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Circular No. 80-139
July 17, 1980

Sale of Bank Holding Company Commercial Paper

The Board of Governors has established the Federal Reserve System's
supervisory policy regarding the involvement of a subsidiary bank in the sale of
affiliated holding company commercial paper. The policy addresses the concern
that individual depositors or investors may purchase bank holding company (or
nonbank subsidiary) commercial paper with the misunderstanding th at it is an
insured deposit or obligation of the subsidiary bank.
For your information, the policy statem ent is printed on the following
pages. Any questions concerning the document should be directed to Sherry L.
Conley, Senior Attorney, of our Holding Company Supervision Department, Ext.
Sincerely yours,
Robert H. Boykin
First Vice President

Banks and others are encouraged to use the following incoming W A TS numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (


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The sale of bank holding company (or nonbank subsidiary) commercial
paper by an affiliated bank to depositors or other investors creates the possibility
th at individuals may purchase such paper with the misunderstanding th at it is an
insured deposit or obligation of the selling bank. The Board of Governors believes
th at the manner in which commercial paper is sold should not lead bank customers
or investors to construe commercial paper as an insured bank obligation or an
instrument which may be higher in yield but equal in risk to insured bank deposits.
All purchasers of commercial paper should clearly understand that such paper is an
obligation of the parent company or nonbank subsidiary and that the quality of the
investment depends upon the risks and operating characteristics associated with
the holding company and its activities.
In light of these considerations, commercial paper obligations issued by
holding companies should prominently indicate in bold type on their face 1) that
they are not obligations of a bank; and 2) that they are not insured by the Federal
Deposit Insurance Corporation.

In cases where purchasers do not take physical

possession of the obligation, they should be provided with a printed advice which
also states that the holding company paper is not an obligation of a bank and is not
insured by the FDIC. Those employees engaged in the sale of the paper should also
convey this information verbally to each purchaser.

In addition, any commercial

banking subsidiary involved in the marketing of holding company commercial paper
should separate the sale of such paper from the retail deposit-taking function.
Thus, for example, commercial paper should not be sold at teller windows or at
areas designated for opening retail deposit accounts.

Similar procedures should


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also be followed for the issuance or sale of commercial paper of nonbank
subsidiaries of bank holding companies where the nonbank subsidiary has a name
similar to that of any of its affiliate banks or there is a possibility that investors
may confuse the obligations of the nonbank subsidiary with those of the holding
company or any of its subsidiary banks.
Commercial paper is generally defined as notes, with original
m aturities not exceeding nine months, that are usually offered and sold to










denominations of $25,000 (although some direct placers sell commercial paper in
denominations as low as $10,000). In order to qualify for the "commercial paper"
exemption from the registration requirements of the Securities Act of 1933, the
proceeds may be used only for current transactions. Obligations that are payable
on demand or have provisions for automatic roll-over do not satisfy the nine-month
m aturity standard.

The Board cautions bank holding companies and nonbank

subsidiaries issuing commercial

paper th at


specific characteristics of

commercial paper which allow exemption from the registration requirements of the
Securities Act of 1933 define the terms of issue and the use of proceeds from the
sale of commercial paper, and companies should only issue commercial paper and
use the proceeds pursuant to those provisions.
Bank holding companies should also note that on March Ik, 1980 the
Board established interest rate limitations on debt instruments that are issued by a
bank holding company in denominations of $100,000 or less and with original
m aturities of four years or less.

Similar action was taken by the FDIC. These

limitations apply only to obligations required to be registered with the Securities
and Exchange Commission under the Securities Act of 1933 and, consequently, they
do not apply to commercial paper issued by a parent bank holding company. In the

- 3Boafd's view, debt obligations issued by a bank holding company in denominations
of less than $10,000 ordinarily will not qualify for the commercial paper exemption
from registration under the Securities Act of 1933. Accordingly, in the absence of
any other exemption provision, such debt obligations will be subject to the interest
rate limitations set forth in Section 217.7 of the Board's Regulation Q and Section
329.6 of the regulations of the FDIC.

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