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FEDERAL RESERVE BANK
OF NEW YORK
I- Circular No. 9355 ~1
[_ September 2, 1982 J
REGULATION Y
Amendment and Interpretation on Permissible Data Processing
Activities of Bank Holding Companies
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 amended its Regulation Y (bank holding companies) and related interpretation to
clarify and expand the data processing activities permissible for bank holding companies.
The Board’s action followed approval in July, by order, of an application by Citicorp to engage in similar expanded
data processing activities. The Board’s order approving the Citicorp application, and its amendment of Regulation Y,
reflect the Board’s consideration of public comment, a public hearing and the findings of the Administrative Law Judge
who conducted the hearings.
The Board’s actions are set forth in the attached official notice and are related to previous provisions of Regulation Y,
previous Board bank holding company actions, the amendment of Regulation Y as proposed for comment and the law
judge’s determinations. Highlights are:
— For the internal operations of the bank holding company or the internal operations of its subsidiaries, services
provided may include data processing and data transmission, including provision of data processing hardware,
software, documentation and operating personnel.
— For others, a bank holding company may provide — when certain specified conditions are met — data processing
and transmission services, facilities (defined to include hardware, software, documentation and operating
personnel) or data bases, provided by any technologically feasible means, on condition that the data to be
processed are financial, banking or economic data.
In an accompanying interpretation, the Board specified that in providing packaged data processing and transmission
facilities a bank holding company should provide facilities only for the performance of banking functions, such as check
collection and the like, for depository or similar institutions, such as mortgage companies. The Board interpreted its
regulation expanding permissible data processing services to include as incidental activities the provision of excess data
processing capacity under specified restrictions, and the provision of by-products of permissible data processing and
transmission activities where they are not designed or appreciably enhanced for marketing purposes.
The Board’s action is effective September 25, 1982.
Enclosed is an excerpt from the F e d e ra l R e g iste r of August 26, 1982, containing the text of the amendment and
interpretation. Questions thereon may be directed to our Domestic Banking Applications Department (Tel. No.
212-791-5861).
A nthony M. So l o m o n ,
President.
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 rv e S y s te m
BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
A M E N D M E N T A N D IN TERPRETATION OF REG U LATIO N Y
(Effective September 25, 1982)
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[D ocket No. R-0363]
Bank Holding Companies and Change
in Bank Control, Data Processing, and
Electronic Funds Transfer Activities
AGENCY: Board o f G overn ors o f the
Federal R eserve System.
a c t io n :
Final rule and interpretation.
The Board o f G overn ors o f
the Federal R eserve System is am ending
its Regulation Y w hich con cern s bank
holding com pa n ies and changes in bank
control, and related interpretation to
clarify and exp an d the s cop e o f
perm issible data processin g activities in
w hich a bank holding com pa n y may
engage. The revised interpretation
d escrib e s certain activities the Board
con sid ers incidental to perm issible data
processin g and data transm ission
activities. The n ew activities include the
transm ission o f data, the provision o f
data bases, and the provision o f data
processin g h ardw are in con ju nction with
perm issible softw are.
summary:
EFFECTIVE DATE: Septem ber 25,1902.
FOR FURTHER INFORMATION CONTACT:
Richard M. A shton, A ssistant General
C ounsel (202) 452-3750, or Jennifer
Johnson, Senior A ttorn ey (202) 452-3584,
Legal D ivision, Board o f G overn ors o f
the Federal R eserve System.
SUPPLEMENTARY INFORMATION: Section
4(c)(8) o f the Bank H olding C om pany
A ct (12 U.S.C. 1843(c)(8)) permits bank
holding com pa n ies to hold shares of
“ any com p a n y the activities o f which
the Board, after due n otice and
opportunity for hearing, determ ines by
order or regulation to be so closely
related to banking or m anaging or
controlling banks as to b e a proper
incident thereto.’ ’ 1Section 225.4(a)(8) o f
the B oard’s Regulation Y currently
p rovides that certain data processin g
activities are closely related to banking
and thus perm issible for bank holding
com pa n ies under section 4(c)(8). In 1971.
the Board issued an interpretation,
w hich w as am ended in 1975 (12 CFR
225.123(e)) and stated, am ong other
things, that bank holding com panies
may perform certain incidental activities
n ecessa ry to carry on perm issible data
processin g activities.
I. Background
In 1979, Citicorp. N ew York, New
York, applied to the Board for approval
to engage in exp an d ed data processing
and data transm ission activities, and
requested the Board to am end
Regulation Y in a m anner that w ould
sp ecifica lly permit C iticorp’ s proposed
activities. The a pplication and proposed
1In N a tio n a l C o u rie r A s s o c ia tio n v. H o a rd o f
G overnors o f the F e d e ra l R eserve System . 516 F 2d
1229 (D.C. Cir. 1975). the court established
guidelines to determine whether a particular
activity meets the “ closely related to banking" test
Under these guidelines an a ctivity may be found to
be closely related to banking if it is demonstrated
that banks generally (1) have in fact provided the
proposed service: or (2) provide services that are
operationally or functionally so sim ilar to the
proposed services as to equip them particularly well
to provide the proposed service; or (3) provide
services that are so integrally related to the
proposed service as to require their provision in a
specialized form.
am endm ent to Regulation Y w ere
protested by the A ssocia tion o f Data
Processing Service O rganizations,
Arlington, Virginia (“ A D A P S O ” ). and
other interested orga n iza tion s2
(collectiv ely "P rotestants” ). On July 22,
1981, the B oard published the prop osed
am endm ent for pu blic com m ent and
s p ecifica lly requested com m en ts from
those interested person s w h o did not
wish to participate in the form al hearing.
