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FED ER AL RESERVE BANK O F NEW YORK Circular N o. 8542 T M arch 2 6 , 1 9 7 9 J BANK SERVICE ARRANGEMENTS — Rules Simplified — Regulation S Revoked To All State Member Banks, and Others Concerned, in the Second Federal Reserve District: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System: [March The Federal Reserve Board announced today 5] it is revoking one of its regulations in the ongoing program to clarify and simplify all of its regulations. The Board decided to revoke Regulation S, which governed the Board’s power to regulate and examine banking services performed for State-chartered member banks by outsiders. The regulation had been in effect since April 3, 1963, but a recent amendment to the Bank Service Corporation Act has made the regulation unnecessary. The Board also adopted modified interpretations to simplify present interpretations and to conform them to the amended Act. The Act creates an exception to the general prohibition in Federal banking laws against the the purchase of stock by member banks. The Act allows two or more banks to engage in a joint venture by investing up to 10 per cent of their capital and surplus in a “bank service corporation” that provides clerical services to banks. Under the Regulatory Improvement Project the Board has now revoked two regulations; reviewed, updated and simplified a number of others; approved a plan for a Federal Reserve Board service to disseminate regulatory materials more widely; and expanded its rulemaking procedures to improve the quality and public understanding of its regulations. Enclosed is the text of the Board of Governors’ order in this matter. Also enclosed, for State mem ber banks, is a statement indicating their continuing responsibility under the Bank Service Corporation Act and a suggested form of notification of performance of bank services. Any questions on this matter should be directed to our Regulations Division (Tel. No. 212-791-5914). Paul A. V olcker, President. RESPONSIBILITIES OF STATE MEMBER BANKS UNDER THE BANK SERVICE CORPORATION ACT Under the Bank Service Corporation Act(12 U.S.C. 1861-65), State member banks are subject to supervision by the Board of Governors of the Federal Reserve System, and national banks are subject to supervision by the Comptroller of the Currency. Section 5 of the Bank Service Corporation Act (but no other section) has been amended by section 308 of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, effective March 10, 1979. That section, as revised, reads as follows: Whenever any bank which is regularly examined by a Federal supervisory agency, or any subsidiary or affiliate of such bank which is subject to examination by that agency, causes to be performed, by contract or otherwise, any bank services for itself, whether on or o ff its premises— (1) such performance shall be subject to regulation and examin ation by such agency to the same extent as if the services were being performed by the bank itself on its own premises, and (2) the bank shall notify such agency of the existence of a service relationship within 30 days after the making of such service contract or the performance of the service, whichever occurs first. The definition of "bank services" in section 1(b) of the Act remains the same and reads as follows: The term 'bank services' means services such as check and deposit sorting and posting, computation and posting of interest and other credits and charges, preparation and mailing of checks, statements, notices, and similar items, or other clerical, bookkeeping, accounting, statistical, or similar functions performed for a bank. The Board has previously elaborated on this definition in two interpretations (see 12 CFR 250.301 and 250.302). In the first, the Board concluded that the term is 1 essentially limited to clerical and similar services and would not usually relate to legal, advisory, and administrative services, such as transportation or guard services. In the other interpretation, the Board described operations of a bank credit card service organization that would meet the definition. The Board believes that a regulation in this area is no longer necessary and thus has rescinded Regulation S effective March 10, 1979. Existing interpretations of the Bank Service Corporation Act have been updated and streamlined to reflect the statutory change. The only substantive rulings that have been added to the interpretations are taken from: (1) an interpretation previously published only in the Federal Reserve Bulletin explaining the scope of investment authority in ’’bank service corporations" (48 Fed. Res. Bull. 1429 (1962)); and (2) the last sentence of section 219.4 of Regulation S, concerning the performance of legal, advisory, and administrative services. A State member bank is to give notice when bank services are provided for it, or its affiliates or subsidiaries that are subject to Federal Reserve examination, by any servicer, including national banks; non-member insured banks; State member banks; non-profit, no-stock bank credit card service organizations, and servicing subsidiaries of bank holding companies. Notification should not be provided for the performance of legal, advisory, and administrative services, such as transportation or guard services. For notification purposes, a letter should be signed by a duly authorized officer of the bank or of its affiliate or subsidiary for which services are performed, and be provided to the District Federal Reserve Bank . This letter is to be provided no later than 30 days after the making of a contract to provide services, or no later than 30 days after the performance of the services, whichever comes first. In lieu of a letter, the attached form may be used to report the making of a contract to provide services, or the performance of services. 