[Federal Register: December 1, 1998 (Volume 63, Number 230)]
[Rules and Regulations]
[Page 66275-66338]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de98-22]
[[Page 66275]]
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Part III
Federal Deposit Insurance Corporation
_______________________________________________________________________
12 CFR Parts 303, 337, and 362
Activities of Insured State Banks and Insured Savings Associations;
Proposed and Final Rules
[[Page 66276]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303, 337 and 362
RIN 3064-AC12
Activities of Insured State Banks and Insured Savings
Associations
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: As part of the FDIC's systematic review of its regulations and
written policies under section 303(a) of the Riegle Community
Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC has
revised and consolidated its rules and regulations governing activities
and investments of insured state banks and insured savings
associations. The rule implements sections 24, 28, and 18(m) of the
Federal Deposit Insurance Act, and also establishes certain safety and
soundness standards pursuant to the FDIC's authority under section 8.
The FDIC's final rule establishes a number of new exceptions and allows
institutions to conduct certain activities after providing the FDIC
with notice rather than filing an application. Subject to appropriate
separations and limitations, the activities that may be conducted
through a majority-owned subsidiary under these expedited notice
processing criteria are real estate investment and securities
underwriting. The FDIC combined its regulations governing the
activities and investments of insured state banks with those governing
insured savings associations. In addition, the FDIC's final rule
updates its regulations governing the safety and soundness of
securities activities of subsidiaries and affiliates of insured state
nonmember banks. The FDIC's final rule modernizes this group of
regulations and harmonizes the provisions governing activities that are
not permissible for national banks with those governing the securities
underwriting and distribution activities of subsidiaries of state
nonmember banks. The FDIC's final rule makes a number of substantive
changes and amends the regulations by deleting obsolete provisions,
rewriting the regulatory text to make it more readable, conforming the
treatment of state banks and savings associations to the extent
possible given the underlying statutory and regulatory scheme governing
the different charters. The FDIC's final rule also conforms most of the
disclosures required under the current regulation to the Interagency
Statement on the Retail Sale of Nondeposit Investment Products.
EFFECTIVE DATE: January 1, 1999.
FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist,
(202/898-6759), Division of Supervision; Linda L. Stamp, Counsel, (202/
898-7310) or Jamey Basham, Counsel, (202/898-7265), Legal Division,
FDIC, 550 17th Street, N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA) required that the FDIC review its
regulations for the purpose of streamlining those regulations, reducing
any unnecessary costs and eliminating unwarranted constraints on credit
availability while faithfully implementing statutory requirements.
Pursuant to that statutory direction, the FDIC reviewed part 362
``Activities and Investments of Insured State Banks,'' subpart G of
Part 303, effective October 1, 1998, (formerly Sec. 303.13) ``Filings
by Savings Associations'', and Sec. 337.4 ``Securities Activities of
Subsidiaries of Insured State Banks: Bank Transactions with Affiliated
Securities Companies'', and proposed making a number of changes to
those regulations. That proposal is found in the September 12, 1997,
issue of the Federal Register at 62 FR 47969.
The FDIC's final rule restructures existing part 362, placing the
substance of the text of the current regulation into new subpart A.
Subpart A addresses the Activities of Insured State Banks implementing
section 24 of the Federal Deposit Insurance Act (FDI Act). 12 U.S.C.
1831a. Section 24 restricts and prohibits insured state banks and their
subsidiaries from engaging in activities and investments of a type that
are not permissible for national banks and their subsidiaries. Through
this new final rule, the FDIC introduces a new streamlined notice
processing concept for insured state nonmember banks that want to
engage in certain activities that are impermissible for national banks
and their subsidiaries.
Due to the experience that the FDIC has gained in reviewing
applications from insured state nonmember banks since the enactment of
section 24, the FDIC has standardized the eligibility criteria and
conditions for two activities. This mechanism gives insured state
nonmember banks a level of certainty that has been lacking for banks
that want to diversify their earnings and maintain their
competitiveness by investing in subsidiaries that engage in activities
not permissible for national banks. This framework sets forth the
eligibility criteria and conditions for majority-owned subsidiaries of
insured state nonmember banks to engage in real estate investment and
securities underwriting. This framework allows insured state nonmember
banks to proceed with their business plans in these areas with relative
certainty that the FDIC will consent to the execution of their plans
and with assurance that consent will be forthcoming on a predictable
schedule. This framework allows the insured state nonmember banks to be
creative and innovative in their business plan within the structure
appropriate to the activities being undertaken. The FDIC hopes that
this rule will assist the insured state nonmember banks as they
progress into the competitive financial environment of the 21st century
in which they operate their business.
The FDIC's final rule moves the part of the FDIC's regulations
governing securities underwriting not permissible for national banks
(currently at 12 CFR 337.4) into subpart A of part 362. Although the
proposal contemplated that the entire regulation, Securities Activities
of Insured State Nonmember Banks, found in Sec. 337.4 of this chapter
would be removed and reserved, we have postponed that action while
redeveloping some of the safety and soundness criteria that govern
insured state bank subsidiaries that engage in the public sale,
distribution or underwriting of securities and other activities that
are not permissible for a national bank but that are permissible for
national bank subsidiaries. The redeveloped regulatory language that
will amend subpart B of this regulation is published as a proposed rule
elsewhere in this issue of the Federal Register for further public
comment. During the period that Sec. 337.4 still exists, where
activities are covered by both Sec. 337.4 and this final rule, we have
provided relief from the requirements of Sec. 337.4 in this rulemaking.
For those activities that were covered under Sec. 337.4 and are now
covered under this part 362, we have attempted to modernize the
regulations governing those activities by updating the requirements,
revising the regulations by deleting obsolete provisions, rewriting the
regulatory text to make it more readable, removing a number of the
obsolete current restrictions on those activities, and removing the
disclosures required under the current regulation.
[[Page 66277]]
Safety and Soundness Rules Governing Insured State Nonmember Banks
is found in the new subpart B. Subpart B establishes modern standards
for insured state nonmember banks to conduct real estate investment
activities through a subsidiary, and for those insured state nonmember
banks that are not affiliated with a bank holding company (nonbank
banks), to conduct securities activities in an affiliated organization.
The existing restrictions on these securities activities are found in
Sec. 337.4 of this chapter.
Subpart G of part 303, effective October 1, 1998, (formerly
Sec. 303.13) of this chapter which relates to activities and filings by
savings associations is revised in a number of ways. First, the
substantive portions applicable to state savings associations of
subpart G are placed in new subpart C of part 362. The substantive
requirements applicable to all savings associations when Acquiring,
Establishing, or Conducting New Activities through a Subsidiary are
moved to new subpart D.
In the proposal, subpart E contained the revised application and
notice procedures as well as delegations of authority for insured state
banks, and subpart F contained the revised application and notice
procedures as well as delegations of authority for insured savings
associations. On a parallel track, the FDIC has completed its revision
of part 303 of the FDIC's rules and regulations. Part 303 contains
substantially all of the FDIC's applications procedures and delegations
of authority. Subparts G and H of part 303 were designated as the place
where the text of subparts E and F of our proposed rule would be
located. As a part of the part 303 review process and for ease of
reference, the FDIC is removing the applications procedures relating to
activities and investments of insured state banks from part 362 and
placing them in subpart G of part 303. The procedures applicable to
insured savings associations are consolidated in subpart H of part 303.
These subparts are published as an amendment to part 303 as a part of
this final regulation.
Part 362 of the FDIC's regulations implements the provisions of
section 24 of the FDI Act. Section 24 was added to the FDI Act by the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
With certain exceptions, section 24 limits the direct equity
investments of state chartered insured banks to equity investments of a
type permissible for national banks. Section 24 prohibits an insured
state bank from directly, or indirectly through a subsidiary, engaging
as principal in any activity that is not permissible for a national
bank unless the bank meets its capital requirements and the FDIC
determines that the activity will not pose a significant risk to the
appropriate deposit insurance fund. In addition, section 24 prohibits
the subsidiary of an insured state bank from directly or indirectly
engaging as principal in any activity that is not permissible for a
national bank subsidiary unless the bank meets its capital requirements
and the FDIC determines that the activity will not pose a significant
risk to the appropriate deposit insurance fund. The FDIC may make such
determinations by regulation or order. The statute requires
institutions that held equity investments not conforming to the new
requirements to divest no later than December 19, 1996. The statute
also requires that banks file certain notices with the FDIC concerning
grandfathered investments.
Part 362 was adopted in two stages. The provisions of the current
regulation concerning equity investments appeared in the Federal
Register on November 9, 1992, at 57 FR 53234. The provisions of the
current regulation concerning activities of insured state banks and
their majority-owned subsidiaries appeared in the Federal Register on
December 8, 1993, at 58 FR 64455.
Subpart G of Part 303, effective October 1, 1998, (formerly
Sec. 303.13) of the FDIC's regulations (12 CFR 303.140) implements FDI
Act sections 28 (12 U.S.C. 1831e) and 18(m) (12 U.S.C. 1828(m)). Both
sections were added to the FDI Act by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA). While section
28 of the FDI Act and section 24 of the FDI Act are similar, there are
a number of fundamental differences between the two provisions which
caused the implementing regulations to differ in some respects.
Section 18(m) of the FDI Act requires state and federal savings
associations to provide the FDIC with notice 30 days before
establishing or acquiring a subsidiary or engaging in any new activity
through a subsidiary. Section 28 governs the activities and equity
investments of state savings associations and provides that no state
savings association may engage as principal in any activity of a type
or in an amount that is impermissible for a federal savings association
unless the FDIC determines that the activity will not pose a
significant risk to the affected deposit insurance fund and the savings
association is in compliance with the fully phased-in capital
requirements prescribed under section 5(t) of the Home Owners' Loan Act
(12 U.S.C. 1464(t)) (HOLA). Except for its investment in service
corporations, a state savings association is prohibited from acquiring
or retaining any equity investment that is not permissible for a
federal savings association. A state savings association may acquire or
retain an investment in a service corporation of a type or in an amount
not permissible for a federal savings association if the FDIC
determines that neither the amount invested in the service corporation
nor the activities of the service corporation pose a significant risk
to the affected deposit insurance fund and the savings association
continues to meet the fully phased-in capital requirements. A savings
association was required to divest itself of prohibited equity
investments no later than July 1, 1994. Section 28 also prohibits state
and federal savings associations from acquiring any corporate debt
security that is not of investment grade (commonly known as ``junk
bonds'').
Section 303.13 of the FDIC's regulations was adopted as an interim
final rule on December 29, 1989 (54 FR 53548). The FDIC revised the
rule after reviewing the comments and the regulation as adopted
appeared in the Federal Register on September 17, 1990 (55 FR 38042).
The regulation established application and notice procedures governing
requests by a state savings association to directly, or through a
service corporation, engage in activities that are not permissible for
a federal savings association; the intent of a state savings
association to engage in permissible activities in an amount exceeding
that permissible for a federal savings association; or the intent of a
state savings association to divest corporate debt securities not of
investment grade. The regulation also established procedures to give
prior notice for the establishment or acquisition of a subsidiary or
the conduct of new activities through a subsidiary. Section 303.13 was
recently moved with stylistic, but not substantive changes, to subpart
G of part 303, effective October 1, 1998 of the FDIC's regulations.
Section 337.4 of the FDIC's regulations (12 CFR 337.4) governs
securities activities of subsidiaries of insured state nonmember banks
as well as transactions between insured state nonmember banks and their
securities subsidiaries and affiliates. The regulation was adopted in
1984 (49 FR 46723) and is designed to promote the safety and soundness
of insured state nonmember banks that have subsidiaries which engage in
securities activities, including activities that are impermissible for
banks directly under section 16 of the Banking Act of 1933
[[Page 66278]]
(12 U.S.C. section 24 (seventh)), commonly known as the Glass-Steagall
Act. For those subsidiaries that engage in underwriting activities that
are prohibited for a bank, the regulation requires that these
subsidiaries qualify as bona fide subsidiaries, establishes transaction
restrictions between a bank and its subsidiaries or other affiliates
that engage in such securities activities, requires that an insured
state nonmember bank give prior notice to the FDIC before establishing
or acquiring any securities subsidiary, requires that disclosures be
provided to securities customers in certain instances, and requires
that a bank's investment in such a securities subsidiary be deducted
from the bank's capital.
On August 23, 1996, the FDIC published a notice of proposed
rulemaking (61 FR 43486, August 23, 1996) (August 1996 proposed rule)
to amend part 362. Under that proposed rule, a notice procedure would
have replaced the application currently required in the case of real
estate, life insurance, and annuity investment activities provided
certain conditions and restrictions were met. The proposed rule set
forth notice processing procedures for real estate, life insurance
policies, and annuity contract investments for well-capitalized, well-
managed insured state banks. While the August 1996 proposed rule would
have amended existing part 362, this new final rule replaces existing
part 362.
After considering the comments to the August 1996 proposed rule and
reconsidering the issues underlying the current regulation, the FDIC
withdrew that proposed rule in favor of the more comprehensive approach
presently adopted. One major change was the elimination of a life
insurance policy and annuity contract investment notice due to
intervening guidance provided by the Office of the Comptroller of the
Currency (OCC) that appears to eliminate the necessity for an
application with respect to virtually all of the life insurance and
annuity investments received by the FDIC in the past. While section 24
and the part 362 application process would continue to apply to those
life insurance and annuity investments which are impermissible for
national banks, the FDIC has decided that there is no need to adopt a
notice process that specifically addresses what we expect to be an
extremely small number of situations.
II. Description of the Final Rule
The FDIC divided part 362 into four subparts and changed some of
the structure of the rule. Generally, we moved substantive aspects of
the regulation that were formerly found in the definitions of terms
like ``bona fide subsidiary'' to the applicable regulation text. This
reorganization should assist the reader in understanding and applying
the regulation. Next we deleted most of the provisions relating to
divesture because we found them to be unnecessary due to the passage of
time. Third, we combined the rules covering the equity investments of
banks and savings associations into part 362 to regulate these
investments as consistently as possible given the limitations imposed
by the different statutes that govern each kind of insured institution.
Finally, although the FDIC agrees with the principles applicable to
transactions between insured depository institutions and its affiliates
contained in sections 23A and 23B of the Federal Reserve Act (12 U.S.C.
371c and 371c-1), our experience over the last five years in applying
section 24 has led us to conclude that extending 23A and 23B by
reference to bank subsidiaries is inadvisable. For that reason, the
final regulation does not incorporate sections 23A and 23B of the
Federal Reserve Act by cross-reference; rather, the regulation adapts
similar principles to those set forth in sections 23A and 23B to the
bank/subsidiary relationship as appropriate. In drafting the final
rule, we have considered each of the requirements contained in sections
23A and 23B in the context of transactions between an insured
institution and its subsidiary and refined the restrictions
appropriately. We are comfortable that this approach strikes a better
balance between caution and commercial reality by harmonizing the
capital deductions and the principles of 23A and 23B.
Subpart A of the final rule deals with the activities and
investments of insured state banks. Except for those sections
pertaining to the applications, notices and related delegations of
authority (procedural provisions), existing part 362 essentially
becomes subpart A under the current proposal. The procedural provisions
of existing part 362 have been transferred to subpart G of part 303.
Subpart A addresses the activities of insured state banks in
Sec. 362.3. The activities carried on in subsidiaries of insured state
banks are addressed separately in Sec. 362.4.
Under a safety and soundness standard, subpart B of the final
regulation requires subsidiaries of insured state nonmember banks
engaged in certain activities to meet the standards established by the
FDIC, even if the OCC determines that those activities are permissible
for a national bank subsidiary. The FDIC has determined that real
estate investment activities may pose significant risks to the deposit
insurance funds. For that reason, the FDIC established standards that
an insured state nonmember bank must meet before engaging in real
estate investment activities that are not permissible for a national
bank, even if they are permissible for the subsidiary of a national
bank.
Subpart B also establishes modern standards for insured state
nonmember banks to govern transactions between those insured state
nonmember banks that are not affiliated with a bank holding company
(nonbank banks) and affiliated organizations conducting securities
activities. The existing restrictions on these securities activities
are found in Sec. 337.4 of this chapter. The new rule only covers those
entities not covered by orders issued by the Board of Governors of the
Federal Reserve System (FRB) governing the securities activities of
those banks that are affiliated with a bank holding company or a member
bank.
In addition, subpart B prohibits an insured state nonmember bank
not affiliated with a company that is treated as a bank holding company
(see section 4(f) of the Bank Holding Company Act, 12 U.S.C. 1843(f)),
from becoming affiliated with a company that directly engages in the
underwriting of securities not permissible for a bank itself unless the
standards established under the proposed regulation are met.
Subpart C of the final rule concerns the activities and investments
of insured state savings associations. The substantive provisions
applicable to activities of savings associations currently appearing in
subpart G of part 303, effective October 1, 1998, (formerly
Sec. 303.13) would be revised in a number of ways and placed in new
subpart C. To the extent possible, activities and investments of
insured state savings associations are treated consistently with the
treatment accorded insured state banks. Thus, we revised a number of
definitions currently contained in subpart G of part 303 to track the
definitions used in subpart A of part 362.
Subpart D of the final rule requires that an insured savings
association provide a 30-day notice to the FDIC whenever the
institution establishes or acquires a subsidiary or conducts a new
activity through a subsidiary. This provision does not alter the notice
required by statute and current subpart G of part 303. We moved this
requirement to a new subpart to accommodate Federally chartered savings
associations by limiting the
[[Page 66279]]
amount of regulation text they would have to read to learn how to
comply with this statutory notice.