In a cco rd a n ce with the B oard’s Rules
o f Practice for H earings (12 CFR Part
263), a pu blic adm inistrative hearing on
the application and p rop osed rule w as
held b efore an A dm inistrative Law
Judge. The A dm inistrative Law Judge
also con sid ered all the com m ents
receiv ed con cern in g the p rop osed
am endm ent from interested persons
w h o did not participate in the hearing.
On M arch 29, 1982, the A dm inistrative
Law Judge, after an evaluation o f all o f
the facts o f record in this matter,
determ ined that each o f the eight
activities p rop osed b y C iticorp is closely
related to banking and thus perm issible
for bank holding com panies, and
recom m en ded that the Board adopt the
prop osed am endm ent to Regulation Y,
with certain lim itations.
On July 9,1982, the Board, acting by
order, a p p roved C iticorp's application to
engage in eight categories o f data
processin g and data transm ission
activities, Finding that each activity, as
discu ssed and lim ited in the order, is
‘ Other Protestants to the application were
Electronic Data Systems Corporation; ADP Network
Services. Inc.; Comshare. Inc.: National CSS. Inc.,
Quantum Computer Services. Inc.; Tymshare. Inc.;
and On-I.inc Systems. Inc., w h io : subsequently
w ithdrew from the proceeding
For this Regulation to be complete, retain:
1) Regulation Y pamphlet, as amended effective April 5, 1978.
2) Rescission o f part o f 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,
December 21, 1981, April 5, 1982, and April 20, 1982.
4) This slip sheet.
PRINTED IN NEW YORK, FROM
[Enc. Cir. No. 9355]
FEDERAL REGISTER , VOL.
47, NO. 166
either clo s e ly related to banking or a
perm issible incidental activity.-3
II. D escription o f the A m endm ent and
R evised Interpretation
C onsistent w ith its app roval o f the
Citishare application, the Board is
adopting the am endm ent to Regulation
Y p ro p o se d w ith the application , with
the m od ifica tion s recom m en d ed b y the
A dm inistrative Law Judge and with
oih er m od ifica tion s exp la in ed b e lo w .
The am endm ent w ill m ake it perm issible
for bank holding com p a n ies to engage in
the data processin g and transm ission
services the Board has a p p roved by
ord er in the Citishcre c a s e .*4The B oard’ s
findings on the perm issibility o f the
services in v o lv e d are set forth in detail
in the B oard's Citishare order.
A. Permissible Services for Internal
Operations
Currently, under Regulation Y, a bank
holding com p a n y m ay provide
b ook k eep in g or data p rocessin g services
for the internal operations o f the holding
com p a n y or its subsidiaries. T he
p ro p o s e d am endm ent w o u ld exp a n d the
types o f services p rovid ed for internal
operation s to include data transm ission,
inform ation, and fa cilities.5*The
A dm in istrative Law Judge recom m en ded
ad op tion o f this revision.
W ith on e m od ification , the Board
a dop ts this recom m en d ed am endm ent. It
has not been con tested that data
p rocessin g services for the internal use
o f a bank holding com p a n y are closely
related to banking. Indeed, such
activities are perm issible as servicing
activities pursuant to section 4(c)(1)(C )
o f the A ct. T he B oard is con cern ed ,
h ow ev er, that the term ‘'in form a tion " as
used in the recom m en d ed am endm ent is
vague and d o e s not d escrib e the
perm issible a ctivities with sufficient
sp ecificity. It is apparent from C iticorp ’ s
app lica tion that the use o f the term
“ in form ation ” in the p ro p o se d
JC itic o r p (“ C itishare") 68 F e d e ra l R eserve
Bulletin (July9 . 1 9 8 2 ).
' These activities are: (1) Data processing through
timesharing. (2) on-site data processing; (3)
electronic funds transfer and inform ation exchange:
(4) home hanking; (5) authentication; (6) data
processing for the internal operation o f Citicorp and
its subsidiaries: (7) the sale of by-products of
permissible data processing activities, and (8) the
sale o f excess capacity on data processing and data
transmission facilities
8The term data processing “ fa cilitie s" is defined
to include hardware, software, documentation, and
operating personnel.
am endm ent w a s in tended to permit
providin g a cce s s to data b a ses com piled
by the holding com pa n y. In ord er to
reduce potential am biguity con cerning
perm issible activities, the final
am endm ent substitutes the term “ data
b a s e s " for “ in form ation .”
B. Permissible Services for Others
S ervices that m ay b e p rov id ed to
others under the current regulation are
lim ited to storing and processin g
perm issible data, i.e., banking, financial,
and related e co n o m ic data. The
p rop ose d am endm ent, as m od ified by
the A dm in istrative Law Judge, w ould
permit processin g and transmitting
perm issible data, and providing
inform ation and facilities for such data.
