the Board under this subpart: (1) Existing control relationships. The the institution remains substantially the same; and acquisition of additional voting (7) A cquisition o f foreign banking securities of a state member bank or bank holding company by a person who: organization. The acquisition of voting securities of a qualifying foreign (1) Continuously since March 9,1979 banking organization. (This exemption (or since the institution commenced business, if later), held power to vote 25 does not extend to the reports and information required under paragraphs percent or more of any class of voting 9,10, and 12 of the Bank Control Act securities of the institution; or (ii) Is presum ed, under § 225.41(c)(2) (12 U.S.C. 1817(j) (9), (10), and (12)) and § 225.44 of this subpart.) of this subpart, to have controlled the (b) Prior notice exem ption. (1) The institution continuously since March 9, following acquisitions of voting 1979, if the aggregate am ount of voting securities of a state mem ber bank or securities held does not exceed 25 bank holding company, w hich would percent or more of any class of voting otherwise require prior notice under securities of the institution or, in other this subpart, are not subject to the prior cases, w here the Board determines that notice requirements if the acquiring the person has controlled the bank person notifies the appropriate Reserve continuously since March 9,1979; Bank w ithin 90 calendar days after the (2) Increase o f previously authorized acquisition and provides any relevant acquisitions. Unless the Board or the information requested by the Reserve Reserve Bank otherwise provides in Bank: writing, the acquisition of additional (i) Acquisition of voting securities shares of a class of voting securities of through inheritance; a state member bank or bank holding (ii) Acquisition of voting securities as company by any person (or persons a bona fid e gift; and acting in concert) who has lawfully (iii) Acquisition of voting securities in acquired and m aintained control of the satisfaction of a debt previously institution (for purposes of § 225.41(c) contracted (DPC) in good faith. of this subpart), after complying w ith 9339 (2) The following acquisitions of voting securities of a state member bank or bank holding company, w hich w ould otherwise require prior notice under this subpart, are not subject to the prior notice requirem ents if the acquiring person does not reasonably have advance knowledge of the transaction, and provides the w ritten notice required under section 225.43 to the appropriate Reserve Bank w ithin 90 calendar days after the transaction occurs: (1) Acquisition of voting securities resulting from a redem ption of voting securities by the issuing bank or bank holding company; and (ii) A cquisition of voting securities as a result of actions (including the sale of securities) by any third party that is not w ithin the control of the acquiror. (3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits the authority of the Board to disapprove a notice pursuant to § 225.43(h) of this subpart. § 225.43 Procedures for filing, processing, publishing, and acting on notices. (a) Filing notice. (1) A notice required u nder this subpart shall be filed w ith the appropriate Reserve Bank and shall contain all the information required by paragraph 6 of the Bank Control Act (12 U.S.C. 1817(j)(6)), or prescribed in the designated Board form. (2) The Board may waive any of the informational requirements of the notice if the Board determines that it is in the public interest. (3) A notificant shall notify the appropriate Reserve Bank or the Board immediately of any material changes in a notice subm itted to the Reserve Bank, including changes in financial or other conditions. (4) W hen the acquiring person is an individual, or group of individuals acting in concert, the requirement to provide personal financial data may be satisfied by a current statement of assets and liabilities and an income summary, as required in the designated Board form, together w ith a statement of any material changes since the date of the statement or summary. The Reserve Bank or the Board, nevertheless, may request additional information, if appropriate. (b) A cceptance o f notice. The 60-day notice period specified in § 225.41 of this subpart begins on the date of receipt of a complete notice. The Reserve Bank shall notify the person or persons submitting a notice under this subpart in writing of the date the notice is or was complete and thereby accepted for processing. The Reserve Bank or the Board may request additional relevant information at any time after the date of acceptance. 