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FEDERAL RESERVE B A *
OF M E W YORK
[
Circular No. 9 8 6 0
"1
May 20, 1985
BANK HOLDING COMPANIES
Application by Citicorp, New York, to Engage in Certain
Securities Underwriting Activities
To A ll Bank Holding Companies, Branches and Agencies o f Foreign 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:
The Federal R eserve Board has requested public com m ent on an application by C iticorp to engage
through a w holly-ow ned subsidiary in underw riting and dealing in, to a lim ited extent: m unicipal reve
nue bonds (including certain industrial developm ent bonds), m ortgage-related securities, and consum er
receivable-related securities. The B oard has not previously found the proposed activities to be perm issi
ble for bank holding com panies under the B ank H olding Com pany A ct.
The B oard requested com m ent by July 22, 1985.
The B oard indicated that notice was being published solely for public com m ent on issues presented
by the proposal under the G lass-Steagall A ct A ct and the Bank H olding Com pany A ct, and that publica
tion did not represent any B oard determ ination that the proposal w ould be consistent or inconsistent w ith
these A cts.
The C iticorp application represents a substantial m odification o f an earlier application w ithdraw n
on February 25, 1985, before the B oard had reached a final decision w hether to seek public com m ent on
the proposal.
Enclosed — for bank holding companies and branches and agencies of foreign banks — is the
complete text of the Board’s notice, which will be published shortly in the Federal Register, copies
will be furnished to others upon request directed to the Circulars Division of this Bank
(Tel. No. 212-791-5216). Comments thereon should be submitted by July 22, 1985, and may be
sent to our Domestic Banking Applications Department.
E. Gerald Corrigan,
President.
FEDERAL RESERVE SYSTEM
CITICORP
Proposal to Underwrite and Deal in Certain Securities
to a Limited Extent
Citicorp, New York, New York, has applied, pursuant to
section 4(c)(8) of the Bank Holding Company Act (12 UoS.Co
§ 1843(c)(8)) and section 225.23(a)(3) of the Board's
Regulation Y (12 C.F.Ro § 225e23(a)(3)), for permission to
engage through its wholly°owned subsidiary, Citicorp
Securities, Inc. ("CSI"), in the activities of underwriting and
dealing in, to a limited extent, the following securities
(hereinafter “ineligible securities"):
1) municipal revenue bonds, including certain
industrial development bonds;
2) mortgage-related securities (obligations secured by
or representing an interest in residential real
estate); and
3) consumer receivable-related securities (obligations
secured by or representing an interest in loans or
receivables of a type generally made to or due from
consumers) ("CRRs").
CSI currently underwrites and deals in securities that
national and state member banks are permitted to underwrite and
deal in under the Glass-Steagall Act ("eligible securities")
(principally U 0S. government securities, general obligations of
states and municipalities and certain money market
instruments), as permitted by section 225.25(b)(16) of
Regulation Y (12 C.F.R. § 225.25 (b) (16)).
[Ref. Cir. No„ 9860]
2
Citicorp also proposes that CSI arrange private
placements and provide certain investment advisory services or
brokerage services to its customers as activities that should
be considered incidental to the proposed underwriting and
dealing activities..
The activities would be conducted in the United States
through offices of CSI located in New York, Houston, San
Francisco, Miami and Chicago,,
The Board has not previously determined that the
proposed underwriting and dealing activities are permissible
for bank holding companies under the Bank Holding Company Acto
Citicorp's application also presents issues under section 20 of
the Glass-Steagall Act (12 U.SoC, § 377)0
Section 20 of the
Glass-=Steagall Act prohibits the affiliation of a member bank,
such as Citibank, N„Ao, with a firm that is "engaged
principally" in the "underwriting, public sale or distribution"
of securitieso
In Applicant's opinion, it would not be
"engaged principally" in these activities on the basis of a
test that would limit the volume of C S I ’s underwriting and
dealing in ineligible securities.
This application represents a substantial modification
of an earlier application under which Citicorp proposed that
CSI underwrite and deal in corporate debt securities as well as
the securities covered by this application.