The p rop osed am endm ent w ou ld also
permit a cce s s to such services,
inform ation, or facilities b y any
tech n ologica lly feasib le m eans. The
A dm inistrative Law Judge con clu d ed
that data p rocessin g and transm ission
services, as w ell as providing
inform ation and facilities, are closely
related to banking within certain
lim itations that he recom m en d ed be
adopted.
Protestants o b je ct to this finding,
arguing that the A dm inistrative Law
Judge erred b y not applying the National
Courier tests to the tech n ologies bunk
holding com pa n ies w ou ld use to p rocess
and transmit perm issible data. A s
exp la in ed in the Citishare decision,
h ow ever, the Board has consistently
taken the position in previous actions
regarding data processin g activities that
the particular tech n ology b y w hich a
data processin g activity is p rovided is
not determ inative o f w hether the
a ctivity is perm issible. In its Decimus
d ecision , the B oard exp ressly stated that
perm issible data processin g activities
m ay b e p rovid ed b y any tech n ologica lly
feasib le m eth od .8 In the B oard’ s view ,
the tech n ology is not an activity in itself
but a m eans o f providin g services that
the record in dicates are clo s e ly related
to banking.
Regulation Y, as am en ded, therefore,
in corporates the R ecom m en d ed
D ecision 's description o f perm issible
types o f services, including the
recom m en ded provision that such
services be provid ed b y any
tech n ologica lly feasib le means.
H ow ever, for the rea son s explained
a b o v e in con n ection w ith internal
8B a rh A m e ric a Corp. (Decimus Corp.) 66 F e d e ra l
R eserve B u lle tin 511, 513 (1980).
services, the term “ data b a s e s ” replaces
“ inform ation” in the revised regulation.
C. Types o f Data
The current regulation permits storing
and p rocessin g o f “ banking, financial
and related economic data.” (Emphasis
supplied). The p rop osed am endm ent
w ou ld permit data processin g activities
with regard to “ banking, financial and
economic related data.” The
A dm inistrative Law Judge con clu d ed
that this portion o f the p roposed
am endm ent should b e adopted.
Protestants o b je ct to this finding,
asserting that economic related data is
too b roa d a category and includes data
that are not closely related to banking.
The substan ce o f this ob jection w as
repeated b y other com m entors w h o did
not participate in the adm inistrative
proceedin g. A s stated in the Citishare
d ecision , the Board agrees that
“ e co n o m ic related data” im plies a
significant exp an sion o f the type o f data
perm itted to be p rocessed b y bank
holding com panies. The R ecom m en ded
D ecision con tain s no con clu sion or
finding that supports such a significant
exp an sion o f the type o f data permitted
to be p rocessed . H ow ever, the record in
this proceedin g supports a finding that
banks p rocess economic data.
A ccord in gly, the am endm ent as a dopted
provides that the designated data
processin g services are perm issible
w here the data to be p rocessed or
furnished are banking, financial, or
e c o n o m ic .7
D. Other Limitations on Permissible
Services
A s prop osed , the am endm ent to
Regulation Y con ta in ed no sp ecific
lim itations on the types o f data
p rocessin g activities permitted.
Protestants and the other com m en tors
raised the ob jection that m odern data
p rocessin g and transm ission
tech n ologies are such that custom ers
m ay m od ify the services and equipm ent
provid ed to en able the processin g o f
im perm issible data. In respon se to this
ob jection , the R ecom m en d ed D ecision
in cluded a lim itation in the am endm ent,
’ Protestants also claim that processing financial
and economic data is not closely related to banking
because, by definition, such data are not banking
data. However, the facts o f record indicate that data
processing activities o f banks today are not lim ited
to banking data but extend to other types of
financial and economic data. The Board finds,
therefore, under the N a tio n a l C o u rie r standards,
that processing o f "banking, financial and economic
data" is closely related to banking.
w hich the Board adopts, that all data
p rocessin g services must be provid ed
pursuant to a written agreem ent that
d escrib e s and limits the services to
perm issible activities. The Board also
adop ts the R ecom m en ded D ecision ’ s
requirem ent that all data processin g
facilities provid ed b y a bank holding
com p a n y must be design ed and
m arketed for perm issilbe d a ta .8
M oreover, con sistent with the B oard’s
finding on this matter in the Citishare
d e c isio n ,9 the am endm ent also provides
that such facilities must also be
operated for p rocessin g and transmitting
perm issible data. A s the Board
exp la in ed in its order, the data
p rocessin g industry has the
tech n ologica l capa b ility to limit the use
o f facilities to perm issible data and the
Board b e lieves that a bank holding
com p a n y should take all technical steps
n ecessa ry to ensure that its facilities are
operated on ly w ith respect to banking,
financial, and e co n o m ic data.
E. Provision o f Hardware
T he current regulation d oes not
exp ressly perm it bank holding
com p a n ies to provide data processin g
h ardw are. The p ro p o se d am endm ent
w o u ld include data processin g hardw are
as part o f the facilities perm itted to be
o ffe re d b y a bank holding com pany.
The A dm inistrative Law Judge, finding
that it is on ly qu estion a b ly econ om ica lly
feasib le to o ffe r data processin g
softw a re w ithout including h ardw are as
part o f the service, recom m en ded that
R egulation Y b e a m en ded exp ressly to
in clude the p rovision o f hardw are under
the lim itations that such hardw are m ay
b e o ffe re d on ly in con ju n ction w ith
softw a re design ed and m arketed for the
processin g and transm ission o f
perm issible data and that such
hardw are m ay not constitute the
predom inant part o f the package.