2 If a bank has an existing bank service arrangement in e ffect on March 10, 1979, and has already furnished "assurances” regarding the arrangement in compliance with Regulation S, no additional notification regarding the arrange ment is necessary. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTIFICATION OF PERFORMANCE OF BANK SERVICES BANk NAm E"An C> ADDRESS (Includes Street, City, State and ZIP Code) Complete below (1n space Indicated) Federal Reserve Bank's Name and Address In compliance with the requirement of the Bank Service Corporation Act we hereby notify the Board of Governors of the Federal Reserve System of bank services provided by the se rv ice r reported below. CORPORATE T I T L E D ? S E R V IC E R ------------------------------------------ l o c a t io n * si op p r e m is e s w h er e s e r v ic e s ARE PERFORMED Ad d r e s s o f S E R V I C E R 'S C O R P O R A T E HEADQUARTERS NAME OF m a n A5TN8 O F F I C E R ( S ) A T PROCESSING LOCATION(S) telephone Nu m b e r a T p r o c e s s i n g s i TE 1 BANK'S p r i n c i p a l c o n t a c t "AT C e n TEr (S) (If other than Managing Officer(s)) TELEPHONE n u m b e r o f p r i n c i p a l c On TAc T(s ) APPLICATIONS PROCESSED AND SERVICES PERFORMED (Indicate both present and planned services) T IJL E or SIGNATURE O F F I C E O O T N O R 1 Z E C )’ T O S IG N N O T I F I C A T I O N -------------------------------------------------- TELEPHONE n u m b e r of authorized O F F IC E R DATE SIGNED Board of Governors of the Federal Reserve System Rescission of Regulation S a [6 2 1 0 -0 1 -M ] [Reg. S, Docket No. R-0209] PART 219— BANK SERVICE ARRANGEMENTS PART 250— MISCELLANEOUS INTERPRETATIONS Rescission of Regulation S; Amend ment of Interpretation Regulations AGENCY: Board of Governors of the Federal Reserve System. ACTION: Revocation and amendment of interpretations. SUMMARY: As part of its Regulatory Improvement Project, involving a sub stantive review of all Federal Reserve regulations, the Board has reviewed Regulation S, “Bank Service Arrange ments” (12 CFR Part 219), which im plements the Bank Service Corpora tion Act (12 U.S.C. 1861-65). That reg ulation specifies the manner of assur ing the Board that the performance of bank services for State member banks will be subject to regulation and exam ination by the Board whenever the services are performed by anyone other than the bank itself. On the basis of its review and in the light of a recent amendment of the Act (Pub. L. 95-630, 92 Stat. 3677), that becomes ef fective on March 10, 1979, the Board has decided to: (1) Rescind Regulation S as no longer necessary; (2) revise and update its interpretations of the Act; and (3) send to State member banks through the Reserve Banks an an nouncement and explanation of the new provisions. The Board’s actions are intended for simplification and clarification, and the revision of the interpretations will not impose any new requirements not contained in the Act. EFFECTIVE DATE: March 10, 1979. FOR FURTHER INFORMATION CONTACT: Carl V. Howard, Attorney, Legal Di vision, Board of Governors of the Federal Reserve System, Washing ton, D.C. 20551 (202/452-3786). SUPPLEMENTARY INFORMATION: The Bank Service Corporation Act (the “Act” ) (12 U.S.C. 1861-65), as originally adopted, required that, when a State member bank has bank services performed for it (such as check sorting and posting of interest on savings accounts), satisfactory as surances must be furnished to the Board that the performance of the services will be subject to the Board’s regulation and examination to the same extent as if the services were being performed by the bank itself on its own premises. The purpose was to make certain that the appropriate Federal banking agency would not be frustrated in its examination of a bank subject primarily to its supervision be cause the bank’s records have been transferred to another organization or some other organization is carrying out part or all of the bank’s functions. Regulation S, “Bank Service Arrange ments” (12 CFR Part 219), was issued by the Board in 1963 to implement the Act by specifying when and in what form assurances shall be provided to the Federal Reserve System. However, the Congress has taken a more direct approach to supervision of bank service arrangements through an amendment of the Act contained in section 308 of the Financial Institu tions Regulatory and Interest Rate Control Act of 1978 (Pub. L. 95-630; 92 Stat. 3677). Effective March 10, 1979, the performance of bank services for State member banks or their subsid iaries or affiliates will be subject to regulation and examination by the Board as a matter of law without the necessity for “assurances.” A State member bank