The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BAWK
OF IVSEW YORK
[
Circular No. 10104 1
November 14, 1986
J
AMENDMENT TO REGULATION Y
Permissible Nonfoaeklng Activities for Bank Holding Companies
To All Depository Institutions, Foreign Banking Organizations, and Bank Holding Companies
in the Second Federal Reserve District, and Others Concerned:
The following statem ent has been issued by the Board of Governors o f the Federal Reserve
System:
The Federal Reserve Board has approved a list of six additional permissible nonbanking activities
for bank holding companies under Regulation Y, subject to certain conditions and limitations.
Some of these activities have previously been approved on a case-by-case basis. The Board’s latest
action means that applications for these additional activities may now be filed under expedited proce
dures.
The additional activies are:
© Consumer financial counseling
© Tax planning and tax preparation
© Futures and options advisory services
© Check guaranty service
© Collection agency and credit bureau services
© Personal property appraisals
Consumer financial counseling involves providing counseling, educational courses and instruc
tional material to individuals on consumer-oriented financial management matters, including debt con
solidation, mortgage applications, bankruptcy, budget management, real estate tax shelters, tax
planning, retirement and estate planning, insurance and general investment management. This service
would not involve the sale of specific products or investments, or the provision of portfolio investment
advice or portfolio management authorized under Regulation Y.
Tax planning and tax preparation activity authorizes bank holding companies to provide advice and
strategies designed to minimize tax liabilities and to prepare tax forms for both corporations and individ
uals.
Futures and options advisory services include advice with respect to financial futures and options
approved for futures commission merchant subsidiaries or “FCMs” . Additionally, bank holding
companies are authorized to provide such advice as a “stand alone” activity as a commodity trading
advisor or “CTA”. FCMs and CTAs are subject to regulation by the Commodity Futures Trading Com
mission pursuant to the Commodity Exchange Act. This advice would include general research and
counseling on market conditions, trades and trading strategies; client account information and reconcilia
tion of trades; communication linkage between clients and the commodity exchange floor; and assistance
to a customer in structuring hedging strategies. Such advice would be provided to financially sophistica
ted customers as described in the Regulation.
Check guaranty services involve the authorization by bank holding companies to subscribing mer
chants to accept personal checks tendered by the merchant’s customers in payment for goods and serv
ices, and the purchase from merchants of validly authorized checks that are not subsequently honored.
(OVER)
Collection agency operation involves collecting overdue accounts receivable, either retail or com
mercial, for a contingent fee based upon a specified percentage of the amount collected. Credit bureau
services involve maintaining files on the past credit history of certain borrowers and providing that infor
mation for a fee to a credit grantor who is considering a borrower’s application for credit.
Personal property appraisal involves estimating or determining the value of all property other than
real property. Real property appraisals were previously included on the list of permissible activities.
Enclosed is the text of the am endm ent, effective D ecem ber 15,1986, w hich has been reprinted
from the Federal Register o f N ovem ber 4. Questions regarding these m atters m ay be directed to our
Dom estic Banking Applications D ivision (Tel. No. 212-720-5861).
E. G erald C o r r ig a n ,
President.
Board off Governors off tine Federal Reserve System
BANK MOLDING COM PANIES AND CHANGE IN BANK C O N TR O L
A M EN DM EN T TO REG U LA TIO N Y
(effective December 15, 1986)
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Reg. V; B©@k©t No. R-C511]
Bank fH!©idtof C@mpaoi©s
C ta g ®
to Bank <S@ntr@ll; E xp and ed List @tf
P@rsnl@sifeS@ INteini&amkfag Aetivitln®
agency: Board
of Governors of the
Federal Reserve System,
Final rule.
(202/452-2038), Division of Banking
Supervision and Regulation; or
Eamestine Hill or Dorothea Thompson,
Telecommunication-Device for the Deaf
(202/452-3544), Board of Governors of
the Federal Reserve System,
Washington, DC 20551.
s u p p l e m e n t a r y in f o r m a t io n :
la n k Holding Company Act
The Bank Holding Company Act of
1956, as amended (“BHC Act”),
generally prohibits a bank holding
SUMMARY: The Board is amending
company from engaging in nonbanking
Regulation Y implementing the Bank
activities or acquiring voting securities
Holding Company Act to include on the of a company engaged in nonbanking
list of nonbanking activities generally
activities. Section 4(c)(8) of the BHC Act
permissible for bank holding companies provides an exception to this prohibition
the following activities: Personal
in the case of activities that the Board
property appraisals, commodity trading determines, after notice and opportunity
and futures commission merchant
for hearing, to be “so closely related to
advice, consumer financial counseling, banking or managing or controlling
tax preparation and planning, check
banks as to be a proper incident
guaranty .services, operating a collection thereto.” (12 U.S.C. 1843(c)(8)). The
agency, and operating a credit bureau.
Board is authorized to make this closelyCertain of these activities have been
related determination by order in an
previously approved by the Board by
individual case or by regulation.
order.
