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F ederal

reserve

Bank

DALLAS, TEXAS

of

D allas

75222
Circular No. 82-121
Septem ber 22, 1982

REGULATION Y
BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL ACT
A m endm ent and Interpretation
(D ata Processing A c tiv itie s)

TO ALL MEMBER BANKS, BANK HOLDING COMPANIES
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board o f Governors o f the Federal R eserve S ystem has issued an
am en dm ent to S e c tio n 225.4(a)(8) o f R egulation Y to expand data processing
a c t iv it ie s perm issible for bank holding com panies.
This a c tio n was taken in
c o n n e c tio n with an application by C iticorp to engage in sim ilar a c tiv itie s . Public
c o m m e n t on this m atter was invited by this R eserve Bank's Circular No. 81-170,
data August 25, 1981. The am endm ent will b e c o m e e f f e c t i v e S ep tem ber 25, 1982.
In addition, the Board has am ended its data processing interpretation to clarify and
expand its position on data processing a c t iv it ie s it d eem s perm issible.
Printed on the follow ing pages are cop ies o f the Board's press r e le a se
and the t e x t o f the Board's n o tic e as published in the Federal R e g is te r . The
am endm ent in slip s h e e t form will be s e n t to you as soon as it b e c o m e s available.
The in terp retation will not be distributed in slip s h e e t form; th erefo re, you may
wish to retain this circular for future r e fe r e n c e .
Q uestions regarding the am endm ent or the in terpretation should be
d ir ec te d to David W. Dixon, R egulations A ttorn ey in this Bank's Holding Company
Supervision D epartm ent, (214) 651-6182.
Additional cop ies o f this circular will be furnished upon request to the
D ep artm en t o f Com m unications, Financial and C om m unity A ffairs, Extension 6289.
Sin cerely yours,

/ f {A S
William H. W allace
First Vice President

Banks and others are encouraged to use the following incoming W A T S 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 (FedHistory@dal.frb.org)

37368

Federal Re i t r / Vol. 47, No. 166 / Thursday, August 26, 1982 / Rules and Regulations
gse
processing hardw are in conjunction with
permissible software.
EFFECTIVE DATE: September 25,1962.
FOR FURTHER INFORMATION CONTACT:

Richard M. Ashton, A ssistant General
Counsel (202) 452-3750, or Jennifer
Johnson, Senior Attorney (202) 452-3584.
Legal Division, Board of Governors of
the Federal Reserve System.
SUPPLEMENTARY INFORMATION: Section
4(c)(8) of the Bank Holding Company
Act (12 U.S.C. 1843(c)(8)) permits bank
holding companies to hold shares of
"any company the activities of which
the Board, after due notice and
opportunity for hearing, determines by
order or regulation to be so closely
related to banking or managing or
controlling banks as to be a proper
incident thereto."' Section 225.4(a)(8) of
the Board’s Regulation Y currently
provides that certain data processing
activities are closely related to banking
and thus permissible for bank holding
companies under section 4(c)(8). In 1971,
the Board issued an interpretation,
which was amended in 1975 (12 CFR
225.123(e)) and stated, among other
things, that bank holding companies
may perform certain incidental activities
necessary to carry on permissible data
processing activities.

I. Background

FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. R-0363)

Bank Holding Companies and Change
In Bank Control, Data Processing, and
Electronic Funds Transfer Activities
a g e n c y : Board of Governors of the

In 1979, Citicorp, New York, New
York, applied to the Board for approval
to engage in expanded data processing
and data transmission activities, and
requested the Board to amend
Regulation Y in a manner that would
specifically permit Citicorp's proposed
activities. The application and proposed
amendment to Regulation Y were
protested by the Association of Data
Processing Service Organizations,
Arlington, Virginia ("ADAPSO"), and
other interested organizations 2

Federal Reserve System.
ACTION: Final rule and interpretation.
SUMMARY: The Board of Governors of

the Federal Reserve System is amending
its Regulation Y which concerns bank
holding companies and changes in bank
control, and related interpretation to
clarify and expand the scope of
permissible data processing activities in
which a bank holding company may
engage. The revised interpretation
describes certain activities the Board
considers incidental to permissible data
processing and data transmission
activities. The new activities include the
transmission of data, the provision of
data bases, and the provision of data

