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F ederal Reserve Bank DALLAS, TEXAS of Dallas 75222 Circular No. 73-l6l July 5, 1973 PROPOSED AMENDMENT TO REGULATION Y (Management Consulting Services) To All Banks, Bank Holding Companies, and Others Concerned in the Eleventh Federal Reserve District: On June 27, 1973 5 the Board of Governors invited comments on a proposal to permit bank holding companies to perform management consulting services for non-affiliated banks. The Board has previously determined that, except for general management consulting services that are expressly authorized by statute to be furnished by a bank holding company to its affiliates, a bank holding company may not engage in general management consulting. A copy of the press release and proposal are printed on the following pages. Interested parties should submit relevant views in writing to the Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. 20551? to be received not later than July 31, 1973. Y ours v e r y t r u l y , P. E. C o ld w e ll, P re sid e n t Enclosure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) k P FEDERAL press RESERVE release ?f*ALRt^* For immediate release June 27, 1973 The Board of Governors of the Federal Reserve System today invited comments on a proposal to permit bank holding companies to perform management consulting services for non-affiliated banks. The proposal was published for comment to be received through July 31, 1973. The proposal is one of a series the Board has made concerning activities that may be regarded as closely related to banking under the 1970 Amendments to the Bank Holding Company Act of 1956. Such activities, if approved, become permissible for bank holding companies subject to Board approval in individual cases. The Board has previously determined that, except for general management consulting services that are expressly authorized by statute to be furnished by a bank holding company to its affiliates, a bank holding company may not engage in general management consulting. A copy of the proposal is attached. Attachment [12 CFR P a r t 2 2 5 ] [R eg. YJ BANK HOLDING COMPANIES N o n b a n k in g A c t i v i t i e s The B oard o f G o v e r n o r s i s c o n s i d e r i n g f u r t h e r i m p l e m e n t a t i o n o f i t s r e g u l a t o r y a u t h o r i t y u n d e r s e c t i o n 4 ( c ) ( 8 ) o f t h e Bank H o l d i n g Company A c t t o p e r m i t b a n k h o l d i n g c o m p a n ie s t o p e r f o r m m anagem ent c o n su ltin g s e rv ic e s fo r n o n - a f f ilia te d banks. Such a c t i v i t i e s a r e o f th e ty p e p r e s e n t l y p erfo rm ed th ro u g h c o rr e s p o n d e n t b a n k in g r e l a t i o n s h i p s . The p r o p o s a l w ould p e r m i t s u c h a c t i v i t i e s t o b e p e r f o r m e d b y a n o n b a n k s u b s i d i a r y o f a h o l d i n g company o r t h e h o l d i n g company d i r e c t l y , w ould r e q u i r e e x p l i c i t p r i c i n g f o r s u c h s e r v i c e s , a n d w ould f o s t e r c o m p e t i t i o n f o r such s e r v i c e s . I n t h e p r o p o s a l , t h e B o ard t a k e s i n t o a c c o u n t t h e p o s s i b i l i t y t h a t t h e m anagem ent c o n s u l t i n g a r r a n g e m e n t i n v o l v e d c o u l d b e u s e d a s a d e v i c e t o c o n t r o l a b a n k t h a t i s n o t p a r t o f t h e same h o l d i n g company sy ste m , c o n tr a r y t o th e p u rp o se s o f th e A c t. In o r d e r to