The Board has included in its
EFFECTIVE ©AYi: December 15,1986.
Regulation Y a list of nonbanking
FOR FURTHER 8NFORMAY80N ©©MTASTil J. activities that the Board has determined
by regulation to be generally permissible
Virgil Mattingly, Deputy General
Counsel (202/452-3430), Sara A. Kelsey, for bank holding companies under
Senior Attorney (202/452-3238), or Kay section 4(c)(8) of the BHC Act. (12 CFR
225.25). Applications by bank holding
E. Bondehagen, Senior Attorney (202/
452-2087), Legal Division; Don E. Kline, companies to engage in activities
included on the list of permissible
Associate Director (202/452-3421), or
Sidney M. Sussan, Assistant Director
nonbanking activities under Regulation
Y generally are handled by the Reserve
Banks under expedited processing
procedures pursuant to delegated
authority.
Proposed Noalbanlda® Activities.
On March 2,1984, the Board proposed
for public comment new nonbanking
activities to be included on the
Regulation Y list of activities that are
generally permissible for bank holding
companies under section 4(c)(8) of the
BHC Act. The list included personal
property appraisal, commodity trading
and futures commission merchant
advisory services, consumer financial
counseling, tax preparation and
planning, check guaranty services,
collection agency and credit bureau
activities, and armored car services.
These activities were suggested by
commenters in connection with the
Board’s revision of Regulation Y in 1984.
Public Comments
Approximately 212 comments were
received on the proposal. Favorable
comments were submitted by banks,
bank holding companies, their trade
associates, and the Department of
Justice. The Federal Reserve Banks
generally commented in support of the
activities, subject to conditions to
alleviate potential adverse effects.
Businesses and professionals engaged in
the proposed activities generally
opposed allowing bank holding
companies to engage in the activities.
For this Regulation to be complete, retain:
1) Regulation Y pamphlet, revised effective February 3, 1984.
2) Amendments effective May 15, 1985 and November 7, 1986.
3) This slip sheet.
[Enc. Cir. No. 10104]
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 51, NO. 213
Closely Related to Bamking
Before the Board may authorize bank
holding companies to engage in a
nonbanking activity, the Board must find
thatjthe activity is closely related to
banking. In National Courier
Association v. Board of Governors, 518
F.2d 1229 (D.C. Cir. 1975), the court
established guidelines for determining
whether a particular activity is closely
related to banking or managing or
controlling banks. Under these
guidelines, an activity may be found to
be closely related to banking if it is
demonstrated that:
(1) Banks generally in fact provide the
proposed service;
(2) Banks generally provide services that
are operationally or functionally so similar to
the proposed service as to equip them
particularly well to provide the proposed
service: or
(3) Banks provide services that are so
integrally related to the proposed service as
to require their provision in a specialized
form.
It is sufficient if the activity satisfies
any one of these three criteria.
[ADAPSO v. Board of Governors, 745
F.2d 877, 688 (D.C. Cir. 1984); National
Courier, 516 F.2d at 1237-38.)
The courts have made it clear,
however, that the Act grants the Board
discretion to consider any criteria which
provide a reasonable basis for a finding
that a particular nonbanking activity has
a close relationship to banking.
Securities Industry Ass'n. v. Board of
Governors, 468 U.S. 207, 210 n.5 (1984).
The Board has stated that it will
consider “any . . . factor that an
applicant may advance to demonstrate a
reasonable or close connection or
relationship of the activity to banking."
49 FR 806 (1984). In considering whether
a proposed activity is permissible for
bank holding companies, the Board must
adhere to the fundamental purpose of
the BHC Act that banking be separated
from commerce, S. Rep. No. 1084, 91st
Sess. 2 (1970).
The Board has determined that all of
the proposed activities, with the
exception of armored car services, are
closely related to banking under the
National Courier guidelines, because
banks engage in the activities or
activities that are operationally or
functionally similar. The Board has
previously determined by order that
certain of the activities are closely
related to banking and has authorized
those activities on a case-by-case basis
[i.e., consumer financial counseling, tax
preparation, FCM advisory services, and
check guaranty services). The Board is
not making a finding that armored car
services are closely related to banking
for the reasons indicated in the
discussion of armored car services
below.
intangible, is closely related to banking.
[Security Pacific Corporation/ Duff &
Phelps, Inc., 71 Federal Reserve Bulletin
118 (1985)). In allowing bank holding
companies to engage in the activity of
providing valuations of companies, the
In addition to finding that an activity
Board noted that the commercial lending
is closely related to banking or
and trust departments of banks
managing or controlling banks, the
commonly make valuations of a broad
Board must find that the activity is a
range of tangible and intangible
proper incident thereto. In making this
property, including the securities of
determination, section.4(c)(8) requires
closely held companies. Although the
the Board to consider whether the
Board did not specify the exact types of
activity will result in public benefits,
personal property appraisal it
such as greater convenience, increased
determined were closely related to
competition, or gains in efficiency, that
banking in the context of valuation
outweigh possible adverse effects, such services, providing valuations of
as undue concentration of resources,
companies necessarily involves the
decreased or unfair competition,
appraisal of various types of intangible
conflicts of interest, or unsound banking personal property, such as securities of
practices.