III. Comment Summary
The FDIC received 129 comments in response to the proposed
regulation. The overall comments generally favored the FDIC's approach
to streamlining the consent process for banks and savings associations
to engage in activities using standardized criteria with seven comments
specifically supporting the FDIC's efforts to streamline these rules.
Comments were received from 102 financial institutions, 2 one bank
holding companies, 3 state banking departments, 14 trade associations,
2 investment companies, 4 Congressmen, 1 federal banking regulator and
1 individual.
The overwhelming majority of the comments (107), primarily from
Massachusetts, were focused on concerns over proposed changes to the
standards governing holding equity securities in subsidiaries by banks
having grandfathered authority to hold the securities at the bank
level. We have responded to these comments by reinstating the exception
for a grandfathered bank to hold equity securities in a subsidiary. A
complete discussion of this issue is found in the section by section
analysis.
With regard to the structure of the rule and the consolidation of
the banking and savings activities into a single rule, five comments
expressly supported the FDIC's efforts to accomplish these goals.
However, one comment suggested using a table like the Office of Thrift
Supervision (OTS) has used to aid understanding this complex and
difficult regulation. Three comments support cross-referencing the
Interagency Statement rather than restating disclosure requirements. A
readability analysis was submitted by one individual and, based upon
the results, the individual questioned whether the FDIC was successful
in achieving the stated objective of using plain English. This
individual offered his services to the FDIC as a writing consultant.
Other general comments observed that diversifying into new activities
increases safety and soundness and were pleased that the FDIC supports
state institutions' exercising of new powers. Two comments indicated
that in the preamble, the FDIC had overstated the authority of the FRB
to impose more stringent standards on any activity conducted by a state
member bank. This statement is derived from section 24(i); however, we
intended to refer to those activities not permissible for national
banks. At least one bank and the state banking departments advocate
further streamlining of the regulations to make it easier for banks to
use their capital through subsidiaries. The bank suggested that banks
must have more flexibility to keep their capital in the banking system,
rather than paying out more dividends to shareholders. Although we
favor diversifying the banks' income stream and making bankers'
compliance burden as light as possible, we also are charged with
maintaining safety and soundness and meeting the requirements of
section 24 of the FDI Act. Thus, we strive to balance these interests
in crafting more flexible regulations.
Most of the remaining comments addressed the substance of the
regulation and provided constructive feedback on the regulation text.
Two comments focusing on the Purpose and Scope Section suggested a
definition of what is meant by ``acting as principal,'' although we
already had a definition of ``as principal.'' Two comments objected to
the FDIC accepting the time period imposed by the National Bank Act on
real estate that is acquired for debts previously contracted as a
limitation that carries over to state banks. We believe that the
authority of a national bank to own real estate is governed by the
statute and that this limitation is inherent in that authority. Thus,
we believe that a state bank is constrained by this same limitation
unless relief can be granted by the FDIC. Relief may be granted by the
FDIC only if the state bank transfers the property to a majority-owned
subsidiary with appropriate capital and complies with whatever other
constraints the FDIC deems adequate to protect the deposit insurance
fund from significant risk.
In the definitions section, eight comments requested that we expand
the definition of majority-owned subsidiary to include limited
liability companies and limited partnership interests. One comment
suggested that the qualified housing exception also include limited
liability companies. Four comments expressed concern over the change to
the definition of ``change of control.'' Four comments expressed
concern about the change to the definition of ``significant risk to the
deposit insurance fund.'' One comment suggested a definition of
``investment in subsidiary'' and further clarification of the items to
be included in debt and equity.
With regard to the activities of insured state banks, two comments
supported the FDIC's new interpretation of when the ``in an amount''
limitation is applicable. Six comments addressed insurance activities,
including three addressing the appropriate disclosures. Five comments
addressed the change in the measurement of the applicable capital limit
for adjustable rate and money market preferred stock. Six comments
addressed the 4(c)(8) list (closely related to banking) activities,
including specific alternatives on real estate leasing. One comment
supported the change in the qualified housing projects exception to
conform the meaning of lower income to that used in the community
reinvestment regulations in defining low and moderate income.
With regard to the activities of subsidiaries of insured state
banks, one comment thought the control concept was unnecessary for
lower tier subsidiaries. Over one hundred ten comment letters addressed
the various issues involving the holding of equity securities through a
majority-owned subsidiary, with the overwhelming majority of the
comments coming from Massachusetts banking interests to advocate not
changing the constraints governing banks in that state owning
grandfathered equity securities in a subsidiary. Several of these
comment letters identified more than one issue. Twenty comments
addressed the issues involved with engaging in real estate investment
activity through a majority-owned subsidiary. Nine comments addressed
the issues identified in securities underwriting activity through a
majority-owned subsidiary. Eleven comments addressed the eligible
depository institution criteria. Twelve comments addressed the eligible
subsidiary criteria and generally expressed the view that the eligible
subsidiary was an improvement over the bona fide subsidiary concept
found in the old rule. Seventeen comments addressed the investment and
transaction limits criteria. Eight comments were directed to the way
the capital requirements operate. One comment said that banks should
have the option of complying with original conditions or the new rule.
With regard to the real estate activities covered by subpart B,
five comments addressed this issue and generally thought that the FDIC
should not impose additional regulations on state nonmember banks.
With regard to subpart C governing savings associations, one
comment expressed the view that thrifts do not know what is permissible
for national banks and needed greater specificity in the regulation.
There were no comments on subpart D; however, no substantive change was
made to this statutory filing requirement.
[[Page 66280]]
With regard to subparts E and F governing the notice and
application processing and content, two comments were received in favor
of firmer processing deadlines.
IV. Section by Section Analysis
A. Subpart A--Activities of Insured State Banks
Section 362.1 Purpose and Scope
As described in the preamble accompanying the proposal, included
within the proposed changes to the regulation was the inclusion of a
purpose and scope paragraph describing the statutory background,
intent, and nature of items covered by this subpart. Several commenters
acknowledged the FDIC's efforts to restructure the regulation and
agreed that the proposed reorganization simplifies what continues to be
complex material. These commenters stated that the use of purpose and
scope paragraphs helps clarify the coverage of each subpart.
The intent of Sec. 362.1 is to clarify that the purpose and scope
of subpart A is to ensure that activities and investments undertaken by
insured state banks and their subsidiaries do not present a significant
risk to the deposit insurance funds, are not unsafe and are not
unsound, are consistent with the purposes of federal deposit insurance,
and are otherwise consistent with law. Subpart A implements the
provisions of section 24 of the FDI Act that restrict and prohibit
insured state banks and their subsidiaries from engaging in activities
and investments of a type that are not permissible for national banks
and their subsidiaries. The phrase ``activity permissible for a
national bank'' means any activity authorized for national banks under
any statute including the National Bank Act (12 U.S.C. 21 et. seq.), as
well as activities recognized as permissible for a national bank in
regulations, official circulars, bulletins, orders or written
interpretations issued by the OCC.
This subpart governs activities conducted ``as principal'' and
therefore does not govern activities conducted as agent for a customer,
conducted in a brokerage, custodial, advisory, or administrative
capacity, conducted as trustee, or conducted in any substantially
similar capacity. As explained in the preamble accompanying the
proposal, we moved this language from Sec. 362.2(c) of the former
version of part 362 where the term ``as principal'' was defined to mean
acting other than as agent for a customer, acting as trustee, or
conducting an activity in a brokerage, custodial or advisory capacity.
The FDIC previously described this definition as not covering, for
example, acting as agent for the sale of insurance, acting as agent for
the sale of securities, acting as agent for the sale of real estate, or
acting as agent in arranging for travel services. Likewise, providing
safekeeping services, providing personal financial planning services,
and acting as trustee were described as not being ``as principal''
activities within the meaning of this definition. In contrast, real
estate development, insurance underwriting, issuing annuities, and
securities underwriting would constitute ``as principal'' activities.
Further, for example, travel agency activities have not been
brought within the scope of part 362 and would not require prior
consent from the FDIC even though a national bank is not permitted to
act as travel agent. Agency activities are not covered by the
regulations because the state bank would not be acting ``as principal''
in providing those services. Thus, the fact that a national bank may
not engage in travel agency activities is of no consequence. Of course,
state banks would have to be authorized to engage in travel agency
activities under state law. We intend to continue to interpret section
24 and part 362 as excluding any coverage of activities being conducted
as agent. To highlight this issue, provide clarity, and alert the
reader of this rule that activities being conducted as agent are not
within the scope of section 24 and part 362, this language was moved to
the purpose and scope paragraph in the proposal.
Comments addressing the proposed treatment of ``as principal'' were
submitted by two industry trade groups. One group agreed that moving
the applicable language to the purpose and scope paragraph helps
clarify that section 24 does not apply to activities conducted in an
agency or similar capacity. However, both commenters recommended that
the FDIC define ``as principal'' by specifying what is meant by acting
as principal rather than providing a list of capacities exempt from
that definition. In other words, the commenters desired a definition
consisting of an inclusive list rather than a list of exemptions.
Additionally, one commenter expressed concern that the current list of
exempt capacities may omit certain agency-like roles. As such, the
commenter recommended that the FDIC include ``substantially similar
capacities'' in the list of capacities that are not considered to be
conducted ``as principal''.
The FDIC continues to believe that including the ``as principal''
language in the purpose and scope paragraph provides clarity regarding
activities coming within the scope of section 24. As such, the FDIC
elects not to separately define ``as principal'', and has deleted as
redundant an overlapping definition of ``as principal'' contained in
Sec. 362.2(c) of the proposal. Additionally, the FDIC cannot reasonably
list all capacities that will be considered to be ``as principal''.
Therefore, the FDIC is not persuaded that changing the nature of the
definition to an inclusive list of capacities that are considered ``as
principal'' would alleviate confusion. Instead, ``as principal''
activities will continue to be described as being all capacities other
than the listed exceptions. The FDIC nonetheless agrees that the
current list may exclude certain agency-like roles and is therefore
adding the phrase ``or in any substantially similar capacity'' to the
regulatory language of Sec. 362.1(b)(1). Also, the FDIC has added a
list of examples of activities that are not ``as principal'' to provide
the public with additional guidance.
The preamble of the proposal also explains that equity investments
acquired in connection with debts previously contracted (DPC) are not
within the scope of this subpart when held within the shorter of the
time limits prescribed by state or federal law. The exclusion of equity
investments acquired in connection with DPC was moved from the
definition of ``equity investment'' in the former regulation to the
purpose and scope paragraph to highlight this issue, provide clarity,
and alert the reader of this rule that these investments are not within
the scope of section 24 and part 362. Interests taken as DPC are
excluded from the scope of this regulation provided that the interests
are not held for investment purposes and are not held longer than the
shorter of any time limit on holding such interests (1) set by
applicable state law or regulation or (2) the maximum time limit on
holding such interests set by applicable statute for a national bank.
The result of the modification would be to make it clear, for example,
that real estate taken DPC may not be held for longer than 10 years
(see 12 U.S.C. 29) or any shorter period of time set by the state. In
the case of equity securities taken DPC, the bank must divest the
equity securities ``within a reasonable time'' (i.e, as soon as
possible consistent with obtaining a reasonable return) (see OCC
Interpretive Letter No. 395, August 24, 1987, (1988-89 Transfer Binder)
Fed Banking L. Rep. (CCH) p. 85619, which interprets and applies the
National Bank Act) or no later than the time permitted under state law
if that time period is
[[Page 66281]]
shorter. Of course, a state bank permitted to hold such interests under
state law may apply to the FDIC for consent to continue to hold the
real property through a majority-owned subsidiary. In the final rule,
the FDIC has added some general information about the manner in which a
national bank may hold DPC.
Two commenters objected to the FDIC imposing the national bank
holding period limits on insured state banks if those limits are
shorter than otherwise permitted under state law. One commenter
suggested applying a ``reasonable time period'' divestiture standard
similar to that concerning equity securities acquired DPC. The holding
periods governing a national bank's ability to own real estate acquired
DPC are contained within section 29 of the National Bank Act (12.
U.S.C. 29). Because a national bank can hold real estate acquired DPC
in limited circumstances, section 24 only allows a state bank to hold
such interests under the same constraints, i.e., for a maximum of 10
years. Conversely, section 29 does not contain divestiture periods for
equity securities acquired DPC and the FDIC has therefore elected to
defer to a ``reasonable time'' standard. However, due to the statutory
limitation in section 29, no changes are made to the exception for real
estate acquired DPC and the regulation will continue to apply the
holding periods in the manner proposed.
As discussed in the proposal's preamble, the intent of the insured
state bank in holding equity investments acquired in connection with
DPC is also relevant to the analysis of whether the equity investment
is permitted. Any interest taken DPC may not be held for investment
purposes. For example, a bank may be able to expend monies in
connection with DPC property and/or take other actions with regard to
that property. However, if those expenditures and actions are not
permissible for a national bank, the property will not fall within the
DPC exception. For an additional example, if the bank's actions are
speculative in nature or go beyond what is necessary and prudent in
order for the bank to recover on the loan, a national bank would not be
permitted to take these actions. The FDIC expects bank management to
document that DPC property is being actively marketed; current
appraisals or other means of establishing fair market value may be used
to support management's decision not to dispose of property if offers
to purchase the property have been received and rejected by management.
Similarly, the proposal also moved to the purpose and scope
paragraph language governing any interest in real estate in which the
real property is (1) used or intended in good faith to be used within a
reasonable time by an insured state bank or its subsidiaries as offices
or related facilities for the conduct of its business or future
expansion of its business or (2) used as public welfare investments of
a type permissible for national banks. Again, this language was moved
from the definition of ``equity investment'' in the former regulation
to highlight this issue, provide clarity, and alert the reader of this
rule that such investments are not within the scope of this subpart. In
the case of real property held for use at some time in the future as
premises, the holding of the property must reflect a bona fide intent
on the part of the bank to use the property in the future as premises.
We are not aware of any statutory time frame that applies in the case
of a national bank which limits the holding of such property to a
specific time period. Therefore, the issue of the precise time frame
under which future premises may be held without implicating part 362
must be decided on a case-by-case basis. If the holding period allowed
under state law is longer than what the FDIC determines to be
reasonable and consistent with a bona fide intent to use the property
for future premises, the bank will be so informed and will be required
to convert the property to use, divest the property, or apply for
consent to hold the property through a majority-owned subsidiary of the
bank. We note that the OCC's regulations indicate that real property
held for future premises should normally be converted to use within
five years after which time it will be considered other real estate
owned and must be actively marketed and divested within no more than
ten years (12 CFR part 34). We understand that the time periods set
forth in the OCC's regulations reflect safety and soundness
determinations by that agency. As such, and in keeping with what has
been to date the FDIC's posture with regard to safety and soundness
determinations of the OCC, the FDIC will make its own judgment to
determine when a reasonable time has elapsed for holding property for
future premises.
The purpose and scope paragraph also explains that a subsidiary of
an insured state bank may not engage in activities that are not
permissible for a subsidiary of a national bank unless the bank is in
compliance with applicable capital standards and the FDIC has
determined that the activity poses no significant risk to the deposit
insurance fund. Subpart A provides standards for certain activities
that are not permissible for a subsidiary of a national bank.
Additionally, because of safety and soundness concerns relating to real
estate investment activities, subpart B reflects special rules for
subsidiaries of insured state nonmember banks that engage in real
estate investment activities of a type that are not permissible for a
national bank, but that may be otherwise permissible for a subsidiary
of a national bank.
The FDIC intends to allow insured state banks and their
subsidiaries to undertake safe and sound activities and investments
that do not present a significant risk to the deposit insurance funds
and that are consistent with the purposes of federal deposit insurance
and other applicable law. This subpart does not authorize any insured
state bank to make investments or to conduct activities that are not
authorized or that are prohibited by either state or federal law.
Section 362.2 Definitions
Revised subpart A Sec. 362.2 contains the definitions applicable to
this subpart. Most definitions are unchanged from those used in the
current regulation. Nonetheless, the proposal contains edits to enhance
clarity and readability, define additional terms, and delete certain
definitions as unnecessary.
To standardize as many definitions as possible, we incorporated the
following definitions from section 3 of the FDI Act (12 U.S.C. 1813):
``depository institution'', ``insured state bank'', ``bank'', ``state
bank'', ``savings association'', ``state savings association'',
``insured depository institution'', ``federal savings association'',
and ``insured state nonmember bank''. This standardization required
that we delete the definitions of the first two terms, ``depository
institution'' and ``insured state bank'', currently found in part 362.
No substantive change was intended by this modification. The remaining
terms were added by reference to provide clarity throughout the
proposed part 362 because we incorporate many of the definitions from
subpart A into the other part 362 subparts. The FDIC received no
comments concerning these changes and is therefore adopting the
referenced definitions as proposed.
Several definitions were carried forward in the proposal from the
current regulation either unchanged or containing only minor edits to
enhance clarity or readability without changing the meaning. The
following definitions
[[Page 66282]]
were carried forward without any substantive meaning changes:
``control'', ``extension of credit'', ``executive officer'',
``director'', ``principal shareholder'', ``related interest'',
``national securities exchange'', ``residents of state'',
``subsidiary'', and ``tier one capital''. Again, the FDIC received no
comments on the referenced definitions which are adopted as proposed.