1 In National Courier Association v. Board of
Governors o f the Federal Reserve System. 516 F.2d
1229 [D C. Cir. 1975], the court established
guidelines to determine whether a particular
activity meets the "closely related to banking" test.
Under these guidelines an activity may he found to
he closely related to banking if it is demonstrated
tha I banks generally {1] have in fact provided the
proposed service; or (2) provide services that are
operationally or functionally so similar to the
proposed services as to equip them particularly well
to provide the proposed service; or [3) provide
services that are so integrally related lo the
proposed service as to require their provision in a
specialized form.
a Other Protestants to the application were
Electronic Data Systems Corporation: ADP Network
Services, Inc.; Comshare, Inc.: National CSS, Inc.;
Quantum Computer Services, Inc.; Tymshare, Inc.;
and On-Line Systems, Inc., which subsequently
withdrew from the proceeding

Federal R i t r / V l 47, No. 166 / Thursday, August 26, 1982 / Rules and Regulations
eg s e
o.
(collectively “Protestants”). On July 22,
1981, the Board published the proposed
amendment for public comment and
specifically requested comments from
those interested persons who did not
wish to participate in the formal hearing.
In accordance with the Board’s Rules
of Practice for Hearings (12 CFR Part
263), a public administrative hearing on
the application and proposed rule was
held before an Administrative Law
Judge. The Administrative Law Judge
also considered all the comments
received concerning the proposed
amendment from interested persons
who did not participate in the hearing.
On March 29,1982, the Administrative
Law Judge, after an evaluation of all of
the facts of record in this matter,
determined that each of the eight
activities proposed by Citicorp is closely
related to banking and thus permissible
for bank holding companies, and
recommended that the Board adopt the
proposed amendment to Regulation Y,
with certain limitations.
On July 9,1982, the Board, acting by
order, approved Citicorp’s application to
engage in eight categories of data
processing and data transmission
activities, finding that each activity, as
discussed and limited in the order, is
either closely related to banking or a
permissible incidental activity .3
II. D e sc rip tio n o f th e A m e n d m e n t a n d
R e v is e d Interpretation

Consistent with its approval of the
Citishare application, the Board is
adopting the amendment to Regulation
Y proposed with the application, with
the modifications recommended by the
Administrative Law Judge and with
other modifications explained below.
The amendment will make it permissible
for bank holding companies to engage in
the data processing and transmission
services the Board has approved by
order in the C itishare case.4The Board’s
findings on the permissibility of the
services involved are set forth in detail
in the Board’s Citishare order.
A. Perm issible Services fo r Internal
Operations
Currently, under Regulation Y, a bank
holding company may provide
bookkeeping or data processing services
for the internal operations of the holding
3Citicorp (“Citishare") 88 Federal Reserve
Bulletin (July 9.1982).
‘ These activities are: (1) Data processing through
timesharing; (2) on-site data processing: (3)
electronic funds transfer and information exchange:
(4) home banking; (5) authentication; (8) data
processing for the internal operation of Citicorp and
its subsidiaries; (7) the sale of by-products of
permissible data processing activities, and (8) the
sale of excess capacity on data processing and data
transmission facilities.

company or its subsidiaries. The
proposed amendment would expand the
types of services provided for internal
operations to include data transmission,
information, and facili ties.s The
Administrative Law Judge recommended
adoption of this revision.
W ith one modification, the Board
adopts this recommended amendment. It
has not been contested that data
processing services for the internal use
of a bank holding company are closely
related to banking. Indeed, such
activities are permissible as servicing
activities pursuant to section 4(c)(1)(C)
of the Act. The Board is concerned,
however, that the term “information” as
used in the recommended amendment is
vague and does not describe the
permissible activities with sufficient
specificity. It is apparent from Citicorp’s
application that the use of the term
“information’’ in the proposed
amendment w as intended to permit
providing access to data bases compiled
by the holding company. In order to
reduce potential ambiguity concerning
permissible activities, the final
amendment substitutes the term “data
bases" for “information.”
B. Perm issible Services fo r Others
Services that may be provided to
others under the current regulation are
limited to storing and processing
permissible data, i.e., banking, financial,
and related economic data. The
proposed amendment, as modified by
the Administrative Law Judge, would
permit processing and transmitting
permissible data, and providing
information and facilities for such data.
The proposed amendment would also
permit access to such services,
information, or facilities by any
technologically feasible means. The
Administrative Law Judge concluded
that data processing and transmission
services, as well as providing
information and facilities, are closely
related to banking within certain
limitations that he recommended be
adopted.
Protestants object to this finding,
arguing that the Administrative Law
Judge erred by not applying the N ational
Courier tests to the technologies bank
holding companies would use to process
and transmit permissible data. As
explained in the C itishare decision,
however, the Board has consistently
taken the position in previous actions
regarding data processing activities that
the particular technology by which a
data processing activity is provided is
6The term data processing “facilities" is defined
to include hardware, software, documentation, and
operating personnel.