closely held corporations, as well as any
This determination usually is made on tangible personal property that a
a case-by-case basis in connection with company might possess.
individual applications to engage in a
In addition, a substantial number of
particular activity. However, the Board
the public commenters stated that banks
may determine not to add an activity to currently engage in the appraisal of
the list of permissible activities in
personal property through their trust
Regulation Y on the basis that the
departments. Several commenters stated
activity generally would result in
that trust departments value private
adverse effects that are not outweighed business interests for their own trust
by public benefits. In addition, the
accounts and other types of personal
Board may include in its regulations
property in a customer’s estate for
various conditions or limitations on
probate and tax purposes. In addition,
which the Board may rely to alleviate
many commenters noted that banks
possible adverse effects of particular
engage in property appraisal activities
activities.
in
connection with secured lending
With respect to public benefits, each
activities and routinely appraise
of the activities being added to the list
property which they take as collateral
would provide greater convenience to
on loans, including perishable
customers and, if commenced de novo,
commodities, durable goods, computer
increase competition. In order to
minimize potential adverse effects with software, crops, livestock, machinery,
and equipment.
respect to certain of the activities, the
Banks also engage in appraisal
Board is imposing certain conditions
activities
in connection with their
that have been previously imposed by
leasing, activities. With regard to leasing,
order or that were suggested by the
banks determine the residual value of
comments. Subject to these conditions,
leased property, such as vehicles and
the Board has determined as a general
equipment, in order to establish the
matter that the public benefits of the
terms of a lease. Some money-center
activities Outweigh possible adverse
banks have appraised aircraft and
effects.
Proper Incident to Banking
locomotives, in connection with their
Specific Activities
leasing or lending transactions. Finally,
Personal Property Appraisal. Personal banks may become involved in personal
property appraising when they appraise
property appraisal involves estimating
real property, since certain types of real
or determining the value of property
other than real property. In the broadest property, such as factories or apartment
buildings, contain fixtures or other
sense, the activity requires expertise
personal property that must be
regarding all types of personal and
evaluated to determine that the value of
business property, including intangible
the real property.
property, such as corporate securities.
On the basis of the foregoing, the
The Board has previously authorized
Board finds that personal property
by regulation real estate appraisal
appraisal is closely related to banking
activities. (12 CFR 225.25(b)(13)). In
under the National Courier tests. The
addition, the Board has determined by
order that the appraisal of certain type' Board’s determination is without
limitation as to types of personal
of personal property, both tangible an.
2
property to be appraised. Although
banks may not be involved currently in
appraising every type of personal
property in connection with their
banking functions, it is evident that they
do engage in appraisals of a variety of
both tangible and intangible property on
a routine basis. In addition, as one of the
commenters pointed out, there are
general unifying principles and concepts
that are basic to all branches of the
appraisal profession. Hence, the skills
that banks currently possess that enable
them to evaluate one type of personal
property are likely to be transferable to
other types of personal property.
The comments indicate that personal
property appraisal services are likely to
result in public benefits in the form of
increased competition in the appraisal
industry due to the increased number of
competitors and enhanced convenience
to customers who would have the
opportunity to obtain more financial
services at a single location. Approval of
personal property appraisal as a
permissible activity would appear to
involve few adverse effects. The
commenters did not indicate any
significant adverse effects arising from
this activity.
Accordingly, the Board has
determined to add this activity to the list
of permissible nonbanking activities in
Regulation Y without conditions.
Federal Reserve Bulletin 780 (1984);
Several commenters favored expanding
Manufacturers Hanover Corporation. 70 the activity to include advice on futures
Federal Reserve Bulletin 369 (1984)). The
proposed CTA activity is identical to
FCM advice and may be provided by a
bank holding company that does not act
as an FCM [i.e., execute or clear orders
for futures and options for customers). A
reasonable basis thus exists that acting
as a CTA is closely related to banking
under the National Courier guidelines.
The comments indicate that the
addition of futures and options advisory
services to the list of permissible
activities is likely to result in public
benefits in the form of increased
competition through de novo entry into
the market place and would provide an
additional service to customers. Some
commenters noted possible adverse
effects, such as tying and conflicts of
interest when the advisor is also a
principal or dealer in the underlying
financial physicals. The risk of liability
for negligent advice also was noted.
The Board considers that the anti
tying provisions of the BHC Act
substantially address any problems in
connection with the possiblity of tying
of services. In order to further minimize
possible conflicts and risk, however, the
Board is imposing additional conditions
similar to those previously imposed by
order that prohibit the advisor from
dealing and limit advice to financially
sophisticated customers on futures and
options on futures previously approved
for FCM subsidiaries.
Accordingly, the Board has
determined that FCM and CTA advice is
a permissible activity subject to the
following conditions:
and options for nonfinancial
commodities, such as agricultural
commodities. However, other
commenters indicated that the field of
banking organizations with sufficient
expertise to offer advice on these
instruments is narrow, and the
overwhelming majority of the
commenters did not request expansion
of the types of instruments at this time.