Protestants o b je ct to this
recom m en dation asserting that
h ardw are is a separate product from
softw a re and that it is not n ecessa ry to
sell the tw o products as a package.
O ther com m en tors a lso assert that the
p rovision o f data p rocessin g hardw are is
’ Protestants have raised various other objections
to the proposed regulation and the Citishare
proposal on the grounds that the activities permitted
are not closely related to banking. The Board
discussed these objections in detail in its order
approving the Citishare proposal and the Board's
findings on the objections are specifically
incorporated by reference herein.
* C itic o rp ("C itishare” ) footnote 3, supra.
not clo s e ly related to banking.
A s the Board found in the Citishare
decision , the record o f this proceedin g
indicates that custom ers o f data
p rocessin g services require that
suppliers provide them w ith both
h ardw are and softw a re as an integrated
p a ck a g e .10*W h ere hardw are is required
to be provid ed in a sp ecia lized form,
such as an A utom ated T eller M achine,
its provision m eets the third National
Courier test and is clo s e ly related to
banking. H ow ever, the B oard b elieves
that the p rovision o f general purpose
h ardw are is perm issible on ly as an
incidental activity. A s exp la in ed in the
Citishare d ecision , the Board b eliev es
that a bank holding com p a n y m ay offer
general pu rpose data processin g
h ardw are in con ju n ction w ith
perm issible data p rocessin g services
on ly if the cost to the bank holding
com p a n y o f such h ardw are d oes not
e x ce e d app roxim ately 30 per cent o f the
total cost o f the services p r o v id e d .11 The
am endm ent a d op ted b y the B oard
in corporates the lim itations on the
p rovision o f h ardw are recom m en d ed b y
the A dm in istative Law Judge, but
p io v id e s that general pu rpose hardw are
provid ed as a part o f a package o f data
p rocessin g services m ay not constitute
m ore than 30 per cent o f any pa ck a ged
offering.
F. On-site Data Processing Packages
In its Citishare d ecision , the Board
found that providing p a ck a ged financial
system s, including data processin g
h ardw are and softw are, to be installed
on the prem ises o f the cu stom er is
clo s e ly related to banking. Citishare’ s
on-site activities w ere, h ow ever,
som ew h at lim ited in scop e, since
Citishare intended to offer such services
to d ep ository or other institutions to
perform on ly banking or banking-related
functions, such as ch eck collection or
trust departm ent securities
recordkeepin g. The record on this
a pplication and on the p rop osed
am endm ent w a s generally restricted to
these lim ited types o f on-site data
processin g services. The Board is
con cern ed that, b y its literal terms, the
'° C itic o r p (“ C itishare” ), footnote 3, supra.
" A s explained in the C itis h a re decision, the
Board expects that in computing relative costs for
the purpose o f applying this lim ita tio n all costs,
both direct and indirect, o f each component o f the
package, including the development costs, must be
taken into account and the cost o f each component
w ill reflect only the cost attributable to that
component.
recom m en ded am endm ent w ou ld permit
a bank holding com p a n y to provide
pa ck a ged data processin g services to
non-depository institutions to perform
non-banking related functions. T h ese
functions are b ey on d the s co p e o f the
prop osa l con sid ered b y the Board in the
Citishare a pplication and the B oard has,
accord in gly, exp ressed no opin ion on
the perm issibility o f such activities. The
Board is, therefore, incorporating into its
interpretation regarding perm issible
data processin g activities, 12 CFR
225.123(e),12 a statem ent that a bank
holding com p a n y should limit its
provision o f on-site pa ck a ged services to
custom ers that are d ep ository or sim ilar
institutions and to providing facilities
that perform on ly banking or banking
related functions. This lim itation is
prem ised solely on the lim ited nature o f
the record b efore the Board in this
proceed in g and is not intended to
preclude a bank holding com pa n y from
dem onstrating in another ca se that
providing on-site data processin g
pa ck a ges to n on -d ep ository cu stom ers is
clo s e ly related to banking.
G. E xcess Capacity
T h e s a le o f e x c e s s com p u ter tim e is
cu rrently trea ted in th e B oard ’s d ata
p ro ce ssin g in terp reta tion a s an
in c id en ta l a c tiv ity .13 T h e in terp reta tion
cu rrently p erm its a b an k h old in g
co m p a n y to m ak e e x c e s s co m p u ter tim e
a v a ila b le to a n y o n e so lon g a s th e o n ly
in v o lv e m e n t o f th e h old in g co m p a n y is
fu rn ish in g th e fa cility and th e n e c e s sa r y
op eratin g p erso n n el. T h e p ro p osed
am en d m en t w o u ld in corp o ra te in to
R egu lation Y a p ro v isio n p erm ittin g th e
s a le o f e x c e s s ca p a c ity o n b oth d ata
p r o c e ssin g and d ata tr a n sm issio n
eq u ip m en t a n d fa c ilitie s u se d in
co n n e c tio n w ith p er m issib le d ata
p r o c e ssin g and tr a n sm issio n a ctiv itie s.