The name of one definition was simplified without substantively
changing its meaning. The subject definition was formerly found in
Sec. 362.2(g) and was described as follows ``an insured state bank will
be considered to convert its charter''. This definition is now provided
by Sec. 362.2(f) and is named ``convert its charter''. No commenters
addressed this simplified title which is adopted as proposed.
The definitions of ``activity permissible for a national bank'',
``an activity is considered to be conducted as principal'', and
``equity investment permissible for a national bank'' were deleted in
the proposed and final rule because the substance of the information
contained in those definitions was incorporated into the scope
paragraph in Sec. 362.1. When developing the proposal, the FDIC
concluded that moving the information contained in these definitions to
the scope paragraph made the coverage of the rule clearer.
Additionally, placing this information at the beginning of the subpart
is consistent with the purpose of a scope paragraph. Some readers may
save time by realizing sooner that the regulation may be inapplicable
to conduct contemplated by a particular bank. It also may be more
logical for the reader to consider the scope paragraph to determine the
rule's applicability, rather than having to rely on the definition
section. Moreover, we concluded that it would be unnecessary to
duplicate this same information in the definition section. The FDIC
received no specific comments on the proposed treatment, but
respondents commenting on the overall structure of the proposal
generally favored the use of the purpose and scope paragraphs. The
final regulation incorporates the changes as proposed. The proposed
definition of ``as principal'' at Sec. 362.2(c) duplicates material set
out in the scope section at Sec. 362.1(b)(1), and has therefore been
eliminated in the final rule. Appropriate definitional language has
been added to Sec. 362.1(b)(1).
The proposal also deleted the definition of ``equity interest in
real estate'' and moved the recitation of the permissibility of owning
real estate for bank premises and future premises, owning real estate
for public welfare investments, and owning real estate from DPC to the
scope paragraph for the reasons stated in the preceding paragraph.
These activities are permissible for national banks and we concluded
that it was unnecessary to continue to restate this information in the
definition section of the regulation. No substantive change is intended
by the simplification of this language. Further, we determined that the
remainder of the definition of ``equity interest in real estate'' did
little to enhance clarity or understanding; therefore, we are relying
on the language defining ``equity investment'' to cover real estate
investments.
Conforming changes were made to the definition of ``equity
investment'' by removing the reference to the deleted definition of
``equity interest in real estate''. Additionally, the remaining part of
the ``equity investment'' definition was shortened and edited to
enhance readability. This definition is intended to encompass an
investment in an equity security, partnership interest, or real estate
as it did in the former regulation. No substantive changes were
intended by the changes described in this or the preceding paragraph.
The FDIC received no comments on these changes which are adopted as
proposed.
With regard to the definition of ``equity security'', we modified
the definition by deleting references to circumstances where holding
equity securities is permissible for national banks, such as when
equity securities are held as a result of a foreclosure or other
arrangements concerning debts previously contracted. Language
discussing the exclusion of DPC and other investments that are
permissible for national banks was relocated to the scope paragraph for
the reasons previously stated. Like the exceptions concerning equity
investments in real estate, no substantive change is intended by the
relocation of the subject exceptions to the purpose and scope
paragraph. No comments were received on this proposed treatment which
is adopted as proposed.
The definitions of ``investment in a department'' and
``department'' were deleted because they are no longer needed in the
revised regulation text. The core standards applicable to a department
of a bank are detailed in Sec. 362.3(c) and defining the term
``department'' is therefore unnecessary. If a calculation of an
``investment in a department'' needs to be made, the FDIC intends to
defer to governing state law. As a result, a definition of ``investment
in a department'' is unnecessary and was deleted. There were no
comments addressing the removal of these definitions.
Similarly, we deleted the definition of ``investment in a
subsidiary'' because the definition is no longer needed in the revised
regulation text. Amounts subject to the investment limits of
Sec. 362.4(d) are listed clearly in that subsection. The FDIC opted to
list amounts subject to investment limits in Sec. 362.4(d) to separate
those debt-type investments from the equity-type investments subject to
the capital treatment of Sec. 362.4(e). The regulation also contains
other investment limits applicable to both debt and equity investments.
Because of these different types of investment limits, the FDIC did not
find a single ``investment in a subsidiary'' definition helpful.
Therefore, the FDIC has elected not to incorporate such a definition
despite a request by one commenter. However, as the same commenter
suggested, the FDIC has attempted to clearly delineate amounts subject
to the various investment limits, transaction restrictions, and capital
requirements when applicable through both the regulation text and the
corresponding preamble language.
We deleted the definition of ``bona fide subsidiary'' and chose to
make similar characteristics part of the ``eligible subsidiary''
criteria in Sec. 362.4(c)(2). Including these criteria as a part of the
substantive regulation text in the referenced subsection, rather than
as a definition, makes reading the rule easier and the meaning clearer.
No commenters addressed this treatment. Comments concerning the various
elements of the eligible subsidiary criteria are discussed elsewhere in
this preamble under the appropriate section.
The regulation substitutes the current definition of ``lower
income'' with a cross reference in Sec. 362.3(a)(2)(ii) to the
definition of ``low income'' and ``moderate income'' used for purposes
of part 345 of the FDIC's regulations (12 CFR 345) which implements the
Community Reinvestment Act (CRA). 12 U.S.C. 2901, et. seq. Under part
345, ``low income'' means an individual income that is less than 50
percent of the area median income or a median family income that is
less than 50 percent in the case of a census tract or a block numbering
area delineated by the United States Census in the most recent
decennial census. ``Moderate income'' means an individual income that
is at least 50 percent but less than 80 percent of the area median or a
median family income that is at least 50 but less than 80 percent in
the case of a census tract or block numbering area.
The ``lower income'' definition is relevant for purposes of
applying the
[[Page 66283]]
exception in the regulation which allows an insured state bank to be a
partner in a limited partnership whose sole purpose is direct or
indirect investment in the acquisition, rehabilitation, or new
construction of qualified housing projects (housing for lower income
persons). As we anticipate that insured state banks will seek to use
such investments in meeting their community reinvestment obligations,
the FDIC is of the opinion that conforming the definition of lower
income to that used for CRA purposes will benefit banks. This change
has the effect of expanding the housing projects that qualify for the
exception. The FDIC received one comment addressing the altered
definition with the respondent favorably noting and supporting the
resultant effect. The final regulation adopts this change as proposed.
The regulation includes an altered definition of the term
``activity''. As modified, the definition includes both activities and
investments. Where equity investments are intended to be excluded from
a particular section of the regulation, we expressly exclude those
investments in the regulatory text. Previously, the term ``activity''
was defined differently depending upon whether it was used in
connection with the direct conduct of business by an insured state bank
or in connection with the conduct of business by a subsidiary of the
bank. This change was made both to simplify the regulation and to
reflect the section 24 definition of ``activity''. No comments were
received on this proposed change.
It is noted that no comments were received regarding the proposed
suggestion also to modify the ``activity'' definition to incorporate a
recent interpretation by the agency that determined that the act of
making a political campaign contribution does not constitute an
``activity'' for purposes of part 362. The referenced interpretation
uses a three prong analysis to help determine whether particular
conduct should be considered an activity and therefore subject to
review under part 362 if the conduct is not permissible for a national
bank.
First, any conduct that is an integral part of the business of
banking as well as any conduct which is closely related or incidental
to banking should be considered an activity. In applying this factor,
it is important to focus on what banks do that makes them different
from other types of businesses. For example, lending money is clearly
an ``activity'' for purposes of part 362. The second factor asks
whether the conduct is merely a corporate function as opposed to a
banking function. For example, paying dividends to shareholders is
primarily a general corporate function and not one associated with
banking because of some unique characteristic of banking as a business.
Generally, activities that are not general corporate functions will
involve interaction between the bank and its customers rather than its
employees or shareholders. The third factor asks whether the conduct
involves an attempt by the bank to generate a profit. For example,
banks make loans and accept deposits in an effort to make money.
However, contracting with another company to generate monthly customer
statements should not be considered to be an activity in and of itself
as it simply is entered into in support of the ``activity'' of taking
deposits. If at least two of the factors yield a conclusion that the
conduct is part of the authorized conduct of business by the bank, the
better conclusion is that the conduct is an activity. Because of the
lack of interest received on expanding the definition to reflect this
interpretation, no change is made to the definition proposed. The FDIC
intends to continue to apply the above analysis when determining
whether particular conduct should be considered an activity.
The definition of ``real estate investment activity'' was shortened
to mean any interest in real estate held directly or indirectly that is
not permissible for a national bank. This term is used in
Sec. 362.4(b)(5) of subpart A. Additionally, it is used in Sec. 362.8
of subpart B which contains safety and soundness restrictions on real
estate activities of subsidiaries of insured state nonmember banks that
may be deemed to be permissible for operating subsidiaries of national
banks but that would not be permissible for a national bank itself. The
proposed definition contained a parenthetical excluding real estate
leasing from the definition of real estate investment activities. By
excluding leasing from the proposed ``real estate investment activity''
definition, the FDIC was attempting to clearly separate leasing
activity from other real estate investment activities.
Under the current regulation, banks and their majority-owned
subsidiaries are allowed to engage in real estate leasing under the
regulatory exceptions enabling them to engage in activities closely
related to banking.1 These regulatory exceptions were
carried forward in the proposal. However, the FDIC is concerned about
certain activities encompassed within this section. For example, the
4(c)(8) list includes real estate leasing. When an individual or entity
engages in leasing activity as the lessor of a particular parcel, the
landlord has an ownership interest in the underlying real estate. Under
section 24 of the FDI Act, insured state banks are limited in their
ability to own real estate. We are concerned that an insured state bank
could consider this regulation and its certain conditions as the FDIC
having permitted the bank or its majority-owned subsidiaries to own
real estate interests that would not be permissible for a national bank
or a subsidiary of a national bank. To prevent insured state banks from
attempting to use this consent to leasing activity as a way to avoid
the corporate separations, transaction limitations and restrictions,
and capital treatment applicable to other real estate investment
activities, the proposed definition expressly excluded leasing.
Additionally, the FDIC was attempting to ensure that banks using the
notice procedure to engage in real estate investment activities were
not, in effect, operating a commercial business by virtue of the terms
of the leasing activity.
---------------------------------------------------------------------------
\1\ These regulatory exceptions were provided by
Sec. 362.4(c)(3)(ii)(A) and (B) depending upon whether conducted by
the bank or through a majority-owned subsidiary, respectively. The
exceptions provided that insured state banks or their majority-owned
subsidiaries could engage in principal in activities that the FRB by
regulation or order has found to be closely related to banking for
the purposes of section 4(c)(8) of the Bank Holding Company Act (12
U.S.C. 1843(c)(8)).
---------------------------------------------------------------------------
The FDIC recognizes, however, that the proposed definition would
have effectively prevented an insured state bank's majority-owned
subsidiary that was proceeding under the notice procedure from leasing
property that it is otherwise permitted to own or develop.2
As a result, the insured state bank would have been required to submit
an application to seek further consent from the FDIC to lease real
property it was allowed to own. To correct this anomaly, the FDIC has
deleted the parenthetical from the definition and deals with the
activities of real estate leasing and other real estate investment
activities separately as discussed elsewhere in this preamble. The
subject definition is otherwise unchanged from the proposal.
---------------------------------------------------------------------------
\2\ Provided it meets the conditions imposed by
Sec. 362.4(b)(5).
---------------------------------------------------------------------------
The final rule includes a modified definition of ``company'' to
which we added limited liability companies to the list of entities
considered to be a company. This change was made to recognize the
creation of limited liability companies and their growing prevalence in
the market place. Four
[[Page 66284]]
commenters suggested explicitly adding limited liability partnerships
to the list of business structures included in the ``company''
definition. The FDIC believes the suggested change is unnecessary
because limited liability partnerships are already included in the
definition through the term ``partnership''.
As proposed, the FDIC adopted the modified definition of
``significant risk to the fund'' with the second sentence that
clarifies that this definition includes the risk that may be present
either when an activity or an equity investment contributes or may
contribute to the decline in condition of a particular state-chartered
depository institution or when a type of activity or equity investment
is found by the FDIC to contribute or potentially contribute to the
deterioration of the overall condition of the banking system. Our
interpretation of the definition remains unchanged. Significant risk to
the deposit insurance fund is understood to be present whenever there
is a high probability that any insurance fund administered by the FDIC
may suffer a loss. The preamble accompanying the adoption of this
definition in 1992 (57 FR 53220, November 9, 1992) indicated that the
FDIC recognizes that no investment or activity may be said to be
without risk under all circumstances and that such a fact alone will
not cause the agency to determine that a particular activity or
investment poses a significant risk of loss to the fund. The definition
emphasizes that there is a high degree of likelihood under all of the
relevant circumstances that an investment or activity by a particular
bank, or by banks in general or in a given market or region, may
ultimately produce a loss to either of the funds. The relative or
absolute size of the loss that is projected in comparison to the fund
is not determinative of the issue. The preamble indicated that the
definition is consistent with and derived from the legislative history
of section 24 of the FDI Act. Previously, the FDIC rejected the
suggestion that a risk to the fund be found only if a particular
activity or investment is expected to result in the imminent failure of
a bank. The suggestion was rejected in 1992 as the FDIC determined that
it was inappropriate to approach the issue this narrowly in light of
the legislative intent.
Four commenters addressed the proposed change to the wording of
this definition. One industry trade association complimented the
change. However, two other groups expressed concern that the added
sentence results in a definition that is overly broad, and a state bank
stated that the change makes the definition incoherent. The latter
three commenters expressed concern that the added sentence contains no
qualifications or limitations. These commenters state that numerous
activities may negatively impact the condition of an institution or may
contribute to deterioration in the overall banking system without
causing loss to the insurance fund. The commenters suggest that section
24 requires the FDIC to consider the extent of the impact before
determining that an activity presents a significant risk to the fund.
The FDIC agrees with the commenters that consideration must be given to
the extent that a negative event may harm an institution or the overall
banking industry. However, the FDIC believes that both sentences
contained in the definition must be read together. The second sentence
clarifies that significant risk is present whenever there is a high
probability that an activity or an equity investment will or could
result in a loss to an insurance fund administered by the FDIC,
regardless of whether the loss results from one or multiple
institutions. After consideration of the comments and the wording, the
FDIC adopts the expanded definition as proposed.
The proposal re-defined the term ``well-capitalized'' to
incorporate the same meaning set forth in part 325 of this chapter for
an insured state nonmember bank. For other state-chartered depository
institutions, the term ``well-capitalized'' has the same meaning as set
forth in the capital regulations adopted by the state. Importing the
capital definitions used by the various state-chartered depository
institutions should simplify the calculations when they deal with their
appropriate federal banking agency. The other terms defined under
Sec. 362.2(x) of the current regulation were deleted as unnecessary due
to the other changes in the regulation text.
The proposal added definitions of the following terms: ``change in
control'', ``institution'', ``majority-owned subsidiary'', ``security''
and ``state-chartered depository institution.''
After reconsideration of the proposed definition of ``change in
control'', the FDIC decided to adopt certain changes to bring the
definition back into substantive consistency with the broader reach of
the term as is provided by the current regulation. The change in
control definition comes into play primarily in connection with section
24's grandfather with respect to common or preferred stock listed on a
national securities exchange and shares of registered investment
companies. Section 24 states that the grandfather ceases to apply if
the bank converts its charter or undergoes a change in control.
The definition proposed at Sec. 362.2(c) covered any instance in
which the bank undergoes a transaction which requires a notice to be
filed under section 7(j) of the FDI Act (12 U.S.C. 1817(j)) except a
transaction which is presumed to be a change in control for the
purposes of that section under FDIC's or FRB's regulations implementing
section 7(j), or in which the bank is acquired by or merged into a bank
that is not eligible for the grandfather. This proposed definition
eliminated two other instances which the current regulation, at
Sec. 362.3(b)(4)(ii), treats as a change in control: any transaction
subject to section 3 of the Bank Holding Company Act (12 U.S.C. 1842)
other than a one bank holding company formation (section 3
transactions), and a transaction in which control of the bank's parent
company changes (parent control changes).
In the preamble to the proposal, the FDIC indicated that
elimination of the section 3 transactions and the parent control
changes would bring the definition more in line with what constituted a
true change in control. For example, the section 3 transaction language
in the current rule would encompass all mergers between the holding
company of a grandfathered bank and another bank holding company,
regardless of which holding company was the survivor. However, upon
further reflection, the FDIC has decided that total elimination of the
section 3 transactions would create anomalous results. If a controlling
interest in a grandfathered bank was acquired by an unrelated holding
company (which requires approval under section 3), it is difficult to
argue how this is materially less of a change in control than if
control of the bank was acquired by an individual in a section 7(j)
transaction. Still, there are cases in which a rigid application of the
section 3 transactions would reach too far. In contrast to the example
in which a bank holding company acquires control of a grandfathered
bank, the FRB's approval under section 3 is required if a bank holding
company acquires anything more than five percent of any outstanding
class of a bank's voting shares. The revised definition at
Sec. 362.2(c) contained in the final rule therefore includes
transactions subject to section 3 approval only when a bank holding
company acquires control of a grandfathered bank through the section 3
transaction. The current exclusion for one bank holding
[[Page 66285]]
company formations also is maintained in the final rule.