9340 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations (c) Publication—(1) N ew spaper A nnouncem ent. Any person(s) filing a notice under this subpart shall publish, in a form prescribed by the Board, an announcem ent soliciting public com m ent on the proposed acquisition. The announcem ent shall be published in a new spaper of general circulation in the com m unity in w hich the head office of the state mem ber bank to be acquired is located or, in the case of a proposed acquisition of a bank holding company, in the com m unity in w hich its head office is located and in the com m unity in w hich the head office of each of its subsidiary banks is located. The announcem ent shall be published no earlier than 15 calendar days before the filing of the notice w ith the appropriate Reserve Bank and no later than 10 calendar days after the filing date; and the publisher’s affidavit of a publication shall be provided to the appropriate Reserve Bank. (2) Contents o f new spaper announcem ent. The new spaper announcem ent shall state: (i) The name of each person identified in the notice as a proposed acquiror of the bank or bank holding company; (ii) The nam e of the bank or bank holding company to be acquired, including the nam e of each of the bank holding com pany’s subsidiary banks; and (iii) A statem ent that interested persons may subm it comments on the notice to the Board or the appropriate Reserve Bank for a period of 20 days, or such shorter period as may be provided, pursuant to paragraph (c)(5) of this section. (3) Federal Register announcem ent. The Board shall, upon filing of a notice under this subpart, publish announcem ent in the Federal Register of receipt of the notice. The Federal Register announcem ent shall contain the information required under paragraphs (c)(2)(i) and (c)(2)(ii) of this section and a statem ent that interested persons may subm it comments on the proposed acquisition for a period of 15 calendar days, or such shorter period as may be provided, pursuant to paragraph (c)(5) of this section. The Board may waive publication in the Federal Register, if the Board determines that such action is appropriate. (4) Delay o f publication. The Board may perm it delay in the publication required under paragraphs (c)(1) and (c)(3) of this section if the Board determines, for good cause shown, that it is in the public interest to grant such delay. Requests for delay of publication may be subm itted to the appropriate Reserve Bank. (D) A dditional tim e is needed to (5) Shortening or waiving notice. The investigate and determ ine that no Board may shorten or waive the public acquiring person has a record of failing com m ent or new spaper publication requirem ents of this paragraph, or act on to comply w ith the requirem ents of the a notice before the expiration of a public Bank Secrecy Act, subchapter II of Chapter 53 of Title 31, U nited States com m ent period, if it determ ines in w riting that an emergency exists, or that Code. (iii) If the Board extends the time disclosure of the notice, solicitation of period u nder this paragraph, it shall public comment, or delay until expiration of the public com m ent period notify the acquiring person(s) of the reasons therefor and shall include a w ould seriously threaten the safety or statement of the information, if any, soundness of the bank or bank holding deemed incom plete or inaccurate. com pany to be acquired. (e) A dvice to bank supervisory (6) Consideration o f public com m ents. agencies. (1) Upon accepting a notice In acting upon a notice filed u nder this relating to acquisition of securities of a subpart, the Board shall consider all state member bank, the Reserve Bank public comments received in writing shall send a copy of the notice to the w ithin the period specified in the appropriate state bank supervisor, new spaper or Federal Register w hich shall have 30 calendar days from announcem ent, w hichever is later. At the date the notice is sent in w hich to the Board’s option, comments received submit its views and recommendations after this period may, but need not, be to the Board. The Reserve Bank also considered. shall send a copy of any notice to the (7) Standing. No person (other than Comptroller of the Currency, the Federal the acquiring person) who submits Deposit Insurance Corporation, and the comments or information on a notice Office of Thrift Supervision. filed under this subpart shall thereby (2) If the Board finds that it m ust act become a party to the proceeding or immediately in order to prevent the acquire any standing or right to probable failure of the bank or bank participate in the Board’s consideration holding company involved, the Board of the notice or to appeal or otherwise may dispense w ith or modify the contest the notice or the Board’s action requirements for notice to the state regarding the notice. (d) Tim e period fo r Board action—(1) supervisor. (f) Investigation and report. (1) After C onsum m ation o f acquisition —(i) The receiving a notice under this subpart, notificant(s) may