T h e R eco m m en d ed D e c isio n a d o p ted
th e p ro p o sed e x c e s s c a p a c ity p ro v isio n
but in clu d ed th ree lim ita tio n s on the
sa le o f e x c e s s ca p a c ity . F irst, a b an k
h old in g co m p a n y m a y n o t p u rch a se d ata
p r o c e ssin g eq u ip m en t s o le ly for the
p u rp ose o f crea tin g e x c e s s ca p a c ity .
S ec o n d , a b an k h old in g co m p a n y m ay
n ot s e ll h ard w a re in c o n n ec tio n w ith
e x c e s s ca p a c ity , an d third, a b an k
" T h e provisions o f the current interpretation
concerning the type o f data for w hich processing
services may be offered and the development of
programs are superseded by provisions in the
amended regulation and have been removed.
" 1 2 CFR 225.123(e).
data b a se s or a cce s s to such services,
facilities, or data b a ses b y any
tech n ologica lly feasib le m eans, w here:
(A ) D ata to b e p r o c e sse d or fu rn ish ed
are fin a n cial, b an k in g or eco n o m ic , and
th e se r v ic e s are p ro vid ed p u rsuan t to a
w ritten a greem en t so d escrib in g and
lim iting the serv ices:
(B) T h e fa cilitie s are d esig n ed ,
m ark eted , an d o p era ted for the
p r o c e ssin g and tra n sm issio n o f
fin a n cial, b an k in g or ec o n o m ic data; and
(C) H ardw are in con n ection therewith
is offered on ly in con ju n ction with
softw a re design ed and m arketed for the
p rocessin g and transm ission o f
financial, banking or e co n o m ic data, and
w here the general purpose hardw are
d o e s not constitute m ore than 30 percent
o f the cost o f any pa ck a ged offering.
II. S ection 225.123(e) is am ended b y
revising the introductory paragraph,
paragraph (e)(1) and (e)(2), and b y
adding a n ew u ndesignated paragraph to
fo llo w paragraph (e)(4) to read as
follo w s:
§ 225.123
banking
*
*
A ctiv itie s closely related to
*
*
*
(e) Data Processing: In p rovid in g
p a c k a g ed d ata p r o c e ssin g an d
tra n sm issio n se r v ic e s for b an k in g,
fin a n cia l an d e c o n o m ic d ata for
in stallation on the prem ises o f the
custom er, as authorized b y
§ 225.4(a)(8)(ii), a bank holding com p a n y
shou ld limit its activities to providing
facilities that perform banking functions,
such as ch eck collection , or other sim ilar
functions for cu stom ers that are
d ep ository or other sim ilar institutions,
such as m ortgage com pa n ies. In
addition, the Board regards the
follow in g as incidental activities
n ecessa ry to carry on the perm issible
activities in this area:
(1)
Providing e x ce s s capa city, not
lim ited to the p rocessin g or transm ission
o f banking, financial or eco n o m ic data
on data p rocessin g or transm ission
equipm ent or facilities used in
con n ection with perm issible data
processin g and data transm ission
activities, w here:
(A ) equipm ent is not pu rch ased solely
for the pu rpose o f creating e x cess
capa city:
(B) hardw are is not offered in
con n ection therewith: and
(C) facilities for the use o f the e x cess
ca p a city d o not in clude the provision o f
any softw are, other than system s
softw a re (including language), netw ork
com m u nications support, and the
operating person nel and docum entation
n ecessa ry for the m aintenance and use
o f these facilities.
(2) Providing b y-prod u cts o f
perm issible data processin g and data
transm ission activities, w here not
design ed, or a pp recia b ly en hanced, for
the purpose o f m arketability.
(3) * * *
*
*
*
*
*
In order to elim inate or reduce to an
insignificant degree any possib ility o f
unfair com petition w here services,
facilities, b y-prod u cts or ex ce s s capacity
are p rovid ed b y a bank holding
co m p a n y ’ s n onbank subsidiary or
related entity, the entity providing the
services, facilities, b y-prod u cts a n d /o r
e x ce s s ca p a city should have separate
b o o k s and financial statem ents, and
should p rovid e these b o o k s and
statem ents to any n ew or ren ew al
cu stom er requesting financial data.
C on solid a ted or other financial
statem ents o f the bank holding com pany
shou ld not b e p rovid ed unless
sp ecifica lly requ ested b y the custom er.
By order of the Board of Governors of the
Federal Reserve System, effective August 20
1982.
William W. Wiles,
Secretary of the Board.
[FR Doc. 82-23374 Filed 8-25-82: 8:45 am)
holding com p a n y m ay provide only
lim ited types o f softw a re in con n ection
with its sale o f e x ce s s ca p a city .14
In recom m en din g that the portion o f
the am endm ent relating to ex ce s s
ca p a city b e a dopted, the Adm inistrative
Law Judge determ ined that the sale o f
e x ce s s ca p a city is clo s e ly related to
banking. Protestants o b je ct to this
finding and the B oard agrees that
Protestants are techn ically correct. The
B oard b elie v e s that providin g ex ce s s
ca p a city should continue to be treated
as a perm issible incidental activity. N o
e v id e n ce w a s in trod uced in the record
o f this proceed in g that w ou ld support a
finding that the sale o f e x ce s s capacity,
w hich under the recom m en ded
am endm ent m ay b e p rovid ed for any
type o f data, is clo s e ly related to
banking.
