Full text of Federal Reserve Bank of New York Circulars : 9259. Regulation Y

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 9259 ~\
March 16, 1982

REGULATION Y
Amendment to Permit Management Consulting Advice
by Bank Holding Companies to
Unaffiliated Nonbank Depository Institutions

To All Bank Holding Companies, 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:
The Federal Reserve Board has announced the adoption of an amendment to Regulation Y adding to
the list of activities permissible to bank holding companies the provision of management consulting
advice to unaffiliated nonbank depository institutions.
The Board acted after consideration of comment received on its proposal issued in October 1981, in
connection with an application by BankAmerica Corporation.
Under the amendment, management consulting advice could be offered to institutions such as
savings and loan associations, mutual savings banks and other types of depository institutions that are not
commercial banks. Previously, the Board’s rules permitted bank holding companies to provide
management consulting advice only to commercial banks.
The amendment also permits management interlocks, under certain conditions, between bank
holding companies and depository institutions to which they provide management consulting.

Enclosed is a copy of the amendment, effective April 20, 1982. Questions thereon may be
directed to our Domestic Banking Applications Department (Tel. No. 212-791-5861).




A nthony

M.

S olom on,

President.

Board of Governors of the Federal Reserve System

BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
AMENDMENT TO REGULATION Y
(effective A p ril 2 0 , 19 8 2 )

M A N A G E M E N T CONSULTING ADVICE TO UNAFFILIATED INSTITUTIONS
AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final Rule.

SUMMARY: The Board of Governors of the Federal Reserve System is amending
its Regulation Y to include in the list of permissible bank holding
company activities the activity of offering management consulting advice
to unaffiliated nonbank depository institutions. These institutions
would include savings and loan associations, mutual savings banks,
credit unions, industrial banks, Morris Plan banks, cooperative banks,
and industrial loan companies. The permissible activities would include,
but not be limited to, the selling to nonaffiliated nonbank depository
institutions of management consulting services which relate to bank
operations and marketing, bank personnel operations, and consumer financial
information. The Board also is amending Regulation Y to permit bank
holding companies to have management interlocks with depository insti­
tutions to which they provide management consulting services if such
interlocks would be permissible under exceptions contained in Regulation L
that apply to institutions in need of management or operating expertise.
EFFECTIVE DATE:

April 20, 1982.

FOR FURTHER INFORMATION CONTACT: Melanie L. Fein, Attorney, (202)4523594, Legal Division, Board of Governors of the Federal Reserve System.
SUPPLEMENTARY INFORMATION: Section 4(c)(8) of the Bank Holding Company
Act (12 U.S.C. 1843(c)(8)) permits bank holding companies to hold shares
of "any company the activities of which the Board, after due notice
and opportunity for hearing, determines (by order or regulation) to
be so closely related to banking or managing or controlling banks as
to be a proper incident thereto." The Board's Regulation Y specifies
activities that it has determined to be closely related to banking and
thus permissible for bank holding companies under section 4(c)(8).
(12 C.F.R. 225.4(a)).
In determining whether a particular activity
is a proper incident to banking or managing or controlling banks, the
Board is required to consider "whether its performance by an affiliate
of a holding company can reasonably be expected to produce benefits
For this Regulation to be complete, retain:
1) Regulation Y pamphlet, as amended effective April 5, 1978.
2) Rescission of part of Regulation Y, effective June 14, 1979.
3) Amendments effective January 1, 1979, March 10, 1979,
October 24, 1979, December 5, 1979, December 31, 1980,
January 3, 1981, January 7, 1981, September 1, 1981,
and December 21, 1981.
4) This slip sheet.
[Enc. Cir. No. 9259]