guard a g a in s t s u c h a r e s u l t , s u c h s e r v i c e s w ould n o t b e p e r m i t t e d t o be f u r n i s h e d t o a n o n - a f f i l i a t e d b a n k i f t h e b a n k h o l d i n g company o r a ny o f i t s s u b s i d i a r i e s owned o r c o n t r o l l e d a n y e q u i t y s e c u r i t i e s i n s u c h b a n k , o r a n y o f f i c e r , d i r e c t o r , o r e m p lo y e e o f t h e b a n k h o l d i n g company o r a n y o f i t s s u b s i d i a r i e s s e r v e s a t t h e same t im e i n a s i m i l a r c a p a c i t y w i t h t h e r e c ip ie n t bank. Such c o n d i t i o n s a r e minimum s a f e g u a r d s o n l y a n d i n a n a p p r o p r ia te c a se th e r e b u t t a b l e p re su m p tio n o f c o n tr o l s p e c i f i e d in s e c t i o n 2 2 5 . 2 ( b ) ( 3 ) o f R e g u l a t i o n Y may s t i l l b e a p p l i e d . F u rth e r, in -2 - o r d e r t o m in i m i z e p o s s i b l e c o n f l i c t s o f i n t e r e s t s , a c o n s u l t a n t company f u r n i s h i n g s e r v i c e s p u r s u a n t t o t h i s a u t h o r i t y w ould be r e q u i r e d t o d i s c l o s e t o e a c h p o t e n t i a l c l i e n t b a n k t h e names o f b a n k s w i t h w h ic h t h e c o n su lta n t i s a f f i l i a t e d and t h e names o f a l l o t h e r c l i e n t b a n k s l o c a t e d i n t h e same m a r k e t a r e a a s t h e c l i e n t b a n k . The B oard h a s p r e v i o u s l y d e t e r m i n e d t h a t , e x c e p t f o r g e n e r a l m anagem ent c o n s u l t i n g s e r v i c e s t h a t a r e e x p r e s s l y a u t h o r i z e d by s t a t u t e t o be f u r n i s h e d b y b a n k h o l d i n g c o m p a n ie s t o i t s a f f i l i a t e s , a b a n k h o l d i n g company may n o t e n g a g e i n g e n e r a l m anagem ent c o n s u l t i n g . 1972 F e d e r a l R e s e r v e B u l l e t i n 5 7 1 .) (1 2 CFR 2 2 5 .1 2 6 ; The p r e s e n t p r o p o s a l r e l a t e s t o t h e f u r n i s h i n g o f m anagem ent c o n s u l t i n g s e r v i c e s t o n o n - a f f i l i a t e d b a n k s and a rise s, in p a r t, fro m a p e n d i n g a p p l i c a t i o n by The C i t i z e n s & S o u t h e r n C o r p o r a tio n , C h a r le s to n , S o u th C a r o li n a , f o r p e rm is s io n t o p erfo rm f o r n o n - a f f i l i a t e d b a n k s , t h r o u g h a p r o p o s e d s u b s i d i a r y , Bank Management A d v i s o r y S e r v i c e s , I n c . , C h a r l e s t o n , S o u th C a r o l i n a , m anagem ent c o n s u l t i n g s e r v i c e s o f a t y p e s i m i l a r t o t h a t w h ic h w o u ld be a u t h o r i z e d by t h e proposed r e g u l a t i o n . T h u s , t h e p r o p o s e d amendment i s l i m i t e d t o m anage m ent c o n s u l t i n g s e r v i c e s f o r n o n - a f f i l i a t e d b a n k s a n d d o e s n o t c o n t e m p l a t e t h e f u r n i s h i n g o f s u c h s e r v i c e s b y a ba n k h o l d i n g company t o n o n -b a n k in g co m p an ies. u n a ffilia te d , The p r o p o s e d b a n k m anagem ent c o n s u l t i n g a c t i v i t y and t h e a p p l i c a t i o n o f The C i t i z e n s fit S o u t h e r n C o r p o r a t i o n a r e s u b j e c t t o t h e p r o c e d u r e s o f § 2 2 5 . 4 ( b ) o f R e g u l a t i o n Y. A c c o r d i n g l y , t h e B o a rd p r o p o s e s t o amend § 2 2 5 . 4 ( a ) o f Regu l a t i o n Y t o p e rm it bank h o ld in g c o m p an ies, s u b je c t t o th e p ro c e d u re s 3o f § 2 2 5 . 