In that
application, Citicorp proposed to limit C S I ’s underwriting and
3
dealing activities to 20 percent of CSI°s total underwriting
and dealing of eligible and ineligible securities*
including
C S I ’ underwriting and dealing in UoSo government seeurities0
s
On February 25* 1985* Citicorp withdrew the application before
the Board had reached a final decision whether to seek public
comment
on
the
the
proposal 0
In
connection
with
the
withdrawal* the Board issued a statement that Its preliminary
analysis
indicated
the proposal was
inconsistent with
the
Glass-Steagall Act and that Congress is the appropriate forum
for proposals* such as that submitted by Citicorp* that would
dramatically alter the framework established by Congress in the
Glass-Steagall Act for the conduct of the commercial banking
and
investment banking businesses.
The Board
urged prompt
Congressional consideration of legislation that would authorize
bank holding companies to underwrite and deal
revenue ‘
bonds*
commercial paper
and 1=4
in municipal
family residential
mortgage-related securities* as well as to sponsor* control and
distribute the securities of mutual funds0
Citicorp's
amended
application
eliminates
corporate
debt securities from the proposal and substantially reduces the
volume of underwriting and dealing activities proposed by CSI „
Under the proposed test* CSI will limit its underwriting of
municipal
revenue
bonds
(including
industrial
development
bonds) in any calendar year to 3 percent of the total amount of
such securities underwritten domestically by all firms during
4
the previous calendar year and its underwriting of
mortgage-related securities and CRRs to 3 percent of the total
amount of all such securities underwritten domestically by all
firms during the previous calendar year0 CSI will limit its
dealing activities so that at no time will CSI hold for dealing
municipal revenue bonds (including industrial development
bonds) in excess of 3 percent of the total amount of such
securities underwritten domestically by all firms during the
previous calendar year or hold for dealing mortgage-related
securities and CRRs in excess of 3 percent of the total amount
of such securities underwritten domestically by all firms
during the previous calendar year0 ^
—
Section 4(c)(8) of the Bank Holding Company Act
provides that a bank holding company may, with Board approval,
engage in any activity "which the Board after due notice and
opportunity for hearing has determined (by order or regulation)
to be so closely related to banking or managing or controlling
i/ In addition, as a further limit on CSI°s activities, CSI
would limit its underwriting of ineligible securities during
the first year so as to not exceed 5 percent of the gross sales
price of all eligible and ineligible securities underwritten by
CSIo CSI would limit its dealing in ineligible securities
dui-iiiy Lhe first year so as not to exceed 5 percent of the
gross sBles price of all eligible and ineligible securities
underwritten by CSI• During the second year the percentage
limitation would be 7 percent? thereafter, the percentage
limitation would be 10 pereento
5
banks as to be a proper incident thereto*,"
In determining
whether an activity is a proper incident to banking, the Board
must consider whether the proposal may "reasonably be expected
to produce benefits 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."
While the Board has decided to publish Citicorp's
amended proposal for comment, the Board does not thereby take
any position on the issues raised by the proposal under the
Glass-Steagall Act or the Bank Holding Company Act.
Publication of the proposal has been ordered by the Board
solely in order to seek the views of interested persons on the
issues presented by the application and does not represent a
determination by the Board that the proposal is consistent or
inconsistent with the Glass-Steagall Act or that the proposal
meets or is likely to meet the standards of the Bank Holding
Company Act.
The Board requests the written views of interested
persons with respect to:
1) whether for purposes of the Glass-Steagall Act the
proposed activities would constitute CSI being "engaged
principally in the issue, flotation, underwriting, public sale,
or distribution . 0 ." of ineligible securities within the
meaning of section 20 of the Glass-Steagall Act? and
6
2) whether for purposes of section 4(c)(8) of the Bank
Holding Company Act the proposed activities are "so closely
related to banking or managing or controlling banks as to be a
proper incident thereto,,"
In this connection, the Board
is seeking
comments
specifically addressed to the following matters?
Glass-Steagall Act
Comments
permitted
by
the
are
requested
phrase
Glass-Steagall Act,
on
"engaged
the
scope
of
principally"
activity
under
the
including whether the phrase contemplates
the type of tests proposed by Citicorp, which are based on a
percentage of the affiliate's total business activities and of
the
total
securities
underwriting
volume
of
the
particular
involved by firms domestically0
seeks comment on whether
type
The Board
of
also
the term "engaged principally"
in
section 20 would preclude a member bank affiliate from engaging
in underwriting or dealing
in
ineligible
securities
substantial and regular or non-incidental basis
regard to the volume of other
activities
on
a
and without
conducted by the
affiliate 0
Bank Holding Company Act
Ao
Closely Related
to Banking
lssue0
Comment
is
roaneq?>ed concerning whether underwriting and dealing in each
of the proposed types of "investment securities"
is closely
related to banking on the basis that? 1) banks have generally
7
in fact provided the proposed services?