will be required to notify the Board of the existence of a bank service arrangement within 30 days after the making of the service contract or the performance of the service, whichever occurs first. In the course of reviewing Regula tion S in its Regulatory Improvement Project, the Board has concluded that the regulation will no longer be neces sary and should be rescinded in the light of the legislative change. The provisions regarding “assurances” will become obsolete. The only provision of the regulation that will continue to have effect is the rule that the per formance of legal, advisory, and ad ministrative services, such as transpor tation or guard services, is not subject to examination unless specifically re quested by the Board. This rule, which essentially is an interpretation o f the term “bank services” in section Kb) of the Act (12 U.S.C. 1861(b)), will be in corporated in the Board’s published interpretations. No new regulatory provisions are considered necessary to reflect the recent amendment o f the Act. As in the past, the letter notifying the Board of the bank service arrange ment is to be sent to the Federal Re serve Bank in whose district the State member bank has its main office. If a bank has an existing bank service ar rangement on March 10, 1979, and has already furnished assurances regard ing the arrangement in compliance with Regulation S, no additional noti fication regarding the arrangement is necessary. As a further effort to improve its ‘ regulations, the Board is revising, up dating, and streamlining Hs interpreta tions. The only substantive rulings being added are taken from: (1) An in terpretation published in the Federal R e s e r v e B u lle tin (48 Fed. Res. Bull. 1429 (1962)) but not in the Code o f F ed era l R e g u la tio n s ; and (2) the last sentence of section 219.4 relating to legal, advisory, and administrative services (discussed above). The Board is also adding a short summary paragraph at the beginning of each interpretation to facilitate the public’s finding of information and lessen the burden of reading materials that may not be relevant to the re searcher’s interest. Of course, if reli ance is to be placed upon the interpre tation, the full text must be consulted since the summary is only a para phrase of the ruling rather than the ruling itself. The Board is asking the Federal Re serve Banks to notify State member banks of the statutory and regulatory changes and to explain compliance with the amended Act. The procedures of 5 U.S.C. 553(b) re garding notice, public participation and deferred effective date were not followed in connection with these reg ulatory changes because: (1) The Board finds that public participation is unnecessary since the rescission of the regulation will result in neither the granting of authority to the per sons regulated, nor the imposition or relaxing of any requirements; and (2) rulemaking procedures do not apply to interpretive rules. For similar reasons, the expanded rulemaking procedures set forth in the Board’s policy state ment of Janury 15, 1979 (44 F.R. 3957) do not apply. To implement these regulatory changes, the following actions are being taken under the Board’s author ity in 12 U.S.C. 1861-65: PART 219— [REVOKED] 1. 12 CFR Part 219 is hereby re voked.* PART 250 MISCELLANEOUS INTERPRETATIONS 2. The table of contents of 12 CFR Part 250 is amended by adding at the end of the table a new heading and three new section titles to read as fol lows: B ank S ervice A rrangements Sec. 250.300 Kinds of bank servicers subject to Board examination under the Bank Service Corporation Act. 250.301 Scope of investment authority and notification requirement under the Bank Service Corporation Act. 250.302 Applicability of Bank Service Cor poration Act to bank credit card service organization. 3. 12 CFR Part 250 is amended by adding new sections §§ 250.300-250.302 immediately after a new heading, * 12 CFR 219.101 is a cross reference to 12 CFR 225.115. The revocation of the former is not intended to result in the revocation of the latter. “BANK SERVICE ARRANGE ganizations that are not bank service MENTS,” to read as follows: corporations is also subject to Board regulation and examination. B an k S ervice A rrangements (d) If the bank servicer is a national § 250.300 Kinds of bank servicers subject bank or a State nonmember insured to Board examination under the Bank bank, its performance of bank services for State member banks is subject to Service Corporation Act. Board regulation and examination, de S u m m a r y . The performance of bank services for State member banks is spite the fact that the servicer is sub subject to the Board’s regulation and ject primarily to regulation and exami examination, regardless of the nature nation by one of the other Federal of the bank servicer, including ser banking ageneies. By the same token, vicers that are national banks; State the performance of bank services by a nonmember insured banks; non-profit, State member bank for a national no-stock credit card servicing organiza bank or State nonmember insured tions; and servicing subsidiaries of bank is subject to regulation and ex amination by the Comptroller of the bank holding companies. T ext, (a) Since the enactment of the Currency or the Federal Deposit