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F ederal R eser ve Bank
OF DALLAS
W IL L IA M
H. W ALLACE
DALLAS, TEXAS 7 5 2 2 2
F IR ST V ICE P R E S I D E N T
AND C H IE F O P E R A T IN G O F F IC E R
December 22, 1988
Circular 88-90
TO:
The Chief Executive Officer of
all financial institutions in the
Eleventh Federal Reserve District
SUBJECT
Request for public comment to rescind an existing rule and proposed
amendments to Regulation Y - Bank Holding Companies and Change in Bank Control
DETAILS
The Board of Governors of the Federal Reserve System has requested
public comment on a proposal to rescind the Board's existing rule in
Regulation Y permitting bank holding companies, through their state banks, to
establish or acquire nonbank companies engaged in activities that may be
conducted by the parent bank (so-called operations subsidiaries).
The Board requests comment on a proposal to establish an expedited
notice procedure for bank holding companies seeking to establish or acquire
operations subsidiaries through their state banks in the future.
Finally, the Board also is requesting comment on a proposal to
permit bank holding companies that have established operations subsidiaries in
reliance on the Board's current rules to retain all or most of these
subsidiaries without further approval.
Comments should be addressed to Mr. William W. Wiles, Secretary,
Board of Governors of the Federal Reserve System, Washington, D.C. 20551. All
correspondence should refer to Docket No. R-0652 and must be received by
January 30, 1989.
ATTACHMENTS
The Board's press release and the material as published in the
Federal Register are attached.
MORE INFORMATION
For further information, please contact Basil Asaro at (214)
744-7400, Gayle Teague at (214) 744-7312, or Dean A. Pankonien at (214)
651-6228.
Sincerely yours,
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules______ 48915
12 CFR Part 225
[R egulation Y; D ocket No. R-0652]
Bank Holding Companies and Change
in Bank Control; Rescission of Existing
Regulation Regarding Investments in
Voting Shares of Nonbanking
Companies by State Banks Owned by
Bank Holding Companies
Board of Governors of the
Federal Reserve System.
a c t i o n : Soliciation of public comment.
agency:
In light of a number of recent
developments, the Federal Reserve
Board is soliciting public comment
regarding a proposal to rescind its
existing regulation permitting bank
holding companies to acquire, through
their subsidiary state banks, shares of
companies engaged in activities that the
bank is permitted to conduct under state
law, so-called operations subsidiaries. If
the existing rule is rescinded, bank
holding companies would be required by
the Bank Holding Company Act to
obtain approval under section 4(c)(8) of
the Act prior to establishing or
acquiring, through their state banks,
operations subsidiaries, unless the
transaction is otherwise authorized
under the A ct
The Board is also requesting comment
regarding a proposal to grandfather all
or most existing subsidiaries of holding
company banks acquired in reliance on.
and in conformance with, this
regulation. In addition, the Board
requests comment on a proposal to
establish an expedited notice procedure
for future proposals by bank holding
companies, through their state banks, to
establish or acquire operations
subsidiaries under section 4(c)(8) of the
Bank Holding Company Act.
s u m m a ry :
48916
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
d a t e : Comments must be received by
January 30.1989.
ADDRESS; All comments, which should
Tefer to Docket No. R-0052. should be
mailed to William W. Wiles, Secretary,
Board of Governors of the Federal
Reserve System, Washington, DC 20551,
or delivered to Room B-2222,20th and
Constitution Avenue NW., Washington.
DC, between 8:45 ajn. and 5:15 p.m.
weekdays. Comments may be inspected
in Room B-1122 between 8:45 a.m. and
5:15 p.m. weekdays.
FOR FURTHER INFORMATION CONTACT:
J. Virgil Mattingly, Deputy General
Counsel (202/452-3583), Scott G.
Alvarez, Senior Counsel (202/452-3583),
Legal Division; or Sidney M. Sussan,
Assistant Director (202/452-2638),
Division of Banking Supervision and
Regulation, Board of Governors of the
Federal Reserve System, Washington,
DC 20551. For the hearing impaired only.
Telecommunications Service for fee
Deaf, Eamestine Hill or Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Introduction
The Board has had under review for
some time the legal and policy issues
associated with the application of the
nonbanking provisions of section 4 of
the Bank Holding Company Act (MBHC
Act”) to subsidiaries of holding
company banks. In light of a number of
developments, including the enactment
of the insurance amendments to section
4(c)(8) of the Act. the expansion of the
powers authorized for subsidiaries of
state banks under a number of state
statutes, petitions and requests for
rulemaking by a number of parties
regarding the coverage of these
subsidiaries under the Act, and the
recent decision by the U.S. Court of
Appeals for the District of Columbia
Circuit in AMBAC,1 the Board has
decided that it is now appropriate to
resolve these issues.
Accordingly, after reexamining the
governing provisions of the Act, the
Board has decided to ask for public
comment on a proposal that would
rescined its existing regulation that
permits state banks owned by bank
holding companies to acquire, without
approval under the Bank Holding
Company Act so-called operations
subsidiaries—companies that are
wholly-owned by fee state bank and
that engage only in activities that fee
bank may conduct directly under state
1American Insurance Association v. Clarke, 854
F. 2d 1405 fD.C Cir. 1988) ['AMBACT), rehearing
granted. October 24,1888.
law.* The result of this proposed
amendment would be to require bank
holding companies to obtain approval
under the closely related to banking
standards of section 4(cK8) of the Act
for their subsidiary state banks to
acquire or retain control of such
operations subsidiaries or their voting
shares, unless control of fee subsidiary
is permitted without an .application
under one of fee other limited
exemptions in fee Act [e.g„ for servicing
activities (12 U.S.C. 1843(c)(1)). The
proposal would provide grandfather
rights for certain existing operations
subsidiaries and establish expedited
notice procedures for future acquisitions
of operations subsidiaries by holding
company state banks.
The Board’s state bank operations
subsidiary rule, which was adopted in
1971, provides feat state banks owned
by bank holding companies may,
without Board approval under fee A ct
acquire or retain all of fee voting shares
of companies that engage solely in
activities feat fee bank may conduct
directly under applicable state law, at
locations at which the bank may
conduct the activity and subject to other
limitations feat would be applicable if
fee bank were conducting fee activity.*
The Board has a similar rule for
operations subsidiaries of national
banks authorized in accordance wife
regulations of fee Comptroller of the
Currency.4
In adopting these rules in 1971, fee
Board noted feat it did so based upon
notions of competitive equity between
independent banks and holding
company banks and m fee absence of
evidence feat acquisitions by holding
company banks were resulting in
evasions of fee Act 36 FR 9292 (1971).*
At that time, fee powers of operations
subsidiaries of banks were limited and
approval for operations subsidiaries
was required by the hanking authorities.
Thus, there was no significant conflict
between fee scope of activities
permitted for bank holding companies
* 12 CFR 225.22(d)(2){ii). As discussed below, the
Board does not propose to rescind or alter its
current rule permitting state banks owned by bank
holding companies to aquire shares of the kinds and
amounts explicitly eligible by federal statute for
investment by a national bank. 12 CFR
22&22(dX2Xi).
3 12 CFR 225.22fdH2)(ii).
* 12 CFR 225.22(d)(1). As discussed below, die
Board is not proposing any action regarding this
regulations pending the decision of the Court in
AMBAC.
* At year-end 1971. bank holding companies
controlled 2,420 banks, or approximately 18 percent
of the total banks in the United States. These banks
held approximately 57 percent of the total assets in
commercial banks in the country. By year-end 1987.
bank holding companies controlled 8,316 banks with
92 percent of assets in commercial banks.
and their direct and indirect nonbank
subsidiaries under fee dosely related to
banking and proper incident standards
of section 4(c)(8) of the Act and fee
Board's rules. The Board, however,
recognized that over time these rules
could become fee focus for evasion of
section 4(c)(8) of fee Act and cautioned
feat it would review fee merits of its
decisions not to apply fee Act to these
subsidiaries from time to time based
upon its experience in administering fee
A ct Id
In 1982, Congress amended section
4(c)(8) of the BHC Act to provide feat
wife certain exceptions, insurance
activities are not closely related to
banking, thereby eliminating fee Board’s
discretion to permit bank holding
companies to engage in these activities.6
This amendment raised fee question of
the continued appropriateness of the
Board's operations subsidiaries rules
because, for fee first time, these rules
potentially permit nonbank subsidiaries
of holding companies to engage in
activities feat fee Board had no
discretion to permit for bank holding
companies and their direct and indirect
nonbank subsidiaries. In addition, in
connection wife its 1983 update and
revision of Regulation Y, fee Board
received substantial comment that these
rules were not consistent wife fee terms
and intent of the BHC Act because they
permitted holding companies to acquire,
through subsidiary banks, companies
engaged in activities not permissible
under fee A ct The Board has also
become concerned feat fee risk
nonbanking activities in subsidiaries of
banks outside the framework and
safeguards Congress established in fee
BHC Act for fee conduct of nonbanking
activities within a bank holding
company organization.