37369

n o t d e te r m in a tiv e o f w h q fh er th e
a c tiv ity is p e r m issib le . In its D ecimus
d e c is io n , th e B oard e x p r e s s ly sta te d that
p e r m is sib le d a ta p r o c e s sin g a c tiv itie s
m a y b e p r o v id e d b y a n y te c h n o lo g ic a lly
f e a s ib le m e th o d .* In th e B o a rd ’s v ie w ,
th e te c h n o lo g y is n o t a n a c tiv ity in it s e lf
b ut a m e a n s o f p ro v id in g s e r v ic e s that
th e record in d ic a te s are c lo s e ly r ela ted
to b an k in g.
R e g u la tio n Y, a s a m e n d e d , therefore,
in c o r p o r a te s th e R e c o m m e n d e d
D e c is io n 's d e sc r ip tio n o f p e r m is sib le
t y p e s o f se r v ic e s , in c lu d in g th e
r e c o m m e n d e d p r o v isio n th a t su ch
s e r v ic e s b e p r o v id e d b y a n y
te c h n o lo g ic a lly f e a s ib le m e a n s.
H o w e v e r , for th e r e a s o n s e x p la in e d
a b o v e in c o n n e c tio n w ith in tern al
se r v ic e s , th e term “d a ta b a s e s ” r e p la c e s
“inform ation " in th e r e v is e d regu lation .

C. Types o f Data
T h e current reg u la tio n p erm its storing
a n d p r o c e s sin g o f “b an k in g , fin a n c ia l
a n d related econom ic data." (E m p h asis
su p p lie d ). T h e p r o p o se d a m e n d m e n t
w o u ld p erm it d a ta p r o c e s sin g a c tiv itie s
w ith regard to "banking, fin a n c ia l a n d
econom ic related data." T h e
A d m in is tr a tiv e L a w Judge c o n c lu d e d
that th is p o rtio n o f th e p r o p o se d
a m e n d m e n t sh o u ld b e a d o p ted .
P ro te sta n ts o b je c t to th is finding,
a sser tin g that econom ic related data is
to o b r o a d a c a te g o r y a n d in c lu d e s d a ta
that a r e n o t c lo s e ly r e la te d to ban king.
T h e su b s ta n c e o f th is o b je c tio n w a s
r e p e a te d b y oth er c o m m en to r s w h o did
n ot p a r ticip a te in th e a d m in istr a tiv e
p r o c ee d in g . A s s t a te d in th e Citishare
d e c is io n , th e B oard a g r e e i that
“e c o n o m ic r e la te d d a ta ” im p lie s a
sig n ifica n t e x p a n s io n o f th e ty p e o f d a ta
p erm itted to b e p r o c e s s e d b y b a n k
h o ld in g c o m p a n ie s. T h e R e c o m m e n d ed
D e c is io n c o n ta in s n o c o n c lu sio n or
fin d in g that su p p o rts su c h a sig n ifica n t
e x p a n s io n o f th e ty p e o f d a ta perm itted
to b e p r o c e s se d . H o w e v e r , th e reco rd in
th is p r o c e e d in g su p p o rts a fin d in g that
b a n k s p r o c e s s econom ic d a ta .
A c c o rd in g ly , th e a m e n d m e n t a s a d o p te d
p r o v id e s th a t th e d e s ig n a te d data
p r o c e s sin g s e r v ic e s a re p e r m issib le
w h e r e th e d a ta to b e p r o c e s s e d or
fu rn ish ed are b an k in g, fin a n c ia l, or
e co n o m ic .'’
•BankAmerica Corp. (Decimus Corp.) 88 Federal
Reserve Bulletin 511,513 (1980).
’Protestants also claim that processing financial
and economic data is not closely related to banking
because, by definition, such d ata are not banking
data. However, the facts of record indicate that data
processing activities of banks today are not limited
to banking data but extend to other types of
financial and economic data. The Board finds,
therefore, under the National Courier standards,
that processing of "banking, financial and economic
data” is closely related to banking.