Also, the elimination of the parent control changes in the proposed
rule created potentially confusing ambiguities, particularly when
coupled with the elimination of the section 3 transactions. For
example, if the holding company of a bank eligible for the grandfather
is acquired and merged into an unrelated bank holding company (again,
which requires approval under section 3), it is difficult to argue how
this is materially less of a change in control than if the bank itself
was merged with an unrelated bank. But the merger and acquisition
language in the proposed definition referred only to the bank itself.
The final rule expands the merger language to holding companies,
accordingly. As another example, it is difficult to argue that a
transaction requiring the holding company of a grandfathered bank to
submit a change in control notice under section 7(j) is materially less
of a change in control than a transaction requiring the grandfathered
bank itself to file such a notice, and the 7(j) language in the
proposed rule did not expressly refer to holding company transactions.
In the final rule, the FDIC has therefore revised the 7(j) language to
clarify its applicability to both scenarios.
The FDIC received three similar comments expressing concern about
the proposed changes to the ``change in control'' definition. The
commenters acknowledge that deleting certain instances from the current
definition reduces the instances in which a bank would lose its
grandfathered rights. Nonetheless, the commenters feel that it is
unclear whether the proposed changes may have also inadvertently
broadened the reach of the remaining transactions causing the
grandfathered right to be terminated. This ambiguity appears to result
from an incomplete understanding of whether the definition continues to
exclude transactions presumed to be a change in control under the
FDIC's and FRB's regulations implementing section 7(j) of the FDI Act.
The FDIC wants to assure commenters that the regulatory language of the
final definition, like that of the proposal, continues to exclude such
presumed changes in control from the events that result in a loss of
the subject grandfathered rights.
One additional commenter took exception to the FDIC's position
concerning the ability to look to the substance of a transaction in
determining whether grandfather rights terminate. The commenter
objected to the FDIC's statement in the preamble to the proposed rule
that state banks should be aware that, depending upon the
circumstances, the grandfather could be considered terminated after a
merger transaction in which an eligible bank is the survivor. For
example, if a state bank that is not eligible for the grandfather is
merged into a much smaller state bank that is eligible for the
grandfather, the FDIC may determine that in substance the eligible bank
has been acquired by a bank that is not eligible for the grandfather.
The commenter argues that the FDIC's interpretation is inconsistent
with the FDIC's current regulations, and claims that if the FDIC
subjects such transactions to subjective criteria such as relative
asset size, institutions considering mergers or acquisitions will be
disadvantaged because of the uncertainty regarding the potential loss
of grandfathered status. The commenter also asserts that the FDIC's
interpretation is inconsistent with congressional intent because
section 24 did not define change in control; Congress clearly intended
the use of ``change in control'' language in section 24(f)(5) to
reference the meaning of the phrase ``change in control'' established
by the Change in Bank Control Act (CBCA) (12 U.S.C. 1817(j)). In the
commenter's view, since the CBCA predates section 24 by nine years,
Congress intended to use ``change in control'' as a term of art.
The interpretation set out in the preamble to the proposal is
consistent with the FDIC's current regulation and is in fact set out in
the preamble accompanying the FDIC's original adoption of the change in
control provisions under part 362 in 1992. 57 FR 53227 (Nov. 9, 1992).
The commenter's argument takes too narrow a view of section 24(f)(5),
as the FDIC pointed out in proposing the change of control provisions
of current part 362. In light of the broader congressional action under
section 24 to generally prohibit equity investments by state banks
which are not permissible for a national bank, and the limited nature
of the grandfather exception, it is appropriate to define the universe
of events constituting a change in control so as to encompass
transactions constituting a true acquisition. 57 FR 30444 (July 9,
1992). In modifying the change in control provisions of part 362, the
FDIC has narrowed the definition somewhat, as discussed above, to
approximate more closely when a true change in control of the bank has
taken place. If, as the commenter argues, change in control only
includes transactions subject to the CBCA, the exclusion under the CBCA
for all transactions reviewable under the Bank Merger Act (12 U.S.C.
1828(c)) or the Bank Holding Company Act would be brought to bear.
Therefore, the FDIC rejects the arguments provided by the commenter as
being an overly narrow interpretation of the statute.
We defined ``state-chartered depository institution'' and
``institution'' to mean any state bank or state savings association
insured by the FDIC. These definitions should enhance readability and
eliminate ambiguity concerning the subject terms. Defining
``institution'' enables us to shorten the drafting of the rule. No
comments were received regarding these definitions which are adopted as
proposed.
Additionally, the proposal added a definition of ``majority-owned
subsidiary'' which was defined to mean any corporation in which the
parent insured state bank owns a majority of the outstanding voting
stock. This definition was added to clarify our intention that
expedited notice procedures only be available when an insured state
bank interposes an entity providing limited liability to the parent
institution. We interpret Congress's intention in imposing the
majority-owned subsidiary requirement in section 24 of the FDI Act to
generally require that such a subsidiary provide limited liability to
the insured state bank. Thus, except in unusual circumstances, we have
and will require majority-owned subsidiaries to adopt a form of
business that provides limited liability to the parent bank. In
assessing our experience with applications, we have determined that the
notice procedure will be available only to banks that engage in
activities through a majority-owned subsidiary that takes the corporate
form of business. We welcome applications that may take a different
form of business such as a limited partnership or limited liability
company, but would like to develop more experience with appropriate
separations to protect the bank from liability under these other forms
of business enterprise through the application process before including
such entities in a notice procedure.
Eight commenters objected to the FDIC's decision to construct the
definition around the corporate form of business. The commenters were
unanimous in suggesting that the FDIC expand the definition to include
limited liability companies (LLCs), limited liability partnerships
(LLPs), and limited partnerships. Several of the commenters note that
these forms of business have been in existence in many states for a
number of years, and they project that the presence of such
[[Page 66286]]
structures will continue to increase given the tax benefits, limited
liability, and flexible structure provided by these business forms. The
respondents contend that these business forms sufficiently insulate the
members and partners from liability. One commenter noted that they are
aware of no significant judicial challenge to the liability insulation
provided by these business forms. As such, the commenter asserts that
the proposed definition contravenes congressional intent because it
does not recognize a business form that would provide limited liability
to the insured state bank. Finally, the commenters note that both the
FRB and the OCC have recently permitted the limited liability
organizational form for operating subsidiaries.
Limited liability partnerships and companies are both relatively
new business forms. There is little definitive legal guidance
concerning the liability protection offered by these organizational
structures. Among the unresolved issues is the question of how to
structure the management of LLCs and LPs to afford the same level of
separateness provided by the corporate form under the eligible
subsidiary criteria. Because of the limited existing case law regarding
piercing the veil of LLCs and LLPs, the FDIC is unable to determine the
appropriate objective separation criteria that will provide the parent
bank with substantially the same liability protection offered by an
independent corporate structure. Thus, we have not expanded the
definition to include LLCs and LLPs at this time. The FDIC views this
decision to preclude LLCs and LLPs as consistent with the agency's
interpretation of the congressional intent to limiting liability for
subsidiaries' activities from accruing to the insured state bank.
The effect of the FDIC's decision is that the notice process is
limited to banks with subsidiaries organized using the corporate form.
We encourage banks to submit applications when they want to use an
alternative business form. Then, the banks can propose appropriate
objective separations that fit the particular activity and the FDIC can
evaluate these separations on a case-by-case basis. At some future
date, more standardized criteria may emerge. Then, the FDIC may
consider re-visiting this issue. The FDIC does not intend any exclusion
of these forms by omitting them from the notice processing criteria.
They simply do not allow for the more limited review involved in an
expedited notice processing system.
Although the FDIC requires the first level majority-owned
subsidiary to be a corporation, it is noted that the final regulation
contains a provision, at Sec. 362.4(b)(3), allowing lower level
subsidiaries to assume other business forms including LLCs and LLPs.
Please refer to the applicable discussion of this section elsewhere in
this preamble.
The final rule also incorporates the definition of ``security''
from part 344 of this chapter to eliminate any ambiguity over the
coverage of this rule when securities activities and investments are
contemplated.
Section 362.3 Activities of Insured State Banks
Equity Investment Prohibition. Section 362.3(a) restates the
statutory prohibition on insured state banks making or retaining any
equity investment of a type that is not permissible for a national
bank. The prohibition does not apply if one of the statutory exceptions
contained in section 24 of the FDI Act (as restated in the current
regulation and carried forward in the final regulation) applies. As
discussed in the preamble accompanying the proposal, the final
regulation eliminates the reference to ``amount'' that is contained in
the current version of Sec. 362.3(a). The FDIC reconsidered our
interpretation of the language of section 24 in which paragraph (c)
prohibits an insured state bank from acquiring or retaining any equity
investment of a type that is impermissible for a national bank and
paragraph (f) prohibits an insured state bank from acquiring or
retaining any equity investment of a type or in an amount that is
impermissible for a national bank. We previously interpreted the
language of paragraph (f) as controlling and read that language into
the entire statute. We reconsidered this approach and decided that it
was not the most reasonable construction of this statute and determined
that the language of the earlier paragraph (c) is controlling without
the necessity to import the language of (f). We believe that the second
mention as contained in paragraph (f) should be limited to those items
discussed under paragraph (f). Thus, the language of paragraph (c)
controls when any other equity investment is being considered.
Therefore, we deleted the amount language from the prohibition stated
in the regulation. The FDIC received comments from two parties
expressly approving this revised interpretation.
Exception for subsidiaries of which the bank is majority owner. The
final regulation retains the exception allowing investments in
subsidiaries of which the bank is majority owner as currently in effect
without any substantive change. However, the FDIC has modified the
language of this section to remove negative inferences and make the
text clearer. Rather than stating that the bank may do what is not
prohibited, the FDIC affirmatively states that an insured state
chartered bank may acquire or retain investments in these subsidiaries.
If an insured state bank holds less than a majority interest in the
subsidiary, and that equity investment is of a type that would be
prohibited to a national bank, the exception does not apply and the
investment is subject to divestiture.
Majority ownership for the exception is understood to mean
ownership of greater than 50 percent of the outstanding voting stock of
the subsidiary. National banks may own a minority interest in certain
types of subsidiaries. (See 12 CFR 5.34 (1998)). Therefore, an insured
state bank may hold a minority interest in a subsidiary if a national
bank could do so. Thus, section 24 does not necessarily require a state
bank to hold at least a majority of the stock of a company in order for
the equity investment in the company to be permissible.
For purposes of the notice procedure, the regulation defines the
business form of a majority-owned subsidiary to be a corporation. As is
discussed above in connection with the definition of a ``Majority-owned
subsidiary'', there may be other forms of business organization that
are suitable for the purposes of this exception such as partnerships or
limited liability companies, but the FDIC prefers to review such
alternate forms of organization on a case-by-case basis through the
application process to assure that appropriate separation between the
insured depository institution and the subsidiary is in place.
To qualify for the exception, the majority-owned subsidiary may
engage only in the activities described in Sec. 362.4(b). The allowable
activities include exceptions to the general statutory prohibition,
some of which have a statutory basis and others of which are derived
through the FDIC's power to create regulatory exceptions.
Investments in qualified housing projects. Section 362.3(a)(2)(ii)
of the final regulation provides an exception for qualified housing
projects. The final regulation combines the language found in two
paragraphs of the current regulation with the resulting paragraph
retaining substantially the same language. Changes were made to clarify
some technical aspects of the manner in which the qualified housing
rules work and are not intended to be substantive. In addition, the
FDIC modified the
[[Page 66287]]
language of the text to remove negative inferences and make the text
clearer.
Under this exception, an insured state bank is allowed to invest as
a limited partner in a partnership, the sole purpose of which is direct
or indirect investment in the acquisition, rehabilitation, or new
construction of a residential housing project intended to primarily
benefit lower income persons throughout the period of the bank's
investment. The bank's investments, when aggregated with any existing
investment in such a partnership or partnerships, may not exceed 2
percent of the bank's total assets. The FDIC expects a bank to use the
figure reported on the bank's most recent consolidated report of
condition (Call Report) prior to making the investment as the measure
of its total assets. If an investment in a qualified housing project
does not exceed the limit at the time the investment is made, the
investment shall be considered to be a legal investment even if the
bank's total assets subsequently decline.
The current exception is limited to instances in which the bank
invests as a limited partner in a partnership. In the proposal, comment
was invited on (1) whether the FDIC should expand the exception to
include limited liability companies and (2) whether doing so is
permissible under the statute. (Section 24(c)(3) of the FDI Act
provides that a state bank may invest ``as a limited partner in a
partnership''.). No comments were received on the legal issue. One
comment applauded our suggestion to expand this statutory exception by
regulation. In the final rule, we have expanded Sec. 362.3(a)(2)(ii) to
permit insured state banks to invest in qualified housing projects as a
limited partner or through a limited liability company.
Although the statutory language in the paragraph allowing an
investment in qualified housing projects explicitly allows only a
limited partnership investment, it does not prohibit other forms of
ownership. For the purpose of this investment and consistent with the
underlying public policy purposes of this statute, we consider limited
liability companies to be substantially equivalent to limited
partnership interests. It is consistent with the FDIC's authority under
the statute to extend the qualified housing projects exception by
regulation to cover the limited liability company form of business
enterprise in this circumstance. Limited partnership interests and
limited liability companies provide similar forms of business
enterprise. Although we have been unwilling to expand the regulatory
exceptions to allow limited liability companies to substitute for
corporate forms of business enterprise where uniform separation
standards were required to protect the bank from the liability of its
subsidiaries that conduct activities not permissible for national bank
subsidiaries, we believe that no similar impediments exist here. We
also acknowledge that we have been reluctant to extend this exception
to limited liability companies in the past when informal
interpretations were requested.3 However, we believe, and no
commenter raised any contrary argument, that it is appropriate to
extend the statutory exception to cover these substantially similar
organizational structures through this regulation. Thus, subject to the
other limitations in the rule, we are allowing by regulation insured
state banks to invest in limited liability companies that invest in the
acquisition, rehabilitation or construction of a qualified housing
project.
---------------------------------------------------------------------------
\3\ See 2 FDIC Law, Regulations, Related Acts (FDIC) 4903; 1994
WL 763183 (F.D.I.C.) and FDIC 94-50, 1994 FDIC Interp. Ltr. LEXIS
89, October 12, 1994.
---------------------------------------------------------------------------
Grandfathered investments in listed common or preferred stock and
shares of registered investment companies. Available only to certain
grandfathered state banks, Sec. 326.3(a)(2)(iii) of the final
regulation carries forward the statutory exception for investments in
common or preferred stock listed on a national securities exchange and
for shares of investment companies registered under the Investment
Company Act of 1940. Although there is no substantive change, the FDIC
has modified the language of this section to remove negative inferences
and make the text clearer.
To use the grandfathered authority, section 24 requires, among
other things, that a state bank file a notice with the FDIC before
relying on the exception and that the FDIC approve the notice. The
notice requirement, content of notice, presumptions with respect to the
notice, and the maximum permissible investment under the grandfather
also are set out in the current regulation. The references contained in
the current regulation describing the notice content and procedures
were deleted because we believe that most, if not all, of banks
eligible for the grandfather already have filed notices with the FDIC.
Thus, we eliminated language governing the specific content and
processing of notices and cross-referencing the notice procedures under
subpart G of part 303. Any bank that has filed a notice need not file
again.
Paragraph (B) of this section of the final regulation provides that
the exception for listed stock and registered shares ceases to apply in
the event that the bank converts its charter or the bank or its parent
holding company undergoes a change in control. This language restates
the statutory language governing when grandfather rights terminate. As
is discussed in the preamble above in connection with the definition of
``change in control'', the FDIC has revised both the current and
proposed scope of transactions encompassed in the notion of a change in
control.
The regulation continues to provide that in the event an eligible
bank undergoes any transaction that results in the loss of the
exception, the bank is not prohibited from retaining its existing
investments unless the FDIC determines that retaining the investments
will adversely affect the bank and the FDIC orders the bank to divest
the stock and/or shares. This provision has been retained in the final
rule without any change except for the deletion of the citation to
specific authorities the FDIC may rely on concerning divestiture.
Rather than containing specific citations, the final regulation merely
references the FDIC's ability to order divestiture under any applicable
authority. State banks should continue to be aware that any inaction by
the FDIC would not preclude a bank's appropriate banking agency (when
that agency is an agency other than the FDIC) from taking steps to
require divestiture of the stock and/or shares if, in that agency's
judgment, divestiture is warranted.
The FDIC has moved, simplified, and shortened the limit on the
maximum permissible investment in listed stock and registered shares.
The final regulation limits the bank's investment in grandfathered
listed stock and registered shares, when made, to a maximum of 100
percent of tier one capital as measured on the bank's most recent Call
Report prior to the investment. The final rule modifies the proposed
regulatory language somewhat, to clarify how the maximum investment
limit is to be determined. The final rule uses the lower of the bank's
cost or the market value of the stock and shares as the measure of
compliance with this limit. The proposal referred to book value. At the
time the FDIC adopted the current version of the rule, call report
instructions and generally accepted accounting principles (GAAP)
provided that equity securities were generally to be carried at the
lower of cost or market value. The FDIC adopted the book value
[[Page 66288]]
approach at that time, in response to industry comments that a market
value approach would exhaust a bank's grandfather authority as the
value of its stock and shares appreciated. Now that call report
instructions and GAAP require stock and shares covered by the rule to
be reported at market value in many cases, the book value approach no
longer serves the desired purpose. The FDIC is expressly referring to
the lower of cost or market approach in the final rule, in order to
maintain consistency with the current rule. The lower of cost or market
approach is also consistent with the federal banking agencies' rules
for determining tier one capital, which require exclusion of net
unrealized holding losses on available-for-sale equity securities with
readily determinable fair values.