For these reasons, fee Board deferred
final action on fee operations subsidiary
rules in its 1983 Regulation Y rulemaking
pending completion of certain related
proceedings involving the insurance and
real estate investment and development
powers of bank holding companies and
consideration by Congress of the
appropriateness of expanded powers for
banking organizations and fee structural
arrangements and prudential limitations
feat should govern fee exercise of these
powers.’ The recent decision by the
Court of Appeals in AMBAC feat a
holding company national bank may not
acquire an operations subsidiary
without compliance with section 4(c)(8)
* Garn-St Germain Depositiory Institutions Acl of
1982, Pub. L 97-320, Title VL 96 Stat. 14®, 15361538 [1982).
1 49 FR 7S4, 797. 811 (1984): 52 FR 543, 545 (1987).
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
of the BHC Act has focused the Board's
attention on the need to resolve the
issues raised by these rules.
A. Acquisition o f Voting Shares and
Subsidiaries by Holding Company State
Banks Under the Nonbanking Porvisions
o f the Bank Holding Company A ct
In light of the above developments,
the Board has reexamined the legal
basis for the state bank operations
subsidiary rule, including, particularly,
the scope of coverage of the nonbanking
provisions of section 4(a) of the act as
they apply to subsidiaries of holding
company banks, and the existence of
any provisions in the Adt that would
permit acquisitions of operations
subsidiaries without section 4(c)(8)
approval. Based upon that
reexamination and in light of judicial
decisions regarding the Board's
discretionary authority under the Act,
the Board is concerned that the current
state bank opeations subsidiary rule
may not be consistent with the terms of
the A ct Accordingly, the Board is
proposing to rescind this rule and is
requesting public comment on the
proposal.
Since enactment of the Act in 1956,
the Board has consistently held that the
nonbanking provisions of section 4(a) of
the Act apply to the acquisition and
retention of the voting shares of
nonbank companies by holding
company banks because such shares are
deemed indirectly held by the parent
holding company under the Act. See e.g.
12 CFR 225.101 and 102. As discussed in
Part III, the literal language of the Act
leaves no room for doubt as to the
correctness of this position.* The overall
structure of the Act, reflecting the line
drawn by Congress in the Act between
banking and nonbanking companies,
and its legislative history and itnent
support this position.
Accordingly, the Board believes that
when a bank controlled by a bank
holding company seeks to acquire or
retain control of a nonbank company or
its voting shares, that transaction is
subject to the nonbanking provisions of
section 4(a) of the BHC Act and, to be
permissible, must fall within one of the
exemptions to these prohibitions.
There is no express exemption in the
Act that permits a state bank owned by
* Under section 4(a) of the Act, a bank holding
company many not acquire or retain direct or
indirect control of the voting shares of any company
other than a bank and may not control any
subsidiary other than banks and other subsidiaries
authorized under the Act. 12 U.S.C. 1843(a). Under
the Act's definitions, a subsidiary of a holding
company bank is deemed to be an indirect
subsidiary of the holding company and its shares
are deemed to be indirectly held by the holding
company. 12 U.S.C. 1841(g)(1).
a bank holding company, without
compliance with section 4(c)(8), to
acquire or retain control of a company
engaged ;n any activity that may be
authorized for the bank under state law
or of the voting shares of such a
company; and the Board cited no such
exemption when the rule was adopted in
1971. Moreover, in lightof judicial
decisions since the operations
subsidiary rules were adopted in 1971
concerning the scope of the Board’s
authority under the Act,9 the Board does
nto believe that it is authorized under
the Act, as a matter of regualtory
discretion or forbearance, to provide a
regulatory exemption permitting such
acquisitions without compliance with
the closely related to banking and public
interest standards and procedural
requirements of section 4(c)(8).
For the foregoing reasons, the Board is
asking for comment on a proposal to
rescind the state bank operations
subsidiary rule (12 CFR 225.22(d)(2)(ii)),
thereby requiring that the acquisition
and retention of operations subsidiaries
and their voting shares meet the closely
related to banking and proper incident
standards of section 4(c)(8) of the Act
(unless the transaction fits under any of
the other limited exemptions in the
Board’s Regulation Y).
B. Consistency o f Proposal With Dual
Banking System Principles
The Board wishes to emphasize that
the principles of die dual banking
system as reflected in the terms and
legislative intent of the BHC Act would
be unaffected by application of the Act
to operations subsidiaries of holding
company state banks. In the 1956 Act,
Congress recognized these principles by
limiting the coverage of the nonbanking
provisions of the Act to bank holding
companies and their direct and indirect
nonbank subsidiaries. The appropriate
range of activities for state and national
banks, which are authorized,
respectively, by the states and the
Comptroller, was deliberately left
unaffected by the prudential limitations
established under section 4(c)(8) of the
BHC A ct The Board has adhered to this
view of the line drawn by Congress in
section 4 of the Act between banks and
nonbanking companies since its
enactment in 1956, and has recently
reaffirmed that position. See Merchants
* See. eq., Board o f governors o f the Federal
Reserve System v. Dimension financial Corp., 474
Uj>. 861. 368 (1986) (if the language of the BHC Act
“is clear and unambiguous, ‘that is the end of the
matter, for the court, as well as the agency, must
give cffect to the unambiguously expressed intent of
Congress' ”, quoting Chevron US~A., Inc., v. Natural
Resources Defense Council, lnc~, 467 U.S. 837,842843 (1984).
48917
National Corporation, 73 Federal
Reserve Bulletin 876,878-60 (1987).10
Because the nonbanking provisions of
the Act apply only to holding companies
and their nonbank subsidiaries, the
direct activities of state and national
banks and the actions of regulatory and
state legislative bodies as they apply to
the direct activities of banks are entirely
unaffected by section 4 of the BHC A ct
Thus, a decision that section 4 of the
BHC Act applies to nonbank
subsidiaries of holding company state
banks does not limit the authority of
states to determine the appropriate
range of activities for banks, whether or
not owned by holding companies, and
does not upset the principles of the dual
banking system.
C. Impact o f the Decision on Operations
Subsidiaries o f State Banks
Similarly, the Board does not believe
that a decision to rescind the state bank
operations subsidiary rule would unduly
disrupt existing relationships or result in
substantial new regulatory burdens. For
example, the Board's proposal to
eliminate the state bank operations
subsidiary rule does not mean that it
would be unlawful for state banks in a
holding company system to establish
operations subsidiaries or that their
activities must be terminated or moved
into the bank.
In this regard, the Board notes that
most of the activities permitted for state
banks are also permissible for bank
holding companies under the BHC Act
and that many bank holding companies
already have approval to engage in the
activities on the Regulation Y list
directly and through their subsidiaries,
including operations subsidiaries.
Moreover, as discussed in Part n, the
Board would emphasize that the
proposal to rescind its state bank
operations subsidiary rule gives
appropriate consideration to
grandfathering acquisitions by banks in
reliance on the Board’s current
regulation.
In those cases where BHC Act
approval has not been secured, the
Board is proposing rules that would
permit approval under an expedited
notice procedure. The procedure would
give full consideration to the authorizing
actions of state bank regulatory
authorities and would allow holding
companies banks to proceed to acquire
operations subsidiaries engaged in
activities listed in Regulation Y unless
notified within a short period of time
10 vacated on other grounds sub nom.
Independent Ins. Agents of America v. Board of
Governors, 838 F.2d 627 (2d Cir. 1988).