Accordingly, the Board is maintaining
the limitation on the scope of advice in
the Board's previous decisions
approving the activity by order. This
decision does not preclude a bank
holding company from filing an
individual application for expanded
advisory authority under section 4(c)(8)
of the BHC Act.
Consumer Financial Counseling.
Consumer financial counseling involves
providing counseling, educational
courses, and instructional materials to
individuals on consumer-oriented
financial management matters, including
debt consolidation, mortgage
applications, bankruptcy, budget
management, real estate tax shelters,
tax planning, retirement and estate
planning, insurance and general
investment management. This activity
does not include the sale of specific
products or investments. The
Commodity Trading and Future
commenters overwhelmingly supported
Commission Merchant Advice. The
the addition of this activity to the
Board proposed to add to the list of
Regulation Y list.
permissible activities furnishing
The Board has previously determined
investment advice, including counsel,
that the provision of consumer financial
publications, written analysis and
counseling services is closely related to
reports, relating to the purchase and
banking and has approved this activity
sale of those futures contracts and
by order. [Citicorp,/C iticorp Person-to(1) Ths FCM oe CTA limits its investment
options on futures contracts that bank
advice to those futures and options on futures Person Financial Centers, 65 Federal
holding company FCM subsidiaries are
that bank holding companies may execute
Reserve Bulletin 265 (1979); Maryland
permitted to execute and clear under
and clear for customers through their FCM
National Corporation, 71 Federal
| 225.25(b)(18) of Regulation Y. Such
subsidiaries under 1 225.25(b)(18) of
Reserve Bulletin 253 (1985); United City
advice could be provided by a bank
Regulation Y [i.e., futures contracts and
options on futures contracts traded on major Corporation, 71 Federal Reserve Bulletin
holding company either through a
662 (1985)).
commodity exchanges for bullion, foreign
futures commission merchant (“FCM”)
The public comments indicated that
exchange, government securities, and money
subsidiary or as a commodity trading
market instruments that a bank may buy or
the addition of this activity to the list
advisor (“CTA”). FCMs and CTAs are
sell in the cash market for its own account);
would result in public benefits in the
subject to registration with and
(2) Customers are limited to financial
form of enhanced customer
regulation by the Commodity Futures
institutions and other financially
Trading Commission pursuant to the
sophisticated customers that have significant convenience, increased availability of
financial information and counseling,
Commodity Exchange Act, as amended. dealings or holdings in the underlying
[7 U.S.C. 1 et seq.}
commodities, securities, or instruments; and and increased competition to the extent
bank holding companies engage in the
(3) The FCM or CTA may not trade for its
The commenters generally favored
activity de novo.
own account except for the purpose of
adding this activity to the list of
hedging a cash position in the related
Some commenters expressed concern
permissible activities in Regulation Y.
that the activity could result in unfair
The Board has previously determined government security, bullion, foreign
competition, conflicts of interest, and
that futures and options advice by FCMe currency, or money market instrument
The Board specifically requested
is closely related to banking and has
other adverse effects. For example, a
comment on whether advice should be
approved this activity by order. [E.g.,
potential conflict was perceived
Bankers Trust New York Corporation,
limited to the financial commodities for between a bank’s traditional role as a
71 Federal Reserve Bulletin 111 (1985);
which the Board has authorized FCM
source of objective financial advice and
J.P. Morgan &■ Co. Incorporated, 70
execution and clearance activities.
the bank’s interest in promoting ©
3
particular product, especially if the bank
holding company provides discount
brokerage services in addition to
consumer financial counseling. Another
conflict was noted in the provision of
debt consolidation or bankruptcy
counseling to clients who are in default
on loan payments to an affiliate. Some
commenters stated that such counseling
could also give rise to legal liability for
the unauthorized practice of law,
depending on the content of the advice
and State law, and that there would be a
general risk of liability for negligent
advice. The possibility of unauthorized
disclosure of confidential information
concerning customers was also noted.
To address these concerns, the Board
has determined that conditions, similar
to those previously established by the
Board in orders approving consumer
financial counseling activities, are
necessary to guard against the potential
conflicts associated with this activity.
(See Citicorp, supra, 65 Federal Reserve
Bulletin at 267]. Accordingly, the Board
is establishing the following conditions
on consumer financial counseling
services in Regulation Y:
the customer is not required to purchase
any services from Citicorp affiliates, the
second condition that the Board has
incorporated into this regulation.
The third condition is also based on
the Board’s order in Citicorp and
prohibits the counselor from obtaining
or disclosing confidential information
concerning its customers without the
customer’s written consent. The
prohibition against unauthorized
disclosure of confidential customer
information does n ot however, bar
disclosure that is legally required, for
example, by statute or under a court
order.
retirement plans, estate planning and
family trusts and, for corporations,
includes analysis of the tax implications
of mergers and acquisitions, portfolio
mix, specific investments, previous tax
payments and year-end tax planning.