consum m ate the the Board or the appropriate Reserve proposed acquisition 60 days after Bank shall conduct an investigation of subm ission to the Reserve Bank of a the competence, experience, integrity, complete notice u n der paragraph (a) of and financial ability of each person by this section, unless w ithin that period and for w hom an acquisition is to be the Board disapproves the proposed made. The Board shall also make an acquisition or extends the 60-day ' independent determ ination of the period, as provided under paragraph accuracy and completeness of any (d)(2) of this section. (ii) The notificant(s) may consummate information required to be contained in a notice under paragraph (a) of this the proposed transaction before the section. In investigating any notice expiration of the 60-day period if the accepted under this subpart, the Board Board notifies the notificant(s) in or Reserve Bank may solicit information w riting of the Board’s intention not to or views from any person, including any disapprove the acquisition. (2) Extensions o f tim e period, (i) The bank or bank holding com pany involved in the notice, and any appropriate state, Board may extend the 60-day period in federal, or foreign governmental paragraph (d)(1) of this section for an authority. additional 30 days by notifying the (2) The Board or the appropriate acquiring person(s). (ii) The Board may further extend the Reserve Bank shall prepare a w ritten report of its investigation, w hich shall period during w hich it may disapprove contain, at a m inim um , a summary of a notice for two additional periods of not more than 45 days each, if the Board the results of the investigation. (g) Factors considered in acting on determines that: notices. In reviewing a notice filed (A) Any acquiring person has not under this subpart, the Board shall furnished all the information required consider the information in the record, under paragraph (a) of this section; (B) Any material information the views and recommendations of the appropriate bank supervisor, and any subm itted is substantially inaccurate; (C) The Board is unable to complete other relevant information obtained the investigation of an acquiring person during any investigation of the notice. because of inadequate cooperation or (h) Disapproval and hearing—(1) Disapproval o f notice. The Board may delay by that person; or Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations disapprove an acquisition if it finds adverse effects w ith respect to any of the factors set forth in paragraph 7 of the Bank Control Act (12 U.S.C. 1817(j)(7)) [i.e., competitive, financial, managerial, banking, or incom pleteness of information). (2) Disapproval notification. W ithin three days after its decision to issue a notice of intent to disapprove any proposed acquisition, the Board shall notify the acquiring person in writing of the reasons for the action. (3) Hearing. W ithin 10 calendar days of receipt of the notice of the Board’s intent to disapprove, the acquiring person m ay submit a w ritten request for a hearing. Any hearing conducted under this paragraph shall be in accordance w ith the Rules of Practice for Formal Hearings (12 CFR part 263). At the conclusion of the hearing, the Board shall, by order, approve or disapprove the proposed acquisition on the basis of the record of the hearing. If the acquiring person does not request a hearing, the notice of intent to disapprove becomes final and unappealable. § 225.44 Reporting of stock loans. (a) Requirements. (1) Any foreign bank or affiliate of a foreign bank that has credit outstanding to any person or group of persons, in the aggregate, w hich is secured, directly or indirectly, by 25 percent or more of any class of voting securities of a state member bank, shall file a consolidated report w ith the appropriate Reserve Bank for the state member bank. (2) The foreign bank or its affiliate also shall file a copy of the report w ith its appropriate Federal banking agency. (3) Any shares of the state member bank held by the foreign bank or any affiliate of the foreign bank as principal m ust be included in the calculation of the num ber of shares in w hich the foreign bank or its affiliate has a security interest for purposes of paragraph (a) of this section. (b) Definitions. For purposes of paragraph (a) of this section: (1) Foreign bank shall have the same meaning as in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101). (2) Credit outstanding includes any loan or extension of credit; the issuance of a guarantee, acceptance, or letter of credit, including an endorsem ent or standby letter of credit; and any other type of transaction that extends credit or financing to the person or group of persons. (3) Group o f persons includes any num ber of persons that the foreign bank or any affiliate of a foreign bank has reason to believe: (i) Are acting together, in concert, or w ith one another to acquire or control shares of the same insured depository institution, including an acquisition of shares of the same depository institution at approxim ately the same time under substantially the same terms; or (ii) Have made, or propose to make, a joint filing under section 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and the rules prom ulgated thereunder by the Securities and Exchange Commission regarding ow nership of the shares of the same insured depository institution. (c) Exceptions. Compliance with paragraph (a) of this section is not required if: (1) The person or group of persons referred to in that paragraph has disclosed the am ount borrowed and the security interest therein to the Board or appropriate Reserve Bank in connection w ith a notice filed u nder § 225.41 of this subpart, or another application filed w ith the Board or Reserve Bank as a substitute for a notice under § 225.41 of this subpart, including an application filed under section 3 of the BHC Act (12 U.S.C. 1842) or section 18(c) of the Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)), or an application for m em bership in the Federal Reserve System; or (2) The transaction involves a person or group of persons that has been the ow ner or owners of record of the stock for a period of one year or more; or, if the transaction involves stock issued by a newly chartered bank, before the bank is opened for business. (a) Report requirements. (1) The consolidated report shall indicate the num ber and percentage of shares securing each applicable extension of credit, the identity of the borrower, and the num ber of shares held as principal by the foreign bank and any affiliate thereof. (2) A foreign bank, or any affiliate of a foreign bank, shall file the consolidated report in writing w ithin 30 days of the date on w hich the foreign bank or affiliate first believes that the security for any outstanding credit consists of 25 percent or more of any class of voting securities of a state member bank. (e) Other reporting requirements. A foreign bank, or any affiliate thereof, that is supervised by the System and is required to report credit outstanding that is secured by the shares of an insured depository institution to another Federal banking agency also shall file a copy of the report w ith the appropriate Reserve Bank. § 225.51 9341 [Removed] 7. Subpart § 2 2 5 .5 1 . F is am ended by removing 8. Subpart G is am ended by revising the heading to read as follows: Subpart G—Appraisal Standards for Federally Related Transactions 9. Subpart H, consisting of §§ 225.71 through 225.73, is revised to read as follows: Subpart H— Notice of Addition or Change of Directors and Senior Executive Officers Sec. 225.71 Definitions. 225.72 Director and officer appointments; prior notice requirement. 225.73 Procedures for filing, processing, and acting on notices; standards for disapproval; w aiver o f notice. Subpart H—Notice of Addition or Change of Directors and Senior Executive Officers §225.71 Definitions. (a) Director means a person who serves on the board of directors of a regulated institution, except that this term does not include an advisory director who: (1) Is not elected by the shareholders of the regulated institution; (2) Is not authorized to vote on any matters before the board of directors or any committee thereof; (3) Solely provides general policy advice to the board of directors and any committee thereof; and (4) Has not been identified by the Board or Reserve Bank as a person w ho performs the functions of a director for purposes of this subpart. (b) Regulated institution means a state member bank or a bank holding company. (c) Senior executive officer means a person w ho holds the title or, w ithout regard to title, salary, or compensation, performs the function of one or more of the following positions: president, chief executive officer, chief operating officer, chief financial officer, chief lending officer, or chief investment officer. Senior executive officer also includes any other person identified by the Board or Reserve Bank, w hether or not hired as an employee, w ith significant influence over, or who participates in, major policymaking decisions of the regulated institution. (d) Troubled condition for a regulated institution means an institution that: (1) Has a com posite rating, as determ ined in its most recent report of examination or inspection, of 4 or 5 under the Uniform Financial Institutions Rating System or under the 9342 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations Federal Reserve Bank Holding Company Rating System; (2) Is subject to a cease-and-desist order or formal w ritten agreement that requires action to improve the financial condition of the institution, unless otherwise inform ed in writing by the Board or Reserve Bank; or (3) Is informed in writing by the Board or Reserve Bank that it is in troubled condition for purposes of the requirem ents of this subpart on the basis of the institution’s m ost recent report of condition or report of exam ination or inspection, or other information available to the Board or Reserve Bank. § 225.72 Director and officer appointments; prior notice requirement. (a) Prior notice by regulated institution. A regulated institution shall give the Board 30 days’ w ritten notice, as specified in § 225.73, before adding or replacing any member of its board of directors, em ploying any person as a senior executive officer of the institution, or changing the responsibilities of any senior executive officer so that the person w ould assume a different senior executive officer position, if: (1) The regulated institution is not in compliance w ith all m inim um capital requirem ents applicable to the institution as determ ined on the basis of the institution’s most recent report of condition or report of examination or inspection; (2) The regulated institution is in troubled condition; or (3) The Board determines, in connection w ith its review of a capital restoration plan required u nd er section 38 of the Federal Deposit Insurance Act or subpart B of the Board’s Regulation H, or otherwise, that such notice is appropriate. (b) Prior notice by individual. The prior notice required by paragraph (a) of this section may be provided by an individual seeking election to the board of directors of a regulated institution. § 225.73 Procedures for filing, processing, and acting on notices; standards for disapproval; waiver of notice. (a) Filing notice—(1) Content. The notice required in § 225.72 shall be filed w ith the appropriate Reserve Bank and shall contain: (i) The information required by paragraph 6(A) of the Change in Bank Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the designated Board form; (ii) A dditional information consistent w ith the Federal Financial Institutions Examination Council’s Joint Statement of Guidelines on Conducting Background Checks and Change in Control Investigations, as set forth in the designated Board form; and (iii) Such other information as may be required by the Board or Reserve Bank. (2) M odification. The Reserve Bank may modify or accept other information in place of the requirem ents of § 225.73(a)(1) for a notice filed under this subpart. (3) A cceptance and processing o f notice. The 30-day notice period specified in § 225.72 shall begin on the date all information required to be subm itted by the notificant pursuant to § 225.73(a)(1) is received by the appropriate Reserve Bank. The Reserve Bank shall notify the regulated institution or individual submitting the notice of the date on w hich all required information is received and the notice is accepted for processing, and of the date on w hich the 30-day notice period will expire. The Board or Reserve Bank may extend the 30-day notice period for an additional period of not more than 60 days by notifying the regulated institution or individual filing the notice that the period has been extended and stating the reason for not processing the notice w ithin the 30-day notice period. (b) C om m encem ent o f service—(1) A t expiration o f period. A proposed director or senior executive officer may begin service after the end of the 30-day period and any extension as provided under paragraph (a)(3) of this section, unless the Board or Reserve Bank disapproves the notice before the end of the period. (2) Prior to expiration o f period. A proposed director or senior executive officer may begin service before the end of the 30-day period and any extension as provided under paragraph (a)(3) of this section, if the Board or the Reserve Bank notifies in writing the regulated institution or individual submitting the notice of the Board’s or Reserve Bank’s intention not to disapprove the notice. (c) Notice o f disapproval. The Board or Reserve Bank shall disapprove a notice under § 225.72 if the Board or Reserve Bank finds that the competence, experience, character, or integrity of the individual w ith respect to w hom the notice is subm itted indicates that it w ould not be in the best interests of the depositors of the regulated institution or in the best interests of the public to perm it the individual to be employed by, or associated with, the regulated institution. The notice of disapproval shall contain a statement of the basis for disapproval and shall be sent to the regulated institution and the disapproved individual. (d) A p p ea l o f a notice o f disapproval. (1) A disapproved individual or a regulated institution that has subm itted a notice that is disapproved under this section may appeal the disapproval to the Board w ithin 15 days of the effective date of the notice of disapproval. An appeal shall be in w