Several com m en tors on the prop osed
am endm ent asserted that it is
tech n ologica lly p o ssib le to limit the
n eed for e x ce s s ca p a city unless p oor
planning is in volved. T h ese com m ents
also asserted that e x ce s s ca p a city cou ld
be created artificially for the purpose o f
develop in g an im perm issible data
p ro ce ssin g /co m m u n ica tion system . The
record o f this proceed in g sh ow s that
data p ro ce sso rs that p ro cess timesensitive data must m aintain sufficient
ca p a city to m eet peak dem and and
p rovid e back -u p ca p a city in ca se o f
equipm ent failure. E xcess ca pa city
n ecessa rily results from these
requirem ents, and the sale o f such
e x ce s s ca p a city is n ecessa ry to reduce
co s ts and rem ain co m p e titiv e.15 The
B oard b e lie v e s that the record o f this
proceed in g con cern in g e x ce s s capacity,
as d iscu ssed in the Citishare decision,
dem onstrates the n ecessity o f the
m aintenance and sale o f e x ce s s
ca p a city and its perm issibility as an
in ciden tal activity. Furthermore, the
Board b e lie v e s that the lim itations
recom m en d ed b y the Adm inistrative
Law Judge, w h ich the Board adopts, are
sufficient to ensure that the sale o f
e x ce s s ca p a city is lim ited to a
perm issible incidental activity. Since the
B oard has determ ined that the sale o f
"T h e s e include systems software (i.e., software
designed only to control and operate the hardware,
not to perform substantive operations), network
communications support, and the operating
personnel and documentation necessary fo r the
maintenance and use o f these facilities.
" T h e N a tio n a l C o u rie r court determined that
a ctivities that are necessary to the performance of
closely related a ctivities are incidental to closely
related activities. 516 F.2d at 1241.
e x ce s s ca p a city is an incidental and not
a clo s e ly related activity, the provision s
and lim itations recom m en d ed b y the
A dm inistrative Law Judge con cerning
ex ce s s ca p a city are in corpora ted into
the data p rocessin g interpretation and
replace the existing p rovision s on
ex ce s s com puter time.
H. By-Products
The sale o f b y-prod u cts o f the
d evelopm en t o f a program for a
perm issible data p rocessin g activity is
currently treated in the B oa rd’ s data
p rocessin g interpretation as a
perm issible incidental a ctiv ity .16 B y
products m ay b e data, softw are, or data
p rocessin g techniques or inform ation
d e v elop ed b y the bank holding
com pan y. The p rop osed am endm ent
w ou ld add a p rovision to the regulation
stating that providing b y-p rod u cts o f
perm issible data p rocessin g and
transm ission services is clo s e ly related
to banking. Relying on the B oa rd’s
previous determ ination that the sale of
b y-prod u cts is an incidental acitivity to
perm issible data processin g, the
A dm inistrative Law Judge recom m en ded
that Regulation Y b e a m en ded to include
the sale o f any b y-p rod u cts o f
perm issible data p rocessin g and
transm ission activities, so long as the
b y-prod u cts are not design ed or
a p p recia b ly en h a n ced for the pu rpose o f
m arketability.
The Board b eliev es the record
supports a dop tion o f the A dm inistrative
Law Judge’ s recom m en dation, but that it
is appropriate to con tin ue to treat the
sale o f b y-p rod u cts in its data
processin g interpretation as an
incidental activity. A ccord in g ly , the b y
products provision o f the data
p rocessin g interpretation is revised to
in corporate the provision s o f the
recom m en d ed am endm ent.
I. The Requirement o f Separate
Bookkeeping
The A dm inistrative Law Judge
recom m en ded that the Board include in
Regulation Y a separate book k eep in g
p rovision that w a s not con ta in ed in the
p rop osed regulation. U nder this
recom m en ded provision, w here
perm issible data processin g and data
transm ission activities are provid ed b y
a bank holding com p a n y subsidiary or
related entity, the entity providin g the
services w ill have separate b o o k s and
financial statem ents and provide these.
"F o o tn o te 13. supra.
docum ents to any n ew or ren ew al
cu stom er w h o requests financial
inform ation.
T he Board finds that the
recom m en d ed provision is appropriate
but should not b e in clu d ed as a part o f
Regulation Y. S ection 4(c)(8) o f the Bank
H olding C om pan y A ct requires the
Board, in authorizing n on ban k activities
for bank holding com panies, to m ake
tw o separate determ inations. First, the
Board must determ ine that the activity is
clo s e ly related to banking. S econ d, the
Board must determ ine w hether the
pu blic benefits ex p ected from a
particular activity outw eigh any
p ossib le adverse effects, such as unfair
com petition . In making the closely
related to banking finding, the Board
m ay p roceed by order or regulation;
h ow ever, the Board resolves the "p u b lic
b en efits" test on a c a s e -b y -ca s e basis.
Section 225.4 o f Regulation Y design ates
the n onbanking activities the Board has
determ ined meet the statutory test o f
being clo s e ly related to banking.