Tax preparation involves the
preparation of tax forms and advice
concerning liability based on records
and receipts supplied by the client. The
overwhelming majority of the
commenters favored adding tax
planning and preparation services to the
list of permissible activities.
The Board has previously determined
that tax preparation services for
With respect to possible unfair
individuals is closely related to banking
competition, the Board relies on the anti and has approved this activity by order.
typing provisions of the BHC Act (12
[Bancorp Hawaii, Inc., 71 Federal
U.S.C. 1971 and 1972(1)} to substantially Reserve Bulletin 168 (1985)). Since tax
address the commenters’ concerns. With preparation services for corporations
respect to possible liability risk, the
are functionally or operationally similar
Board notes that insurance may be
to the tax preparation services that
available in many cases to reduce any
banks already provide to individuals as
losses and cautions applicants to
well as to their affiliates and other
confine their activities to applicable
financial institutions, the Board has
state law limitations.
determined that corporate tax
In addition, the Board has determined preparation services are closely related
that a bank holding company may offer to banking.
The Board also has determined that
(1) Educational materials and presentations this activity through a subsidiary that
also engages in securities brokerage
tax planning is closely related to
used by the counselor may not promote
only if the brokerage activity is provided banking because banks provide this
specific products and services;
by completely different personnel and in service through their trust and financial
(2) The counselor shall advise each
customer that the customer is not required to
separate offices or in separate and
counseling departments, in addition,
purchase any services from affiliates; and
distinctly marked areas of the facility
banks perform tax analyses of business
(3) The counselor shall not obtain or
through which counseling services are
transactions they finance, provide tax
disclose confidential information concerning
offered. The Board imposed similar
planning services to financial
its customers without the customer’s written
restrictions
in
approving
by
order
an
institutions, and provide tax planning
consent or pursuant to legal process.
application by a bank holding company services to corporations in connection
The first of these conditions provides
to provide consumer financial
with merger and acquisition and similar
that the consumer financial counselor’s
counseling and securities brokerage
educational materials and presentations services in the same subsidiary. United advisory services, and through their
leasing subsidiaries.
may not promote specific products and
City Corporation, 71 Federal Reserve
The Board specifically requested the
services. The purpose of the consumer
Bulletin 682 (1885).
commenters to address whether tax
financial counseling authorization is to
The Board has also determined that
planning for corporations should be
allow bank holding companies to
consumer financial counseling does not
considered management consulting. The
provide consumers with basic consumer include the provision of portfolio
Board
has determined that general
financial education and advice
investment advice or portfolio
management consulting is not an
concerning the development of a general management. These activities are
activity that is closely related to
financial plan to meet the consumer’s
already permissible under provisions of
banking. The Board has defined
needs and objectives. The condition is
Regulation Y authorizing trust activities
management consulting to include a
intended to promote this purpose by
(12 CFR 225.25(b)(3)) and investment
broad
range of counseling on matters
ensuring the objectivity of educational
advice (12 CFR 225.25(b)(4)(iii)) subject
relating to the substantive operation of a
materials and activities and preventing
to a fiduciary standard. The Board
trade or business, often on a continuing
them from being used to promote
believes that these activities should not
basis. (See 12 CFR 225.25(b)(4) n.2; First
specific products and services, such as
be authorized in other than a fiduciary
those that may be offered by an affiliate. context because of potential conflicts of Commerce Corporation, 58 Federal
Reserve Bulletin 674 (1972)).
For example, in Citicorp the Board
interest that could arise between the
The Board has concluded that tax
noted that the consumer financial
provision of disinterested investment
planning is a specialized form of
counseling materials proposed in that
advice and the incentives to promote
financial advice, akin to the provision of
case were objective and did not promote specific products sold by the bank
financial feasibility studies on specific
Citicorp financial services. This
holding company or its affiliates.
projects, which the Board has previously
condition incorporates the distinction
Tax Planning and Preparation. Tax
between promotional and educational
planning involves providing advice and approved [Security Pacific Corporation/
Duff &Phelps, Inc., 71 Federal Reserve
activities required in the Citicorp case.
strategies designed to minimize tax
In addition, Citicorp undertook to
liabilities and includes, for individuals, Bulletin 118 (1985)), and does not
involve the degree of influence over
specifically advise each customer that
analysis of the tax implications of
4
substantive operations necessary to be
deemed management consulting.
Several commenters recommended
that the Board expand the final rule to
include services to noncorporate
businesses, such as partnerships and
sole proprietorships, and tax exempt
nonprofit organizations. Although not
specifically proposed, services to these
customers represent a logical extension
of the proposed activity involving the
same skills and expertise necessary to
perform such services for corporations
and individuals. In view of this
similarity, the Board believes that its
initial proposal is sufficiently broad to
encompass tax services to noncorporate
businesses and nonprofit organizations.
The comments indicated that tax
planning and preparation services are
likely to result in public benefits in the
form of enhanced convenience to
customers, who would have a single
source for many types of financial
services. In addition, to the extent that
bank holding companies enter this
activity on a de novo basis, competition
would be increased.