riting and explain the reasons for the appeal and include all facts, docum ents, and arguments that the appealing party w ishes to be considered in the appeal, and state w hether the appealing party is requesting an informal hearing. (2) W ritten notice of the final decision of the Board shall be sent to the appealing party w ithin 60 days of the receipt of an appeal, unless the appealing party’s request for an informal hearing is granted. (3) Tne disapproved individual may not serve as a director or senior executive officer of the state member bank or bank holding company while the appeal is pending. (e) Inform al hearing. (1) An individual or regulated institution whose notice u nd er this section has been disapproved may request an informal hearing on the notice. A request for an informal hearing shall be in writing and shall be subm itted w ithin 15 days of a notice of disapproval. The Board may, in its sole discretion, order an informal hearing if the Board finds that oral argument is appropriate or necessary to resolve disputes regarding material issues of fact. (2) An informal hearing shall be held w ithin 30 days of a request, if granted, unless the requesting party agrees to a later date. (3) W ritten notice of the final decision of the Board shall be given to the individual and the regulated institution w ithin 60 days of the conclusion of any informal hearing ordered by the Board, unless the requesting party agrees to a later date. (f) Waiver o f notice—(1) Waiver requests. The Board or Reserve Bank may perm it an individual to serve as a senior executive officer or director before the notice required under this subpart is provided, if the Board or Reserve Bank finds that: (1) Delay w ould threaten the safety or soundness of the regulated institution or a bank controlled by a bank holding company; (ii) Delay w ould not be in the public interest; or (iii) Other extraordinary circumstances exist that justify waiver of prior notice. (2) A utom atic waiver. An individual may serve as a director upon election to the board of directors of a regulated institution before the notice required Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations u n d er this subpart is provided if the individual: (i) Is not proposed by the management of the regulated institution; (ii) Is elected as a new member of the board of directors at a m eeting of the regulated institution; and (iii) Provides to the appropriate Reserve Bank all the information required in § 225.73(a) w ithin two (2) business days after the ind ividual’s election. (3) Effect on disapproval authority. A waiver shall not affect the authority of the Board or Reserve Bank to disapprove a notice w ithin 30 days after a waiver is granted u n d er paragraph (f)(1) of this section or the election of an individual w ho has filed a notice and is serving pursuant to an automatic waiver under paragraph (f)(2) of this section. * * * * * 10. Section 225.125 is am ended by revising paragraphs (f) and (g) to read as follows: § 225.125 * * Investment adviser activities * * * (f) In the Board’s opinion, the GlassSteagall Act provisions, as interpreted by the U.S. Suprem e Court, forbid a bank holding com pany to sponsor, organize, or control a m utual fund. However, the Board does not believe that such restrictions apply to closedend investm ent com panies as long as such com panies are not prim arily or frequently engaged in the issuance, sale, and distribution of securities. A bank holding com pany should not act as investm ent adviser to an investment company that has a nam e sim ilar to the name of the holding company or any of its subsidiary banks, unless the prospectus of the investm ent company contains the disclosures required in paragraph (h) of this section. In no case should a bank holding com pany act as investm ent adviser to an investment company that has either the same name as the name of the holding company or any of its subsidiary banks, or a name that contains the w ord “bank.” (g) In view of the potential conflicts of interests that may exist, a bank holding com pany and its bank and nonbank subsidiaries should not purchase in their sole discretion, in a fiduciary capacity (including as managing agent), securities of any investment com pany for w hich the bank holding com pany acts as investment adviser unless, the purchase is specifically authorized by the terms of the instrum ent creating the fiduciary relationship, by court order, or by the law of the jurisdiction under w hich the trust is administered. * * * * * §225.145 [Amended] 11. Section 225.145, paragraph (a) the fifth sentence is am ended by removing the w ords “increasing their assets at an annual rate exceeding 7 percent during any 12-month period after August 10, 1988,” and the last sentence by removing “ 225.51 a n d ”. 