4 ( b ) , t o p e r f o r m m anagem ent c o n s u l t i n g s e r v i c e s f o r b a n k s o n l y . The t e x t o f t h e p r o p o s e d amendment r e a d s a s f o l l o w s t § 225*4 N on b a n k in g a c t i v i t i e s (a) A c t i v i t i e s c l o s e l y r e l a t e d t o b a n k i n g o r m an a g in g o r c o n tro llin g banks. * * * x h e f o l l o w i n g a c t i v i t i e s h a v e b e e n d e t e r m i n e d by t h e B oard t o b e a p r o p e r i n c i d e n t t h e r e t o : * * * * * ( 1 1 ) p r o v i d i n g m anagem ent c o n s u l t i n g s e r v i c e s f o r n o n - a f f i l i a t e d b a n k s , i n c l u d i n g , b u t n o t l i m i t e d t o , s i t e p l a n n i n g and e v a l u a t i o n , a d v i c e r e g a r d i n g b a n k m e r g e r s and t h e e s t a b l i s h m e n t o f new b r a n c h e s , p e r s o n n e l r e c r u i t m e n t and t r a i n i n g , m a r k e t i n g , c a p i t a l a d e q u a c y and p l a n n i n g , a c c o u n tin g p r o c e d u r e s , in v e stm e n t a d v ic e (as a u th o r iz e d in su b p a ra g rap h ( 5 ) ) , a nd c o m p u te r o p e r a t i o n s , p r o v i d e d t h a t pany n o r any o f i t s th e c l i e n t bank; ( i ) n e i t h e r t h e b a n k h o l d i n g com s u b s i d i a r i e s own o r c o n t r o l a n y e q u i t y s e c u r i t i e s in ( i i ) no o f f i c e r , d i r e c t o r , o r em p lo y e e o f t h e b a n k h o l d i n g company o r a ny o f i t s s u b s id ia r ie s se rv e s as an o f f i c e r , d i r e c t o r , o r em p lo y ee o f t h e c l i e n t b a n k ; (iii) t h e s e r v i c e s a r e p e r f o r m e d on a n e x p l i c i t f e e b a s i s w i t h o u t r e g a r d t o c o r r e s p o n d e n t b a l a n c e s m a i n t a i n e d by t h e c l i e n t b a n k a t a n y s u b s i d i a r y b a n k o f t h e b a n k h o l d i n g com pany; and ( i v ) d i s c l o s u r e i s made t o e a c h p o t e n t i a l c l i e n t b a n k o f ( a ) t h e names o f a l l b a n k s w h ic h a r e a f f i l i a t e s o f t h e c o n s u l t i n g company and ( b ) t h e names o f a l l o t h e r c l i e n t b a n k s l o c a t e d i n t h e same m a r k e t a r e a a s t h e c l i e n t bank. -4 - To a i d i n t h e c o n s i d e r a t i o n o f t h e s e m a t t e r s b y t h e B o a r d , i n t e r e s t e d p e rs o n s a r e i n v i t e d t o su b m it r e l e v a n t d a t a , v ie w s , o r a rg u m ent* Any s u c h m a t e r i a l s h o u l d b e s u b m i t t e d i n w r i t i n g t o t h e S e c r e t a r y , B oard o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s te m , W a s h i n g t o n , D. C. t o be re c e iv e d n o t l a t e r th a n J u ly 31, 1973* 20551, Such m a t e r i a l w i l l b e made a v a i l a b l e f o r i n s p e c t i o n and c o p y in g u p o n r e q u e s t e x c e p t a s p r o v i d e d i n s e c t i o n 2 6 1 . 6 ( a ) o f t h e B o a r d 's R u l e s R e g a r d in g A v a i l a b i l i t y o f I n f o r m a tio n . The a p p l i c a t i o n o f The C i t i z e n s and S o u t h e r n C o r p o r a t i o n may be i n s p e c t e d a t t h e o f f i c e o f t h e B o a rd o f G o v e r n o rs o r a t t h e F e d e r a l R e s e r v e Bank o f R ichm ond. B oard o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s te m , J u n e 1 8 , 1 9 7 3 . ( S i g n e d ) C h e s t e r B. F e l d b e r g Chester B. Feldberg Assistant Secretary of the Board [SEAL]
@FedFRASER