48918
Federal Register / Vol. 53, No. 233 / Monday, December 5. 1988 / Proposed Rules
that the activity of the subsidiary was
inconsistent with the safety and
soundness and other prudential
provisions of section 4(c)(d) of the A ct
D. Implications for Bank Regulation
Application of the BHC Act to holding
company state bank operations
subsidiaries would further a
fundamental policy objective of bank
regulation in the powers area. The
Board has taken the position that it is
necessary to expand the activities in
which banking organizations may
engage, particularly in the securities
area, in order to assure their competitive
vitality in a rapidly changing financial
environment To accomplish this
objective the Board has considered it
essential that these activities take place
in a subsidiary of a holding company
rather than in a holding company bank
or in a subsidiary of a bank.
The purpose of this organizational
structure is to separate more effectively
than through other available techniques
these new functions from the benefits of
the federal safety net, which consists of
access to Federal Reserve credit and
federal deposit insurance. This
separation is required for two reasons:
(1) To assure that the risks of these
activities are not passed on to the
federal safety net, and (21 to assure that
competition is not distorted by the
'Support for depository institutions that
is an aspect of the federal safety n e t
Application of the Act to holding
company state bank subsidiaries would
help to accomplish these goals by
assuring that activities that pose a risk
to the federal safety net will be
conducted in entities that are much
more effectively insulated from their
bank affiliates. The Board is sensitive to
the concern that these goals might be
achieved only as a result of additional
regulatory burdens and at die cost of
limiting the scope of initiative at the
state level. The Board believes,
however, that effective and flexible
administration of the BHC Act, such as
through the options discussed in Part Q,
will allow these goals to be
accomplished without imposing
substantial new regulatory burdens, or
unduly limiting the initiative of state
authorities to adapt banking powers to
market realities.
K Applicability o f Section 4(c)(5) o f the
A ct to Permit Acquisition o f Shares by
Holding Company State Banks.
The Board notes that section 4(c)(5) of
the Act also does not by its terms
authorize the acquisition of operations
subsidiaries by holding company state
banks. Under section 4(c)(5), a holding
company may acquire, without an
application or compliance with the
prudential safeguards of section 4(c)(8)
of the A ct “shares which are the kinds
and amounts eligible for investment by
national banking associations under the
provisions of section 5138 of the Revised
Statutes’*. 12 U.S.C. 1843(c)(5). It is clear
that section 4(c)(5) does not authorize
bank holding companies or their
subsidiaries to make either direct or
indirect investments that may be
permissible for state banks under state
law. As noted above, there is no other
provision in the BHC Act feat would
have this effect for state bank
acquisitions.
The Board has interpreted section
4(c)(5) as permitting holding company
state banks to acquire shares of
companies only of the kinds and in the
amounts listed or cross-referenced in
section 5136 of fee Revised Statutes as
eligible for investment for national
banks.11 The Board continues to believe
that this section of its rules is fully
consistent wife the terms of fee A ct and
feus is proposing to readopt this rule.
This existing rule is also consistent
with the Board’s rules implementing
section 4(c)(5) as they apply to the
acquisition of shares by bank holding
companies directly and by their direct
nonbank subsidiaries. 12 CFR
225.22(c)(4). In 1971. at fee time it
adopted fee state bank operations
subsidiary rule, the Board also adopted
rules implementing section 4(c)((5) that
provide that a bank holding company
and its nonbank subsidiaries may
acquire voting shares under section
4(c)(5), but only if the shares were of the
limited range explicitly eligible by
federal statute for investment by a
national bank.1* At that time, the Board
recognized that if section 4(c)(5) is
deemed to go beyond the limited range
of shares authorized by statute for
national banks to invest in, the carefully
established Congressional framework in
section 4(c)(8) for authorization of fee
activities of holding companies and their
nonbank subsidiaries would be upset19
»* 12 CFR 225-22fcf)(2}fT}. The voting share* which
am Hated as eligible for investment under section
5136 include thoee of-bankers' banks and bankers’
bank holding companies op to 10 percent of capital
and surplus, agricultural credit companies up to 20
percent of capital and surplus, and aafe-depoeit
companies up to 15 percent of capital and surplus.
Section 5138 also cross-ref«r»nce» investments in
stock specifically authorized under other statutes,
which also are limited in amount. E.g., shares of
Edge Act and Agreement Corporations up to 10* of
capital and surphus, (12 U.S.C. 601.818), small
business investment companies up to 5% of capital
and surplus. (15 U-S.CL 881), and bank sarvk*
corporations op to 10% of capital and surplus (12
U.S.C. 1882).
'* 12 CFR 225.22(c)(4).
’• The Board stated that unless section 4(c)(5)
were so interpreted “Congress' purpose in amending
In this regard, fee Board notes th at
unless section 4(c)(5) is read as reflected
in § 225.22(c)(4) of Regulation Y, direct
acquisitions by holding companies of
finance, mortgage banking, leasing, data
processing, and similar companies
engaged in activities permissible for
national banks would be permissible
without regard to fee capital adequacy,
conflict of interest safety and
soundness and other public benefits
criteria of section 4(c)(8). Moreover,
these acquisitions, in many cases
involving substantial portions of fee
capital resources of fee holding
company, would be subject to no
regulatory review.
The Board notes feat the Court of
Appeals in AMBAC has granted a
petition by the Comptroller for rehearing
of the BHC Act issues in that case which
involve fee acquisition of shares by a
holding company national bank in
reliance on section 4(c)C5) and the
Board's national bank operations
subsidiary rule (12 CFR 225.22(d)(1)).
Accordingly, the Board is taking no
action to complete its rulemaking
proceeding with respect to S 225.22(d)(1)
at this time. Depending on fee outcome
of the AMBAC case and this rulemaking
proceeding, the Board will consider
appropriate action regarding this section
of its rules.
F. Applicability o f Section 7 o f the A ct
to the Acquisition By Holding Company
State Banka o f Operations Subsidiaries
and Their Shares.
The Board has also considered
whether, as some argue, section 7 of fee
Act authorizes fee Board’s state bank
operations subsidiary rule. Section 7
provides that “fee enactment by fee
Congress of the (BHC) Act shall not be
construed as preventing any State from
exercising such powers and jurisdiction
which it now has or may hereafter have
with respect to companies, banks, bank
holding companies, and subsidiaries
thereof.” 12 U.S.C 1846.
That section does not and was not
intended to, limit fee applicability of fee
nonbanking provisions of section 4, or
provide an exemption for state bank
operations subsidiaries. As fee Supreme
Court has noted, section 7 is intended
only “to define fee extent of fee (Act’s)
pre-emptive effect on state law.” Lewis
v. BTInvestm ent Managers, Inc. 447
U.S. 27,49 (1980). The Senate Report on
section 4(c)(8) might be substantially nullified.” 30
FR 143a 1431: see id at 3292 (1971). In its 1S84
rulemaking regarding section 4(c)(5), the Board
reaffirmed this view, a view that haa been accepted
by the banking industry, insofar as the bank holding
companies themselves ai_ concerned, without
dissent. 48 FR 23.529 (1983).
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
the original 1956 Act is explicit that
section 7 was intended to make it dear
that while the states retained
concurrent jurisdiction over banks and
bank holding companies, "a State could
not enact legislation inconsistent with
the bill and therefore nullify its
effect” 14
The fact th a t under this interpretation
of section 7 of the A ct the Board and
the state banking authorities would
share concurrent jurisdiction over
nonbank subsidiaries of holding
company state banks is not new in the
federal banking laws. For example, the
Board and the states share supervisory
authority over state member banks,
including the scope of their activities.1*
as do the FDIC and the states with
respect to nonmember banks.1*
Moreover, the BHC Act grants the Board
full examination, reporting, and
subpoena authority over national and
state banks owned by bank holding
companies, even though the Comptroller
and the states have similar authority
over national and state banks,
respectively* 12 U.S.C. 1844(c). The
Supreme Court has recognized that the
regulatory framework of the BHC Act
overlaps with statutes administered by
other banking authorities, and has left
no doubt that, in such situations, the
requirements of the BHC Act prevail.
Board o f Govenrors v. First
Lincolnwood Corp., 439 U.S. 234,240-41,
250-51 (1978).