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to the public, such as greater convenience, increased competition, or
gains in efficiency, that outweigh possible adverse effects, such as
undue concentration of resources, decreased or unfair competition,
conflicts of interests, or unsound banking practices."
Section 225. 4(a) (12) of Regulation Y permits bank holding
companies to provide management consulting services to nonaffiliated
banks. The Board has stated in a published interpretation that such
activities should be provided "only to an institution that both accepts
deposits that the depositor has a legal right to withdraw on demand
and engages in the business of making commercial loans." 12 C.F.R.
225.131. The Board has regarded this interpretation as excluding most
thrift institutions.
In response to a request by a bank holding company for prior
approval to offer management consulting services to nonaffiliated non­
bank depository organizations, the Board on November 3, 1981 requested
public comment on a proposed rule to amend Regulation Y to specifically
authorize the provision of such services to nonbank clients. The Board
requested interested persons to comment on whether the provision of
management consulting services to nonbank clients is "closely related
to banking or managing or controlling banks" and whether the performance
of such services to nonbank clients can "reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition, conflicts of interests, or unsound banking practices."
The Board also requested comment on a proposal to amend Regulation Y
to permit bank holding companies to have management interlocks with
depository institutions to which they provide management consulting
services if such interlocks would be permissible under exceptions con­
tained in Regulation L (12 C.F.R. § 212) that apply to institutions
in need of management or operating expertise.
The Board received forty-nine comments favoring the proposal
and three comments opposing it. The comments favoring the proposal
asserted that the provision of management consulting services to nonbank
depository institutions was closely related to banking since banks
traditionally have provided such services to unaffiliated commercial
banks. Many commenters asserted that banks in fact provide management
consulting services to nonbank depository institutions through corre­
spondent relationships.
The comments favoring the proposal stated that the proposed
activity would offer public benefits by increasing the availability
of management consulting advice to all depository institutions. These
comments also stated that the proposal would produce procompetitive
benefits by assisting thrift institutions to fully utilize the powers
conferred by the Monetary Control Act.




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On the basis of the comments received and the Board's con­
sideration of this matter, the Board has determined that the proposed
activity is closely related to banking. Banks traditionally have provided
management consulting services to nonaffiliated commercial banks and
thus have provided services that are functionally similar to the proposed
service. Moreover, banks traditionally have provided specialized services
to nonbank depository institutions that those institutions either have
been precluded by law frcm providing for themselves or which they did
not have the capability to provide for themselves. National banks have
been permitted to offer a wide range of consulting and advisory services
to nonbank financial institutions for seme time.
Accordingly, the Board has determined that it would be appro­
priate to amend Regulation Y to include the activity on the list of
permissible bank holding company activities.
In order to guard against
possible adverse effects of the proposal, such as the possibility for
anticompetitive cooperative arrangements, improper use of confidential
information, and similar abuses, the Board has determined that the
provision of management consulting advice to nonbank clients should
be subject to the same restrictions that apply when such services are
provided to bank clients.
The Board also is adopting two changes to the regulatory language
authorizing management consulting activities that were suggested by
the public comments. The Board believes that these changes would simplify
the regulation's application and that their inclusion in the regulation
would be appropriate at this time.
The first suggestion would effect a change in the requirement
that bank holding companies disclose to all potential clients the names
of all existing client institutions to which they provide management
consulting advice located in the same market area(s) as the prospective
client institution.
It was suggested that the administration of this
provision would be simplified by changing "market area(s)" to "county(ies)
or SMSA(s)." This change would reduce the compliance and administrative
costs of the provision by minimizing uncertainty over the appropriate
market definition without significantly reducing the amount of disclosure
to prospective clients. The Board believes that the proposed change
would improve the regulation and has included it in the final regulation.
The second proposed change that the Board is adopting would
automatically permit bank holding companies that have been granted prior
approval to offer management consulting services to commercial banks
to also offer such services to nonbank depository organizations without
the necessity of filing an application. This change was recommended
in order to avoid unnecessary applications since the public benefits
considerations upon which the Board based its initial approvals of
management consulting services are essentially the same as would apply