Language indicating that investments by well-capitalized banks in
amounts up to 100 percent of tier one capital will be presumed not to
present a significant risk to the fund was deleted, as was language
indicating that it will be presumed to present a significant risk to
the fund for an undercapitalized bank to invest in amounts that high.
In addition, the proposed rule deleted the language stating the
presumption that, absent some mitigating factor, it will not be
presumed to present a significant risk for an adequately capitalized
bank to invest up to 100 percent of tier one capital. The FDIC received
one comment asking that we retain regulatory language describing these
presumptions for well- and adequately-capitalized banks. The commenter
believes that removal of the presumptions will create uncertainty and
may cause banks to hesitate to take full advantage of these investment
opportunities. The FDIC nonetheless believes at this time that it is
not necessary to expressly state these presumptions in the regulation.
However, this action does not alter the FDIC's position regarding the
presumptions.
Language in the current regulation concerning the divestiture of
stock and/or shares in excess of that permitted by the FDIC (as well as
such investments in excess of 100 percent of the bank's tier one
capital) has been deleted under the proposal as no longer necessary due
to the passage of time. In both instances, the time allowed for such
divestiture has passed.
We note that the statute does not impose any conditions or
restrictions on a bank that enjoys the grandfather in terms of per
issuer limits. The proposal invited comment on whether the FDIC should
impose restrictions under the regulation that would, for example, limit
a bank to investing in less than a controlling interest in any given
issuer. Additionally, we asked whether the regulation should
incorporate other limits or restrictions to ensure the grandfathered
investments do not pose a risk. Although no comments specifically
addressed these questions, several commenters referred to the fact that
most institutions to which the grandfather is applicable have already
filed notices with the FDIC regarding those investments. These
institutions have since complied with any imposed conditions, or
subsequently applied to have the conditions altered or removed. The
commenters do not feel that banks should now be subject to requirements
the FDIC did not originally impose. Moreover, the commenters point out
that the FDIC and state banking authorities routinely review investment
portfolios as part of the supervisory process and can address any
deficiencies on a case-by-case basis. Upon further reflection, the FDIC
is persuaded not to impose any new regulatory requirements on these
grandfathered institutions for directly held investments. However, the
FDIC wants to emphasize that it expects banks using this grandfathered
investment authority to establish prudent limits and controls governing
these investments. Equity securities and registered shares that are
held by the bank must be consistent with the institution's overall
investment goals and will be reviewed by examiners in that context. The
FDIC will not take exception to listed stock and registered shares that
are well regarded by knowledgeable investors, marketable, held in
moderate proportions, and meet the institution's overall investment
goals.
Stock investment in insured depository institutions owned
exclusively by other banks and savings associations (banker's banks).
Section 362.3(b)(2)(iv) of the final regulation continues to reflect
the statutory exception that an insured state bank is not prohibited
from acquiring or retaining the shares of depository institutions that
engage only in activities permissible for national banks, are subject
to examination and are regulated by a state bank supervisor, and are
owned by 20 or more depository institutions not one of which owns more
than 15 percent of the voting shares. In addition, the voting shares
must be held only by depository institutions (other than directors'
qualifying shares or shares held under or acquired through a plan
established for the benefit of the officers and employees). Note that
the proposal modified this exception to no longer limit the bank's
investment in such depository institutions to ``voting'' stock. This
change was made to allow banks to hold non-voting interests in these
entities because section 24(f)(3)(B) of the FDIC Act does not limit the
exception to voting stock. However, the final regulation retains the
reference to ``voting'' stock in determining the various ownership and
control thresholds. The FDIC received no comments on this provision
which is adopted as proposed.
Stock investments in insurance companies. Section 362.3(a)(2)(v) of
the final regulation incorporates statutory exceptions permitting state
banks to hold equity investments in insurance companies. The exceptions
are provided by statute and are implemented in the current version of
part 362. For the most part, the exceptions are carried forward into
the final regulation with no substantive editing. The exceptions are
discussed separately below.
Directors and officers liability insurance corporations. The first
exception permits insured state banks to own stock in corporations that
solely underwrite or reinsure financial institution directors' and
officers' liability insurance or blanket bond group insurance. A bank's
investment in any one corporation is limited to 10 percent of the
outstanding stock. Consistent with the proposal, we eliminated the
present limitation of 10 percent of the ``voting'' stock and changed
the present reference from ``company'' to ``corporation'' conforming
the language to the statutory exception.
While the statute and regulation provide a limit on a bank's
investment in the stock of any one insurance company under this
provision, there is no statutory or regulatory ``aggregate'' investment
limit in all insurance companies, nor does the statute combine these
investments with any other exception under which a state bank may
invest in equity securities. In the past, the FDIC has addressed
investment concentration and diversification issues on a case-by-case
basis. Nonetheless, the FDIC invited comment on whether it should
incorporate aggregate limits on grandfathered bank investments in
insurance companies. Responses addressing this issue were submitted by
two trade associations and one bank consortium. While one trade
association suggested that it would be prudent for the FDIC to
incorporate some form of investment limit, the other two parties
strongly opposed the imposition of any regulatory limit on what are
statutory
[[Page 66289]]
exceptions. The FDIC has elected not to impose aggregate investment
limits on equity investments specifically permitted by statute, nor
will it combine the bank's investments in insurance companies with
other equity investments made pursuant to any regulatory exception.
Instead, the FDIC will continue to address investment concentration and
diversification issues on a case-by-case basis.
Stock of savings bank life insurance company. The second exception
for equity investments in insurance companies permits any insured state
bank located in New York, Massachusetts, or Connecticut to own stock in
savings bank life insurance companies provided that certain consumer
disclosures are made. Again, this regulatory provision mirrors the
specific statutory exception found in section 24. The savings bank life
insurance investment exception is broader than the director and officer
liability insurance company exception discussed above. There are no
individual or aggregate investment limitations for investments in
savings bank life insurance companies.
Consistent with the proposal, the provision implementing this
exception in the current regulation was carried forward into the final
regulation with some modifications. The language describing this
exception was revised to affirmatively permit banks located in New
York, Massachusetts, or Connecticut to own stock in a savings bank life
insurance company provided the company provides the required
disclosures. Additionally, the final regulation alters the required
disclosure from that provided by the current regulation. Rather than
continue the disclosure language currently contained in
Sec. 362.3(b)(3), the FDIC has decided to require disclosures of the
type provided for in the Interagency Statement. As a result, these
companies are required to provide their retail customers with written
and oral disclosures consistent with the Interagency Statement when
selling savings bank life insurance policies, other insurance products,
and annuities. The required disclosures in the Interagency Statement
include a statement that the products are not insured by the FDIC, are
not a deposit or other obligation of, or guaranteed by, the bank, and
are subject to investment risks, including the possible loss of the
principal amount invested. While the existing regulatory language is
similar to the Interagency Statement in what it requires to be
disclosed, it is not identical. The last disclosure--that such products
may involve risk of loss--is not required under the current regulation.
Although commenters generally supported referencing the Interagency
Statement rather than incorporating a different disclosure standard, a
savings bank life insurance company and a United States Congressman
objected to the ``risk of loss'' disclosure. The savings bank life
insurance company claims that a disclosure of that nature is a
falsehood unsupported by factual data. Both commenters are concerned
that the ``risk of loss'' disclosure places savings bank life insurance
companies at a competitive disadvantage relative to other entities
selling life insurance products. The Congressman suggested replacing
the required disclosure concerning ``may involve risk of loss'' with
``may involve market risk, if applicable''.
It is the FDIC's view that FDIC-insured deposits differ from
savings bank life insurance products and annuities because investors in
such products are exposed to a possible loss of the principal amount
invested. The Interagency Statement does not distinguish between the
relative loss exposure presented by various nondeposit investment
products. The distinction is simply between insured deposits and other
investment products. Savings bank life insurance, other insurance
products, and annuities contain an investment risk component exposing
the investor to a loss of principal despite the assertion offered by
one commenter. Further, investors in nondeposit products are exposed to
more than market risks. The FDIC is therefore unwilling to change the
nature of the required disclosure.
Nevertheless, the FDIC recognizes that the language proposed in
Sec. 362.3(a)(2)(v)(B) may be interpreted to mean the subject
disclosure must contain the phrase ``may involve risk of loss''. The
FDIC intends for the disclosures to be consistent with the Interagency
Statement and was simply paraphrasing the respective disclosure content
in the event the Interagency Statement is succeeded by another
statement or regulation. Included in the required disclosures is a
statement specifying that the nondeposit product is ``subject to
investment risks, including possible loss of the principal amount
invested''. The actual Interagency Statement language may convey a less
threatening tone concerning the possibility of loss. To avoid confusion
and reflect the FDIC's actual intent, the phrase ``may involve risk of
loss'' was replaced with ``are subject to investment risks, including
possible loss of the principal amount invested'' in the final rule.
The FDIC is aware that insurance companies, including savings bank
life insurance companies, typically offer annuity products and that
many states regulate annuities through their insurance departments. The
FDIC agrees with the OCC that annuities are investment products that
are subject to the requirements found in the Interagency Statement when
sold to retail customers on bank premises as well as in other instances
specified in the Interagency Statement.
Other activities prohibition. Section 362.3(b) of the final
regulation restates the statutory limit prohibiting insured state banks
from directly or indirectly engaging as principal in any activity that
is not permissible for a national bank. Activity is defined in the rule
as the conduct of business by a state-chartered depository institution
and includes acquiring or retaining any investment. Because acquiring
or retaining an investment is an activity by definition, the proposal
added language to make clear that this prohibition does not supersede
the equity investment exceptions of Sec. 362.3(a)(2). The prohibition
does not apply if one of the statutory exceptions contained in section
24 of the FDI Act (restated in the current regulation and carried
forward in the final regulation) applies. The FDIC has also provided a
regulatory exception to the prohibition on other activities concerning
the acquisition of certain debt-like instruments. Insured state banks
desiring to engage in other activities must submit an application to
the FDIC pursuant to Sec. 362.3(b)(2)(i).
Consent through Application. The limit on activities contained in
section 24 states that an insured state bank may not engage as
principal in any type of activity that is not permissible for a
national bank unless the FDIC has determined that the activity would
pose no significant risk to the appropriate deposit insurance fund, and
the bank is and continues to be in compliance with applicable capital
standards prescribed by the appropriate federal banking agency. Section
362.3(b)(2)(i) establishes an application process for the FDIC to make
the determination concerning risk to the funds. The substance of this
process is unchanged from the current regulation.
Insurance underwriting. This exception tracks the statutory
exception in section 24 which grandfathers: (1) Certain insured state
banks engaged in the underwriting of savings bank life insurance
through a department of the bank; (2) any insured state bank that
engaged in underwriting of insurance on
[[Page 66290]]
or before September 30, 1991, which was reinsured in whole or in part
by the Federal Crop Insurance Corporation; and (3) certain well-
capitalized banks engaged in insurance underwriting through a
department of a bank. The exception is carried forward from the current
regulation with a number of modifications.
The savings bank life insurance exception applies to insured state
banks located in Massachusetts, New York, or Connecticut. To use this
exception, banks must engage in the activity through a department of
the bank meeting the core standards discussed below. The standards for
conducting this activity are taken from the current regulation with the
exception of the disclosure standards which are discussed below. We
moved the requirements for a department from the definitions section to
the substantive portion of the regulation text.
The exception for underwriting federal crop insurance is unchanged
from the current regulation, and there are no regulatory limitations on
the conduct of the activity.
An insured state bank that wishes to use the remaining
grandfathered insurance underwriting exception may do so only if the
insured state bank was lawfully providing insurance, as principal, as
of November 21, 1991. Further, the insured state bank must be well-
capitalized if it is to engage in insurance underwriting and the bank
must conduct the insurance underwriting in a department that meets the
core standards described below. Banks taking advantage of this
grandfather provision may underwrite only the same type of insurance
that was underwritten as of November 21, 1991, and may operate and have
customers only in the same states in which it was underwriting policies
on November 21, 1991. The grandfather authority for this activity does
not terminate upon a change in control of the bank or its parent
holding company.
Both savings bank life insurance activities and grandfathered
insurance underwriting must take place in a department of the bank
which meets certain core operating and separation standards. Consistent
with the disclosure requirements of the current regulation, the core
operating standards require the department to inform its customers that
only the assets of the department may be used to satisfy the
obligations of the department. Note that this language does not require
the bank to say that the bank is not responsible for the obligations of
the department. The bank and the department constitute one corporate
entity. In the event of insolvency, the insurance underwriting
department's assets and liabilities would be segregated from the bank's
assets and liabilities due to the requirements of state law. The
regulatory language of the final rule has been changed to clarify that
a bank seeking to operate its department under separation standards
different than the core standards in the rule may submit an application
to the FDIC.
The final regulation eliminates the proposed operating standard
requirement that the department provide customers with written
disclosures consistent with those in the Interagency Statement. The
FDIC proposed replacing the disclosure statement currently imposed by
Sec. 362.4(g)(1)(iii) with that required in the Interagency Statement
to increase consistency and reduce the regulatory burden of differing
requirements. Upon further reflection, the FDIC has decided that while
it is prudent to eliminate the disclosure currently required by part
362, the proposal to impose the Interagency Statement in connection
with this activity in this regulation is unnecessary. Unlike the
statutory exception permitting banks to engage in savings bank life
insurance activities, the authorizing statute does not require a
customer disclosure as a condition of engaging in other grandfathered
insurance activities. Nevertheless, banks engaged in grandfathered
insurance underwriting continue to be subject to the Interagency
Statement in connection with sales to bank customers, including the
disclosure provisions of that statement. Comments support this change
and recognize that any retail sale of nondeposit investment products to
bank customers is subject to the Interagency Statement if made on bank
premises, by a bank employee, or pursuant to a compensated referral.
The FDIC cannot, however, eliminate the regulatory requirement that
insured state banks engaged in savings bank life insurance activities
make disclosures to all consumers. Section 24(e) of the FDI Act
authorizes this activity only if the bank meets the consumer disclosure
requirements. Thus, under the statute, the FDIC must promulgate
consumer disclosures for savings bank life insurance. Section
362.4(c)(1) of the current regulation addresses banks engaging in
savings bank life insurance underwriting activities. The referenced
section requires the bank to make certain disclosures to purchasers of
life insurance policies, other insurance products, and annuities. As
discussed previously in this preamble, these disclosures are similar to
those set out in the Interagency Statement but they are not identical.
Currently, banks engaging in savings bank life insurance underwriting
are covered by the Interagency Statement and part 362. As a result,
banks have been required to comply with both of these similar but
somewhat different requirements. The final regulation replaces the
current disclosure requirement with a cross reference to the
Interagency Statement to make compliance easier. Banks engaging in
savings bank life insurance activities should note, however, that
consistent with the proposal and the current regulation, the final rule
carries forward the requirement that the department also inform
purchasers that only the assets of the insurance department may be used
to satisfy the obligations of the department. Comments and the FDIC's
response are described elsewhere in this preamble.
The core separation standards in the final rule restate the
requirements currently found in the definition of department. These
standards require the department to: (1) Be physically distinct from
the remainder of the bank; (2) maintain separate accounting and other
records; (3) have assets, liabilities, obligations, and expenses that
are separate and distinct from those of the remainder of the bank; and
(4) be subject to state statutes that permitting the obligations,
liabilities, and expenses to be satisfied only with the assets of the
department. The standards are unchanged from those in the current
regulation, but they have been moved from the definitions section to
ensure that the requirements are shown in connection with the
appropriate regulatory exception.
Acquiring and retaining adjustable rate and money market preferred
stock. The proposal provides an exception that allows a state bank to
invest in up to 15 percent of the bank's tier one capital in adjustable
rate preferred stock and money market (auction rate) preferred stock
without filing an application with the FDIC. The exception was adopted
when the 1992 version of the regulation was adopted in final form.
After reviewing comments at that time, the FDIC found that adjustable
rate preferred stock and money market (auction rate) preferred stock
were essentially substitutes for money market investments such as
commercial paper and that these investments possess characteristics
closer to debt than to equity securities. Therefore, money market
preferred stock and adjustable rate preferred stock were excluded from
the definition of equity security. As a result, these investments are
not subject to the equity investment prohibitions of the statute or the
regulation and they are
[[Page 66291]]
considered to be an ``other activity'' for the purposes of this
regulation.
This exception focuses on two categories of preferred stock. This
first category, adjustable rate preferred stock, refers to shares where
dividends are established by contract through the use of a formula
based on Treasury rates or some other readily available interest rate
levels. Money market preferred stock refers to those issues where
dividends are established through a periodic auction process that
establishes yields in relation to short-term rates paid on commercial
paper issued by the same or a similar company. The credit quality of
the issuer determines the value of the security. Money market preferred
shares are sold at auction.