EL Proposed Rules Governing the
Acquisition and Retention of Operations
Subsidiaries by Holding Company State
RanW under the Bank Holding
Company A ct
A. Generally
Rescission of the state bank
operations subsidiary rule would require
bank holding companies to obtain
approval under section 4(c)(8) of the Act
in order for their subsidiary state banks
to acquire operations subsidiaries or for
these subsidiaries to commence
nonbanking activities (unless the
acquisition falls under one of the other
exemptions in the A ct e.g., servicing
activities). In order to minimize the
impact and regulatory burdens on these
future acquisitions or proposals, the
Board is requesting comment on an
expedited 30-day notice procedure
under which bank holding companies
could seek the necessary approval under
section 4(c)(8).
>« s. Rep. No. 1095. pt. 2. frttb Cong- 2d Seas. S
(1986); 102 Cong. Rec. 6751.6758 (195ft> (rau u k s of
Senator Robertson).
»• See *.g. 12 U-&C 322.12 CFR
“ See 12 U.S.G IMS.
The Board also recognizes that a
number of bank holding companies have
acquired operations subsidiaries,
through their subsidiary state banks,
without approval under section 4(c)(8),
in reliance on the Board’s existing state
bank operations subsidiary regulation.
Rescission of this rule would require
these bank holding companies to obtain
approval under section 4(c)(8) of the Act
to retain these operations subsidiaries
unless the retention is otherwise
authorized under the A ct
The Board notes that a great number
of bank holding companies already have
the necessary approval under section
4(c)(8) to acquire or retain operations
subsidiaries engaged in a broad range of
activities. For these companies, no
further approval under the Act would be
required if the operations subsidiary
rule were rescinded. Under existing
rules, a bank holding company that has
secured approval under section 4(c)(8) to
engage in a nonbanking activity, either
directly or through a subsidiary, may
open a new office or create a new
subsidiary to conduct the activity,
generally without further approval under
the A ct 12 CFR 225.23(b)(1). For
example, a bank holding company that
has secured approval under section
4(c)(8) to engage in lending activities
without geographic limit could conduct
this activity on a de novo basis through
any of its subsidiaries. Including through
an operations subsidiary of one of its
state banks, without further approval
under the A ct
Where the bank holding company has
not previously obtained approval under
section 4(c)(8) of the Act for a particular
activity conducted by an operations
subsidiary, the Board is proposing for
comment a rule that would permit bank
holding companies, without an
application under section 4(c)(8) of the
Act to retain all or most existing
operations subsidiaries acquired in
reliance on the Board's current rule.
B. Future Acquisitions o f Operations
Subsidiaries
1. Listed Activities. The Board
proposes to establish an expedited 30day notice procedure for backing
holding companies seeking approval
under section 4(c)(8) of the Act to
acquire, through a subsidiary state bank,
an operations subsidiary engaged in
activities the Board has previously
found by regulation to be closely related
to banking or for such a subsidiary to
commence, or acquire assets or shares
of a company engaged in. these
activities. Under the proposed
procedure, holding company state banks
may establish operations subsidiaries.
48919
insofar as the BHC Act is concerned,
after the holding company provides the
appropriate Reserve Bank with 30 days
prior written notice of the proposal. This
expedited notice procedure would apply
to operations subsidiaries that are
wholly owned by the state bank, as
under the existing rule, and that engage
in activities that are both permissible
under state law for the bank directly
and that the Board has determined, by
regulation, to be closely related to
banking under section 4(c)(8). The Board
asks for comment on whether the notice
procedures should also be available for
activities that have been found closely
related to banking by order in an
individual case.17
The notice required under this
procedure would be limitd to a brief
description of the proposal and the
activity that would be conducted by the
operations subsidiary, a reference to the
relevant provisions of Regulation Y or
Board order that found the activity to be
closely related to banking, and a copy of
any notice or application submitted by
the state bank to its primary regulator
for approval to establish or acquire the
operations subsidiary under state law or
for the subsidiary to commence a new
activity.
The appropriate Reserve Bank would
act on all notices submitted under this
procedure within 30 days of their
submission in accordance with the
existing expedited notice procedures in
3 225.23(a)(1) of Regulation Y. the
proposed notice procedure would be
available not only for de novo
proposals, but also could be used for
proposals to acquire the shares or assets
of going concerns. As an alternative, the
Board asks for comment on whether the
notice procedure should be limited to
proposals to engage de novo in listed
activities, and a fuller application
required for acquisitions of going
concerns, as is the case under existing
rules for bank holding companies. 12
CFR § 225.23(a)(2).
The Reserve Bank would have the
discretion to require an application or
fuller information regarding a proposal
described in the notice, but would
generally do so only where the bank
holding company does not meet the
Board’s capital adequacy guidelines, or
where the condition of the bank holding
company organization or the nature of
the proposed new activity warrants a
more extensive analysis.
•’ If the Board adopts this procedure, it proposes
to amend its existing rules to allow bank bolding
companies to file notices for suck acquisitions also.
12 CFR 225.23(a)(1).
48920
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
The Board asks for comment on
whether there are certain activities on
the Regulation Y list of closely related to
banking activities that should not be
permitted for a subsidiary of a holding
company bank, but only allowed
through a direct subsidiary of the bank
holding company.
2. Unlisted Activities. In the case of
proposals by operations subsidiaries
involving activities that have not been
added to the list of permissible activities
in § 225.25(b) of Regulation Y, the Board
proposes to require an application under
the procedures currently established in
the Board’s regulations for such
proposals. See 12 CFR 225.23(a)(3).
In considering these applications, the
Board will give full consideration to the
finding by the state that the activity is
permissible for state banks in that state.
In this regard, in determining whether
an activity is closely related to banking,
the Board and the courts have looked
primarily to whether banks in fact
conduct the activity.18
C. Retention o f Existing Operations
Subsidiaries
To deal with the impact of the
proposed rescission of § 225.22(d)(2) on
existing operations subsidiaries, the
Board is requesting public comment on a
proposal that would permit bank holding
companies, without further approval
under the BHC A ct to retain operations
subsidiaries held by their subsidiary
state banks in compliance with/that
regulation on November 21,1988, the
date of the proposal to rescind
§.225.22(d)(2). Entitlement to this
provision would be available only if the
operations subsidiary was in
compliance with that rule on November
21,1988, that is, the subsidiary must be
wholly-owned by the parent bank
(except for directors’ qualifying shares)
and the subsidiary must be engaged
only in activities that the parent bank
could conduct directly under relevant
state law at locations at which the bank
could conduct the activities.
The Board notes that the courts have
ruled in a number of cases that changes
in regulations that adversely affect
parties should ordinarily be applied only
prospectively.19 The courts have been
particularly concerned about retroactive
application of new regulations in
circumstances in which affected parties
have reasonably relied on the existing
regulation in conducting their affairs
•• National Courier Assn. v. Board o f Governors.
516 F.2d 1229 (D.C. Cir. 1975)
** See. e.g.. Georgetown University Hospital?.
Bowen, 021 F.2d 750 (D.C Cir. 1987), cert, granted.
108 S. C t 1073 (1988); Sam v. United States. 682 F.2d
925 (Ct Cl. 1982), cert denied 459 U.S. 1146 (1983).
and would suffer detriment under the
new rule.20
The Board believes it important to
consider that the great majority of
operations subsidiaries acquired in
reliance on § 225.22(d)(2)(ii) engage in
lending, leasing, trust and other
activities that are closely related to
banking and permissible for bank
holding companies under section 4(c)(8).
In addition, many of these operations
subsidiaries were formed de novo,
rather than through acquisition of going
concerns, and their retention and
continued operation would be likely to
promote competition, increase customer
convenience, and enhance operating
efficiencies. Retention of these
subsidiaries also would not involve
additional expenditures of funds or
increased debt. Consequently, the
financial impact of the retention
proposal should in most cases be
negligible. For these reasons, the Board
believes retention of these subsidiaries
would, as a general matter, satisfy the
requirements under section 4(c)(8) that
the activity be closely related to banking
and that the public benefits of the
proposal outweigh its adverse effects.
The Board notes that under the
grandfather proposal, bank holding
companies, in some cases, could retain
indirectly operations subsidiaries that
engage in activities that the Board has
not determined to be closely related to
banking, such as certain insurance or
real estate development activities.21
The Board requests comment on
whether under the principles articulated
by the courts regarding the retroactive
application of agency rules, as discussed
in the cases noted above, the Board is
authorized to apply any rescission of its
operations subsidiary rule only
prospectively, thereby permitting bank
holding companies to retain these
subsidiaries as well as subsidiaries
conducting activities that have been
determined to be closely related to
banking. The Board also seeks comment
on whether, if it is so authorized, it
should permit these subsidiaries to be
retained or should prohibit their
retention without an application and
compliance with the standards of
section 4(c)(8) of the Act.