2) banks generally
provide services that are so similar to the proposed services
as to equip them particularly well to provide the proposed
services; or 3) banks generally provide services that are so
integrally related to the proposed services as to require their
provision in a specialized forme
These guidelines for determining whether an activity
is closely related to banking are set out in National Courier
Association
v . Board
of Governors
of
the Federal
System, 516 F.2d 1229 (D.C. Cir. 1975)«
Reserve
In addition, the Board
may consider any other basis that may demonstrate that the
activity has a reasonable or close relationship to banking or
managing
or
controlling
bank.
Board
Statement
regarding
Regulation Y, 49 Federal Register 813 (1984) .
Bo
Proper Incident to Banking Issue.
Comment is requested on whether the proposal would be
a proper incident to banking, that is, whether the performance
of the activity may reasonably be expected to produce public
benefits
that outweigh possible adverse effects0
The Board
also requests comment on whether the proposal may result in the
abuses or hazards that the United States Supreme Court has
identified
as
motivating
2 /
Glass-Steagall Acto—'
Congress
in
enacting
the
These include conflicts of
2/
These possible adverse effects are discussed by the
United States Supreme Court in Investment Company Institute v.
Camp, 401 U.S. 617, 630=633 (1971), and- Securities Industry
Ass'n Vo Board of Governors of the Federal Reserve System, 104
S o C t o
2 9 7 9 ,
2 9 8 4 = 2 9 8 5
( 1 9 8 4 ) o
8
interest, such as the distribution of a company's securities
for the purpose of repaying extensions of credit to the company
by an affiliate of the underwriter, unsound banking practices,
such as the imprudent investment of a bank's funds in
securities underwritten by an affiliate or in imprudent
extensions of credit to customers of the affiliated
underwriter, damage to the bank's reputation or the confidence
of its customers in the bank, or adverse effects on the
impartiality of an affiliate bank in the credit=granting
process or the conduct of its fiduciary activities (including
the provision of investment advice to customers) as a result of
a "salesman's stake" in the securities underwritten or dealt in
by an affiliatec
Comment is requested on whether conditions should be
established to ameliorate any possible adverse effects,
including appropriate capital or other financial requirements,
or limitations on:
transactions between CSX and its bank
affiliates; the use of a name or logo that would be associated
with the Applicant or its subsidiary banks; lending by any CSX
affiliate (bank or nonbank) to a person for the purpose of
purchasing securities from CSX, or to an entity the securities
of which are underwritten or dealt in by CSX or for the benefit
of which such securities are issued; the purchase by a CSX
affiliate, for its own account or as a fiduciary, of securities
underwritten or dealt in by CSI; the offering or marketing of
CSI°s services by its bank affiliates; the access of CSI to
information from its bank affiliates; common personnel or other
interlocking relationships between CSI and its bank affiliates;
or the maintenance of common offices with a CSI affiliateQ
Upon the expiration of the public comment period,
depending upon the comments received, the Board may wish first
to consider the legal issue presented by the application under
the Glass-Steagall Act in order to determine whether there is a
legal basis for considering whether the activities could be
permitted for a bank holding company under the Bank Holding
Company Act.
Any request for a hearing must, as required by
section 262.3(e) of the Board's Rules of Procedure (12 C o F . Ro
§ 262.3(e)), be accompanied by a statement of the reasons why a
written presentation would not suffice in lieu of a hearing,
identifying specifically any questions of fact that are in
dispute, summarizing the evidence that would be presented at a
hearing, and indicating how the party commenting would be
aggrieved by approval of the proposal.
The application may be inspected at the offices of the
Board of Governors or the Federal Reserve Bank of New York.
10
Any views or requests for hearing should be submitted
in writing and received by William W. Wiles, Secretary, Board
of Governors of the Federal Reserve System, Washington,
D»Co
20551, not later than July 22, 1985.
Board of Governors of the Federal Reserve System,
May 13, 1984c
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
@FedFRASER