Some commenters noted potential
adverse effects similar to those in
consumer financial counseling, such as
conflicts of interest if tax planner or
preparer used materials that promoted
other specific products or services, the
misuse of confidential information
concerning customers, or tying. Some
commenters raised the possibility that
tax planning services could give rise to
legal liability for negligent advice or for
the unauthorized practice of law.
The Board has determined that the
activity should be added to the list of
permissible activities subject to the
following conditions to guard against
potential conflicts and misuse of
confidential information:
specify the activity as the practice of
law.
Check Guaranty Services. The
proposed activity of check guaranty
services would permit bank holding
companies to authorize the acceptance
by subscribing merchants of certain
personal checks tendered by the
merchant’s customers in exchange for
goods and services and to purchase
validly authorized checks from
merchants in the event the checks are
subsequently dishonored.
The Board has previously determined
that check guaranty services are closely
related to banking and has approved
applications by bank holding companies
on a case-by-case basis to engage in this
activity. [Barnett Banks of Florida, 65
Federal Reserve Bulletin 263 (1979);
Citicorp, 67 Federal Reserve Bulletin 740
(1981)).
The comments indicate that the
provision of check guaranty services by
bank holding companies can reasonably
be expected to provide public benefits in
the form of increased competition
through de novo entry into the market
place. In addition, check guaranty
services would increase customer
convenience by facilitating the use of
checks by consumers for the purchase of
retail goods and services while
providing merchants with a means to
decrease bad check losses.
The commenters did not indicate that
any significant adverse effects would
result from this activity. In approving
check guaranty services by order,
however, the Board noted the potential
for unfair competition or conflicts of
interest with respect to the authorization
of checks not drawn on affiliated banks.
To minimize this possibility, the Board
relied on a commitment that the
applicant would not discriminate
against checks drawn on unaffiliated
(1) The materials used by the tax planner
banks.
[Citicorp, supra). The Board
or preparer do not promote other specific
believes it is appropriate to maintain
products and services; and
that condition in authorizing check
(2) The tax planner or preparer shall not
guaranty services under Regulation Y.
obtain or disclose confidential information
concerning its customers without the
In proposing this activity, the Board
customer’s written consent or pursuant to
asked whether conditions should be
legal process.
imposed to limit the liability of a bank
holding company on the purchase of
With respect to tying, existing
dishonored checks. The commenters on
provisions of the BHC Act are
this issue answered in the negative. A
specifically directed at preventing this
number of commenters noted that banks
type of abuse. Liability risk may be
impose various policies and procedures
reduced by insurance and conforming
to limit liability through the terms of the
activities to applicable legal and
agreement with the merchant
fiduciary limitations.
subscribing to the service, and some
With respect to the unauthorized
practice of law, the Board notes that the limit liability to the amount of the
purchased check. The Board believes
activity must be conducted in strict
that such procedures are sufficient to
accordance with applicable local law,
and that the activity would therefore be limit liability arising, from this action.
Operating a Collection Agency or a
prohibited in those jurisdictions that
5
Credit Bureau. A collection agency
seeks to collect payment on the overdue
bills of debtors, charging the party
submitting the claim a flat dollar amount
or a specified percentage commission
contingent on the amount collected. A
credit bureau gathers, stores, and
disseminates factual information
relating to the identity and paying habits
of consumers. Credit bureaus then
provide this information for a fee to
credit grantors such as retailers, banks
and finance companies to enable these
institutions to arrive at prudent credit
granting decisions.
The commenters noted that banks
function as collection agencies, since
they are presently engaged in debt
collection activities for loans they
originate and service. A number of
commenters reported that some banks
maintain professional staffs to conduct
such collection activities. Other
commenters pointed out that banks
historically have operated collection
agencies in order to collect on overdue
credit card accounts. Accordingly, there
is a reasonable basis for concluding that
operating a collection agency is closely
related to banking under the National
Courier guidelines.
With regard to the credit bureau
activity, the comments indicated that
banks provide services that are
operationally or functionally similar.
Numerous commenters noted that banks
maintain credit files and analyze credit
information as part of their consumer
lending function. Therefore, banks
'already possess a particular expertise
with regard to credit reporting, and a
reasonable basis exists to conclude that
this activity is closely related to banking
under National Courier.
The comments indicate that the
operation of collection agencies and
credit bureaus by bank holding
companies can reasonably be expected
to produce benefits to the public by
increasing competition through de novo
entry into the marketplace for these
services. A number of commenters
noted that the national credit bureau
market is dominated by a small number
of firms and that de novo entry by bank
holding companies in this area would
increase competition. In addition, the
convenience of business customers
would be enhanced because they would
be able to obtain an increased number
of financial services at a single source.
With respect to possible adverse
effects from operating'a collection
agency, several commenters expressed
concern over the potential for unfair
competition or tying if business
customers of an affiliated bank were
required to use the collection services.