The Board further asks for comment
on whether, from the point of view of
the prudential standards in section
4(c)(8), the Board should permit
activities that involve high risk, such as
real estate development if it were
authorized under section 4(c)(8) of the
Act for bank holding companies, to be
conducted only through a direct
subsidiary of the bank holding company
subject to appropriate prudential
limitations and not through subsidiaries
of holding company banks.
The Board further asks for comment
on whether the proposed grandfather
rule should contain a provision
permitting the Board to determine, in an
individual case, after notice and
opportunity for the affected bank
holding company to comment that a
particular activity that has not
previously been determined by the
Board to he closely related to banking,
is not permissible under the standards
set forth in section 4(c)(8) of the Act and
must, therefore, be terminated by the
company.
Finally, the Board asks for comment
as to whether to limit the grandfather
proposal for operations subsidiaries
established under $ 225.22(d)(2) prior to
November 21,1988, to only those
subsidiaries engaged in activities
previously found by the Board, by
regulation or order, to be closely related
to banking under section 4(c)(8).
Because these subsidiaries would meet
the Act’s closely-related to banking
standard and because, as discussed
above, the retention of the subsidiary
would be likely to result in public
benefits that outweigh potential adverse
effects, the Board believes that this
option would satisfy the terms of section
4(c)(8) and that individual applications
to retain these subsidiaries would not be
required. In support of this proposal, the
Board notes that under section 4(c)(8)
the Board may act by order or by
regulation in authorizing nonbanking
proposals. As discussed above, the
Board is asking for comment on whether
it should require that certain of these
activities that may involve high risk
should be conducted only through direct
subsidiaries of the bank holding
company.
As discussed in Part I, as a result of
the Gam-St Cermain Act insurance
amendments, the Board has no
discretion under section 4(c)(8) to permit
bank holding companies or their
nonbank subsidiaries to engage in the
United States in insurance activities,
except as specifically authorized in
those amendments.22 One of these
20 See Anderson. Clayton & Co. v. United States.
562 F.2d 972 (5th Cir. 1977), cert, denied. 433 U.S. 944
(1978).
11 The Board currently has a proposed rule under
consideration to authorize real estate investment
and development activities for bank holding
companies under section 4(c)(8) within certain
83 For example, the amendments permit bank
prudential limits. 52 FR 543 (January 7.1987); 50 FR
holding companies to sell credit-related life,
4519 (January 31.1985).
accident, health and unemployment insurance.
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
provisions permits a holding company
subsidiary to continue any insurance
agency activity it conducted on May 1,
1982. The U.S. Court of Appeals for the
District of Columbia Circuit recently
affirmed a Board decision recognizing
that an operations subsidiary of a
holding company state bank selling
insurance on May 1,1982, in reliance on
the Board's state bank operations
subsidiary rule, qualifies for this
grandfather exception and may continue
to sell insurance under section 4(c)(8).2a
Accordingly, the Board believes that, if
the state bank operations subsidiary
rule is rescinded, state banks could
continue to hold operations subsidiaries
engaged in general or other insurance
agency activities that they conducted on
May 1.1982, in accordance with the
Board’s state bank operations
subsidiary rule and without further
application under the BHC A ct
In the event the grandfather rule is
limited, as discussed above, the Board
asks for comment on a proposal to
permit bank holding companies to retain
operations subsidiaries that do not
q u a l i f y under the grandfather rule for
two years in order to permit the bank
holding company time to seek a
determination from the Board that the
particular activity satisfies the
standards of section 4(c)(8).84 The
Reserve Banks would be authorized to
extend this two-year period for three
additional one-year periods in
appropriate cases.
III. Legal Framework Relating to the
Proposed Rescission of the State Bank
Operations Subsidiary Rule.
A. The Literal Terms o f the BHC A ct
Cover the Acquisition and Retention by
Holding Company Banks o f Control o f
Companies (other than Banks) and
Their Voting Shares
The BHC Act establishes a
comprehensive framework governing the
acquisitions and activities of bank
holding companies. Section 4 of the Act
contains two prohibitions that together
limit the nonbanking acquisitions and
activities of bank holding companies to
those expressly permitted under various
specific provisions in the statute. Under
these prohibitions, a holding company
may not acquire or retain, d irec tly or
23 National Association o f Casualty and Surety
Agents v. Board o f Coventors, 856
282 (D.C.
Cir. 1988), petition far rehearing pending.
14 In the event the Board does not extend
grandfather rights to real estate development
activities, operations subsidiaries engaged in such
activities would be permitted to complete any
projects commenced by the subsidiary prior to
November 21.1988, but could not invest in any
additional projects without approval under section
4(c)(8) of the Act
through a subsidiary, voting shares or
subsidiaries unless the shares or
subsidiary are authorized under one of
the Act’s exemptions.
Section 4 of the Act provides that,
except as set forth in the A ct bank
holding companies may not (1) acquire
or retain direct or indirect control of
voting shares of “any company which is
not a bank,*' or (2) engage in activities
other than banking or managing and
controlling banks and other subsidiaries
authorized under the Act and those
activities permitted under the closely
related to banking standards of section
4(c)(8) of the Act.2* Section 4 then sets
out certain exceptions from these
general prohibitions, the principal one
being for companies engaged in
activities the Board, after notice and
opportunity for hearing, has determined
to be so closely related to banking as to
be a proper incident thereto.**
By their terms, the prohibitions of
section 4 apply not only to voting shares
and nonbank companies controlled
directly by a bank holding company but
also to shares and nonbank companies
controlled by the bank holding company
indirectly through any of its
subsidiaries.21 Section 2(g)(1) of the Act
*• Section 4(a) of the Act provides:
Except as otherwise provided ia this Act, no bank
holding company shall—
(1) * * * acquire direct or indirect ownership or
control of any voting shares of sny company which
is not a bank, or
(2)* * * retain direct or indirect ownership or
control of any voting shares of any company which
is not a bank or bank holding company, or engage in
any activities other than (AT those of banking, or of
managing or corrtroFHng banks and other
subsidiaries authorized under this Act * * and
(B) those permitted under para&aph (8) of
subsection (cj (that is, those found by the Board to
be closefy related to banking) * * * 1Z U.S.C
1843(a)(1) and (Z).
The activity provision in section 4(a)(2) of the Act
limits the direct activities at a bank holding
company. The authorization to engage in banking
pertains to those banks that were themselves bank
holding companies. Merchants National Corp., 73
Fed. Res. BulL 878* 87a a l l (1987).
** 12 U.S.C. 1843(c)(8). The other exceptions to the
general nonbanking provisions of the Act are set out
in paragraphs (1) through (14) of section 4(c) of the
Act and include exemptions for holding shares of
servicing subsidiaries, of companies acquired in
satisfaction of debts previously contracted or is a
fiduciary capacity, shares of the kinds and amounts
eligible for investment by a national bank under
section 5138 of the Revised Statutes, shores of an
investment company, shares amounting to less than
5 percent of a company's outstanding shares, shares
of certain foreign com p a n ies, and shares of an
export trading company. 12 U-S.G 1843(c)(1) through
(14). There are certain other grandfather exceptions
found in section 4(a)(2) of the AcL 12 U-S-C1843(a)(2).
*7 A holding company’s sobidiaifes include direct
as well as indirect subsidiaries. 12 U.&.C. 1841(d)(1)1.
Thus, under the provisions of section 4(a)(2). a bank
holding company could not manage or control an
operations subsidiary unless control of that
subsidiary was authorized under the AcL
48921
is explicit that "shares owned or
controlled by any subsidiary of a bank
holding company shall be deemed to be
indirectly owned or controlled by such
bank holding company.” 12 U.S.C.
1841(g)(l)(emphasis added). The
attribution provisions in this section
apply to voting shares held by “any
subsidiary” of a holding company and
do not distinguish between shares held
by a subsidiary bank of a bank holding
company or by a nonbank subsidiary of
a bank holding company.**
Thus, under the unambiguous
language of the statute, the voting
shares of a company held by a holding
company bank are indirectly owned or
controlled by the parent holding
company and, in order for the shares or
subsidiary to be retained, they must fit
within one of the exceptions to the
general prohibitions in section 4(a).
