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FEDERAL RESERVE BANK
OF NEW YORK
Circular No. 10384
September 20, 1990
[
”1
J
BANK HOLDING COMPANIES
Proposed Amendment to Regulation Y
(Comment Invited by October 22, 1990)
To All Bank Holding Companies in the Second
Federal Reserve District, and Others Concerned:
The following statement was issued by the Board of Governors of the Federal
Reserve System:
The Federal Reserve Board has issued for public comment a proposal to revise
the Board’s Regulation Y to permit the provision of financial advisory services to fi
nancial and nonfinancial institutions and high net worth individuals, and the offering
of investment advice and securities brokerage activities on a combined basis.
Comment is requested by October 22, 1990.
Printed on the following pages is the text of the Board’s proposed amendment
to Regulation Y, which has been reprinted from the F ed era l R eg ister. Comments
thereon should be submitted by October 22, and may be sent to the Board of
Governors, as set forth in the notice, or to our Domestic Banking Applications
Division.
E.
G
erald
C
o r r ig a n
,
P resid en t.
Proposed Rules
Federal Register
Vol. 55, No. 172
W ednesday, Septem ber 5, 1990
12 CFR Part 225
Telecommunication Device for the Deaf
(TDD), Eamestine Hill or Dorothea
Thompson (202/452-3544).
{Regulation Y; Docket No. R-0706]
SUPPLEMENTARY INFORMATION:
FEDERAL RESERVE SYSTEM
Bank Holding Companies and Change
in Bank Control; Nonbanking Activities
and Acquisitions by Bank Holding
Companies
Board of Governors of the
Federal Reserve System.
a c t i o n : Notice of proposed rulemaking.
AGENCY:
The Board is seeking public
comment on a proposal to amend the
provisions in Regulation Y implementing
the Bank Holding Company Act (the
“BHC Act”) to add to the regulatory list
of nonbanking activities generally
permissible for bank holding companies
certain financial advisory activities and
the provision of full service securities
brokerage services. The Board has
previously determined by order that
subject to certain restrictions, these
activities are so closely related to
banking as to be a proper incident
thereto for purposes of section 4(c)(8) of
the Bank Holding Company Act (12
U.S.C. 1843(c)(8)). The proposal would
modify some of the restrictions on these
activities previously imposed by order.
DATES: Comments must be received by
October 22,1990.
ADDRESSES: Comments, which should
refer to Docket No. R-0706, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and
Constitution Avenue, NW., Washington,
DC 20551, to the attention of Mr.
William W. Wiles, Secretary: or
delivered to room B-2223, Eccles
Building, between 8:45 a.m. and 5:15 p.m.
Comments may be inspected in room B1122 between 9 a.m. and 5 p.m., except
as provided in § 261.8 of the Board's
Rules Regarding Availability of
Information, 12 CFR 261.8.
sum m ary:
FOR FURTHER INFORMATION CONTACT:
Scott G. Alvarez, Assistant General
Counsel (202/452-3583), Andrew T.
Karp. Attorney (202/452-3554), or
Brendan T. Gormley, Attorney (202/4523721), Legal Division: or Sidney M.
Sussan, Assistant Director (202/4522638), Division of Banking Supervision
and Regulation, Board of Governors. For
the hearing imparied only,
Background
The Bank Holding Company Act of
1956, as amended, generally prohibits a
bank holding company from engaging in
nonbanking activities or acquiring
voting securities of any company that is
not a bank. Section 4(c)(8) of the BHC
Act provides an exception to this
prohibition where the Board determines
after notice and opportunity for hearing
that the activities being conducted are
"so closely related to banking or
managing or controlling banks as to be a
proper incident thereto.” 12 U.S.C.
1843(c)(8). The Board is authorized to
make this determination by order in a
individual case or by regulation.
The Board has included in its
Regulation Y a list of nonbaking
activities that the Board has determined
to be closely related to banking under
section 4(c)(8) of the BHC Act and,
therefore, generally permissible for bank
holding companies. Applications by
bank holding companies to engage in
activities included on the Regulation Y
list of permissible nonbanking activities
may be processed by the Reserve Banks
under expedited procedures pursuant to
delegated authority.
Proposed Nonbanking Activities
The Board is seeking public comment
regarding whether the Regulation Y list
of nonbanking activities permissible for
bank holding companies (12 CFR 225.25)
should be amended to add so-called full
service securities brokerage activities,
and financial advisory activities
previously approved by order.