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with respect to applications to offer such services to nonbank insti­
tutions. Since the activity in question would be the same and the types
of customers would not significantly differ, the Board regards its prior
approvals of management consulting activities as extending to the pro­
vision of such services to nonbank clients in view of the addition of
such clients to Regulation Y.
The Board also is making a technical change in section 225.4(a)(12)
of Regulation Y by deleting the requirement in footnote 10 requiring
that applications to engage de novo in management consulting activities
be filed in accordance with the procedures in section 225. 4(b) (2) for
acquisitions of a going concern. Such applications should be filed
in accordance with the procedures in section 225. 4(b) (1) for de novo
activities. This change reflects the Board's actual practice with
regard to such applications.
In connection with this action, the Board also is amending
Regulation Y to permit bank holding companies to have common management
officials with depository institutions to which they provide management
consulting services if such interlocks would be permissible under exceptions
contained in the Board's Regulation L (Management Official Interlocks)
that apply to depository institutions in need of management or operating
expertise. 12 C.F.R. § 212.4(b). Regulation Y currently provides that
bank holding companies may not have officers, directors, or employees
in common with banks to which they provide management consulting services.
12 C.F.R. § 225. 4(a) (12) (ii) . The purpose of this restriction is to
guard against potential conflicts of interest. An exception is provided
when such interlocking relationships are or would be permitted under
the exception contained in Regulation L for banks located in low income
areas. This exception reflects a determination that the benefits of
providing management consulting services to institutions in need of
management expertise outweigh any potential conflicts of interest.
The low income exception was incorporated into Regulation Y
at the same time that it was added to Regulation L. Since adoption
of this exception, other exceptions have been added to Regulation L.
These include exceptions for depository organizations controlled or
managed by wanen or minorities, newly chartered organizations, and
organizations facing conditions endangering safety or soundness or
disruptive loss of management officials due to the prohibitions in
Regulation L. 12 C.F.R. § 212.4(b). The exceptions may be granted
by the appropriate federal supervisory agency in individual cases on
the basis of a determination that the exception is necessary to provide
management or operating expertise to the requesting institution. These
Regulation L exceptions have not yet been incorporated into the Regu­
lation Y provision that prohibits interlocks between bank holding companiesand client institutions to which they provide management consulting
services. The Board is incorporating them at this‘time since the
public interest they serve in Regulation L would similarly be served
by their inclusion in Regulation Y. The amendment in this regard uses
the terminology of the Depository Institution Management Interlocks
Act of 1978, 12 U.S.C. § 3201 et seg., which refers to interlocks by



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"management officials," instead of the language in section 8 of the
Clayton Act, which was superseded by the Interlocks Act, which refers
to "officer, director, or employee" interlocks.
Pursuant to section 605(b) of the Regulatory Flexibility Act
(Pub. L. No. 96-354); 5 U.S.C. 601 et seq.), the Board of Governors
of the Federal Reserve System certifies that the amendment will not
have a significant economic impact on a substantial number of small
entities that would be subject to the regulation. The amendment would
liberalize the existing regulations and does not have any particular
effect on small entities that would be subject thereto.
Accordingly, pursuant to its authority under section 5(b) of
the Bank Holding Company Act, 12 U.S.C. § 1844(b), the Board of Governors
of the Federal Reserve System amends 12 C.F.R. Part 225, as follows:
12 C.F.R. Part 225 is amended as follows:
1.

The authority citation for Part 225 reads as follows:

Authority.
wise noted.
2.
to read as follows:

Sec. 5, 70 Stat. 137; 12 U.S.C. 1844, unless other­

Section 225. 4 is amended by revising paragraph (a) (12)

225.4— Nonbanking Activities
(a) * * *
9/
(12) providing management consulting advice— to nonaffiliated
bank and nonbank depository institutions, including commercial
banks, savings and loan associations, mutual savings banks,
credit unions, industrial banks, Morris Plan banks, cooperative
banks, and industrial loan companies, Provided that,
(i)
neither the bank holding company nor any of its sub­
sidiaries own or control, directly or indirectly, any equity
securities in the client institution;

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9/ In performing this activity, bank holding companies are not authorized
to perform tasks or operations or provide services to client institutions
either on a daily or continuing basis, except as shall be necessary
to instruct the client institution on how to perform such services for
itself. See also the Board's interpretation of bank management consulting
advice (12 CFR 225.131). This interpretation shall apply to the performance
of management consulting services for nonbank depository institutions
as well as for commercial banks.



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(ii) no management official, as defined in 12 CFR 212.2(h),
of the bank holding company or any of its subsidiaries serves
as a management official of the client institution except
where such interlocking relationships are permitted pursuant
to an exemption granted under 12 CFR 212.4(b);
(iii) the advice is rendered on an explicit fee basis
without regard to correspondent balances maintained by the
client institution at any depository institution subsidiary
of the bank holding company; and
(iv) disclosure is made to each potential client insti­
tution of (A) the names of all depository institutions which
are affiliates of the consulting company, and (B) the names
of all existing client institutions located in the same county(ies)
or SMSA(s) as the client institution.— '
By order of the Board of Governors of the Federal Reserve
System, March 11, 1982.

(signed)

William W. Wiles

William W. Wiles
Secretary of the Board

[SEAL]

10/ A bank holding company that has received the Board's prior approval
to engage in offering management consulting advice to nonaffiliated
commercial banks as of April 20, 1982, may offer such advice to nonbank
depository institutions pursuant to this paragraph without filing an
application under section 4(c)(8) of the Bank Holding Company Act for
prior approval to engage in the activity, provided that it does not
acquire a going concern to provide such advice.




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