37370

Federal R g s e / V l 4 , No. 166 / Thursday, August 2 , 1982 / Rules and Regulations
eitr o. 7
6

D. O ther Lim itations on Perm issible
Services
As proposed, the amendment to
Regulation Y contained no specific
limitations on the types of data
processing activities permitted.
Protestants and the other commentors
raised the objection that modern data
processing and transmission
technologies are such that customers
may modify the services and equipment
provided to enable the processing of
impermissible data. In response to this
objection, the Recommended Decision
included a limitation in the amendment,
which the Board adopts, that all data
processing services must be provided
pursuant to a w ritten agreement that
describes and limits the services to
permissible activities. The Board also
adopts the Recommended Decision's
requirement that all data processing
facilities provided by a bank holding
company must be designed and
marketed for permissilbe d a ta .'
Moreover, consistent with the Board's
finding on this m atter in the Citishare
decision ,9the amendment also provides
that such facilities must also be
operated for processing and transmitting
permissible data. As the Board
explained in its order, the data
processing industry has the
technological capability to limit the use
of facilities to permissible data and the
Board believes that a bank holding
company should take all technical steps
necessary to ensure that its facilities are
operated only with respect to banking,
financial, and economic data.
E. Provision o f Hardware
The current regulation does not
expressly permit bank holding
companies to provide data processing
hardware. The proposed amendment
would include data processing hardw are
as part of the facilities permitted to be
offered by a bank holding company.
The Administrative Law Judge, finding
that it is only questionably economically
feasible to offer data processing
software without including hardw are as
part of the service, recommended that
Regulation Y be amended expressly to
include the provision of hardw are under
the limitations that such hardw are may
be offered only in conjunction with
software designed and marketed for the
processing and transmission of
' P ro testa n ts h av e ra ised v ario u s other objections
to the pro p osed regulation a n d th e C itishare
p ro po sal on the grounds th a t the activ ities perm itted
a re n o t closely re la te d to banking. T he Board
d iscu ssed th ese objections in detail in its o rd er
approving the C itishare proposal a n d th e B oard's
findings on th e objections a re specifically
in corp orated by reference herein.
•Citicorp (“C itishare") footnote 3, supra.

p e r m is sib le d a ta a n d that su c h
h a r d w a re m a y n o t c o n stitu te the
p r e d o m in a n t part o f th e p a c k a g e .
P ro te sta n ts o b je c t to this
r ec o m m e n d a tio n a ss e r tin g that
h a r d w a re is a se p a r a te p ro d u ct from
s o ftw a r e a n d th a t it is n o t n e c e s s a r y to
se ll th e t w o p r o d u cts a s a p a c k a g e .

Other commentors also assert that the
provision of data processing hardw are is
not closely related to banking.
As the Board found in the C itishare
decision, the record of this proceeding
indicates that customers of data
processing services require that
suppliers provide them with both
hardw are and software as an integrated
package .1 W here hardw are is required
0
to be provided in a specialized form,
such as an Automated Teller Machine,
its provision meets the third N ational
Courier test and is closely related to
banking. However, the Board believes
that the provision of general purpose
hardw are is permissible only as an
incidental activity. As explained in the
C itishare decision, the Board believes
that a bank holding company may offer
general purpose data processing
hardw are in conjunction with
permissible data processing services
only if the cost to the bank holding
company of such hardw are does not
exceed approximately 30 per cent of the
total cost of the services provided.n The
amendment adopted by the Board
incorporates the limitations on the
provision of hardw are recommended by
the Administative Law Judge, but
provides that general purpose hardware
provided as a part of a package of data
processing services may not constitute
more than 30 per cent of any packaged
offering.
F. O n-site Data Processing Packages
In its C itishare d e c is io n , th e B oard
fo u n d that p ro v id in g p a c k a g e d fin a n c ia l
sy s te m s , in c lu d in g d a ta p r o c e s sin g
h a r d w a r e a n d so ftw a r e , to b e in sta lle d
o n th e p r e m is e s o f th e c u sto m e r is
c lo s e ly r e la te d to b an k in g. C itish a r e ’s
o n -s ite a c t iv itie s w e r e , h o w e v e r ,
s o m e w h a t lim ite d in s c o p e , s in c e
C itish a re in te n d e d to o ffer su ch se r v ic e s
to d e p o s ito r y or o th er in stitu tio n s to
perform o n ly b a n k in g or b an k in g -r ela te d
fu n ctio n s, su ch a s c h e ck c o lle c tio n or
trust d ep a r tm e n t se c u r itie s
rec o rd k e ep in g . T h e record o n this