Consistent with other parts of the proposal, the FDIC has modified
the exception by limiting the 15 percent measurement to tier one
capital, rather than total capital. Throughout the final regulation,
all capital-based limitations are measured against tier one capital to
increase uniformity within the regulation. The FDIC recognizes that
this change may lower the permitted amount of these investments held by
institutions already engaged in the activity. An insured state bank
that has investments exceeding the proposed limit, but within the total
capital limit, may continue holding those investments until they are
redeemed or repurchased by the issuer. The 15 percent of tier one
capital limitation should be used in determining the allowable amount
of new purchases of money market preferred and adjustable rate
preferred stock. Of course, institutions wanting to increase their
holdings of these securities may submit an application to the FDIC.
The FDIC received five comments regarding this proposed change.
Although the commenters applaud the desire for consistency, they
contend that the results of such a change are unjustified when done
principally for the sake of uniformity. Thus, the commenters suggest
that the FDIC either leave the measurement base unchanged or increase
the limit to offset the impact of the change. While the FDIC
acknowledges the concerns expressed by commenters, it is not persuaded
that changing the capital base from total to tier one capital creates a
significant hardship. Therefore, the final regulation uses the tier one
capital base to measure the applicable limit. The FDIC will handle
applications to exceed the governing threshold in an expeditious manner
according to procedures detailed in subpart G of part 303.
The final regulation incorporates a provision allowing insured
state banks to acquire and retain other instruments of a type
determined by the FDIC to have the character of debt securities
provided the instruments do not represent a significant risk to the
deposit insurance funds. In response to investor and client needs, the
financial markets continually develop new financial products. A recent
example of such an instrument is trust preferred stock. Trust preferred
stock is a hybrid instrument possessing characteristics typically
associated with debt obligations. Trust preferred securities are issued
by an issuer trust that uses the proceeds to purchase subordinated
deferrable interest debentures in a corporation. The corporation
guarantees the obligations of the issuer trust and agrees to indemnify
third parties for other expenses and liabilities incurred by the issuer
trust. Taken together, the debentures, guarantee, and expense indemnity
agreement constitute a full, irrevocable, and unconditional guarantee
of the obligations of the issuer trust by the issuer corporation. With
the exception of credit risk, investors in trust preferred stock are
protected from changes in the value of the instruments. Like investors
in debt securities, trust preferred stock investors do not share any
appreciation in the value of the issuer trust and have no voting rights
in the management or ordinary course of business of the issuer trust.
Additionally, trust preferred stock is not perpetual and distributions
on the stock resemble the periodic interest payments on debt. In
essence, such investments are functionally equivalent to investments in
the underlying debentures. In the future, as such new instruments come
to the FDIC's attention, the FDIC will provide public notice of its
determinations under the rule by issuing Financial Institution Letters
describing its decisions. Any investments in such instruments would be
aggregated with investments in adjustable rate and money market
preferred stock for purposes of applying the 15 percent of tier one
capital limit.
Activities that are closely related to banking. The language in the
proposal providing a regulatory exception allowing insured state banks
to engage in activities closely related to banking has been eliminated.
The proposed regulation continued language found in the current
regulation entitled ``Activities that are closely related to banking''.
Section 362.3(b)(2)(iv) of the proposal permitted an insured state bank
to engage as principal in any activity that is not permissible for a
national bank provided that the FRB by regulation or order has found
the activity to be closely related to banking for the purposes of
section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)).
However, the proposed exception was subject to the statutory
restrictions prohibiting the bank from directly holding equity
investments that a national bank may not hold or which are not
otherwise permissible investments for insured state banks pursuant to
Sec. 362.3(b). Additionally, the proposal imposed limits on certain of
the activities authorized by the 4(c)(8) reference. Included in the
limits was a provision requiring the bank, when acting as a real
property lessor, to either re-lease the real estate or dispose of the
same within two years after the lease expires.
The FDIC received six comments on this provision, four of them
objecting to the two-year disposition period at the conclusion of a
real estate lease. Another opined that the bank's survival depends on
its ability to diversify by engaging in real estate leasing through a
subsidiary. An industry trade association supports continued reliance
on activities authorized by the FRB pursuant to 4(c)(8) of the Bank
Holding Company Act.
Upon further analysis, the FDIC has deleted the reference to the
4(c)(8) list because the activities included on that list generally are
of a type permissible for national banks. The one exception that
clearly is not generally permissible for a national bank involves real
estate leasing. It is noted that national banks are permitted to engage
in certain real estate leasing activities. As with other activities
permissible for national banks, insured state banks can engage in the
same real estate leasing activities subject to any limitations imposed
by the applicable state law. However, since section 24 of the FDI Act
does not permit the FDIC to allow insured state banks, at the bank
level, to hold equity investments that are not permissible for national
banks, any FDIC authorization for real estate leasing raises a question
whether, under a particular leasing arrangement, the bank as lessor
holds an interest in real estate tantamount to an equity investment.
Given the variety of potential lease structures, it is not practicable
for the FDIC to deal with this issue categorically, under a regulatory
exception, at this time. If authorized under state law, state banks are
permitted to engage in leasing activities through majority-owned
subsidiaries. This exception is discussed in the description of
Sec. 362.4(b) in this preamble.
Guarantee activities. The current regulation contains a provision
that
[[Page 66292]]
permits a state bank with a foreign branch to directly guarantee the
obligations of its customers as set out in what was formerly
Sec. 347.3(c)(1) of the FDIC's regulations without filing any
application under part 362. A technical amendment to part 362 was
recently made to update this reference to Sec. 347.103(a)(1) as
published in the Federal Register on April 8, 1998 (63 FR 17090). The
current regulation also permits a state bank to offer customer-
sponsored credit card programs in which the bank guarantees the
obligations of its retail banking deposit customers. This provision has
been deleted as unnecessary since these activities are permissible for
a national bank. In its current rule, the FDIC used this provision to
clarify that part 362 does not prohibit these activities. To shorten
the regulation, such clarifying language has been deleted since the
activity is permissible for a national bank. The FDIC received no
comments addressing this provision and it is dropped as proposed.
Section 362.4 Subsidiaries of Insured State Banks
General prohibition. The regulatory language implementing the
statutory prohibition on an insured state bank engaging in ``as
principal'' activities that are not permissible for a national bank is
separated from the prohibition on an insured state bank subsidiary
engaging in activities which are not permissible for a subsidiary of a
national bank. For ease of reference we separated bank and subsidiary
activities. Section 362.4 deals exclusively with activities that may be
conducted in a subsidiary of an insured state bank. Five commenters
supported this restructuring of the regulation. The FDIC believes that
separating the activities that may be conducted at the bank level from
the activities that must be or may be conducted by a subsidiary makes
it easier for the reader to focus on the analysis of the regulation.
Therefore, the general prohibition in the final regulation is adopted
as proposed.
Exceptions. First, the regulation provides that activities not
permissible for a national bank subsidiary may not be conducted by the
subsidiary of an insured state bank unless one of the exceptions in the
regulation applies. This language is similar to the current part 362
and we received no comments on the provision. The final regulation
contains no changes to the proposed language.
Consent obtained through application. The revised regulation allows
approval by individual application provided that the insured state bank
meets and continues to meet the applicable capital standards and the
FDIC finds there is no significant risk to the fund. Language from the
current regulation is deleted that expressly provides that approval is
necessary for each subsidiary even if the bank received approval to
engage in the same activity through another subsidiary. Deleting this
language does not automatically permit a state bank to establish a
second subsidiary to conduct the same activity that was approved for
another subsidiary of the same bank; however, the issue will be handled
on a case-by-case basis by the FDIC pursuant to order. For example, if
the FDIC approves an application by a state bank to establish a
majority-owned subsidiary to engage in real estate investment
activities, the order may (in the FDIC's discretion) be written to
allow more than one subsidiary to conduct the activity or to require
that any additional real estate subsidiaries must be individually
approved.
Application procedures may be used by a bank to request the FDIC's
consent to engage in an activity that is limited but not specifically
prohibited by this part. For instance, the notice procedures require
that the subsidiary take the corporate organizational form. Several
comments expressed concern about the restriction on the form of
business enterprise. Any subsidiary that is organized as a limited
liability company would be required to use the application procedures.
The FDIC does not intend to prohibit insured state banks from
organizing subsidiaries in a form other than a corporation, or to make
it more difficult to establish these other forms of business
enterprise. However, the FDIC would like to review other forms of
organizations, on a case-by-case basis, to satisfy itself that adequate
separations are placed between the bank and its subsidiary. At this
time, we have not found a way to craft standardized separation criteria
for these other forms of business enterprise. No commenters suggested
any criteria. Other requests that do not meet the notice criteria or
that desire relief from a limit or restriction included in the notice
criteria also are encouraged. Application instructions have been moved
to subpart G of part 303.
Consistent with the proposal, the final rule eliminates language
that prohibited an insured state bank from engaging in insurance
underwriting through a subsidiary except to the extent that such
activities are permissible for a national bank. Eliminating this
language does not result in any substantive change as section 24 of the
FDI Act clearly provides that the FDIC may not approve an application
for a state bank to directly or indirectly conduct insurance
underwriting activities that are not permissible for a national bank.
The FDIC received no comment on this change. Therefore, the language is
unnecessary and has been eliminated as proposed.
The current part 362 allows state banks that do not meet their
minimum capital requirements to gradually phase out otherwise
impermissible activities that were being conducted as of December 19,
1992. These provisions are eliminated due to the passage of time. The
relevant outside dates to complete the phase out of those activities
have passed (December 19, 1996, for real estate activities and December
8, 1994, for all other activities).
Grandfathered Insurance Underwriting. The regulation provides for
three statutory exceptions that allow subsidiaries to engage in
insurance underwriting, covering ``grandfathered'' insurance
activities, title insurance, and crop insurance.
Subsidiaries may engage in the same grandfathered insurance
underwriting as the bank if the bank or subsidiary was lawfully
providing insurance as principal on November 21, 1991. The limitations
under which this subsidiary may operate have been changed.
The current standard that the bank must be well-capitalized has
been changed. Consistent with the proposal, the final rule requires the
bank to be well-capitalized after deducting its investment in the
insurance subsidiary. One comment on this change argues that the risk
involved in insurance underwriting depends upon the type of insurance
and that not all insurance underwriting is inherently risky enough to
justify an automatic capital deduction. The FDIC believes that this
capital treatment is an important element to separate the operations of
the bank and the subsidiary. This treatment clearly delineates and
identifies the capital that is available to support the bank and the
capital that is available to support the subsidiary. Capital standards
for insurance companies are based on different criteria from bank
capital requirements. Most states have minimum capital requirements for
insurance companies. The FDIC believes that a bank's investment in an
insurance underwriting subsidiary is not actually ``available'' to the
bank in the event the bank experiences losses and needs additional
capital. As a result, the bank's investment in the insurance subsidiary
should not be considered when determining whether the bank has
sufficient capital.
[[Page 66293]]
Another commenter objects to the introduction of the ``capital
deduction'' arguing that providing insurance as principal under the
``grandfather'' provision is not an activity for which a state bank
must obtain a risk to the fund determination. The comment asserts that
the provision is self-operative in the absence of any determination or
regulations of the FDIC, since Congress evaluated the risk to the
insurance funds created by the activity and found that risk to be
acceptable. The FDIC agrees that, other than the requirement that the
bank must be well-capitalized, section 24 itself imposes no additional
conditions or restrictions on the activity. Nevertheless, ever since
the FDIC originally promulgated its part 362 rules regarding the
conduct of this activity, the FDIC has noted that the activity can
involve material risks, and it is therefore prudent to separate those
risks from the insured state bank. See 58 FR 64482 (Dec. 8, 1993). The
FDIC has always imposed conditions on this activity, over and above
those addressed in section 24 itself, to protect bank safety and
soundness and protect the deposit insurance funds. See 58 FR 6465
(January 29, 1993). As noted at the time, the FDIC is not precluded
from imposing such restrictions, as section 24(i) itself clearly
indicates.
Commenters disagreed on the need for an aggregate investment limit
for equity investments in grandfathered insurance activities. One
comment argues that it is important to limit the maximum exposure to
the depository institution. Another comment states that such a limit is
not suggested by the statute, and the FDIC should retain the
flexibility to act on a case-by-case basis. After further consideration
of this issue, the FDIC is not convinced that the risks from the
different types of insurance subject to grandfather provisions are
similar. Therefore, an aggregate limit would not necessarily enhance
the safety and soundness of the banks involved in this activity. After
considering the comments received and for the reasons stated above, the
language in the final regulation is unchanged from the proposal.
The revisions to the regulation require a subsidiary engaging in
grandfathered insurance underwriting to meet the standards for an
``eligible subsidiary'' discussed below. This standard replaces the
``bona fide'' subsidiary standard in the current regulation. The
``eligible subsidiary'' standard generally contains the same
requirements for corporate separateness as the ``bona fide'' subsidiary
definition but adds the following provisions: (1) The subsidiary has
only one business purpose; (2) the subsidiary has a current written
business plan that is appropriate to its type and scope of business;
(3) the subsidiary has adequate management for the type of activity
contemplated, including appropriate licenses and memberships, and
complies with industry standards; and (4) the subsidiary establishes
policies and procedures to ensure adequate computer, audit and
accounting systems, internal risk management controls, and the
subsidiary has the necessary operational and managerial infrastructure
to implement the business plan. No comment was received relating to the
effect of these additional requirements on banks engaged in insurance
underwriting. We believe that the standards for adequate separation
between an insured state bank and any subsidiary engaged in insurance
underwriting should be similar to those that separate other
subsidiaries that engage in activities not permitted to the bank.
Therefore, no changes have been made to the proposed separation
standards.
In lieu of the prescribed disclosures contained in the current
regulation and in a departure from the proposal, the revision does not
prescribe disclosures. Instead, the FDIC is relying on the terms of the
Interagency Statement as applicable guidance when the subsidiary's
products are sold on bank premises, are sold by bank employees, or are
sold when the bank receives remuneration for a referral. The FDIC has
made the change primarily because it recognizes that there is a reduced
likelihood of customer confusion when sales of insurance products by a
subsidiary of an insured state bank are not made on bank premises, are
not made by bank employees, and are not a result of a referral from the
bank.
However, there is an increased risk of customer confusion where the
insured state bank and the subsidiary selling the product have similar
names. Those cases are addressed in part by a separation standard which
is discussed below. The separation standard requires that the
subsidiary conduct its business pursuant to independent policies and
procedures designed to inform customers and prospective customers of
the subsidiary that the subsidiary is a separate organization from the
state-chartered depository institution and that the state-chartered
depository institution is not responsible for and does not guarantee
the obligations of the subsidiary. The institution and its subsidiary
should take any steps necessary to avoid customer confusion on behalf
of non-bank customers, or bank customers in transactions not covered by
the Interagency Statement.
Under Sec. 362.5(b)(2), banks with subsidiaries engaged in
grandfathered insurance underwriting activities are expected to meet
the new requirements, and have 90 days from the effective date to
achieve compliance or apply to the FDIC for approval to operate
otherwise. The FDIC will consider any such applications on a case-by-
case basis.
The regulation provides that a subsidiary may continue to
underwrite title insurance based on the specific statutory authority
from section 24. This provision is currently in part 362 and is carried
forward with no substantive change. The insured state bank is permitted
only to retain the investment if the insured state bank was required,
before June 1, 1991, to provide title insurance as a condition of the
bank's initial chartering under state law. The authority to retain the
investment terminates if a change in control of the grandfathered bank
or its holding company occurs after June 1, 1991. There are no
statutory or regulatory investment limits on banks holding these types
of grandfathered investments.
The exception for subsidiaries engaged in underwriting crop
insurance is continued. Under section 24, insured state banks and their
subsidiaries are permitted to continue underwriting crop insurance
under two conditions: (1) They were engaged in the business on or
before September 30, 1991; and (2) the crop insurance was reinsured in
whole or in part by the Federal Crop Insurance Corporation. While this
grandfathered insurance underwriting authority requires that the bank
or its subsidiary had to be engaged in the activity as of a certain
date, the authority does not terminate upon a change in control of the
bank or its parent holding company.
Majority-owned subsidiaries ownership of equity investments that
represent a control interest in a company. In proposed
Sec. 362.4(b)(3), the FDIC would have allowed majority-owned
subsidiaries of insured state banks to hold controlling interests in
lower-level subsidiaries engaged in certain activities which the FDIC
authorized to be conducted at the bank level in proposed
Sec. 362.3(b)(2). These activities were holding adjustable rate and
money market preferred stock; and engaging in activities found by the
FRB to be closely related to the business of banking under section
4(c)(8) of the Bank Holding Company Act (subject to certain
restrictions). Proposed Sec. 362.4(b)(3) differed from current
Sec. 362.4(c)(3)(iv)(C), which effectively
[[Page 66294]]
authorizes the majority-owned subsidiary to own stock of a corporation
engaged in 4(c)(8) activities by authorizing the ownership of stock of
a corporation that engages in activities permissible for a bank service
corporation but imposes no control requirement. Proposed
Sec. 362.4(b)(3) also contained no counterpart to current
Sec. 362.4(c)(3)(iv)(D), authorizing a majority-owned subsidiary to
invest in 50 percent or less of the stock of a corporation engaging
solely in activities which are not ``as principal'.