12. A ppendix C is revised to read as follows: Appendix C to Part 225—Small Bank Holding Company Policy Statement P olicy Statem ent on A ssessm ent o f Financial and Managerial Factors In acting on applications filed under the Bank H olding Company Act, the Board has adopted, and continues to follow , the principle that bank hold in g com panies sh ould serve as a source o f strength for their subsidiary banks. W hen bank holding com panies incur debt and rely upon the earnings o f their subsidiary banks as the m eans o f repaying su ch debt, a question arises as to the probable effect upon the financial condition of the hold in g com pany and its subsidiary bank or banks. The Board believes that a high level o f debt at the parent holding com pany impairs the ability o f a bank hold in g com pany to provide financial assistance to its subsidiary bank(s) and, in som e cases, the servicing requirements on such debt m ay be a significant drain on the resources of the bank(s). For these reasons, the Board has not favored the use o f acquisition debt in the formation of bank hold in g com panies or in the acquisition of additional banks. Nevertheless, the Board has recognized that the transfer of ow nership o f sm all banks often requires the use o f acquisition debt. The Board, therefore, has perm itted the formation and expansion o f sm all bank holding com panies w ith debt levels higher than w o u ld be perm itted for larger holding com panies. Approval o f these applications has been given on the condition that sm all bank holding com panies demonstrate the ability to service acquisition debt without straining the capital of their subsidiary banks and, further, that su ch com panies restore their ability to serve as a source o f strength for their subsidiary banks w ith in a relatively short period of time. In the interest o f continuing its policy of facilitating the transfer o f ow nership in banks w ithout com prom ising bank safety and soundness, the Board has, as described below , adopted the follow in g procedures and standards for the formation and expansion of sm all bank holding com panies subject to this p o licy statement. 1. A p plicab ility o f P olicy Statem ent T his p o licy statem ent applies only to bank holding com panies w ith p ro form a consolidated assets o f less than $150 m illion that: (i) are n o t engaged in any nonbanking activities involving significant leverage1 and (ii) do n o t have a significant amount of 1A parent com pany that is engaged in significant off-balance sheet activities w ould generally be deemed to be engaged in activities that involve significant leverage. 9343 outstanding debt that is h eld by the general public. W hile this policy statem ent primarily applies to the formation o f sm all bank holding com panies, it also applies to existing sm all bank holding com panies that w ish to acquire an additional bank or com pany and to transactions involving changes in control, stock redem ptions, or other shareholder transactions.2 2. O ngoing Requirem ents The follow in g guidelines m ust be follow ed on an ongoing basis for all organizations operating under this p o licy statement. A. Reduction in parent com pany leverage: Sm all bank holding com panies are to reduce their parent com pany debt consistent w ith the requirement that all debt be retired w ithin 25 years of being incurred. The Board also expects that these bank holding com panies reach a debt to equity ratio of .30:1 or less w ithin 12 years o f the incurrence of the d eb t.3 The bank holding com pany must also com ply w ith debt servicing and other requirements im posed by its creditors. B. Capital adequacy: Each insured depository subsidiary o f a sm all bank holding com pany is expected to be w ell-capitalized. Any institution that is not w ell-capitalized is expected to becom e w ell-capitalized w ith in a brief period o f time. C. D ividend restrictions: A sm all bank holding com pany w h o se debt to equity ratio is greater than 1.0:1 is not expected to pay corporate dividends until su ch tim e as it reduces its debt to equity ratio to 1.0:1 or less and otherw ise m eets the criteria set forth in §§2 25 .1 4(c)(l)(ii), 225.14(c)(2), and 225.14(c)(7) o f Regulation Y .4 2The appropriate Reserve Bank should be contacted to determ ine the m anner in w hich a specific situation m ay qualify for treatm ent under this policy statement. 