This reading of the statutory language
is confirmed by its legislative history.
Congress added the attribution
provisions in section 2(g)(1) to the Act in
1966 29 “to confirm current
interpretations of the Board (that)
provide that a bank holding company
shall be deemed to control indirectly
any shares owned or controlled by any
of its subsidiaries * * V S. Rep. No.
1179,89th Cong., 2d Sess. 8 (1966). One
of the interpretations codified in section
2(g)(1) expressly stated that the
prohibition against retention of shares of
a company applies to indirect control of
shares of a nonbanking company held
by a banking subsidiary of a bank
holding company. 12 CFR 225.101(aHc);
see also § 225.102. The statutory
provisions concerning the scope of
section 4(a) have not been subsequently
amended!
B. Other Provisions o f the A ct
Demonstrate that the BHC Act Applies
to Shares o f Nonbank Companies Held
by Holding Company Banks
Two other sections of the BHC Act
demonstrate that section 4 applies to the
voting shares of nonbank companies
owned by a holding company bank. The
original sections 4(c)(2) and 4(c)(4) of the
Act provided exemptions from the
*• A bank owned or controlled by a holding
company is clesriy its subsidiary. 12 U.S.C. 1841(d).
A “subsidiary’*of a bank holding company is
defined to include “any company'* 25 percent or
more of the voting shares of which is directly or
indirectly owned or controlled by that holding
company. Id. That the term “subsidiary" as used in
the BHC Act encompasses banks is evident in
provisions throughout the Act. E.g., 12 U.S.C.
1842(a)(2), 1844(c). Section 4(a)(2) itself confirms this
when it limits holding companies to controlling
“banks and other subsidiaries authorized under this
Act.” 12 U.S.C. 1843(a)(2).
*» Pub. L No. 89-485.8, 80 Stat. 238, 237 (1968).
48922_______Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
nonbanking restrictions of section 4 for
voting shares acquired by “any banking
subsidiary * * * in satisfaction of a debt
previously contracted in good faith”
(“DPC”) 30 and for shares acquired “by
any banking subsidiary of a bank
holding company, in good faith in a
fiduciary capacity * *
31 It is
obvious that there would be no need for
these exemptions to section 4 for
holding company banks unless the
prohibition in section 4 applies to shares
held by a holding company bank. The
fact that Congress added these
exemptions to the Act to exempt the
fiduciary and DPC acquisitions of
holding company banks is explainable
only by the conclusion that Congress
recognized and intended the Act to
apply to the acquisition of nonbank
shares by a holding company bank.
The legislative history confirms this
view. As originally drafted, the
exemptions extended only to shares
acquired by a bank that was itself &
bank holding company or any of its
banking subsidiaries.32 In the version
that was enacted, these provisions,
however, were deliberately revised to
include an exemption for shares
acquired by “any banking subsidiary of
a bank holding company.” 33 Thus, the
legislative history shows that in 1956,
Congress specifically focused on the
question of whether the nonbanking
provisions of the Act applied to
acquisitions by holding company banks,
found that they did, and provided a
specific exemption for DPC and
fiduciary acquisitions.
The Board also notes that a 1987
amendment to the BHC Act further
confirms Congressional recognition that
shares of companies held by subsidiary
banks are subject to section 4. A new
section 3(f)(1) creates a “specical rule”
which exempts subsidiaries of certain
holding company savings banks from
section 4.34 This authorization would be
•° See Bank Holding Company Act of 1956. Pub. L.
No. 84-511, section 4(c)(2). 70 Stat 133.136 (1956).
This section was amended in 1977 to provide an
exception for shares acquired “by a bank holding
company or any of its subsidiaries." in order to
extend this exemption to nonbank subsidiaries of a
holding company. 12 U.S.C. 1643(c)(2) (1982); HR.
Rep. No. 95-774.95th Cong., 1st Sess. 11 (1977).
81 See Bank Holding Company Act of 1956, Pub. L
No. 511, section 4(c)(4), 70 Stat. 133.136 (1956). This
section was amended in 1971. but continues to
provide an exception for "shares held or acquired
by a bank in good faith in a fiduciary capacity
...........12 U.S.C. 1843(c)(4) (1982).
88 H.R 6227.84th Cong., 1st Sess. (1955); S. 2577,
84th Cong. 1st Sess. (1955).
•» S. Rep. No. 1095. pL 2,84th Cong., 2d Sess. 3-4
(1956). See also 102 Cong. Rec. 6048 (1956) (Remarks
of Sen. Robertson to the same effect).
** 12 U.S.C. 1842(f). as added by Pub. L No. 10086, Title 1, section 101(d). 101 Stat. 552. 561; S. Rep.
No. 100-19,100th Cong., 1st Sess. 35 (1967); H.R.
Rep. No. 261,100th Cong.. 1st Sess. 130 (1987).
unnecessary if section 4 of the Act is
inapplicable to subsidiaries of banks
controlled by holding companies.
C. The Board Has Consistently held that
Section 4 Applies To Voting Shares and
Subsidiaries Controlled by Holding
Company Banks
The Board has, since the enactment of
the BHC Act in 1956, consistently held
the view that the nonbanking
prohibitions of section 4 apply to shares
of a nonbank company held by a holding
company bank. As explained above,
Board interpretations expressing this
view, issued in 1956 and 1957
contemporaneously with passage of the
Act, were subsequently codified in
section 2(g)(1) of the Act. 12 CFR 225.101
and 102. Moreover, the Comptroller of
the Currency in congressional testimony
in 1970, has stated that “there is no legal
doubt” regarding this construction of the
Act:
The opening language of section 4(a) of the
present Act * * * states that no bank
holding company shall “acquire direct or
indirect ownership etc.” of a nonbank
company. There is no legal doubt that any
acquisition by the national bank subsidiary
would be an “indirect” acquisition by the
(one bank holding company).**
In 1971, the Board reaffirmed its view
that section 4 applies to nonbank
subsidiaries of holding company banks
in connection with its promulgation of
§ 225.22(d) of Regulation Y (then
§ 225.4(e)), providing a regulatory
exemption from the nonbanking
prohibitions of the Act but only for
wholly owned operations subsidiaries
doing business at locations at which the
state bank could conduct the activity
and subject to limitations applicable to
the bank36 Since 1956, acquisitions of
companies engaged in activities not
permissible for the bank or of less than
100 percent of the shares of a company
engaged in bank-eligible activities has
not been permitted under the Board’s
rules without compliance with section 4
of the Act.
The Board recently reaffirmed its
view that the nonbanking provisions of
the BHC Act apply to acquisitions by
holding company banks of voting
interests in nonbank companies and
14 One-Bank Holding Company Legislation o f
1970: Hearings Before the Senate Comm, on
Banking and Currency. 91st Cong., 2d Sess. 198
(1970) (Statement of William B. Camp) (“Senate
Hearings").
*®In its notice of rulemaking, the Board stated its
view that the proposed limitation “would not affect
the scope of activities permitted to a banking
subsidiary of a bank holding company, but could
affect acquisitions of a nonbanking company by
such a bank since any acquisition by a subsidiary
bank would represent an indirect acquisition by the
parent holding company.” 36 FR 1431 (1971).
required divestiture by a holding
company bank of such an interest that
did not comply with the Board's
regulations.37
D. Views o f Commenters on Act's
Coverage to Acquisitions o f Shares by
Holding Company Banks
In response to the Board’s request for
comments regarding the real estate
development activities of bank holding
companies, a number of commenters
have argued that the Board has no
authority to regulate the activities of
nonbank subsidiaries of holding
company banks. The commenters argue
that the BHC Act does not by its terms
permit the Board to regulate the direct
activities of holding company banks and
that the legislative history of the Act
indicates that Congress did not intend
the BHC Act to confer such authority on
the Board. Based on the argument that
the BHC Act does not extend to the
activities of banks owned by holding
companies, the commenters argue that a
nonbank subsidiary of a bank is also
exempt from the Act because it is
merely an incorporated department or
division of the bank operating under
color of the bank’s charter and
authority. These commenters suggest
that Congress could not have intended
to create the anomalous result of
excluding holding company banks from
the Board's authority under the BHC Act
while granting the Board authority over
the nonbank operating subsidiaries of
those same banks.