In the final version, at Sec. 362.4(b)(3), the FDIC has broadened
the proposed language, so that the overall effect of the section is to
authorize insured state banks to have lower-level subsidiaries engaged
in many of the same types of activities which the FDIC previously found
do not pose a significant risk when conducted at the bank level or
through a majority-owned subsidiary. The FDIC has received questions
concerning the types of activities and the restrictions on these
activities if conducted by lower-level subsidiaries. This addition to
the final regulation is intended to clarify that generally, the same
limitations are imposed on the lower-level subsidiary as are imposed on
the majority-owned subsidiary conducting the same type of activity. As
discussed below, the FDIC has retained the control requirement (subject
to one modification), because the overall design of the section is to
authorize lower-level subsidiaries to engage in approved activities. Of
course, banks also may apply to the FDIC for permission to make
additional investments in excess of or which differ from those where
general consent is granted under the rule.
As is also discussed below, the activities covered by the final
version of Sec. 362.4(b)(3) still differs from current
Sec. 362.4(c)(3)(iv)(C) and current Sec. 362.4(c)(3)(iv)(D), but
changes made from the proposed language narrow the gap.
First, the FDIC has found that it is not a significant risk to the
deposit insurance funds if a majority-owned subsidiary holds a
controlling interest in a company engaged in real estate or securities
activities authorized under the real estate investment activities and
securities activities sections of this regulation at Sec. 362.4(b)(5),
discussed below. The bank must file notice with the FDIC, and may
proceed if the FDIC does not object. The bank must meet the same core
eligibility criteria in Sec. 362.4(c)(1) that would apply if the bank
were conducting the activity directly through a majority-owned
subsidiary. The bank's investments in and transactions with the lower
tier company are subject to the same limits under Sec. 362.4(d) as
would apply if the bank were conducting the activity directly through a
majority-owned subsidiary. The majority-owned subsidiary must also
comply with the investment and transaction limits, to ensure that the
majority-owned subsidiary is not used as a conduit to the lower tier
company in derogation of the Sec. 362.4(d) limits on the lower tier
company. The bank must also deduct its equity investment in the
majority-owned subsidiary and the lower tier company from its capital
in accordance with Sec. 362.4(e), as would be the case if the bank were
conducting the activity directly through a majority-owned subsidiary.
If the lower tier company is engaged in securities activities of the
type contemplated by Sec. 362.4(b)(5)(ii), the bank and the lower tier
company must observe the additional requirements set out in that
section. Finally, either the majority-owned subsidiary must observe the
core eligibility criteria in Sec. 362.4(c)(2), or the lower tier
company must observe them. However, absent an application to the FDIC,
the latter option is available only if the lower tier company takes
corporate form. The FDIC's rationale for each of these limits on the
activities authorized by Sec. 362.4(b)(5) is discussed in detail below.
Second, the FDIC also has found that it is not a significant risk
to the deposit insurance funds if a majority-owned subsidiary holds a
controlling interest in a company which engages in: (1) Any activity
permissible for a national bank including such permissible activities
that may require the company to register as a securities broker; (2)
acting as an insurance agency; (3) acquiring or retaining adjustable
rate and money market preferred stock or other instruments of a similar
character to the same extent allowed for the bank itself under
Sec. 362.3(b)(2)(iii) and combined with the 15 percent limit therein;
or (4) engaging in real estate leasing activities to the same extent
permissible for the majority-owned subsidiary under Sec. 362.4(b)(6),
discussed below.
One comment, on the use of the control test for defining activities
for lower level subsidiaries, indicated concern over the change from
the current regulation. Specifically, concern was expressed relating to
a group of insured depository institutions that collectively own
through majority-owned subsidiaries a company engaged in securities
brokerage and insurance underwriting. None of the banks involved own a
control interest. The structure of the ownership was set up in reliance
upon the exception in current Sec. 362.4(c)(3)(iv)(D). The FDIC
recognizes that many community banks rely on formation of a consortium
of banks to provide permissible financial services for its customers
that one bank could not efficiently provide. We believe it would be
imprudent to penalize institutions that have invested in these
activities through a majority-owned subsidiary. Therefore, the proposed
regulatory language has been changed, creating an exception to the
control requirement where the company in question is controlled by
insured depository institutions.
The scope of the activities authorized under final Sec. 362.4(b)(3)
differ from current Sec. 362.4(c)(3)(iv)(C) and current
Sec. 362.4(c)(3)(iv)(D). The FDIC eliminated proposed
Sec. 362.3(b)(2)(iv), which would have authorized 4(c)(8) activities at
the bank level. In a parallel fashion, we eliminated current
Sec. 362.4(c)(3)(iv)(C), which effectively authorizes the majority-
owned subsidiary to own stock of a corporation engaged in 4(c)(8)
activities. As is discussed above in connection with that change, the
activities included on the 4(c)(8) list are generally of a type
permissible for national banks, and the authorization in
Sec. 362.4(b)(3)(ii)(A) of the final rule authorizes the lower-level
subsidiary to engage in activities permissible for national banks. As
is also discussed above, the 4(c)(8) list's inclusion of real estate
leasing is the one significant exception that was not otherwise dealt
with in this regulation. To address the elimination of real estate
leasing under the 4(c)(8) list, the FDIC has created Sec. 362.4(b)(6)
to govern real estate leasing by a majority-owned subsidiary. Such
activity also is authorized for a lower-level subsidiary under
Sec. 362.4(b)(3)(ii)(D) of the final rule.
With regard to current Sec. 362.4(c)(3)(iv)(D), authorizing a
majority-owned subsidiary to invest in 50 percent or less of the stock
of a corporation engaging solely in activities which are not ``as
principal'', the final version of Sec. 362.4(b)(3) has the effect of
authorizing non-principal activities which are financially-related.
Section 362.4(b)(3)(ii)(B) of the final rule authorizes insurance
agency activities by the lower-level subsidiary; and
362.4(b)(3)(ii)(A), authorizing the lower-level subsidiary to engage in
activities permissible for national banks, encompasses certain non-
principal activities, such as securities brokerage and investment
advisory services.
We have previously required applications to hold savings
association stock, although a savings association
[[Page 66295]]
could be owned, controlled or operated if the savings association
engages only in deposit-taking and other activities that are
permissible for a bank holding company.4
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\4\ 12 U.S.C. 1843(c) and 12 CFR 225.28(b)(4)(ii).
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If a bank was relying on a previous regulatory exception that has
now been eliminated, Sec. 362.5(b)(3) of the final rule provides the
activity may continue as previously conducted for 90 days after the
effective date of this regulation. If the activity of the lower-level
subsidiary is not authorized by the new rule, or the control standard
is not met in that time frame, the insured state bank must apply to the
FDIC for permission to continue the activity.
Equity securities held by a majority-owned subsidiary. The FDIC
sought comment on whether the final regulation should contain an
exception that would allow an insured state bank to hold equity
securities at the subsidiary level. In light of comments received on
this issue, Staff is further analyzing the proposal. Thus, the final
rule does not contain the provision that would have permitted a
majority-owned subsidiary of a state bank and savings association to
engage in equity securities investment activities. At this time, we are
proceeding with the remainder of the final regulation so as to avoid
further delay in the streamlining benefits that state banks and savings
associations will enjoy from the revisions. As a part of this
regulation, we are inserting provisions from the current regulation
that allow: (1) An insured state bank through a majority-owned
subsidiary to invest in up to ten percent of the stock of another
insured bank; and (2) an insured state bank that has received approval
to invest in equity securities pursuant to the statutory grandfather to
conduct these activities through a majority-owned subsidiary without
any additional approval from the FDIC. The provisions have been
continued to allow previously approved activities to continue while
staff is analyzing equity securities investment activities further.
The FDIC proposed to eliminate the notice for these activities, the
specific reference to grandfathered activity, and to allow similar
activity for all insured state banks. However, the exception provided
that the bank's investment in the majority-owned subsidiary be deducted
from capital and that the activity be subject to certain eligibility
requirements and transaction limitations. Comment was frequent and
strong that this proposal was unacceptable to the banks that held
stocks under the current regulation.
Numerous commenters argued that the statutory grandfather for banks
holding common and preferred stock investments and registered shares
extends to the bank and its subsidiaries. Section 24(f) is the
governing statute in this matter. The exception contained in this
provision extends only to the insured state bank. The statute makes no
mention of the bank's subsidiary. Section 24(c) of the FDI Act does
allow the bank to hold common or preferred stock or shares of
registered investment companies through a majority-owned subsidiary.
Activities conducted in a majority-owned subsidiary are subject to the
bank's compliance with applicable capital standards and the FDIC's
finding under section 24(d) that the activity poses no significant risk
to the funds.
Most of the comments received came from interested parties in the
Commonwealth of Massachusetts and referred to a type of subsidiary
authorized in Massachusetts to hold all types of securities, whether
permissible or impermissible for a national bank. These subsidiaries
were established to take advantage of specialized tax treatment under
Massachusetts law. The FDIC understands the tax-favored treatment of
these subsidiaries; however, that tax treatment is a matter of state
tax law and is not a factor in the FDIC's risk to the fund
determination under this statute. However, the FDIC is not
unsympathetic to the plight of insured state banks that have acted
lawfully in structuring their business to achieve tax-favored
treatment. The FDIC is unwilling to upset such good faith arrangements
without considering other alternatives.
Reflecting a sentiment that is contained in many comment letters,
one commenter stated, ``as a practical matter, we are unaware of any
circumstance where banks have been harmed by conducting these
activities through a subsidiary, and thus we believe that conducting
the grandfathered activities in that manner poses no risk to the
deposit insurance funds''. The FDIC recognizes that for the past 15
years there has been an unprecedented rise in the value of common and
preferred stock and registered shares, and these markets have
experienced no sustained, appreciable downturn in value in over 10
years. The FDIC does not base its risk to the fund determination on the
recent history of markets for listed common and preferred stock and
registered shares. The FDIC's policy regarding holding individual
stocks is to not take exception to holding corporate equities which are
well regarded by knowledgeable investors, marketable and held in
moderate proportions. In reviewing equities held on an aggregate basis,
the bank's portfolio of common and preferred stock and registered
shares is reviewed in context of its overall investment portfolio. The
holding of common and preferred stock and registered shares must be in
the context of the bank's overall goals of investment quality, maturity
pattern, diversification of risks, marketability of the portfolio, and
income production. The bank's overall investment strategies are then
judged in relationship to the: (1) General character of the
institution's business; (2) analysis of funding sources; (3) available
capital funds; and (4) economic and monetary factors.
The FDIC proposed that the bank's investment in a subsidiary
investing in equity securities be deducted from the bank's capital
before determining the adequacy of the bank's capital. This treatment
would separate the capital that is available to support the bank from
the capital that is available to support the activities of the
subsidiary. In that scenario, because the risks of holding equity
securities is borne by the capital of the subsidiary, the portfolio of
equity securities and registered shares does not have to be analyzed in
context of the bank's overall investment strategies. If the capital
separations are not present, then the risks of holding equity
securities through a fully consolidated subsidiary must be considered
in context of the bank's overall investment strategies. In addition, if
a bank chooses to hold investments that are permissible for a national
bank in a subsidiary that also may hold investments that are not
permissible for a national bank, the FDIC will treat the entire
subsidiary as engaged in an activity that is not permissible for a
national bank.
Many comments say that the FDIC's proposal for deducting a bank's
investment in its securities subsidiary from the bank's capital before
determining capital adequacy is inconsistent with the capital treatment
for recognition of 45% of net unrealized gains in the equities
portfolio under the FDIC's capital regulations (12 CFR part
325).5 The argument that has been made by these comments is
persuasive to the FDIC. The two approaches to treatment of gains on
securities do seem inconsistent, and the capital regulation is
consistent with the other federal financial institution regulators'
approach to capital treatment of common and preferred stock and shares
of registered investment companies.
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\5\ 63 FR 46518 (Sept. 1, 1998).
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[[Page 66296]]
State law in Massachusetts permits a state bank to establish a
subsidiary to hold the equity security and investment company share of
investments that the bank is permitted to make under state law. Those
investments if made directly by the bank are eligible for the
``grandfather'' provided for by section 24(f) of the FDI Act and
Sec. 362.3(a)(2)(iii). According to the comments, such subsidiaries
should be given the same treatment accorded to the bank, i.e., if the
bank is permitted by the FDIC to exercise its direct investment
authority, the bank should be permitted to invest in those securities
and investment company shares through a subsidiary under the same terms
as exist under the current rule without a capital deduction.
After considering the comments, the FDIC has decided to retain the
current provision allowing grandfathered banks to hold their
investments in common or preferred stock and shares of investment
companies through a majority-owned subsidiary until the staff analysis
of equity securities investments is completed. Section 362.4(b)(4)(i)
of the final regulation provides that any insured state bank that has
received approval to invest in common or preferred stock or shares of
an investment company pursuant to Sec. 362.3(a)(2)(iii) may conduct the
approved investment activities through a majority-owned subsidiary
provided that any conditions or restrictions imposed with regard to the
approval granted under Sec. 362.3(a)(2)(iii) are met. Section
362.3(a)(2)(iii) provides that no insured state bank may take advantage
of the ``grandfather'' provided for investments in common or preferred
stock listed on a national securities exchange and shares of an
investment company registered under the Investment Company Act of 1940
(15 U.S.C. 80a-1, et seq.) unless the bank files a notice with the FDIC
of the bank's intent to make such investments and the FDIC determines
that such investments will not pose a significant risk to the deposit
insurance funds. In no event may the bank's investments in such
securities and/or investment company shares exceed 100% of the bank's
tier one capital. The FDIC may condition its finding of no risk upon
whatever conditions or restrictions it finds appropriate. The
``grandfather'' will be lost if certain events occur (see
Sec. 362.3(a)(2)(iii)).
The maximum permissible investment by the consolidated bank and
majority-owned subsidiary engaged in this activity is 100 percent of
the bank's consolidated tier one capital. If the bank also holds listed
common or preferred stock or shares of registered investment companies
at the bank level pursuant to the grandfather, such securities will
count toward the limit. For a particular bank, the FDIC may impose a
limit on a case-by-case basis at its discretion of less than the
maximum permissible investment of 100 percent of tier 1 capital. The
FDIC may require divestiture of some or all of the investments if it is
determined that retention of the investments will have an adverse
effect on the safety and soundness of the consolidated bank. The
limitation of up to 100 percent of tier one capital, the requirement
for bank policies, and the reservation of the authority to require
divestiture are taken directly from the current regulation of these
activities when conducted at the bank level.
Bank stock. Section Sec. 362.4(b)(4)(ii) of the final regulation
restores the exception which allows an insured state bank to invest in
up to ten percent of the outstanding stock of another insured bank
without the FDIC's prior consent provided that the investment is made
through a majority-owned subsidiary which was organized for the purpose
of holding such shares. This exception is restored to the regulation to
provide relief for those state banks which are permitted under state
law to invest in the stock of other banks and have done so in reliance
on the current regulation. Insured state banks should note, however,
that the holding of such shares must of course be permissible under
other relevant state and federal law.
The FDIC has become aware that some insured state banks own a
sufficient interest in the stock of other insured state banks to cause
the bank which is so owned to be considered a majority-owned subsidiary
under part 362. It is the FDIC's posture that such an owner bank does
not need to file a request under part 362 seeking approval for its
majority-owned subsidiary that is an insured state bank to conduct as
principal activities that are not permissible for a national bank. As
the majority-owned subsidiary is itself an insured state bank, that
bank is required under part 362 and section 24 of the FDI Act to
request consent on its own behalf for permission to engage in any as
principal activity that is not permissible for a national bank.
Again, we are reinstating the provision in the current rule that
permits a majority-owned subsidiary of a state bank to invest in up to
ten percent of the outstanding stock of another insured bank. No other
restrictions on this investment are imposed until the staff analysis of
equity securities investment activities is complete.
Majority-owned subsidiaries conducting real estate investment
activities and securities underwriting. The FDIC has determined that
real estate investment and securities underwriting activities do not
represent a significant risk to the deposit insurance funds, provided
that the activities are conducted by a majority-owned subsidiary in
compliance with the requirements set forth. These activities require
the insured state bank to file a notice. Then, as long as the FDIC does
not object to the notice, the bank may conduct the activity in
compliance with the requirements. The FDIC is not precluded from taking
any appropriate action or imposing additional requirements with respect
to the activities when the facts and circumstances warrant such action.
Engage in real estate investment activities. Section 24 of the FDI
Act and the current version of part 362 generally prohibit an insured
state bank from engaging in real estate investment activities not
permissible for a national bank, absent FDIC approval. Section 24 does
not grant FDIC authority to permit an insured state bank to directly
engage in real estate investment activities not permissible for a
national bank. The circumstances under which national banks may hold
equity investments in real estate are limited. If a particular real
estate investment is permissible for a national bank, an insured state
bank only needs to document that determination. If a particular real
estate investment is not permissible for a national bank and an insured
state bank wants to engage in real estate investment activities (or
continue to hold the real estate investment in the case of investments
acquired before enactment of section 24 of the FDI Act), the insured
state bank must file an application with FDIC for consent. The FDIC may
approve such applications if the investment is made through a majority-
owned subsidiary, the institution meets the stated capital requirements
and the FDIC determines that the activity does not pose a significant
risk to the affected deposit insurance fund.
The FDIC evaluates a number of factors when acting on requests for
consent to engage in real estate investment activities. In evaluating a
request to conduct equity real estate investment activity, the FDIC
considers the type of proposed real estate investment activity to
determine if the activity is suitable for the insured depository
institution. Where appropriate, the FDIC fashions
[[Page 66297]]
conditions designed to address potential risks that have been
identified in the context of a given request. The FDIC also reviews the
proposed subsidiary structure and its management policies and practices
to determine if the insured state bank is adequately protected and
analyzes capital adequacy to ensure that the insured institution has
sufficient capital to support its banking activities.