In Bank Service Corporation Act (the surance Corporation, respectively. The “Act” ) (12 U.S.C. 1861-65), the Board purpose of section 5 of the Act is to has on several occasions considered make certain that the appropriate whether performance of “bank serv Federal banking agency will be able ef ices” (as that term is defined in sec fectively to exercise its responsibilities tion 1(b) of the Act) for State member with respect to a bank subject primar banks is subject to regulation and ex ily to its supervision. (e) It is important to note that the amination by the Board under section 5 of the Act if (1) the bank servicer is scope of the Board’s regulation and not a “bank service corporation” (as examination under section 5 of the that term is defined in the Act), or (2) Act does not extent to all affairs of the bank servicer is a bank itself. In the bank servicer, but only to the each instance, based on the reasoning “bank services” performed for a State set forth below, the Board expressed member bank and only to the same the view that section 5 of the Act ap extent as if the services were being plied to any organization that per performed by the State member bank formed bank services for State itself on its own premises. member banks, including national banks; another State member bank; § 250.301 Scope of investment authority and notification requirement under the State nonmember insured banks; serv Bank Service Corporation Act. icing subsidiaries of bank holding com panies; and non-profit, no stock credit S u m m a r y , (a) The authority of State card servicing organizations. member banks under the Bank Service (b) The Senate Committee on Bank Corporation Act to invest in bank serv ing and Currency stated with regard ice corporations is limited to invest to section 5 of the Act, as enacted in ments in corporations that perform 1962, that the Federal supervisory “bank services” solely. agencies “must be able to examine all (b) A State member bank is required of the banks’ records, and they must by the Act to notify the Board only of be able to exercise proper supervision the performance of “bank services” over all the banks’ activities, whether for it. performed by the banks’ employees on (c) “Bank services” will not usually their premises or by anyone else on or be regarded as including legal, adviso off the banks’ premises. This examina tion and this supervision cannot be ry, and administrative services, such as frustrated by a transfer of the banks’ transportation or guard services. T e x t (a) Section 2(a) of the Bank records to some other organization or by having some other organization Service Corporation Act (12 U.S.C. carry out all or part of the banks’ 1861-65) provides that “no limitation functions.” (S. R£p. No. 2105, 87th or prohibition otherwise imposed by Cong. 3 (1962)). Similarly, the Com any provision of Federal law exclusive mittee on Banking and Currency of ly relating to banks shall prevent any the House of Representatives stated two or more banks from investing not that “it would obviously be unwise to more than 10 per centum of the paidpermit banks to avoid the examination in and unimpaired capital and unim and supervision of vital banking func paired surplus of each of them in a tions by the simple expedient of farm bank service corporation.” This 10 per ing out such functions.” (H.R. Rep. cent investment ceiling applies to loans and other advances of funds, as No. 2062, 87th Cong. 3 (1962)). (c) Section 5 of the Act. is not limited well as the purchase of stock. The Act, by its terms to “bank service corpora however, does not authorize a State tions” as defined in the Act; nor, in bank to invest in a bank service corpo the Board’s opinion based on the legis ration if the bank is not permitted to lative history of the Act, should such a do so under the applicable State law. (b) “Bank service corporation” is de limitation be implied. The Board con cludes that the performance of bank fined in section 1(c) of the Act to services for State member banks by or mean “a corporation organized to per form bank services for two or more banks, each of which owns part of the capital stock of such corporation, and at least one of which is subject to ex amination by a Federal supervisory agency.” Section 4 of the Act states that “no bank service corporation may engage in any activity other than the performance of bank services for banks.” Thus, the investment authori ty created by section 2(a) is limited to corporations that are engaged solely in the provision of “bank services” to banks, as that term is defined in the Act. (c) In addition to its grant of invest ment authority, the Act also requires State member banks to notify the Board within 30 days of the execution of a contract for “bank services” or the actual provision of such services, whichever occurs first. Moreover, the Act authorizes the Board to regulate and examine the performance of “bank services.” Thus, the scope of the Act’s notification and examination re quirements also is limited to “bank services.” (d) The term “bank services” is de fined in section 1(b) of the Act to mean “services such as check and de posit sorting and posting, computation and posting of interest and other cred its and charges, preparation and mail ing of