“Citicorp (‘'C itishare"), footnote 3, supra.
11As ex plain ed in the Citishare decision, th e
B oard expects th a t in com puting re lative coats for
the purpose of applying this lim itation all casts,
b a th direct a n d indirect, of each com pdnent o f the
package, including the developm ent costs, m ust be
taken into account and the coat o f each com ponent
will reflect only the cost attrib u tab le to that
com ponent.

application and on the proposed
amendment w as generally restricted to
these limited types of on-site data
processing services. The Board is
concerned that! by its literal terms, the
recommended amendment would permit
a bank holding company to provide
packaged data processing services to
non-depository institutions to perform
non-banking related functions. These
functions are beyond the scope of the
proposal considered by the Board in the
Citishare application and the Board has,
accordingly, expressed no opinion on
the permissibility of such activities. The
Board is, therefore, incorporating into its
interpretation regarding permissible
data processing activities, 12 CFR
225.123(e),12a statem ent that a bank
holding company should limit its
provision of on-site packaged services to
customers that are depository or similar
institutions and to providing facilities
that perform only banking or banking
related functions. T h is lim ita tio n is
p r e m ise d solely on the lim ite d nature of
the record before the Board in this
proceeding and is not intended to
preclude a bank h o ld in g co m p a n y from
demonstrating in an o th er case that
providing on-site data processing
p a c k a g e s to non-depository customers is
closely related to ban king.
G. E xcess Capacity
T h e s a le o f e x c e s s co m p u ter tim e is
currently tr ea te d in th e B o a rd ’s d a ta
p r o c e s sin g in terp retatio n a s an
in c id e n ta l a c t iv it y .13 T h e in terp reta tio n
cu rren tly p erm its a b a n k h old in g
co m p a n y to m a k e e x c e s s co m p u ter tim e
a v a ila b le to a n y o n e s o lo n g a s the o n ly
in v o lv e m e n t o f th e h o ld in g c o m p a n y is
fu rn ish in g th e fa c ility a n d the n e c e s s a r y
o p era tin g p e r so n n el. T h e p r o p o sed
a m e n d m e n t w o u ld in c o rp o ra te into
R eg u la tio n Y a p r o v isio n perm itting the
s a le o f e x c e s s c a p a c ity o n b o th d a ta
p r o c e s sin g a n d d a ta tr a n sm issio n
eq u ip m e n t a n d fa c ilitie s u s e d in
c o n n e c tio n w ith p e r m is sib le d ata
p r o c e s sin g a n d tr a n sm issio n a c tiv itie s.
T h e R e c o m m e n d e d D e c is io n a d o p te d
th e p r o p o s e d e x c e s s c a p a c ity p r o v isio n
but in c lu d e d th ree lim ita tio n s o n the
s a le o f e x c e s s c a p a c ity . First, a b a n k
h o ld in g c o m p a n y m a y n o t p u rc h a se data
p r o c e s sin g eq u ip m en t s o le ly for th e
p u rp o se o f creatin g e x c e s s ca p a c ity .
S e c o n d , a b a n k h o ld in g c o m p a n y m a y
n o t se ll h a r d w a re in c o n n e c tio n w ith
e x c e s s c a p a c ity , a n d third, a b a n k
11 The provisions of the current interpretation
concerning the type of data for which processing
services may he offered and the development of
programs are superseded by provisions in the
amended regulation end have been removed.
‘*12 CFR 225.123(e).