The Board notes, however, that this
view appears to advocate an
interpretation of the Act that is
inconsistent with the express terms of
the BHC Act, which as noted apply to
the direct or indirect nonbanking
subsidiaries of a bank holding company
without distinction between nonbank
companies owned by the holding
company and those owned by a bank
subsidiary of the holding company.*8
87 Security Pacific Corp./Arizona Bancwest, 72
Federal Reserve Bulletin 800 (1986). See also The
South Dakota Loophole: Hearing Before the
Subcomm. on Financial Institutions Supervision.
Regulation and Insurance of the House Comm, on
Bonking. Finance and Urban Affairs, 99th Cong.. 1st
Sess. 7 (1985) (statement ofJ. Charles Partee,
Member, Board of governors. Federal Reserve
System). (‘The Board has long held that the
provisions of the Act apply to acquisitions by
holding company banks of voting shares of a
nonbanking company.”)
** In support of their view that section 4(a) does
not apply to subsidiaries or nonvoting shares held
by holding company banks, some commenters rely
on Cameron Financial Corp. v. Board of Governors,
497 F.2d 841.848 (4th Cir. 1974). That decision,
however, held only that since section 4(a) does not
apply to banks, activities conducted directly by
banks do not qualify under the grandfather proviso
Continued
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
Since nonbank subsidiaries of holding
company banks are by definition not
banks, they are not excluded from
section 4 of the Act.
Moreover, the commenters’ view that
a nonbank subsidiary of a bank is
merely part of its bank parent appears
to conflict with the facts generally
associated with the formation of many
such subsidiaries. They are separately
incorporated entities, in many cases
with different names, offices, and
employees, and are formed largely in
order to permit the parent to^eparate
and insulate itself from the activities of
the subsidiary in order to limit its
liability for the activities conducted by
the subsidiary.
In this regard, the Board notes that the
other federal banking agencies have
often expressed the view that
subsidiaries of banks provide an
effective mechanism to separate and
insulate nonbanking activities from the
bank and the support of the federal
safety n et For example, the Comptroller
of the Currency has recently stated that
the functions of subsidiaries of national
banks—at least those conducting certain
new types of activities—should be
insulated from the parent bank in order
to protect the insured deposits of the
parent from risks arising from its
ownership of the subsidiary.3* The FDIC
has specifically recognized that a
subsidiary of a bank is a separate entity,
which should not be confused with the
bank itself.40
1. Divestiture Provisions o f Section
5(e) o f BHC A ct Commenters also point
to section 5(e) of the BHC A ct which
allows the Board to order a bank
holding company to terminate
ownership or control of any nonbank
subsidiary "other than a nonbank
subsidiary of a bank” where the
nonbank constitutes a serious risk to the
safety and soundness of a holding
in section 4(a)(2). In that context the reference to
the term subsidiary in the grandfather proviso
means a subsidiary that is not a bank and that
would, therefore, not be subject to the nonbank
provisions of section 4(a) in the first place. This
case does not address the question raised by the
commenters in this proceeding whether section 4
applies to activities conducted by a subsidiary of
the bank and not by the bank itself.
Some commenters have also referred to the fact
that section 4 is entitled "Interests in Nonbanking
Organizations.” That argument supports only the
position that section 4 applies to nonbank
companies wherever located within a bank holding
company organization.
*• Reform o f the Nation's Banking and Financial
Systems, Hearings Before the House Committee on
Banking, Finance, and Urban Affairs, 100th Cong.,
1st Sess. 283,287 (1987) (Statement of Comptroller
Clarke). See also Statement of FDIC Chairman
Seidman. Id., at 128,128.
40 See also, SOFR 23964 (1985); Mandate for
Change: Restructuring the Banking Industry, A Staff
Study, FDIC (August 18,1987).
company bank. 12 U.S.C. 1844(e). This
provision was added to the Act in 1978
and is pointed to as evidence of
Congressional intent that the Act does
not apply to nonbank subsidiaries of
holding company banks.
This exemption, however, merely
recognizes that primary responsibility
for the ongoing supervision of the bank
and its safety and soundness rests with
the bank’s primary supervisor, which
has adequate enforcement authority to
protect the bank against safety and
soundness risks from nonbank
subsidiaries. This section does not in
any way attempt to regulate the kinds of
nonbanking activities that the nonbank
subsidiary may conduct or by its terms
exempt the activities of such a nonbank
subsidiary from the Act. Indeed, the
Board notes that the fact that Congress
excluded nonbank subsidiaries of
holding company banks from only this
provision of the Act suggests that such
subsidiaries are to be included as
subsidiaries of the bank holding
company for all other provisions of the
Act where they are not so excluded,
including the nonbanking provisions of
section 4. Moreover, if nonbank
subsidiaries of holding company banks
are not subject to the Act, the exclusion
in section 5(e) is unnecessary.
2. Board Authority Over Nonbank
Subsidiaries o f Holding Company Banks
Under the Financial Institutions
Supervisory A ct o f 1966. Similarly, some
commenters have argued that the ceaseand-desist authority of the Board under
the Financial Institutions Supervisory
Act of 1968 (‘’FISA") (12 U.S.C.
1818(b)(3)) does not extend to nonbank
subsidiaries of holding company banks
and that this demonstrates that the BHC
Act also does not apply to such
subsidiaries. This argument however,
appears based on a misreading of the
statute. In fact, the terms of the ceaseand-desist statute (12 U.S.C. 1818(b)(3))
confirm that section 4(a) of the BHC Act
applies to subsidiaries of holding
company banks as indirect subsidiaries
of the bank holding company. FISA
grants the Board cease and desist
authority over “any bank holding
company and [to] any subsidiary (other
than a bank) of a holding company, as
those terms are defined in the A ct” As
noted, a subsidiary of a holding
company bank is, as a matter of law, a
subsidiary of the holding company and
is, thus, contrary to the commenters'
claims, subject to the Board's cease-anddesist authority.
The second sentence of section
1818(b)(3), in recognition of the Board’s
exclusive jurisdiction over holding
companies, establishes the rule that the
49023
other federal banking agencies may not
issue a cease and desist order against
bank holding companies or their
subsidiaries “(other than a bank or a
subsidiary of that bank)”.41 The
parenthetical language is necessary to
prevent the primary federal supervisor
from losing cease and desist authority
over banks and their subsidiaries that
are also subsidiaries of a bank holding
company. The parenthetical does not,
however, mean, as some claim, that the
Board has no cease and desist authority
over nonbank subsidiaries of holding
company banks.42
Thus, the cease and desist provisions
recognize a distinction between holding
company banks and nonbank
subsidiaries of such banks and grant the
Board concurrent authority over the
nonbank subsidiaries of holding
company banks. The concurrent cease
and desist authority over nonbank
subsidiaries of holding company banks
is necessary to enable the Board to
enforce the BHC Act as it applies to
these subsidiaries while allowing the
appropriate banking authority to enforce
provisions of law for which it has
responsibility. This grant of authority to
the Board under FISA would be
unnecessary if Congress had intended,
as the commenters suggest, that
nonbank subsidiaries of holding
company banks were to be considered
as part of the parent bank and outside
the Board’s jurisdiction for purposes of
the BHC A ct
3. Legislative History o f 1970
Amendments to BHC Act. Some
commenters point to the following
testimony of Chairman Bums regarding
the 1970 Amendments to the BHC Act as
support for the claim that Congress did
not intend the BHC Act to cover
subsidiaries of holding company banks:
We now have three Federal agencies
regulating banks. The agencies that now
regulate banks would continue to regulate
banks.
Let us say that you gave the power of
regulation to the Federal Reserve Board. The
Board would then be simply regulating the
4112 U.S.C. 1818(b)(3) states: “Nothing in this
subsection * * * shall authorize any Federal
banking agency, other than the Board o f Governors
of the Federal Reserve System, to issue a notice of
charges or cease-and-desist order against a bank
holding company or any subsidiary thereof (other
than a bank or subsidiary of that bank)."