Full Service Securities Brokerage
The Board’s regulations permit bank
holding companies to provide securities
brokerage and investment advisory
activities separately. See 12 CFR
225.25(b) (4) (investment advice),
225.25(b) (15) (securities brokerage). In
addition, the Board haspreviously
determined by order that bank holding
companies may provide these services
on a combined basis to institutional and
retail customers pursuant to section
4(c)(8) of the BHC Act. See e.g., National
PRINTED IN NEW YORK. FROM F E D E R A L
R E G IS T E R ,
2
Westminster Bank PLC, 72 Federal
Reserve Bulletin 584 (1986), affirmed
Securities industry A ss’n v/. Board o f
Governors, 821 F.2d 810 (D.C. Cir. 1987),
cert, denied, 108 S.Ct. 697 (1988): Bank of
New England Corporation, 74 Federal
Reserve Bulletin 700 (1988) (combined
services offered to institutional and
retail customers).
In its orders permitting bank holding
companies to engage in full service
brokerage activities, the Board
established a framework that includes
certain limitations and disclosure
requirements that were designed to
address potential adverse effects,
including conflicts of interests, that may
result from combining investment
advisory and securities brokerage
activities. See e.q., Bank of New
England Corporation, 74 Federal
Reserve Bulletin 700 (1988). Many of the
restrictions imposed by the framework
established in these previous Board
orders are similar to the existing
requirements of federal and state
securities laws. In this regard, the
brokerage subsidiaries of bank holding
companies are required by federal
securities laws to be registered with the
Securities and Exchange Commission
(the "SEC") and the National
Association of Securities Dealers, Inc.
and are subject to various federal and
state securities laws in conducting these
brokerage activities. Brokers are also
subject to the general anti-fraud
provisions of the securities laws and to
a duty, expressed in nemerous SEC and
judicial decisions, to deal fairly with
customers. See e.q., 17 CFR 240.15cl-2
(SEC anti-fraud rule specifically
applicable to broker-dealers).
The Board also requires that a holding
company that engages, directly or
indirectly, in combined securities
brokerage and advisory services make
certain disclosures to its customers,
Since the Board's initial decision ir. this
area, the Office of the Comptroller of the
Currency has authorized operations
subsidiaries of national banks to offer
full service brokerage activities within
the framework established by the
relevant securities laws, and with
similar disclosure requirements. See,
e.g., O.C.C. Interpretive Letter 403
reprinted in [1988-89 Transfer Binder]
VOL. 55, NO. 172, pp. 36282-36284
Fed. Banking L rep. (CCH) ^ 85,627
(December 9,1987).
The Board proposes to add the
conduct of full service securities
brokerage activities to its regulatory list
of permissible nonbanking activities
with a requirement that the brokerage
company disclose to all of its customers
that the brokerage company is solely
responsible for its contractual
obligations and commitments; that it is
not a bank or insured institution, and is
separate from any affiliated bank or
insured institution; and that the
securities sold, offered, or recommended
by the brokerage company are not
deposits, are not insured by the FDIC,
and are neither endorsed nor guaranteed
by, nor constitute an obligation of, any
bank. The proposal requires that these
disclosures be made prominently and in
writing before the brokerage company
provides any brokerage or advisory
services to its customers and again in its
statements of accounts to customers.
The brokerage company would, or
course, continue to be subject to
applicable federal and state securities
laws.
The Board also proposes to retain the
limitation that combination of
discretionary investment management
services with brokerage services be
available only for institutional
customers. J.P. Morgan & Co.,
Incorporated, 73 Federal Reserve
Bulletin 810 (1987). The Board requests
comments on whether it is appropriate
to permit bank holding companies to
provide these discretionary investment
services to retail customers as well as
institutional customers. In this regard,
the Board notes that national banks may
not offer these services unless the
national bank has been authorized to
offer trust services directly or through
an operations subsidiary, pursuant to 12
U.S.C. 92a. See, 12 CFR part 9, Trust
Banking Circular No. 23 (October 4,
1983), reprinted in, Fed. Banking L Rep.
(CCH) U 60,575, and O.C.C.
Interpretative Letter No. 353, reprinted
in, [1985-1987 Transfer Binder] Fed.
Banking L. Rep. (CCH) 85,523. The
Board has previously defined an
“institutional customer.” See. The Chase
Manhattan Corporation, 74 Federal
Reserve Bulletin 704 (1988). The Board
proposes to amend Regulation Y to
reflect this definition.
In its actions approving the
combination of investment advice with
brokerage services, the Board has
limited director, officer, and employee
interlocks between a bank and a
securities brokerage affiliate.1 The
Board is not proposing to retain
restrictions on interlocks between a
bank and an affiliated full-service
brokerage company.
