Full text of Federal Reserve Bank of New York Circulars : 10303. Bank Holding Companies

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No.

10303 ~l

June 29, 1989

BANK HOLDING COMPANIES
Comment Invited by July 20 on Proposals Regarding
Dealing in Affiliate Securities Under Section 20
of the Glass-Steagall Act
To All Bank Holding Companies, and Others Concerned,
in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has proposed two changes in its rules regarding un­
derwriting or dealing in certain securities by bank holding company subsidiaries. Following are the texts o f the
Board’s statements announcing these proposals:

Proposal to increase the revenue limit on bank-ineligible securities
T h e F e d e r a l R e s e r v e B o a r d is s e e k in g p u b lic c o m m e n t o n w h e t h e r t o in c r e a s e fr o m 5 p e r c e n t to 1 0 p e r c e n t th e r e v e n u e
lim it e s t a b lis h e d b y th e B o a r d in its o r d e rs a u th o r iz in g b a n k h o ld in g c o m p a n y s u b s id ia r ie s to u n d e r w r it e a n d d e a l in b a n k in e li g i b l e s e c u r it ie s c o n s is t e n t w it h s e c tio n 2 0 o f t h e G la s s - S t e a g a ll A c t.
C o m m e n t m u s t b e s u b m itte d to th e B o a r d b y J u ly 2 0 , 1 9 8 9 .
In its o r d e r s th e B o a r d s ta te d th at u n d e r w r itin g a n d d e a lin g w it h in a r a n g e o f 5 to 1 0 p e r c e n t o f r e v e n u e s w o u ld n o t
v io la t e s e c t io n 2 0 . T h e B o a r d s e t a n in itia l lim it o f 5 p e r c e n t a n d sta te d it w o u ld r e v ie w w h e t h e r to in c r e a s e th e lim it u p
to 1 0 p e r c e n t a fte r o n e y e a r o f o p e r a tio n .

Proposal to modify restriction on asset-based securities
T h e F e d e r a l R e s e r v e B o a r d is s e e k in g p u b lic c o m m e n t o n w h e t h e r to m o d i f y a r e s tr ic tio n o n u n d e r w r it in g a s s e t - b a s e d
s e c u r it i e s o f a f f ilia t e s in th e B o a r d ’s o r d e r s u n d e r s e c t io n 2 0 o f th e G la s s - S t e a g a ll A c t.
C o m m e n t m u s t b e s u b m itte d to th e B o a r d b y J u ly 2 0 , 1 9 8 9 .
T h e m o d if ic a t io n w o u ld a llo w u n d e r w r itin g o f a f f ilia t e s ’ s e c u r it ie s i f th e y are:
• ra ted b y a n o n - a f f ilia t e d n a tio n a lly r e c o g n i z e d r a tin g a g e n c y ; o r
• is s u e d o r g u a r a n te e d b y th e F e d e r a l H o m e L o a n M o r t g a g e C o r p o r a tio n , th e F e d e r a l N a tio n a l M o r t g a g e A s s o c ia t i o n ,
o r th e G o v e r n m e n t N a tio n a l M o r tg a g e A s s o c ia t i o n , o r r e p r e se n t in te r e s ts in s u c h o b lig a t io n s .

Printed on the reverse side is the text of the Board’s proposals, which have been reprinted from the Federal
Register of June 26. Comments thereon should be submitted by July 20, 1989, and may be sent to the Board of
Governors, as specified in the proposals, or to our Domestic Banking Applications Division.




E. G erald C o r rig an ,

President.
(OVER)

FEDERAL R ESER V E SYSTEM
R eview o f R e ve n u e Lim it on Se curitie s
U nderw riting S u b sid ia rie s
T h e B o a r d is c o n s id e r in g w h e t h e r to
in c r e a s e fro m 5 to 10 p e r c e n t th e
r e v e n u e lim it e s t a b l i s h e d b y th e B o a r d
in its S e c t io n 20 O r d e r s a u th o r iz in g b a n k
h o ld in g c o m p a n y s u b s id ia r ie s to
u n d e r w r ite a n d d e a l in b a n k - in e lig ib le
s e c u r it ie s . S e e , e .g ., Citicorp, f.P. Morgan

& Co. Incorporated, and Bankers Trust
New York Corporation, 73 F e d e r a l
R e s e r v e B u lle tin 473, 485 (1987), affirmed
sub nom. Securities Industry
Association v. Board of Governors of
the Federal Reserve System/Citicorp,
J.P. Morgan & Co. Incorporated, Bankers
Trust N ew York Corporation, 839 F.2d 47
(2d Cir. 1988), cert, denied, 108 S.Ct. 2830
(1988). See also Securities Industry
Association v. Board of Governors of
the Federal Reserve System /The Chase
Manhattan Corporation, 847 F.2d 890
(D.C. Cir. 1988).
In those Orders, the Board determined
that a bank holding company subsidiary
would not be “engaged principally” in
securities underwriting activity in
violation of section 20 of the GlassSteagall Act (12 U.S.C. 377), if the
subsidiary's gross revenue from bankineligible underwriting and dealing did
not exceed a range of between 5 and 10
percent of its total gross revenues.
Initially, the Board established a 5
percent limit on the amount of revenues
received by a section 20 subsidiary from
bank-ineligible activity for the first year
of operation.
The Board stated that it would review
after one year of operation under the
Orders whether to increase the limit to
10 percent. In this connection, a number
of bank holding companies have filed
requests for an increase of the revenue
limit to the 10 percent level.
Any comments regarding this matter
should be submitted in writing and




received by William VV. Wiles,
Secretary, Board of Covemors of the
Federal Reserve System, Washington,
DC 20551, not later than July 20,1989.
B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e
S y s t e m . Jun e 20, 1 9 8 9 .
J e n n if e r J. J o h n s o n ,