42 If the commenters’ view were correct that the
Board's cease and desist authority does not extend
to subsidiaries of the holding company banks, the
exclusion in the first sentence of 12 U.S.C. 1818(b)(3)
would read as does the exclusion in the second
sentence, that is. the Board's ccase and desist
authority under the first sentence would be limited
to "any bank holding company, and to any
subsidiary (other »han a bank or Subsidiary of that
bank)".
48924
Federal Register / Vol. 53, No. 233 / Monday, December 5, 1988 / Proposed Rules
bank holding companies, not the banks
themselves. The banks would continue to
function under their present supervisory
authorities.
(W)e would not be examining the banks
w hich we are not presently examining.
All that we would do, if this came to us at
the Federal Reserve Board, would be to
determine whether a given acquisition is or is
not in accordance with the principles of the
legislation and regulations that we might
have draftnfc or whether a divestiture is or is
not proper in the circumstances or whether it
is or is not being carried out.
But we would not be examining the banks
which we are not presently examining. We
would not supervise banks we are not
presently supervising. Therefore, the
distribution of regulatory authority functions,
as far as the banks are concerned, would
remain entirely unchanged.49
The testimony of Chairman Bums,
however, reflects the Board’s long
standing position that the Board would
not exercise its authority examine
holding company banks and will defer
to the primary supervisor with respect to
safety and soundness matters.44 The
testimony carefully points out that the
1970 Amendments would make no
change in the distribution of regulatory
authority “as far as banks are
concerned.” The testimony, however,
says nothing about nonbank
subsidiaries of holding company banks
and in no way indicates that section 4(a)
does not apply to the acquisition of
shares or subsidiaries by holding
company banks. As discussed above,
the Board’s long-held position predating
Chairman Bums' testimony had been
that the Act does apply to the
acquisition of shares of nonbank
companies by holding company banks.
Moreover, three weeks after enactment
of the 1970 Amendments, the Board
reiterated this view in proposing rules to
implement that legislation. 30 FR 1430,
1431, and 9292 (1971).
The Board has also considered the
reference by some commenters to the
House Banking Committee report
associated with the 1970 Amendments
stating that the nonbanking restrictions
of section 4 apply only to bank holding
companies and their nonbank
subsidiaries and “not to the bank
subsidiaries” whose activities are
governed by other Federal and State
law. H. Rep. No. 387,91st Cong., 1st
Sess. 15 (1969). This comment however,
is directed at the permissible activities
of the subsidiary bank itself, and
4* Senate Hearings at 157-158.
44 The Board is given extensive authority under
the BHC Act over holding company banks, including
direct authority to examine any holding company
subsidiary, including subsidiary banks, and to
require reports and to issue subpoena* against such
institutions. 12 U.S.C.1844.
therefore does not address the
applicability of section 4 to the nonbank
subsidiaries of a holding company bank.
4. Consistency o f Board Interpretation
with Intent o f BHC Act. In establishing
the BHC Act framework. Congress was
required to draw the line between
banking and nonbanking activities in the
Act in some manner. As the terms of the
Act demonstrate. Congress rationally
did so' on the basis of whether the
company conducting the activity is a
bank or a nonbank. Thus, where the
company is chartered and operated as a
bank under the definition in the BHC
Act, it is outside the scope of the
nonbanking provisions of the A ct But
where the company is not a bank, it is,
consistent with the line drawn by
Congress in section 4, subject to the
nonbanking provisions of the Act—
wherever located within a bank holding
company system—and in order fOT these
acttvfties to be permissible, they must tit
within one of the Act’s authorizing
provisions.
IV. Regulatozy Flexibility Act Analysis
This rulemaking has been initiated to
permit public comment on whether the
Board is required to rescind its existing
state bank operations subsidiary rule in
light of the terms of section 4 of the BHC
Act. If the Board is required to rescind
its rule, the Board has proposed several
procedures that are designed to mitigate
the effect of this action on bank holding
companies, including the economic
impact on bank holding companies that
may be small business entities within
the meaning of the Reguatory Flexibility
Act (5 U.S.C 601 et seq). In particular,
the Board has proposed several
alternatives for permitting bank holding
companies, including small bank holding
companies, to retain all or most existing
operations subsidiaries held through
state bank subsidiaries. The Board has
also proposed an expedited notice
procedure for future acquisitions of
operations subsidiaries that has been
designed to minimize any procedural
burden on bank holding companies,
including small bank holding companies.
The Board notes that a great number
of bank holding companies already have
received Board approval to engage in
the activities conducted by operations
subsidiaries of holding company state
banks, and may. therefore, retain and
establish such operations subsidiaries
engaged in these activities without
further approval. As a result this
proposal may have little or no effect on
many bank holding companies,
including in particular small bank
holding companies, that engage in
activities already approved by the Board
under the Act
List of Subjects in 12 CFR Part 225
Banks, Banking, Federal Reserve
System, Holding companies. Reporting
and recordkeeping requirements.
For the reasons set out in this notice,
and pursuant to the Board's authority
under section 5(b) of the Bank Holding
Company Act of 1956, as amended (12
U.S.C. 1844(b)), the Board proposes to
amend 12 CFR Part 225 as follows:
PART 225—[AMENDED]
1. The authority citation for Part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818.
1843(c)(8). 1844(b), 3106, 3108. 3907 and 3909.
§225.2 [A m ended]
2. The Board proposes to amend
§ 225.2 by redesignating existing
paragraphs (g) through (1) as paragraphs
(h) through (m). and adding a new
paragraph (g) to read as follows:
* * * * *
(g) “Operations subsidiary" means a
company (other than a bank) (1) all (but
except for directors’ qualifying shares,
not less than all) of the shares of which
are owned by a state bank, and (2) that
engages solely in activities that the state
bank may itself conduct directly under
relevant law, subject to the same
limitations on those activities, including
geographic limitations, as are applicable
to its parent bank.
*
*
*
*
*
3. The Board proposes to amend
§ 225.22 by revising paragraph (d)(2) to
read as follows:
§ 225.22 Exem pt nonbanking activities and
acquisition*.
*
*
*
*
*
(d) * * *
(2) State Bank—(i) Securities Eligible
For Investment. Insofar as the Bank
Holding Company Act is concerned and
without the Board's prior approval
under this subpart, a state-chartered
bank owned by a bank holding company
may acquire or retain, on the basis of
section 4(c)(5) of the BHC Act, securities
of the kinds and amounts explicitly
eligible for investment by a national
bank under section 5136 of the Revised
Statutes.
(ii) Grandfathered operations
subsidiaries. Without the Board's prior
approval under this subpart a bank
holding company may retain indirect
ownership and control of an operations
subsidiary and its voting shares that it
owned and controlled through a
subsidiary state bank on November 21,
1988, so long as the operations
subsidiary:
Federal Register / Vol. 53, No. 233 / Monday. December 5, 1988 / Proposed Rules
(A) Was acquired and held in
compliance with the Board’s regulations
governing operations subsidiaries of
state banks in effect on November 21,
1988; and,
(B) Does not thereafter commence
new activities or acquire shares or
assets of another company except as
otherwise authorized under this subpart.
•
*
*
*
*
§ 225.23 [A m ended]
4. The Board proposes to amend
§ 225.23 by adding a new paragraph
(a)(4) to read as follows:
(a) * * *
(4) Acquiring an operations
subsidiary—(i) Listed activities. A
notice is required under paragraph (a)(1)
of this section for a bank holding
company indirectly to acquire and
control voting shares of an operations
subsidiary engaged in activities listed in
§ 225.25, and for such an operations
subsidiary to commence, or acquire the
assets of a company engaged in, any
such activity. The notice under this
paragraph shall be processed pursuant
to paragraph (a)(1) of this section as a
notice to engage de novo in an activity
listed in $ 225.25.
(ii) Unlisted activities. An application
is required under paragraph (a)(3) of this
section for a bank holding company
indirectly to acquire and control voting
shares of an operations subsidiary
engaged in an activity that is not listed
in § 225.25, and for such an operations
subsidiary to commence, or acquire the
assets of a company engaged in, any
such activity.
* * * * *
5. The Board proposes to amend the
reference to “12 CFR 262.2" in the
introductory text to paragraph (a) of
§ 225.23 to read “12 CFR 262.3”.
By order of the Board of Governors of the
Federal Reserve System, November 29,1988.
William W. Wiles,
Secretary o f the Board.
[FR Doc. 88-27847 Filed 12-2-88; 8:45 am]
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