3 The term debt, as used in th e ratio of debt to equity, m eans any borrowed funds (exclusive of short-term borrowings that arise out of current transactions, the proceeds of w hich are used for current transactions), and any securities issued by, or obligations of, the holding com pany that are the functional equivalent of borrowed funds. The term equity, as used in th e ratio of debt to equity, m eans the total stockholders’ equity of the bank holding company as defined in accordance w ith generally accepted accounting principles. In determ ining the total am ount of stockholders’ equity, the bank holding com pany should account for its investm ents in the com m on stock of subsidiaries by the equity m ethod of accounting. Ordinarily the Board does not view redeemable preferred stock as a substitute for common stock in a small bank holding company. Nevertheless, to a limited degree and under certain circumstances, the Board w ill consider redeem able preferred stock as equity in the capital accounts of the holding com pany if the following conditions are met: (1) The preferred stock is redeem able only at the option of the issuer and (2) the debt to equity ratio of the holding com pany would be at or rem ain below .30:1 following the redem ption or retirem ent of any preferred stock. Preferred stock that is convertible into common stock of the holding company may be treated as equity. 4 Dividends may be paid by small bank holding com panies w ith debt to equity at or below 1.0:1 and otherwise m eeting the requirem ents of §§225.14(c)(l)(ii), 225.14(c)(2), and 225.14(c)(7) if the d ividends are reasonable in amount, do not Continued 9344 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations Sm all bank hold in g com panies formed before the effective date o f this policy statement m ay sw itch to a plan that adheres to the intent o f this statement provided they com ply w ith the requirem ents set forth above. 3. Core R equirem ents for A ll A p plican ts In assessing applications or notices by organizations subject to this p o licy statement, the Board w ill continue to take into account a full range o f financial and other information about the applicant, and its current and proposed subsidiaries, including the recent trend and stability o f earnings, past and prospective growth, asset quality, the ability to m eet debt servicing requirements w ithou t placing an undue strain on the resources o f the bank(s), and the record and com petency o f m anagement. In adversely affect the ability of the bank holding com pany to service its debt in an orderly manner, and do not adversely affect the ability of the subsidiary banks to be well-capitalized. It is expected that d ividends will be elim inated if the holding com pany is (1) not reducing its debt consistent w ith the requirem ent that the debt to equity ratio be reduced to .30:1 w ith in 12 years of consum mation of the proposal or (2) not meeting the requirem ents of its loan agreement(s). addition, the Board w ill require applicants to m eet the follow in g requirements: A. M inim um dow n payment: The am ount o f acquisition debt should not exceed 75 percent of the purchase price of the bank(s) or com pany to be acquired. W hen the owner(s) o f the hold in g com pany incurs debt to finance the purchase o f the bank(s) or com pany, su ch debt w ill be considered acquisition debt even though it does not represent an obligation o f the bank holding com pany, u n less the owner(s) can demonstrate that such debt can be serviced w ithou t reliance on the resources of the bank(s) or bank hold in g com pany. B. A bility to reduce parent com pany leverage: The bank holding com pany m ust clearly be able to reduce its debt to equity ratio and com ply w ith its loan agreement(s) as set forth in paragraph 2A above. Failure to m eet the criteria in this section w o u ld norm ally result in denial o f an application. 4. A d dition al A p plication R equirem ents for E xpedited/W aived P rocessing A. Expedited notices under §§ 225.14 and 225.23 o f Regulation Y: A sm all bank holding com pany proposal w ill be eligible for the expedited processing procedures set forth in § § 2 2 5 .1 4 and 225.23 o f Regulation Y if the bank holding com pany is in com plian ce w ith the ongoing requirem ents o f this policy statement, the bank hold in g com pany m eets the core requirements for all applicants noted above, and the follow in g requirem ents are met: i. The parent bank hold in g com pany has a p ro fo r m a debt to equity ratio o f 1.0:1 or less. ii. The bank hold in g com pany m eets all of the criteria for expedited action set forth in §§ 225.14 or 225.23 o f Regulation Y. B. Waiver o f stock redem ption filing: A sm all bank holding com pany w ill be eligible for the stock redem ption filing exception for w ell-capitalized bank hold in g com panies contained in § 225.4(b)(6) if the follow in g requirem ents are met: i. The parent bank hold in g com pany has a p ro fo r m a debt to equity ratio of 1.0:1 or less. ii. The bank holding com pany is in com pliance w ith the ongoing require m ents of this p olicy statem ent and m eets the requirem ents of §§ 225.14(c)(l)(ii), 225.14(c)(2), and 225.14(c)(7) o f Regulation Y. W illiam W. W iles, S ecreta ry o f the Board. [FR Doc. 9 7 -4 9 0 6 Filed 2 -2 7 -9 7 ; 8:45 am] BILUNG CODE 6 2 1 0 -0 1-P
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