Federal Re i t r / V l 4 , No. 160 / Thursday, August 2 , 1982 / Rules and Regulations
gse * o. 7
6
holding company may provide only
limited types of software in connection
with its sale of excess capacity .1
4
In recommending that the portion of
the amendment relating to excess
capacity be adopted, the Administrative
Law Judge determined that the sale of
excess capacity is closely related to
banking. Protestants object to this
finding and the Board agrees that
Protestants are technically correct. The
Board believes that providing excess
capacity should continue to be treated
as a permissible incidental activity. No
evidence w as introduced in the record
of this proceeding that would support a
finding that the sale of excess capacity,
which under the recommended
amendment may be provided for any
type of data, is closely related to
banking.
Several commentors on the proposed
amendment asserted that it is
technologically possible to limit the
need for excess capacity unless poor
planning is involved. These comments
also asserted that excess capacity could
be created artificially for the purpose of
developing an impermissible data
processing/communication system. The
record of this proceeding shows that
data processors that process timesensitive data must maintain sufficient
capacity to meet peak demand and
provide back-up capacity in case of
equipment failure. Excess capacity
necessarily results from these
requirements, and the sale of such
excess capacity is necessary to reduce
costs and remain competitive .14The
Board believes that the record of this
proceeding concerning excess capacity,
as discussed in the C itishare decision,
dem onstrates the necessity of the
m aintenance and sale of excess
capacity and its permissibility as an
incidental activity. Furthermore, the
Board believes that the limitations
recommended by the Administrative
Law Judge, which the Board adopts, are
sufficient to ensure that the sale of
excess capacity is limited to a
permissible incidental activity. Since the
Board has determined that the sale of
excess capacity is an incidental and not
a closely related activity, the provisions
and limitations recommended by the
Administrative Law Judge concerning
excess capacity are incorporated into
1 These include systems software [i.e., software
4
designed only to control and operate the hardware,
not to perform substantive operations), network
communications support, and the operating
personnel and documentation necessary for the
maintenance and use of these facilities.
1 The National Courier court determined that
8
activities that are necessary to the performance of
closely related activities are incidental to closely
related activities. 516 F.2d at 1241,

the data processing interpretation and
replace the existing provisions on
excess computer time.
H. By-Products
The sale of by-products of the
development of a program for a
permissible data processing activity is
currently treated in the Board’s data
processing interpretation as a
permissible incidental activity .18By­
products may be data, software, or data
processing techniques or information
developed by the bank holding *company. The proposed amendment
would add a provision to the regulation
stating that providing by-products of
permissible data processing and
transmission services is closely related
to banking. Relying on the Board’s
previous determination that the sale of
by-products is an incidental acitivity to
permissible data processing, the
Administrative Law Judge recommended
that Regulation Y be amended to include
the sale of any by-products of
permissible data processing and
transmission activities, so long as the
by-products are not designed or
appreciably enhanced for the purpose of
marketability.
The Board believes the record
supports adoption of the Administrative
Law Judge's recommendation, but that it
is appropriate to continue to treat the
sale of by-products in its data
processing interpretation as an
incidental activity. Accordingly, the by­
products provision of the data
processing interpretation is revised to
incorporate the provisions of the
recommended amendment.
I. The R equirem ent o f Separate
Bookkeeping
The Administrative Law Judge
recommended that the Board include in
Regulation Y a separate bookkeeping
provision that was not contained in the
proposed regulation. Under this
recommended provision, where
permissible data processing and data
transmission activities are provided by
a bank holding company subsidiary or
related entity, the entity providing the
services will have separate books and
financial statements and provide these
documents to any new or renewal
customer who requests financial
information.
The Board finds that the
recommended provision is appropriate
but should not be included as a part of
Regulation Y. Section 4(c)(8) of the Bank
Holding Company Act requires the
Board, in authorizing nonbank activities
for bank holding companies, to make
"Footnote 13, supra.

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two separate determinations. First, the
Board must determine that the activity is
closely related to banking. Second, the
Board must determine whether the
public benefits expected from a
particular activity outweigh any
possible adverse effects, such as unfair
competition. In making the closely
related to banking finding, the Board
may proceed by order or regulation;
however, the Board resolves the “public
benefits” test on a case-by-case basis.
Section 225.4 of Regulation Y designates
the nonbanking activities the Board has
determined meet the statutory test of
being closely related to banking.
The record of this proceeding does not
show that the Administrative Law
Judge's recommended separate books
requirement has any bearing on a
determination that the proposed
activities are closely related to banking
and, accordingly, such a requirement is
inappropriate for inclusion in the
regulation. However, the Board believes
that such a requirement is appropriate to
minimize any dangers of adverse
competitive effects. Therefore, the Board
has determined to include a separate
books and financial statements
requirement in the revision of its data
processing interpretation.
III. Public Comments on the Proposal