The record o f this proceed in g d oes not
sh ow that the A dm inistrative Law
Judge's recom m en ded separate b ook s
requirement has any bearing on a
determ ination that the p rop osed
activities are clo s e ly related to banking
and, a ccordingly, such a requirem ent is
inappropriate for inclusion in the
regulation. H ow ever, the Board b elieves
that such a requirem ent is appropriate to
minim ize any dangers o f adverse
com petitive effects. Therefore, the Board
has determ ined to include a separate
b ook s and financial statem ents
requirem ent in the revision o f its data
processin g interpretation.
III. Public C om m ents on the P roposal
T he Board receiv ed sixty-three
com m en ts on the p rop osed rule, o f
w hich thirty-five fav ored the proposal.
The fa v ora b le com m ents, m ost o f w hich
w ere from banking organizations,
asserted that the p rop osed rule m erely
reflects the tech n ologica l developm ents
in the data p rocessin g field in the past
d eca d e. T he com m en tors also asserted
that the services p rop osed to be
p rovided under the p rop osed rule are
services that banks have a lw a ys
provid ed to their custom ers. A few o f
the fav ora b le com m ents suggested that
the banking industry’ s involvem ent in
data processin g w ill m ean greater
innovation and a cce s s to the special
expertise o f b anks in financial matters.
T w en ty-five com m ents op p osed the
p ro p osal, o f w h ich tw e n ty -o n e w er e
from d ata p ro ce ssin g o rg a n iza tio n s. In
a d d itio n to g en er a lly a sser tin g that th e
ex p a n d e d d ata p ro ce ssin g and d ata
tr a n sm issio n a c tiv itie s are n ot c lo se ly
rela ted to b an k in g, th e se d ata
p ro ce ssin g o rg a n iz a tio n s a sse r te d that
en try o f b an k h old in g c o m p a n ie s in to
the field w o u ld d rive th em out o f
b u sin e ss. T h ese co m m en tors a lso m ad e
four sp e c ific a sse r tio n s co n cern in g
a d v e r se e ffe c ts on co m p etitio n that
w o u ld resu lt if b an k h old in g co m p a n ies
w e r e p erm itted to o ffer th e p ro p o sed
se r v ic e s. T h e se effe c ts are tying, c r o ss
su b sid iza tio n , m a n ip u latio n o f th e sto ck
o f d ata p r o c e ssin g co m p a n ie s that b a n k s
h old in their p o r tfo lio s and im p rop er
fin a n cia l lev e ra g e.
W ith the e x c e p tio n o f co m m en ts
co n cern in g the c lo s e ly r e la te d n e ss to
b an k in g o f th e p ro p o sed se r v ic e s, w h ich
are d is c u ss e d a b o v e , th e u n fa v o ra b le
co m m en ts from th e d ata p ro ce ssin g
o rg a n iz a tio n s co n ce rn a d v e r se
c o m p etitiv e e ffe c ts that m a y resu lt if
b an k h old in g c o m p a n ie s en g a g e in the
p ro p osed a c tiv itie s. T h ese
c o n sid e r a tio n s re la te to th e p u b lic
b e n e fits te st and , a s e x p la in e d a b o v e ,
th e B oard m u st c o n sid e r th e lik e lih o o d
o f th e ty p e o f a n tic o m p etitiv e
c o n se q u e n c e s ra ised b y th e co m m en ts
w ith re sp e ct to ea c h p ro p o sa l b y a b an k
h old in g co m p a n y to en g a g e in
p er m issib le d ata p ro ce ssin g a c tiv itie s.
In a d d itio n , th e record in th is
p ro ce ed in g c o n ta in s e v id e n c e relatin g to
th e effect o f e x p a n d e d b an k h old in g
co m p a n y p articip a tio n in th e d ata
p r o c e ssin g in d u stry g e n er a lly a n d the
A d m in istra tiv e L aw Judge m a d e e x p lic it
fin d in gs, w h ich the B oard a d o p ts, that
e x p a n sio n o f b an k h old in g co m p a n y
d ata p ro ce ssin g a c tiv itie s, a s a g en eral
m atter, is n ot lik e ly to resu lt in
d e c r e a se d co m p etitio n , v olu n ta ry tying,
c r o ss-su b sid iz a tio n or p red atory pricing,
or u n d u e co n ce n tra tio n o f re so u rc es.
T h e se fin d in gs, w h ich w e r e b a se d
prim arily on th e h igh ly d e c en tr a lize d
stru ctu re o f th e d ata p ro ce ssin g s e r v ic e s
in d u stry, sup p ort th e B oa rd ’s
d eterm in ation that th e a c tiv itie s
e n c o m p a sse d b y the p ro p o sed
a m en d m en t are p er m issib le an d
a p p rop riate for b an k h old in g co m p a n ies.
W ith regard to m a n ip u latio n o f sto ck
an d im p rop er fin a n cia l le v e ra g e, the
u n fa v o ra b le co m m en tors p ro vid ed no
in d icatio n o f e x a c tly w h a t th e se e ffe c ts
c o n sist o f and no e v id e n c e that b an k
h old in g c o m p a n ie s h a v e or are lik e ly to
en g a g e in th e se p ra ctice s. T h e B oard
regard s th e co m m en tors co n ce rn s in th is
regard to b e m erely sp e c u la tiv e and
d eterm in es that th e se co m m en ts d o not
req uire the B oard to d isa p p ro v e th e
p ro p o sed a m en d m en t.