Other commenters noted possible
conflicts of interest arising if a bank
allowed its affiliated collection agency
to prematurely garnish a customer’s
bank account or to give a preference to
an affiliated creditor in cases where
multiple creditors are trying to collect
from the same debtor.
Although the anti-tying provisions
address potential tie-in arrangements,
the Board has determined that
conditions are warranted to minimize
potential unfair competition or conflicts
of interest. Accordingly, the Board is
establishing the following conditions on
operating a collection agency:
(1) The collection agency shall not obtain
the names of customers of competing
collection agencies from an affiliated
depository institution that maintains trust
accounts for those agencies; and
(2) The collection agency shall not provide
preferential treatment to an affiliate or a
customer of such affiliate seeking collection
of an outstanding debt.
With respect to possible adverse
effects from operating a credit bureau,
representatives of the credit bureau
industry expressed concern regarding
potential conflicts of interest and unfair
competition resulting from a bank
holding company performing credit
bureau activities. For example, under
the Fair Credit Reporting Act, a credit
bureau is required to investigate the
accuracy of any item of information
disputed by a consumer. (15 U.S.C.
1681(i}}. Industry representatives
claimed that a bank holding company
credit bureau may not conduct an
impartial investigation if the disputed
information originates with an affiliate.
In addition, they claimed that holding
company entry into the industry would
not result in increased competition
through de novo entry, but rather would
result in the absorption of existing firms
by bank holding companies.
The Board considered similar
arguments when it denied a bank
holding company’s proposal to engage in
providing credit ratings for large
businesses, many of which w ere credit
customers of its subsidiary bank.
[Security P acific C orporation/D uff &
Phelps, Inc., 71 Federal Reserve Bulletin
118 (1985)). The present proposal,
however, would allow bank holding
companies to engage only in consumer
credit reporting activities, rather than
credit reporting activities concerning
large commercial institutions. Consumer
related activities would be subject to the
public disclosure and other
requirements of the Fair Credit
Reporting Act. In addition, in order to
address the possible conflict of interest
of favoring an affiliate, the Board is
imposing the condition that a credit
bureau shall not provide preferential
treatment to a customer of an affiliated
financial institution.
Although the national credit reporting
industry consists of only five firms, bank
holding company entry into this market
need not have an anticompetitive effect
if entry is on a de n o vo basis.
Accordingly, the Board would carefully
consider an application to acquire one
of the five dominant firms under the
standards in the BHC A c t including
whether it would result in unfair
competition, undue concentration of
resources, conflicts of interest, or other
adverse effects.
Accordingly, the Board has
determined to add operation of a credit
bureau to Regulation Y subject to the
above noted conditions.
A rm ored Car Services. The Board
proposed to amend Regulation Y to
authorize bank holding companies to
provide fully insured transportation of
cash, securities, and valuables
(primarily between commercial
customers and financial institutions)
and such ancillary services as coin
wrapping, change delivery, mail
delivery, payroll check cashing,
servicing of ATMs and leasing safes to
commercial customers.
This activity w as the most
controversial of the activities proposed,
and generated the most negative
comment. The Board received numerous
comments against adding this activity to
the list, primarily from armored car
operators, their trade associations, and
insurers of armored car operators.
The opponents maintained that the
activity is not closely related to banking
but rather is essentially a transportation
activity requiring no banking expertise.
The opponents noted several possible
adverse effects, including tying, conflicts
of interest, liability risk for lo sses of
valuables, or the use of armored car
services to facilitate illegal branch
banking. A large number of these
commenters also maintained that
approval would lead to unfair
competition, possibly disrupting the
existing level of service.
The Board initially proposed adding
this activity to the list in 1971. In view of
the adverse comments received from the
industry at that time and the lack of
strong interest on the part of bank
holding companies, the Board did not
issue a final rule, finding the evidence in
support of the activity to be insufficient.
6
However, the Board stated it would
consider individual applications for this
activity. To date the Board has received
no bank holding company applications
for armored car services.
The Board received many comments
from bank holding companies
expressing generalized support for the
addition of armored car services to the
Regulation Y list along with the other
proposed new activities. Only a few of
the commenters commented specifically
on this activity, however, or indicated a
desire to engage in the activity in the
near future.
In view of the issue raised by the
comments on this activity and the
minimal interest by bank holding
companies, the Board has decided not to
add the activity to the Regulation Y list
at this time. This decision w ill not
preclude Board consideration of
individual applications to engage in the
activity under section 4(c)(8) of the Act,
however.
Accordingly, the Board w ill continue
its present policy of deferring action to
add armored car services to Regulation
Y pending receipt of an application for
the activity. The Board expresses no
opinion as to whether the activity would
meet the N a tio n a l Courier test and
would be a proper incident to banking.
Regulatory Flexibility Analysis—
Paperwork Reduction Act
The Board has certified that adoption
of this amended regula tion dealing with
permissible activities for bank holding
companies is not expected to have a
significant economic impact on small
business entities within the meaning of
the Regulatory Flexibility Act (5 U.S.C.
