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FE D E R A L R E SE R V E BANK
O F N E W YORK
r C ircular No. 7 8 5 6 * 1
A pril 13, 1976

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AMENDMENT TO REGULATION Y
Prior Notification By Bank Holding Companies Planning to Purchase Their Own Stock
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Following is the text of a statement issued April 8 by the Board of Governors of the Federal
Reserve System:
The Board of Governors of the Federal Reserve System today amended its Regulation Y to require
prior notification by bank holding companies planning to purchase their own stock.
The purpose of the amendment is to assist the Board in supervising bank holding companies by pro­
viding advance notice of redemptions of bank holding company stock that could have a significant impact on
the company's capital structure.
In particular, the amendment is intended to deter the practice known as "bootstrapping"—whereby a hold­
ing company incurs substantial debt in order to purchase or redeem its own outstanding stock, generally to
help a shareholder or shareholder group gain control of the company.
Effective May 15, the regulatory amendment will require 45 days advance notice to the Board by a bank
holding company planning to redeem its own stock. A proposal to require prior notification was issued for
comment by the Board last December 11 and the final amendment includes the following two principal changes
from the earlier proposal:
—The period for prior notification was shortened, from 60 to 45 days.
—The threshold requirement for notification, in the amendment as adopted, makes prior notification
necessary when the gross consideration in the transaction equals 10 percent or more of the company's net
worth, or, when the current transaction combined with the net consideration for similar transactions during the
past 12 months (previously five years) aggregates 10 percent (previously 25 percent) of the company's net
worth.
Although the Board is aware that there are legitimate reasons for a bank holding company to buy its
own stock, it is requiring prior notification of transactions that may result in the following conditions:
—The "bootstrapped" bank holding company is left with heavy debts and much reduced, perhaps very
little or no equity.
—Repayment and servicing of the debt depends mainly upon dividends the holding company receives from
its subsidiary bank or banks, resulting in substantial pressure on them to pay excessive dividends to the
parent company, possibly creating an unsafe or unsound bank condition.
—The need of the holding company to meet heavy debt service obligations may encourage undue risk­
taking aimed at increasing the earnings of its subsidiary bank or banks.
The Board also wished to forestall bootstrapping due to the difficulties that may be encountered in un­
winding such a transaction once it has taken place.
Where the required pre-notification indicates that consummation of a proposed purchase of its own stock
by a bank holding company would violate applicable law, or would create an unsafe or unsound condition
in a holding company, the Board would, if necessary, use its cease-and-desist powers to prevent the transaction.
The amendment specified information to be included with notifications.
The Reserve Bank to which the transaction is reported may allow it to take place in less than 45 days
if it determines that the transaction would not be an unsafe or unsound practice and would not violate appli­
cable law or regulations.

In submitting the amendment for publication in the
following additional statement:

the Board made the

By notice of proposed rulemaking published in the
on December 19, 1975 (40 F.R.
58866) the Board of Governors proposed for comment an addition to Regulation Y (12 CFR 225) that




(O VER)

would require prior notification to the Board by bank holding companies planning to purchase or redeem
their own stock. Comments were received through January 15, 1976.
The purpose of the proposed amendment was to aid the Board in the performance of its supervision and
regulation of bank holding companies by affording it advance notice of stock redemptions that could have a
significant impact upon a holding company's capital structure, and, more particularly, to deter "bootstrapping,"
a practice whereby a holding company incurs substantial debt to purchase or redeem its outstanding equity securi­
ties, generally to facilitate a transfer of control by the controlling shareholder or shareholder group.
While banks may be under statutory prohibitions against repurchasing their own shares, as a protection
against the reduction of capital (see,
12 U.S.C. §83), holding companies are not generally subject to
such prohibitions. State corporate laws may forbid a corporation to redeem shares when it is insolvent or when
to do so would render it insolvent, but it is possible for such a bank holding company to effect a repurchase or
redemption without violating such a statute where the result would nevertheless be to cause a serious drain of
equity capital from the company. While the Board has authority under present law to issue cease-and-desist
orders to remedy violations of law or unsafe or unsound practices by bank holding companies, the supervisory
power may not be fully effective to cure the weakened financial condition of a company caused by a consum­
mated repurchase or redemption.
The proposed amendment to Regulation Y would require prior notification to the Board of such action
by a bank holding company. If such notice were to indicate that consummation of the proposed repurchase or
redemption would violate applicable law or would create an unsafe or unsound condition in the holding company,
the Board would, in appropriate cases, invoke its authority under the Financial Institutions Supervisory Act
of 1966 (Section 8(b) of the Federal Deposit Insurance Act) to institute cease-and-desist proceedings against
the company in order to prevent the repurchase or redemption.^
After consideration of all comments received, several changes in the proposed amendment have been made.
The major changes are as follows: (1) The term "equity securities" has been substituted for the term "voting
securities," so as to include redemptions and purchases of nonvoting preferred stock and prevent circumven­
tion of the notice requirement by that route. (2) The threshold for giving prior notice has been changed to
require notice when the gross consideration involved in a transaction would involve an amount equal to 10 per­
cent of the company's net worth, or when the gross consideration for the transaction when aggregated with the
net consideration for similar transactions during the preceding 12 months would equal 10 percent of net
worth. This method of calculation would take into account the effect of sales of treasury stock and new equity
securities by the company. (3) The requirement of providing the names of the persons from whom the securi­
ties will be purchased has been modified to require that the names of the sellers be provided when known to the
company. (4) The period of prior notice has been reduced from 60 to 45 days.
1 Even if a repurchase or redemption were not of sufficient magnitude to require prior notice under this amendment, the
Board might nevertheless institute cease-and-desist proceedings with respect to such a transaction that otherwise came to its
attention if it were to believe that an unsafe or unsound condition would result or had resulted or that an applicable law or
regulation would be or had been violated.