The Board received sixty-three
comments on the proposed rule, of
which thirty-five favored the proposal.
The favorable comments, most of which
were from banking organizations,
asserted that the proposed rule merely
reflects the technological developments
in the data processing field in the past
decade. The commentors also asserted
that the services proposed to be
provided under the proposed rule are
services that banks have always
provided to their customers. A few of
the favorable comments suggested that
the banking industry's involvement in
data processing will mean greater
innovation and access to the special
expertise of banks in financial matters.
Twenty-five comments opposed the
proposal, of which twenty-one were
from data processing organizations. In
addition to generally asserting that the
expanded data processing and data
transmission activities are not closely
related to banking, these data
processing organizations asserted that
entry of bank holding companies into
the field would drive them out of
business. These commentors also made
four specific assertions concerning
adverse effects on competition that
would result if bank holding companies
were permitted to offer the proposed
services. These effects are tying, cross­

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Federal R g s e / V l 4 , No. 166 / Thursday, August 2 , 1982 / Rules and Regulations
eitr o. 7
6

subsidization, manipulation of the stock
of data processing companies that banks
hold in their portfolios and improper
financial leverage.
W ith the exception of comments
concerning the closely relatedness to
banking of the proposed services, which
are discussed above, the unfavorable
comments from the data processing
organizations concern adverse
competitive effects that may result if
bank holding companies engage in the
proposed activities. These
considerations relate to the public
benefits test and, as explained above,
the Board must consider the likelihood
of the type of anticompetitive
consequences raised by the comments
with respect to each proposal by a bank
holding company to engage in
permissible data processing activities.
In addition, the record in this
proceeding contains evidence relating to
the effect of expanded bank holding
company participation in the data
processing industry generally and the
Administrative Law Judge made explicit
findings, which the Board adopts, that
expansion of bank holding company
data processing activities, as a general
matter, is not likely to result in
decreased competition, voluntary tying,
cross-subsidization or predatory pricing,
or undue concentration of resources.
These findings, which were based
primarily on the highly decentralized
structure of the data processing services
industry, support the Board's
determination that the activities
encompassed by the proposed
amendment are permissible and
appropriate for bank holding companies.
W ith regard to manipulation of stock
and improper financial leverage, the
unfavorable commentors provided no
indication of exactly w hat these effects
consist of and no evidence that bank
holding companies have or are likely to
engage in these practices. The Board
regards the commentors concerns in this
regard to be merely speculative and
determines that these comments do not
require the Board to disapprove the
proposed amendment.
Several banking organizations
opposed the amendment asserting that
certain aspects of the proposed rule
represent a method to circumvent the
restrictions on interstate banking. One
commentor also stated that the home
banking portions of the proposed rule
are in conflict with the Electronic Funds
Transfer Act, 15 U.S.C. 1601 et seq., the
Board's Regulation E, 12 CFR Part 205,
and other consumer credit law s .1
7
’’ The comment slated that Regulation Erequires
written documentation of certain electronic funds

However, no evidence has been
presented that the approved activities
would necessarily violate these
restrictions or that such activities could
not be conducted in compliance with the
restrictions against interstate banking or
with Regulation E under any
circumstances. The Board expects that a
bank holding company that has received
Board approval to engage in data
processing and transmission services
covered by the amended regulation will
comply with all applicable legal
requirements. These considerations do
not therefore w arrant a decision not to
adopt the amendment to Regulation Y.
IV. Regulatory Flexibility Act
The Small Business Administration
submitted an opinion that the
Regulatory Flexibility Act, 5 U.S.C. 601
e t seq., required the preparation of an
initial flexibility analysis in conjunction
with the notice of proposed rulemaking.
The Administrative Law Judge
determined that the Regulatory
Flexibility Act did not apply to the
proposed rule because the initial notice
of proposed rulemaking was published
before the effective date of that Act.
The Board believes that it is
unnecessary to determine whether this
rulemaking proceeding preceded the
effective date of the Regulatory
Flexibility Act. Under section 605(b) of
that Act, 5 U.S.C. 605(b), the A ct’s
provisions requiring the preparation of
an initial or final flexibility analysis do
not apply to any proposed or final rule if
the head of the agency certifies that the
rule, if promulgated, will not have a
significant economic impact on a
substantial number of small entities.
This amendment clarifies and expands
the types of data processing and
transmission services that may be
engaged in by a bank holding company
or its nonbank subsidiaries. As the
Administrative Law Judge found, the
amendment does not impose any
recordkeeping, reporting, or compliance
requirement on any entities, including
small entities .1
8
transfers and home banking terminals currently in
use do not provide such documentation.
" T h e Small Business Administration, supported
by Protestants, asserts that the amendment will
have a substantial economic effect on nonbank data
processing service organizations, many of which are
small entities, by permitting targe banking
organizations, such as Citicorp, to compete with
such organizations. A review of the terms, purpose
and legislative history of the Regulatory Flexibility
Act demonstrates, however, that by applying the
Act to a rule with significant economic impact on
small entities. Congress meant regulations that
directly impose federal recordkeeping, compliance
and reporting requirements that may result in
potentially unnecessary legal, accounting, and
consulting costs on institutions with limited
resources. See 94 Stat. 1164. The amendment

