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FEDERAL OF RESERVE NEW BANK YORK r Circular No. 7 9 8 0 "I L BANK H O L D IN G October 29, 1976 J C O M P A N IE S D e f e r r a l o f A c t io n o n P r o p o s a l to P e r m it U n d e r w r it in g a n d D e a lin g in G o v e r n m e n t S e c u r it ie s b y B a n k H o ld in g C o m p a n ie s T o A l l B a n k H o ld in g C o m p a n ie s , a n d O th e r s C o n c e r n e d , in th e S e c o n d F e d e r a l R e s e r v e D i s t r i c t : —- Follow ing is the text of a statement issued October 20 by the Board of Governors of the Federal Reserve S y stem : T h e B oard of G overnors of the Federal Reserve System today deferred action on a proposal to make underw riting and dealing in Federal G overnm ent securities and general obligations of States or their subdi visions (m unicipal securities) a perm issible activity for bank holding companies. T he B oard also suspended fu rth er consideration of applications by bank holding companies to engage in the activity, and announced in consequence th at it was deferring action on an application from U nited Bancorp of R oseburg, O regon. A ction was deferred for 12 m onths unless before th at tim e actions by the M unicipal Securities R ulem aking B o a r d - c r e a te d by C ongress in 1975 to regulate the m unicipal securities field— make reconsideration ap p ro p ri ate in the B o ard ’s judgm ent. T he B oard proposed on A pril 2, 1974 to add to the list of perm issible bank holding underw riting and dealing in obligations of the U nited States, general obligations of any political subdivision thereof, and other obligations that State mem ber banks are authorized deal in. U n d erw ritin g and dealing in U .S. G overnm ent securities and municipals is common com pany activities S tate and of any to underw rite and am ong banks. Printed below is the text o f the Board of Governors’ Order deferring action on the pro posal. Questions regarding this matter may be directed to our Dom estic Banking Applications Department. Additional copies o f this circular will be furnished upon request. P aul A. V olcker, President. (R eg. Y ) B A N K H O L D IN G C O M P A N IE S N on b an k in g A ctiv ities o f B an k H o ld in g C om p anies By notice of proposed rulem aking published in the on A pril 10. 1974 (39 F .R . 13007 ), the Board of G overnors proposed, in connection w ith an application filed pursuant to § 4 ( c ) ( 8 ) of the Bank H old in g Com pany A ct (1 2 U .S .C . § 1 8 4 3 ( c ) ( 8 ) ) and 8 2 2 5 .4 ( b ) ( 2 ) of the B oard’s R egulation Y (1 2 C F R § 2 2 5 .4 (b ) ( 2 ) ) , to add to the list o f activities that it has determ ined to be closely related to banking or m an aging or controlling banks (§ 2 2 5 .4 (a ) of R egulation Y ) the following : F e d e r a l R e g is te r underwriting and dealing in such obligations of the United States, general obligations of any State and of any political subdivision thereof, and other obligations that State member banks of the Federal Reserve System may from time to time be authorized to underwrite and deal in. T h e Board has considered all com m ents received. A fter considering all relevant aspects of the proposal to add the above activity to the list of perm issible activi ties for bank holding companies, the B oard has de term ined not to adopt the proposed am endm ent at the present time and to suspend fu rther consideration of the activity at this time. In order for the Board to approve an activity as perm issible for a bank holding com pany under ^ 4 (c ) ( 8 ) of the Bank H old in g Com pany Act. the Board m ust find that the activity satisfies two distinct tests. T h e activity m ust be determ ined (1 ) to be closely related to banking or m anaging or controlling b anks; and ( 2 ) to be a proper incident thereto. T h e second test involves a w eigh in g of public benefits that m ay be e x pected to flow from a bank holding company engaging in the activity against the possible adverse effects. ( o v e r ) O n the basis of the inform ation in the record, the B oard believes th at there is support for a determ ination that the activity is “closely related to banking.” N ational banks and State m em ber banks are specifically authorized under 12 U .S.C . §§ 24, P a ra g ra p h Seventh and 335, to engage in the activity directly and m any banks do, in fact, engage in the activity. A t the present time, banks are a m ajo r com petitive factor in the industry. T o date, only tw o courts have considered the “closely related” language in section 4 ( c ) ( 8 ) of the A ct, and both courts concluded, i n t e r a lia , th at an activity generally engaged in by banks directly w ould seem to qualify as “closely related” to banking or m anaging or controlling banks within the m eaning of the sta tu te .1 A ccordingly, the Board is of the view th a t the proposed activity is “closely related” to banking. N otw ithstanding the foregoing conclusion, the B oard believes th at developm ents occurring since the issuance of the proposed rulem aking in this m atter w arran t de ferral of a decision to adopt the proposed am endm ent to R egulation Y. In 1975, subsequent to the notice of the proposed rulem aking in this m atter, Congress am ended the Securities E xchange A ct of 1934 to sub ject, for the first tim e, m unicipal securities dealers to extensive regulation. A s p a rt of a com prehensive scheme of regulation, the 1975 A m endm ents created the M unici pal Securities R ulem aking B oard ( “ M S R B ” ) and authorized it to prom ulgate rules governing the activi ties of bank and nonbank m unicipal securities dealers. U nder the statute, the M S R B is required, am ong other things, to propose and adopt rules t h a t : “ [are] designed . . . to prom ote ju st and equitable principals of trade . . . to rem ove im pedim ents to and perfect the m echanism of a free and open m arket in m unicipal securities, and, in general, to protect in vestors and the public interest [and m ust] not be*10 1 N a tio n a l C o u r ie r A s s o c ia tio n V. 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 , 516 F. 2d 1229 (D .C . Cir. 1975) ; and A la b a m a A s s o c ia tio n o f I n s u r a n c e A g e n t s v . 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 , 533 F . 2d 224 (5 th Cir. June 10, 1976). designed to perm it unfair discrim ination between cus tom ers . . . [and th at] establish the term s and condi tions under which any municipal securities dealer m ay sell, or prohibit any m unicipal securities dealer from selling, any p a rt of a new issue of m unicipal securities to a m unicipal securities portfolio during the underw riting period.” 2 T he M S R B is currently in the process of prom ulgat ing regulations governing the conduct of municipal se curities dealers. W ith o u t the benefit of a thorough consideration of the impact th at the M S R B ’s actions may have on the m unicipal securities industry and in light of the specific Congressional m andate th at the M S R B has received to act in this area, the B oard believes th at action by it to adopt the proposed am end m ent at this tim e w ould be prem ature. Possible regulatory changes that may be brought about by actions of the M unicipal Securities Rulem aking Board may significantly alter present practices and op erations of bank-related and nonbank-related municipal securities underw riters and dealers. In light of this uncertainty, any findings of public benefits deriving from bank holding com pany perform ance of the instant ac tivity or of possible adverse effects of such perform ance would necessarily be speculative at best. A pplication of the balancing test necessary to determ ine th at the instant activity is a proper incident to banking or m anaging or controlling banks would be even m ore uncertain at this time. F o r the foregoing reasons, the B oard has determ ined not to adopt the proposed am endm ent at this time, and to suspend fu rth er consideration of the activity, either by order or by regulation, as perm issible for bank hold ing companies, for a period of twelve m onths, unless prior to th at tim e actions of the M unicipal Securities Rulem aking Board lead the B oard in its judgm ent to reconsider the deferral of action on this m atter. - S e c t i o n 1 5 ( b ) ( 2 ) ( C ) and ( K ) of the S ecu rities E x ch a n g e A ct of 1934, as am ended.
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