601 e t seq). The Board is required by
section 4(c)(8) of the BHC Act, 12 U.S.G.
1843(c)(8), to determine whether
nonbanking activities are closely related
to banking and thus are permissible for
bank holding companies. The Board is
clarifying the scope of activities it
considers to be closely related to
banking and permissible for bank
holding companies, with Board
approval. The amended regulation does
not impose different or more
burdensome requirements than the prior
regulation for applications to the Board
to engage in such activities. By clarifying
the scope o f permissible activities, the
amended regulation w ill permit certain
additional applications to qualify for
more expeditious processing in the
regional Federal Reserve Banks under
authority delegated by the Board. 12
CFR 225.23.
The amended regulation im poses no
additional information collection
requirements and imposes no
substantial change in the requirements
for applications to engage in nonbanking
activities.
List of Subjects in 12 CFR Part 225
Banks, Banking, Federal Reserve
System, Holding companies, Reporting
and recordkeeping requirements.
PART 225—[AMENDED]
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 1958, as amended (12
U.S.C. 1844(b)), the Board is amending
12 CFR Part 225 as follows:
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), 31GS, 3108, 3807 and 3808.
2. Section 225.25(b) is amended by
revising paragraph (13) and adding new
paragraphs (19), (20), (21), (22), (23), and
(24) to read as follows:
§ 225.25 List o f perm issible <re@rsbanikiffi§
activities.
*
*
*
*
*
in paragraph (b)(18) of this section,
provided that the FCM or CTA:
(i) Does not trade for its own account
except for the purpose of hedging a cash
position in the related government security,
bullion, foreign currency, or money market
instrument: and
(ii) Limits its advice to financial institutions
and other financially sophisticated customers
that have significant dealings or holdings in
the underlying commodities, securities, or
instruments.
advice and strategies to minimize tax
liabilities, and the preparation of tax
forms, provided:
(i) The materials used by the tax planner or
preparer do not promote other specific
products and services; and
(ii) The tax planner or preparer does not
obtain or disclose confidential information
concerning its customers without the
customer’s written consent or pursuant to
legal process.
(22) Check guaranty services.
Authorizing a subscribing merchant to
accept personal checks tendered by the
merchant’s customers in payment for
goods and services and purchasing from
the merchant validly authorized checks
that are subsequently dishonored,
provided that the check guarantor does
not discriminate against checks drawn
on unaffiliated banks.
(23) Operating collection agency.
(i) Educational materials and presentations Collecting overdue accounts receivable,
used by the counselor may not promote
either retail or commercial, provided the
specific products and services:
collection agency:
(20) Consumer financial counseling.
Providing advice, educational courses,
and instructional materials to
consumers on individual financial
management matters, including debt
consolidation, applying for a mortgage,
bankruptcy, budget management, tax
planning, retirement and estate
planning, insurance and general
investment management, provided:
(ii) The counselor advises each customer
that the customer is not required to purchase
any services from affiliates: and
(iii) The counselor does not obtain or
disclose confidential information concerning
its customers without the customer’s written
consent or pursuant to legal process.
This paragraph does not authorize the
provision of advice on specific products
or investments or the provision of
portfolio investment advice or portfolio
management, which are authorized
* * * * *
under paragraph (b)(3) and (4)(iii) of this
(19)
Investment advice on financial section subject to certain fiduciary
futures and options on futures. Providing standards. If consumer financial
counseling is offered by a company that
investment advice, including counsel,
also offers securities brokerage services
publications, written analyses and
pursuant
to paragraph (b){15) of this
reports, as a futures commission
section, the brokerage and counseling
merchant ("FCM”) authorized pursuant
services must be provided by different
to paragraph (b)(18) of this section or as
personnel and in separate offices or in
a commodity trading advisor ("CTA”)
separate and distinctly marked areas.
registered with the Commodity Futures
(21) Tax planning and preparation.
Trading Commission, with respect to the
Providing individuals, businesses, and
purchase and sale of futures contracts
nonprofit organizations tax planning
and options on futures contracts for the
commodities and instruments referred to and tax preparation services, including
(b) * * *
(13) Real estate and personal property
appraising. Performing appraisals of real
estate and tangible and intangible
personal property, including securities.
7
(i) Does not obtain the names of customers
of competing collection agencies from an
affiliated depository institution that
maintains trust accounts for those agencies;
and
(ii) Does not provide preferential treatment
to an affiliate or a customer of such affiliate
seeking collection of an outstanding debt.
(24) Operating credit bureau.
Maintaining files on the past credit
history of consumers and providing that
information to a credit grantor who is
considering a borrower’s application for
credit, provided that the credit bureau
does not provide preferential treatment
to a customer of an affiliated financial
institution.
By order of the Board of Governors of the
Federal Reserve System, October 30,1986.
William W. Wiles,
Secretary o f the Board.
[FR Doc. 86-24930 Filed 11-3--86; 8:45 am)
B 1 U J N © C O D E 6 2 1 0 -O T -S 3
@FedFRASER