Therefore, pursuant to section 605(b)
of the Regulatory Flexibility Act, the
Board of Governors of the Federal
Reserve System certifies that the
amendment will not have a significant
economic impact on a substantial
number of small entities that would be
subject to the regulation.
List of Subjects in 12 CFR Part 225
Banks, banking, Holding companies.
Accordingly, pursuant to its authority
under sections 4(c)(8), and 5(b) of the
Bank Holding Company Act, 12 U.S.C.
1843(c)(8), and 1844(b), the Board of
Governors of the Federal Reserve
System amends 12 CFR Part 225 as
follows:
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
I. Section 225.4 amended by revising
paragraph (a)(8) to read as follows:
§ 225.4 N onbanking activities.

(a)* * *
(8)(i) Providing data processing and
data transmission services, data bases
or facilities (including data processing
and data transmission hardware,
software, documentation and operating
personnel) for the internal operations of
the holding company or its subsidiaries;
(ii) Providing to others data processing
and transmission services, facilities,
data bases or access to such services,
facilities, or data bases by any
technologically feasible means, where:
(A) Data to be processed or furnished
are financial, banking or economic, and
the services are provided pursuant to a
written agreement so describing and
limiting the services;
(B) The facilities are designed,
marketed, and operated for the
processing and transmission of
financial, banking or economic data; and
(C) H ardware in connection therewith
is offered only in conjunction with
software designed and marketed for the
processing and transmission of
financial, banking or economic data, and
where the general purpose hardware
does not constitute more than 30 percent
of the cost of any packaged offering.
II. Section 225.123(e) is amended by
revising the introductory paragraph,
paragraph (e)(1) and (e)(2), and by
adding a new undesignated paragraph to
follow paragraph (e)(4) to read as
follows:
adopted by the Board imposes no such regulatory or
reporting requirements.

Federal R g s e / V l 4 , No. 166 / Thursday, August 2 , 1982 / Rules and Regulations
eitr o. 7
6
9 225.123 A ctivities closely related to
banking

*

*

*

*

*

(e) Data Processing: In providing
packaged data processing and
transmission services for banking,
financial and economic data for
installation on the premises of the
customer, as authorized by
I 225.4(a)(8)(ii), a bank holding company
should limit its activities to providing
facilities that perform banking functions,
such as check collection, or other similar
functions for customers that are
depository or other similar institutions,
such as mortgage companies. In
addition, the Board regards the
following as incidental activities
necessary to carry on the permissible
activities in this area:
(1) Providing excess capacity, not
limited to the processing or transmission
of banking, financial or economic data
on data processing or transmission
equipment or facilities used in
connection with permissible data
processing and data transmission
activities, where:
(A) equipment is not purchased solely
for the purpose of creating excess
capacity;
(B) hardw are is not offered in
connection therewith; and
(C) facilities for the use of the excess
capacity do not include the provision of
any software, other than systems
software (including language), network
communications support, and the
operating personnel and documentation
necessary for the maintenance and use
of these facilities.
(2) Providing by-products of
permissible data processing and data
transmission activities, where not
designed, or appreciably enhanced, for
the purpose of marketability.
(3) * * *
* * * * *
In order to eliminate or reduce to an
insignificant degree any possibility of
unfair competition where services,
facilities, by-products or excess capacity
are provided by a bank holding
company's nonbank subsidiary or
related entity, the entity providing the
services, facilities, by-products and/or
excess capacity should have separate
books and financial statements, and
should provide these books and
statem ents to any new or renewal
customer requesting financial data.
Consolidated or other financial
statem ents of the bank holding company
should not be provided unless
specifically requested by the customer.

By order of the Board of Governors of the
Federal Reserve System, effective August 20,
1982.
William W. W iles,

Secretary ofthe Board.
[FR Doc. 82-23374 Filed 8-25-82; 8:45 am]

BILLING CODE 8210-01-M

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102