The Board requests public comment
on whether other restrictions are
necessary to address potential adverse
effects, including conflicts of interests
and unsafe and unsound banking
practices, that may be associated with
full service brokerage services.
The proposed regulation would not
expand the securities brokerage and
investment advisory authority of bank
holding companies beyond that which is
currently authorized by order. The
Board notes that the proposed regulation
would not affect the framework
governing bank holding company
subsidiaries that underwrite or deal in
bank-ineligible securities. In addition,
this proposal is not intended to modify
the Board’s interpretive rule regarding
the investment advisory activities of
bank holding companies. See 12 CFR
225.125; 55 FR 25,849 (June 25, 1990)
(proposed revision to interpretive rule).
Financial Advisory Services
The Board has previously determined
by order that the provision of financial
advisory services is closely related to
banking for purposes of section 4(c)(8) of
the BHC Act. Specifically, the Board has
by order permitted bank holding
companies to provide advice to financial
and nonfinancial institutions and high
net worth individuals with respect to
mergers, acquisitions, divestitures,
financing transactions, structuring and
arranging loan syndications, interest
rate swaps, interest rate caps, and
similar transactions, including rendering
fairness opinions and providing
valuation services; and conducting
feasibility studies for corporations. See.
e.g., SunTrust Banks, Inc., 74 Federal
Reserve Bulletin 256 (1988); Banc One
Corporation, 76 Federal Reserve Bulletin
--------(Order dated July 16,1990)
(approving provision of financial
advisory services to high net worth
individuals). In making this
determination, the Board relied on
several limitations designed to mitigate
the effects of possible conflicts of
interests that could arise from the
activity, and to ensure that bank holding
companies and their nonbanking
subsidiaries would not exert significant
control over the operations of the client
institution through the provision of
financial advisory services.
1Signet Banking Corporation 75 Federal Reserve
Bulletin 34 (1969).
3
The Board also proposes to permit
bank holding companies to conduct
feasibility studies for nonfinancial and
financial institutions and high net worth
individuals. The Board has permitted
bank holding companies to provide
feasibility studies only for corporations.
The Board proposes to add the
provision of financial advisory services
to its regulatory list of activities,
permissible for bank holding companies.
The proposal would not permit bank
holding companies that provide
financial advisory activities to perform
routine tasks or operations for a
customer on a daily or continuous basis.
In addition, the proposal would not
permit a financial advisor to make
available to any of its affiliates
confidential information regarding a
party received in the course of providing
any of the financial advisory services,
except as authorized by the party. The
Board seeks public comment on these
requirements as well as on whether
other requirements may be appropriate
to address possible conflicts of interests,
unsafe and unsound banking practices,
or other potential adverse effects.
Section-by-Section Analysis
Section 225.25(b)(4)(i)-(v): The
proposed amendment retains in full the
existing investment and financial
advisory provisions of § 225.25(b)(4)(i)MSection 225.25(b)(4)(vi): The proposed
amendment adds paragraph (vi) to
§ 225.25(b)(4). This paragraph authorizes
bank holding companies to engage in
additional varieties of financial advisory
activities subject to the limitations set
forth in that subsection.
Section 225.25(b)(15): The proposed
amendment retains in full the existing
securities brokerage provisions and
modifies the subsection to authorize
nonbank subsidiaries of bank holding
companies to engage, subject to certain
disclosure requirements, in securities
brokerage in combination with
investment advisory services
permissible under $ 225.35(b)(4) of
Regulation Y.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the
Regulatory Flexibility Act (Pub. L No.
95-354, 5 U.S.C. 001 et seq.), the Board of
Governors of the Federal Reserve
System certifies that this notice of
proposed rulemaking, if adopted as a
final rule, 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
Administrative practice and
procedure, Appraisals, Banks, Banking,
Capital adequacy, Federal Reserve
System, Holding companies, Reporting
and recordkeeping requirements.
Securities, State member banks.
For the reasons set forth in this notice,
and pursuant to the Board's authority
under sections 4(c)(8) and 5(b) of the
Banking Holding Company Act of 1956,
as amended (12 U.S.C. 1843(c)(8),
1844(b)), the Board proposes to amend
12 CFR part 225 as follows:
registered investment company under
the Investment Company Act of 1940; or
a corporation, partnership,
proprietorship, organization or
institutional entity with net worth
exceeding $1,000,000;
(2) An employee benefit plan with
assets exceeding $1,000,000, or whose
investment decisions are made by a
bank, insurance company or investment
advisor registered under the Investment
Advisors Act of 1940;
(3) A natural person whose individual
net worth (or joint net worth with his or
her spouse) at the time of receipt of the
investment advice or brokerage services
PART 225— BANK HOLDING
exceeds $1,000,000;
COMPANIES AND CHANGE IN BANK
(4) A broker-dealer or option trader
CONTROL
registered under the Securities Exchange
1.