S ev er a l b an k in g o rg a n iza tio n s
o p p o se d th e a m en d m en t a sser tin g that
certain a sp e c ts o f the p ro p o sed rule
rep resen t a m eth od to circu m v en t the
restrictio n s on in tersta te b an k in g. O n e
co m m en tor a lso sta ted that th e h om e
b an k in g p ortion s o f th e p ro p o sed rule
are in co n flict w ith the E lectron ic F un d s
T ran sfer A ct, 15 U .S.C . 1601 et seq., the
B oard's R egu lation E, 12 CFR Part 205,
and o th er co n su m er cred it la w s .17
H ow ever, no evid en ce has been
presen ted that the ap p roved activities
w ou ld n ecessa rily violate these
restrictions or that such activities cou ld
not b e con d u cted in com p lia n ce w ith the
restrictions against interstate banking or
w ith Regulation E under any
circum stances. The Board exp ects that a
bank holding com p a n y that has receiv ed
Board approval to engage in data
p rocessin g and transm ission services
co v e re d b y the am en ded regulation w ill
com p ly w ith all app lica b le legal
requirem ents. T h ese con sidera tion s do
not therefore w arrant a d ecision not to
adopt the am endm ent to Regulation Y.
IV. Regulatory Flexibility Act
The Small Business Adm inistration
subm itted an opin ion that the
Regulatory Flexibility A ct, 5 U.S.C. 601
et seq., required the preparation o f an
initial flexibility analysis in con ju nction
w ith the n otice o f p rop osed rulemaking.
The A dm inistrative Law Judge
determ ined that the Regulatory
Flexibility A ct did not apply to the
p rop osed rule b eca u se the initial n otice
o f p rop osed rulem aking w a s published
b efore the effectiv e date o f that A ct.
The B oard b eliev es that it is
u nn ecessary to determ ine w hether this
rulem aking p roceed in g p reced ed the
effective date o f the Regulatory
Flexibility A ct. U nder section 605(b) o f
that A ct, 5 U.S.C. 605(b), the A c t’ s
provision s requiring the preparation o f
an initial or final flexibility analysis do
not apply to any p rop osed or final rule if
the head o f the agen cy certifies that the
rule, if prom ulgated, w ill not have a
significant e co n o m ic im pact on a
substantial num ber o f small entities.
' The comment stated that Regulation E requires
w ritte n documentation o f certain electronic funds
transfers and home banking terminals currently in
use do not provide such documentation.
T h is am en d m en t cla r ifies an d e x p a n d s
th e ty p es o f d ata p ro ce ssin g and
tr a n sm issio n s e r v ic e s that m ay b e
en g a g ed in b y a b an k h old in g co m p an y
or its n on b a n k su b sid ia rie s. A s the
A d m in istra tiv e L aw Judge found, the
a m en d m en t d o e s n ot im p o se an y
reco rd k eep in g, reporting, or co m p lia n ce
req uirem en t on a n y en tities, in clu din g
sm a ll e n titie s .18
Therefore, pursuant to section 605(b)
o f the Regulatory Flexibility A ct, the
Board o f G overn ors o f the Federal
R eserve System certifies that the
am endm ent w ill not have a significant
e co n o m ic im pact on a substantial
num ber o f small entities that w ou ld be
subject to the regulation.
List of Subjects in 12 CFR Part 225
B an k s, b an k in g, H old in g co m p an ies.
A cco rd in g ly , p ursuant to its authority
u n der s e c tio n s 4(c)(8), and 5(b) o f the
B ank H old in g C om p an y A ct, 12 U .S.C .
1843(c)(8), and 1844(b), the B oard o f
G o vern ors o f th e F ed eral R eserv e
S y stem a m en d s 12 CFR Part 225 as
fo llo w s:
PART 225-B A N K HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
I. Section 225.4 am ended b y revising
paragraph (a)(8) to read as follow s:
§ 225.4 Nonbanking activities.
(a) * * *
(8)(i) P rovidin g d ata p ro ce ssin g and
d ata tra n sm issio n serv ic es, d ata b a se s
or fa c ilitie s (inclu d in g d ata p ro cessin g
an d d ata tra n sm issio n h ard w are,
so ftw a r e, d ocu m en ta tio n and operating
p erso n n el) for th e in tern al o p era tion s o f
th e h old in g co m p a n y or its su b sid ia ries;
(ii) P rovidin g to oth ers d ata p ro cessin g
an d tra n sm issio n serv ic es, fa cilities,
18The Small Business A dm inistration, supported
by Protestants, asserts that the amendment w ill
have a substantial economic effect on nonbank data
processing service organizations, many o f which are
small entities, by perm itting targe banking
organizations, such as Citicorp, to compete w ith
such organizations. A review o f the terms, purpose
and legislative history o f the Regulatory F le x ib ility
A ct demonstrates, however, that by applying the
Act to a rule w ith significant economic impact on
small entities. Congress meant regulations that
directly impose federal recordkeeping, compliance
and reporting requirements that may result in
potentially unnecessary legal, accounting, and
consulting costs on institutions w ith lim ited
resources See 9-t Stat TIS4 The amendment
adopted by the Board imposes no such regulatory or
reporting requirements.
@FedFRASER