Enclosed is a copy of the amendment to Regulation Y. Questions regarding the amendment
may be directed to our Domestic Banking Applications Department.
Additional copies of the enclosure will be furnished upon request.




PAUL

A.

VoLCKER,

Board of Governors of the Federal Reserve System
BANK HOLDING COMPANIES

AM ENDM ENT TO REGULATION Y
Regulation Y is amended by adding a new
section (225.6) thereto, to read as follows:
SECTION 225.6—CORPORATE
PRACTICES

company's equity securities purchased or re­
deemed by it over the preceding 12-month pe­
riod, by class;
(4) the date upon which, or that period of
time during which, the purchase or redemption
will occur;

(a)
Purchase or redem ption by a bank
holding company of its own shares. No bank
holding company shall purchase or redeem any
shares of any class of its outstanding equity
securities without giving at least 45 days prior
notice thereof to its Federal Reserve Bank if
(i) the gross consideration to be paid for such
purchase or redemption is equal to 10 percent or
more of the company's consolidated net worth as
of the date of notification, or (ii) the gross con­
sideration to be paid for such purchase or re­
demption when aggregated with the net con­
sideration paid by the company for all pur­
chases or redemptions of its equity securities
during the 12 months preceding the date of
notification^ equals or exceeds 10 percent of
the company's consolidated net worth as of the
date of such notice. The 45-day period shall
begin to run from the date such notice is re­
ceived by the Reserve Bank, which shall
promptly acknowledge receipt thereof in
writing.

(5) if known, the names of persons from
whom shares are to be purchased or redeemed
in such transaction, and, if known, the names
of persons from whom shares were purchased
or redeemed in the preceeding 12 months;

Each notice hied hereunder shall furnish the
following information:

The Reserve Bank may permit a purchase or
redemption to be accomplished prior to the ex­
piration of the 45-day period if it determines
that the repurchase or redemption would not
constitute an unsafe or unsound practice and
would not violate any applicable law, rule,
regulation or order, or any condition imposed
by, or written agreement with, the Board.

(1) the title of the security to be purchased
or redeemed, and the purposes of the pro­
posed transaction;
(2) the number of shares of that security
to be purchased or redeemed; the total number
of shares of equity securities outstanding as of
the date of the notice, by class; and the number
of shares of all other equity securities of the
company purchased or redeemed by it over the
preceding 12-month period, by class;
(3) the consideration to be paid for the
shares to be purchased or redeemed, and the
consideration paid for all other shares of the
13 For the purposes of this regulation "net considera­
tion" is the gross consideration paid by the company
for all of its equity securities purchased or redeemed
during the period minus the gross consideration re­
ceived for all of its equity securities sold during the
period other than as part of a new issue.

(6) if debt is to be incurred or has been
incurred by the company or a subsidiary in con­
nection with the purchase or redemption or any
other such purchase or redemption over the
preceding 12 months, a description of the terms
of the debt, including the identity of the obligee,
and the interest rate, maturity and repayment
schedule of the debt;
(7) if the transaction is related in any way
to a transfer of control of the company, a de­
scription of the terms of the transfer, including
the identity of the transferee and a copy of any
agreements relating to such transfer; and
(8) a current and pro forma consolidated
balance sheet of the holding company.

Effective date. This amendment is effective
May 15, 1976, and shall be applicable to all
transactions occurring after that date for which
prior notice is required under this amendment.
Such notice may be given prior to the effec­
tive date with respect to a transaction proposed
to be consummated within 45 days after the
effective date. Any company that prior to the
effective date has completed plans to effect a
transaction that would be covered by this
amendment, but as to which there may be in­
sufficient time to provide 45 days prior notice,
may request accelerated consideration of the
transaction by its Federal Reserve Bank.

For this Regulation to be complete, retain:
1) Printed Regulation Y pamphlet, as amended effective June 24, 1974.
2) Corrective amendments effective June 24, 1974 (§§225.3 and 225.4).
3) Amendment effective December 1, 1975 (§225.5).
4) This slip sheet.

[ E n c . C ir . N o . 78S 61




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