The authority citation for part 225 Act of 1934, or other securities
continues to read as follows:
professional; or
(5) An entity all of the equity owners
Authority: 12 U.S.C. 1817(j)(13), 1818,1831i,
of which are institutional customers.
1843(c)(8). 1844(b), 3106, 3108, 3907, 3909,
3310, and 3331-3351.
4.
In § 225.25, the word “and" is
removed at the end of paragraph
§ 225.25 [Amended]
(b)(4)(iv); the period at the end of
2.
In § 225.25 the footnotes are
paragraph
(b)(4)(v) is removed and “;
redesignated as shown below:
and" is added; and new paragraph
(b)(4)(vi) is added to read as follows:
C u r
S e c tio n a n d p a ra g ra p h
re n t
fo o t
n o te
New
fo o t
n o te
No.
No.
§ 2 2 5 .2 5
( b ) ( 5 ) ( i i i ) ..................................................................
3
4
( b ) ( 5 ) ( i v ) ................................................................
4
5
5
6
( b ) ( 5 ) ( v i ) ................................................................
6
7
( b ) ( 8 ) ( i ) ( B ) ............................................................
7
8
{b )( 8 ) (i i > ..................................................................
8
( b ) ( 8 ) ( h ) ( B ) ..........................................................
9 1
( b ) ( 8 ) ( i v ) ................................................................
1 0 , 11
g
10
1 1. 12
< b ) { i 0 ) ( i i ) ...............................................................
12
13
( b ) ( 1 l ) ....................................................................
13
14
( b j t 1 l j ( i v ) .............................................................
14
15
3.
In § 225.2, paragraphs (g) through
Ii) are redesignated as paragraphs (h)
t irough (p) and new paragraph (g) is
i.dded to read as follows:
§ 225.2.
*
*
Definitions.
*
*
*
(g) Institutional customer means:
(1)
A bank (acting in an individual or
fiduciary capacity): a savings and loan
association: an insurance company; a
and, the financial advisor shall not make
available to any of its subsidiaries
confidential information regarding a
party obtained in the course of providing
any financial advisory services except
as authorized by the party.
* * * * *
5.
In § 225.25, paragraph (b)(15) is
revised to read as follows:
§225.25 [Amended]
*
*
*
*
*
(b) * * *
(15)
Securities brokerage, (i) Providing
securities brokerage services, related
securities credit activities pursuant to
the Board’s Regulation T (12 CFR part
220), and incidental activities such as
offering custodial services, individual
retirement accounts, and cash
management services, if the securities
brokerage services are restricted to
buying and selling securities solely as
agent for the account of customers and
do not include securities underwriting or
dealing; and
(ii) A bank holding company or its
nonbank subsidiary may provide
securities brokerage services under
paragraph (b)(15)(i) of this section in
§ 225.25 List of permissible nonbanking
combination with investment advisory
activities.
services permissible under paragraph
* * * * *
(b)(4) of this section 16 if the brokerage
company prominently discloses to each
(b) * * *
customer in writing before providing any
(4) * * *
(vi)
(A) Providing advice to financial brokerage or advisory services and
again in any customer account
and nonfinancial institutions and high
statements that:
net worth individuals 8 with respect to
mergers, acquisitions, divestitures,
(A) The brokerage com pany is solely
responsible for its contractural obligations
financing transactions, structuring and
and commitments;
arranging loan syndications, interest
r a te s w a p s , in te r e s t r a te c a p s , a n d
similar transactions, including rendering
fairness opinions, providing valuation
services, and conducting feasibility
•studies;
(B) Financial advisory activities under
paragraph (b)(4)(vi)(A) of this section
shall not encompass the performance of
routine tasks or operations for a
customer on a daily or continuous basis,
* High net worth individual means for purposes of
this paragraph an individual whose net worth (or
joint net worth with a spouse) exceeds one million
dollars.
4
(B) The brokerage com pany is not a bank
an d is sep arate from any affiliated bank; and
(C) The securities sold, offered, or
recom m ended by the brokerage com pany are
not deposits, are not insured by the Federal
Deposit Insurance C orporation, do not
constitute obligations of any bank, and are
not endorsed or guaranteed by any bank,
unless this is the case.
Board of G overnors of the Federal Reserve
System , August 29,1990.
Jennifer J. Johnson,
Associate Secretary of the Board.
[FR Doc. 90-20780 Filed 9-4-90; 8:45 am]
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