Associate Secretary of the Board.
[FR D o c . 8 9 - 1 4 9 9 0 F ile d 6 - 2 3 - 8 9 ; 8:45 a m ]
B ILLIN G CO D E 6210-01-M

R e q u e st for M odification of
R estrictio n on S e ctio n 20 S u b sid ia rie s’
U nderw riting o f A s se t-B a c k e d
Securitie s o f A ffiliates

The Board is considering whether to
modify a provision in the Board's
Section 20 Orders which prohibits
securities subsidiaries of bank holding
companies from underwriting or dealing
in bank-ineligible securities issued by
affiliates or representing interests in, or
secured by, obligations originated or
sponsored by affiliates (“affiliate
securities”). This restriction was
established by the Board in its initial
Orders under section 4(c)(8) of the Bank
Holding Company Act (12 U.S.C.
1843(c)(8)) authorizing the establishment
of subsidiaries that underwrite and deal
in bank-ineligible securities to a limited
extent consistent with section 20 of the
Glass-Steagall Act (12 U.S.C. 377). The
prohibition was adopted by the Board as
a precautionary measure to address the
Board’s specific concern that a Section
20 subsidiary might be tempted to
securitize the affiliates’ least
creditworthy assets. See, e.g., Citicorp.
J.P. Morgan & Co. Incorporated, and
Bankers Trust New York Corporation,
73 Federal Reserve Bulletin 473, 499, 504
(1987).
S u b s e q u e n t to th e B o a r d ’s in itia l
O rd er s, th e U .S . S e n a t e a n d C o m m it t e e s
o f th e U .S . H o u s e o f R e p r e s e n t a t iv e s
v o t e d in fa v o r o f l e g i s la t io n to p e r m it

PR IN T E D IN NEW YORK. FROM

F E D E R A L R E G IS T E R ,

b a n k h o ld in g c o m p a n y s u b s id ia r ie s to
u n d e r w r ite a n d d e a l in a f f ilia t e
s e c u r it ie s th a t are: (1) R a te d b y a n
u n a ffilia te d , n a t io n a lly r e c o g n iz e d r a tin g
o r g a n iz a tio n , or (2) i s s u e d or g u a r a n te e d
b y th e F e d e r a l H o m e L o a n M o r tg a g e
C o r p o r a tio n , th e F e d e r a l N a t io n a l
M o r tg a g e A s s o c ia t i o n , or th e
G o v e r n m e n t N a t io n a l M o r tg a g e
A s s o c ia t i o n , or r e p r e s e n t i n t e r e s t s in
s u c h o b l i g a t io n s .1 T h e B o a r d h a s
r e c e iv e d r e q u e s t s fro m b a n k h o ld in g
c o m p a n ie s to m o d ify th e p r o h ib itio n o n
u n d e r w r itin g a f f ilia t e s e c u r it ie s to
p erm it s u c h u n d e r w r itin g a n d d e a lin g if
th e r e q u ir e m e n ts l is t e d a b o v e a r e m e t.
In a p p r o v in g th e in itia l e s t a b lis h m e n t
o f s e c t io n 20 s u b s id ia r ie s , th e B o a r d
s t a t e d it w o u ld r e v i e w th e c o n t in u e d
a p p r o p r ia t e n e s s o f th e lim it a t io n s
e s t a b l i s h e d in itia lly , a n d r e s e r v e d th e
righ t to a m p lify or m o d ify th e m fro m
tim e to tim e a s th e B o a r d d e e m s
n e c e s s a r y to e n s u r e th e s t a n d a r d s o f th e
B a n k H o ld in g C o m p a n y A c t a r e m e t.
T h e B oard r e q u e sts c o m m e n t on
w h e t h e r r e p la c in g th e e x is t in g
p r o h ib itio n o n u n d e r w r itin g a f f ilia t e
o b lig a t io n s w it h a t e s t b a s e d o n th e
a b o v e - s t a t e d r e q u ir e m e n ts w o u ld b e
a p p r o p r ia te to a d d r e s s th e B o a r d ’s
con cern .
A n y c o m m e n t s r e g a r d in g th e
r e q u e s t e d r e lie f s h o u ld b e s u b m itte d in
w r itin g a n d r e c e iv e d b y W illia m W .
W ile s , S e c r e ta r y , B o a r d o f G o v e r n o r s o f
th e F e d e r a l R e s e r v e S y s te m ,
W a s h in g to n , DC 20551, n o t la te r th a n

July 20,1989.
Board of Governors of the Federal Reserve
System, June 20,1989.
Jennifer J. Johnson,
Associate Secretary of the Board.

[FR Doc. 89-14989 Filed 6-23-89; 8:45 am]
B IL U N G CO D E 6210-01-M

1 S. 1886, s e c tio n 1 0 2 ,100th C ong., 2d S ess. (1988);
H R. 5094, se c tio n 201, 100th C ong., 2d S ess. (1988).

VOL. 54, NO. 121, pp.26840-26841