checks, statements, notices, and similar items, or any other clerical, bookkeeping, accounting, statistical, or similar functions performed for a bank.” (e) Bearing importantly upon the meaning of "bank services” is the fol lowing quotation from the Report of the Senate Committee on Banking and Currency: “The authority to examine and supervise banks is broad and must be vigorously exercised. At the same time sound discretion must be used. Banks have always employed others to do many things for them, and they will have to continue to do so, and the bill is not intended to prevent this or to make it more difficult. For example, banks have employed lawyers to pre pare trust and estate accounts and to prosecute judicial proceedings for the settlement of such accounts. Banks have employed accountants to prepare earnings statements and balance sheets. Banks have employed public relations and advertising firms. And banks have employed individuals or firms to perform all kinds of adminis trative activities, including armored car and other transportation services, guard services and, in many cases, other mechanical services needed to run the bank’s buildings. It is not ex pected that the bank supervisory agencies would find it necessary to ex amine or regulate any of these agents or representatives of a bank, except under the most unusual circum stances. The authority is intended to be limited to banking functions as such.” (S. Rep. No. 2105, 87th Cong. 3 (1962)). (f) On the basis of the Act’s defini tion of “bank services”, the limitation contained in section 4 of the Act, and the preceding quotation from the Act’s legislative history, it is apparent that the term "bank services” is essen tially limited to clerical and similar services. For example, the term would not usually be regarded as including legal, advisory, and administrative services, such as transportation or guard services. (g) Thus, State member banks gener ally may rely on the Act to justify in vestment only in a corporation that is engaged solely in performing one or more of the services contained in the definition of “bank services” in section 1(b), or a service similar to one of those services, and only if those serv ices are provided solely to banks. In vestment in a corporation providing any other services, such as the type of services described in the above quota tion from the Act’s legislative history, generally is not permitted on the basis of this Act, unless such services are le gitimately incidental to the provision of "bank services” by that corporation. (h) Since the notification required by section 5 of the Act, as amended, also is based on the provision of "bank services,” such notification need only be provided with regard to the provi sion of one or more of the services enumerated in section 1(b) of the Act or a service similar to one of those services. § 250.302 Applicability o f Bank Service Corporation Act to bank credit card service organization. cedures relating to credit card security control; (5) upon telephonic request, advising merchants and participating banks respecting credit authorizations above certain specified limits; and (6) compiling lists of participating mer chants. (c) The Board expressed the view that because the service organization has no stock and the State member bank does not otherwise “invest” therein by "the making of a loan, or otherwise, except a payment for rent earned, goods sold and delivered, or services rendered prior to. the making of such payment” (section 1(d) of the Act), the service organization is not a "bank service corporation” within the meaning of section 1(c) of the Act. (d) However, the Board concluded that the functions described above do constitute "bank services” as defined bi section 1(b) of the Act. Accordingly, the State member bank is required to notify the Board (through the appro priate Federal Reserve Bank) of the performance of the services for the bank in accordance with section 5 of the Act. S u m m a r y . Although a non-profit, no-stock service organization in which no bank has made an investment is not a “bank service corporation” as de fined in the Bank Service Corporation Act, that organization’s credit card servicing activities are "bank services” as defined in the Act and thus subject to the notification requirement of sec tion 5 of the Act. T e x t (a) The Board of Governors has considered whether the Bank Service Corporation Act (12 U.S.C. 1861-65), is applicable where a bank credit card plan of a State member bank and other banks used the facili ties of a non-profit, no-stock service organization. (b) The functions of the service or ganization include the following: (1) Performing cardholder accounting for participating banks; (2) developing in formation concerning each credit card Effective date: March 10, 1979. and holder, including such holder’s current balance owing to the card issu Board of Governors of the Federal ing bank and the amount of such bal Reserve System, March 5, 1979. ance that is delinquent; (3) assisting in procedures relating to the presenta T heodore E. A l l is o n , tion and settlement of drafts and S e c r e ta r y o f the B o a r d . credit memoranda; (4) developing pro [FR Doc. 79-7307 Filed 3-8-79; 8:45 am]
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