In all of the applications that have been approved to conduct a
real estate investment activity to date, the FDIC has imposed a number
of conditions in granting the approval. In short, the FDIC has
determined on a case-by-case basis that the conduct of certain real
estate investment activities by a majority-owned corporate subsidiary
of an insured state bank will not present a significant risk to the
deposit insurance fund provided certain conditions are observed. In
drafting these notice provisions, the FDIC has evaluated the conditions
usually imposed when granting approval to insured state banks to
conduct real estate activities and incorporated these conditions within
the revised regulation where appropriate.
The revised rule allows majority-owned subsidiaries to invest in
and/or retain equity interests in real estate not permissible for a
national bank under an expedited notice process, provided certain
criteria are met. Institutions not meeting the criteria must make
application to the FDIC and obtain the FDIC's approval on a case-
specific basis. To use the notice process, the insured state bank must
qualify as an ``eligible depository institution'', as that term is
defined within the revised regulation, and the majority-owned
subsidiary must qualify as an ``eligible subsidiary'', which is also
defined within the revised rule. These criteria are discussed below.
The insured state bank must also abide by the investment and
transaction limitations set forth in the revised regulation.
Under the revisions, the insured state bank may not invest more
than 20 percent of the bank's tier one capital in all of its majority-
owned subsidiaries which are conducting activities subject to the
investment limits. This language reflects two changes from the
proposal. First, the 10 percent per subsidiary limit has been
eliminated. Second, the revisions provide that the 20 percent aggregate
investment limit applies to all subsidiaries engaged in activities that
are being separated from the insured depository institution. Under the
regulation, the activities subject to the investment limit are real
estate investment activities and securities underwriting. These
investment limits may cover any other activities that the FDIC deems
appropriate by regulation or any FDIC order. For the purpose of
calculating the dollar amount of the investment limitations, the bank
would calculate 20 percent of its tier one capital after deducting all
amounts required by the regulation or any FDIC order.
Comments received were generally supportive of the overall
investment limit but were critical of a provision in the proposed
regulation that the bank could invest no more than 10 percent of its
tier one capital in any one subsidiary engaged in real estate
activities. The comments questioned the rationale for requiring more
than one subsidiary if a bank is investing up to its aggregate limit in
real estate investment activities. The FDIC in its proposal attempted
to have the restrictions on transactions between an insured state bank
and its subsidiaries reflect as closely as possible the same
restrictions that are imposed on a bank/affiliate relationship. The 10
percent limitation per subsidiary in the proposal reflected the desire
of the FDIC that a bank engaging in real estate investment activities
diversify its risks. Upon reflection, the FDIC believes an arbitrary
limit on the amount that can be invested in any one subsidiary does not
necessarily accomplish the desired diversification. In reviewing
notices of intent to engage in this activity, the FDIC will look at the
bank's diversification of risks when making a determination of whether
to consent to the planned activity. Therefore, the final rule drops the
proposed 10 percent limit on investment in each subsidiary. The 20
percent limitation on the investment in real estate investment
activities provides an important safeguard against excessive investment
in these activities, and is retained in the final regulation. However,
that limit now includes all subsidiaries engaged in activities that are
being separated from the insured depository institution. This change
occurred when the FDIC reassessed the limit and decided to make it more
closely parallel the 23A standard governing affiliates. Thus, the 20
percent limit will apply to all activities that are separated from the
insured depository institution. Under the final regulation, the
activities subject to the investment limit are real estate investment
activities and securities underwriting. Of course this limit may be
modified by application.
The FDIC recognizes that some real estate investments or activities
are more time, management and capital intensive than others. Our
experience in reviewing the requests submitted under section 24 has led
us to conclude that small equity investments in real estate--held under
certain conditions--do not pose a significant risk to the deposit
insurance fund. As a result, the final rule provides relief to insured
state banks having small investments in a majority-owned subsidiary
engaging in real estate investment activities. The FDIC is attempting
to strike a reasonable balance between prudential safeguards and
regulatory burden in its revisions. As a result, the final rule
establishes certain exceptions from the requirements necessary to
establish an eligible subsidiary whenever the insured state bank's
investment is of a de minimis nature and meets certain other criteria.
Under the final rule, whenever the bank's investment in its majority-
owned subsidiary conducting real estate activities does not exceed 2
percent of the bank's tier one capital and the bank's investment in the
subsidiary does not include extensions of credit from the bank to the
subsidiary, a debt instrument purchased from the subsidiary or any
other transaction originated from the bank to the benefit of the
subsidiary, the subsidiary is relieved of certain of the requirements
that must be met to establish an eligible subsidiary under the
regulation. For example, the subsidiary need not be physically separate
from the insured state bank; the chief executive officer of the
subsidiary is not required to be an employee separate from the bank; a
majority of the board of directors of the subsidiary need not be
separate from the directors or officers of the bank; and the subsidiary
need not establish separate policies and procedures as described in the
regulation in Sec. 362.4(c)(2)(xi). Commenters did not object to the
elimination of these eligible subsidiary standards in these
circumstances. Several commenters expressed concern that the de minimis
investment level is too low. The comments suggested that 2 percent of
tier one capital is an arbitrary limit and should be raised to 5
percent. Another commenter supported the limit stating that it is an
appropriate safe harbor limit. The FDIC recognizes that arguments can
be made for varying limits in this regard. We have chosen a
conservative limit. With further experience that provides evidence that
this limit can be safely increased, we can reconsider the appropriate
level to be considered de minimis activity in the future.
One commenter suggested that both investment limits should be
measured against tier one and tier two capital rather than using only
tier one capital. The FDIC believes that certain elements
[[Page 66298]]
of tier two capital such as the allowance for loan and lease losses do
not provide protection against activities such as real estate
investment. Therefore, the FDIC has decided to retain tier one capital
as the appropriate capital against which to measure risk in these
activities.
Another commenter suggested that extensions of credit should be
permitted subject to an aggregate limit. This same comment added that
the restriction to a single subsidiary could be eliminated. In creating
the de minimis exception, the FDIC wanted this exception to be used
primarily for the passive holding of real estate. Multiple subsidiaries
and bank lending to fund the investments is indicative of a more active
investment.
If the institution or its investment does not meet the criteria
established under the revised regulation for using the notice
procedure, an application may be filed with the FDIC. A description of
the requisite contents of notices and applications, and the FDIC's
processing thereof, is contained in subpart G of part 303. The FDIC
encourages institutions to file an application if the institution
wishes to request relief from any of the requirements necessary to be
considered an eligible depository institution or an eligible
subsidiary. The FDIC recognizes that not all real estate investment
should require a subsidiary to be established exactly as outlined under
the eligible subsidiary definition. However, the FDIC is unwilling to
eliminate those criteria under the expedited notice process.
Engage in the public sale, distribution or underwriting of
securities that are not permissible for a national bank under section
16 of the Banking Act of 1933. The current regulation provides that an
insured state nonmember bank may establish a majority-owned subsidiary
that engages in the underwriting and distribution of securities without
filing an application with the FDIC if the requirements and
restrictions of Sec. 337.4 of the FDIC's regulations are met. Section
337.4 governs the manner in which subsidiaries of insured state
nonmember banks must operate if the subsidiaries engage in securities
activities that would not be permissible for the bank itself under
section 16 of the Banking Act of 1933, commonly known as the Glass-
Steagall Act. In short, the regulation lists securities underwriting
and distribution as an activity that will not pose a significant risk
to the deposit insurance funds if conducted through a majority-owned
subsidiary that operates in accordance with Sec. 337.4. The proposed
revisions made significant changes to that exception. Most of the
proposal has been adopted without significant change in the final rule.
Due to the existing cross reference to Sec. 337.4, the FDIC
reviewed Sec. 337.4 as a part of its review of part 362 for CDRI. The
purpose of the review was to streamline and clarify the regulation,
update the regulation as necessary given any changes in the law,
regulatory practice, and the marketplace since its adoption, and remove
any redundant or unnecessary provisions. As a result of that review,
the FDIC is making a number of substantive changes to the rules which
govern securities sales, distribution, or underwriting by subsidiaries
of insured state nonmember banks. Although the FDIC has chosen to place
the exception in the part of the regulation governing activities by
insured state banks, by law, only subsidiaries of state nonmember banks
may engage in securities underwriting activities that are not
permissible for national banks. As we have previously stated, subpart A
of this regulation does not grant authority to conduct activities or
make investments. Subpart A only gives relief from the prohibitions of
section 24 of the FDI Act. Insured state banks must be in compliance
with applicable state law when engaging in any activity.
Since the FDIC issued its proposal to amend part 362, the OCC has
given its consent to an operating subsidiary of a national bank to
conduct municipal revenue bond underwriting. This activity currently is
not permissible for the national bank even though the activity has been
approved for a subsidiary of a national bank. Concurrent with these
revisions, the FDIC is issuing a proposal to address activities that
are permissible for a subsidiary of a national bank that are not
permissible for the national bank itself. Until that regulation is
finalized, Sec. 337.4 will remain operative to govern only activities
that are not covered by the final rule in subpart A of part 362.
The FDIC is also issuing a technical amendment to Sec. 337.4, at
Sec. 337.4(i), in connection with this rulemaking to make this clear.
It provides that any state nonmember bank subsidiary or affiliate
conducting securities activities governed by Sec. 362.4(b)(5)(ii) or
Sec. 362.8(b) must comply with such rules, and such compliance
satisfies their obligations under Sec. 337.4.
Background of section 337.4. On August 23, 1982, the FDIC adopted a
policy statement on the applicability of the Glass-Steagall Act to
securities activities of insured state nonmember banks (47 FR 38984).
That policy statement expressed the opinion of the FDIC that under the
Glass-Steagall Act: (1) Insured state nonmember banks may be affiliated
with companies that engage in securities activities; and (2) securities
activities of subsidiaries of insured state nonmember banks are not
subject to section 21 of the Glass-Steagall Act (12 U.S.C. 378) which
prohibits deposit taking institutions from engaging in the business of
issuing, underwriting, selling, or distributing stocks, bonds,
debentures, notes, or other securities.
The policy statement applies solely to insured state nonmember
banks. As noted in the policy statement, the Bank Holding Company Act
of 1956 (12 U.S.C. 1841 et seq.) places certain restrictions on non-
banking activities. Insured state nonmember banks that are members of a
bank holding company system need to take into consideration sections
4(a) and 4(c)(8) of the Bank Holding Company Act of 1956 (12 U.S.C.
1843 (a) and (c)) and applicable FRB regulations before entering into
securities activities through subsidiaries.
The policy statement also expressed the opinion of the Board of
Directors of the FDIC that there may be a need to restrict or prohibit
certain securities activities of subsidiaries of state nonmember banks.
As the policy statement noted, ``the FDIC * * * recognizes its ongoing
responsibility to ensure the safe and sound operation of insured state
nonmember banks, and depending upon the facts, the potential risks
inherent in a bank subsidiary's involvement in certain securities
activities''.
In November 1984, after notice and comment proceedings, the FDIC
adopted a final rule regulating the securities activities of affiliates
and subsidiaries of insured state nonmember banks under the FDI Act. 49
FR 46709 (Nov. 28, 1984), regulations codified at 12 CFR 337.4
(1986).6 Although the rule
[[Page 66299]]
does not prohibit such securities activities outright, it does restrict
these activities in a number of ways and only permits the activities if
authorized under state law.
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\6\ After the regulations were adopted, the representatives of
mutual fund companies and investment bankers brought another action
challenging the regulations allowing insured banks, which are not
members of the Federal Reserve System, to have subsidiary or
affiliate relationships with firms engaged in securities work. The
United States District Court for the District of Columbia, Gerhard
A. Gesell, J., 606 F. Supp. 683, upheld the regulations, and
representatives appealed and also petitioned for review. The Court
of Appeals held that: (1) representatives had standing to challenge
regulations under both the Glass-Steagall Act and the FDI Act, but
(2) regulations did not violate either Act. Investment Company
Institute v. Federal Deposit Insurance Corporation, 815 F.2d 1540
(D.C. Cir. 1987).
A trade association representing Federal Deposit Insurance
Corporation-insured savings banks also brought suit challenging FDIC
regulations respecting proper relationship between FDIC-insured
banks and their securities-dealing ``subsidiaries'' or
``affiliates.'' On cross motions for summary judgment, the District
Court, Jackson, J., held that: (1) trade association had standing,
and (2) regulations were within authority of FDIC. National Council
of Savings Institutions v. Federal Deposit Insurance Corporation,
664 F.Supp. 572 (D.C. 1987).
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Section 337.4 is structured to ensure the separateness of the
subsidiary and the bank. This separation is necessary as the bank would
be prohibited by the Glass-Steagall Act from engaging in many
activities the subsidiary might undertake and the separation safeguards
the soundness of the parent bank.
Section 337.4 adopted a tiered approach to the activities of the
subsidiary and limits the underwriting of securities that would
otherwise be prohibited to the bank itself under the Glass-Steagall Act
unless the subsidiary and bank meet the separation standards in the
regulation and the activities are limited to underwriting of investment
quality securities. Section 337.4 permitted a subsidiary to engage in
additional underwriting if it meets the separation standards and the
subsidiary is a member in good standing with the National Association
of Securities Dealers and management has at least five years experience
in the industry.
The subsidiaries engaged in activities not permissible for the bank
itself also are required to be adequately capitalized, and therefore,
these subsidiaries are required to meet the capital standards of the
NASD and SEC. As a protection to the deposit insurance fund, a bank's
investment in these subsidiaries is not counted toward the bank's
capital.
An insured state nonmember bank that has a subsidiary or affiliate
engaging in the sale, distribution, or underwriting of stocks, bonds,
debentures or notes, or other securities, or acting as an investment
advisor to any investment company is prohibited under Sec. 337.4
through a series of restrictions from engaging in transactions which
could create a conflict of interest or the appearance of a conflict of
interest.
Under Sec. 337.4, the FDIC created an atmosphere in which bank
affiliation with entities engaged in securities activities is very
controlled. The FDIC has examination authority over bank subsidiaries.
Under section 10(b) of the FDI Act (12 U.S.C. 1820(b)), the FDIC has
the authority to examine affiliates to determine the effect of that
relationship on the insured institution. Nevertheless, the FDIC
generally has allowed these entities to be functionally regulated, that
is the FDIC usually examines the insured state nonmember bank and
primarily relies on the SEC and the NASD oversight of the securities
subsidiary or affiliate. The FDIC views its established separations for
banks and securities firms as creating an environment in which the
FDIC's responsibility to protect the deposit insurance funds has been
met without creating too much overlapping regulation for the securities
firms. The FDIC maintains an open dialogue with the NASD and the SEC
concerning matters of mutual interest. To that end, the FDIC has
entered into an agreement in principle with the NASD concerning
examination of securities companies affiliated with insured
institutions.
The number of banks which have subsidiaries engaging in securities
activities that can not be conducted in the bank itself is very small.
These subsidiaries engage in the underwriting of debt and equity
securities and distribution and management of mutual funds.
The FRB permits a nonbank subsidiary of a bank holding company to
underwrite and deal in securities through its orders under the Bank
Holding Company Act and section 20 of the Glass-Steagall
Act.7 The FDIC has reviewed its securities underwriting
activity regulations in light of the FRB's recently-adopted operating
standards that modify the FRB's section 20 orders.8 The FDIC
also reviewed the comments received by the FRB. The FRB conducted a
comprehensive review of the prudential limitations established in its
section 20 decisions. The FRB sought comment on modifying these
limitations to allow section 20 subsidiaries to operate more
efficiently and serve their customers more effectively.9 The
FDIC found the analysis of the FRB instructive and has determined that
its regulation already incorporates many of the same modifications that
the FRB has made.
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\7\ The affiliate restrictions under Sec. 337.4 were created
prior to the time the FRB had approved securities activities under
section 20 of the Glass-Steagall Act as an activity that is closely
related to banking. Given the regulatory structure now in place for
affiliates of banks engaged in securities activities, the FDIC's
affiliate restrictions are no longer necessary except for those
holding companies that are not subject to the restrictions of the
Bank Holding Company Act. The restrictions on affiliation have been
moved to subpart B of this regulation and are focused only on those
companies that are not registered bank holding companies.
\8\ 62 FR 45295, August 21, 1997.
\9\ 61 FR 57679, November 7, 1996, and 62 FR 2622, January 17,
1997.
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In the final rule, the FDIC is not adopting all of the standards of
the FRB. For instance, the FDIC is not requiring a separate statement
of operating standards. The final regulation applies certain standards
to insured state banks engaging in securities underwriting activities
through majority-owned through the ``eligible subsidiary''
requirements. Separate operating standards are unnecessary because each
of these safeguards provides appropriate protections for bank
subsidiaries engaged in underwriting activities.
However, the FDIC has retained the proposed requirement that the
chief executive officer of the subsidiary may not be an employee of the
bank and a majority of the subsidiary's board of directors must not be
directors or officers of the bank. This standard is the same as the
operating standard on interlocks adopted by the FRB to govern its
section 20 orders.
One of the reasons for these safeguards involves the FDIC's
continuing concerns that the bank should be protected from liability
for the securities underwriting activities of the subsidiary. Under the
securities laws, a parent company may have liability as a ``controlling
person''.10 The FDIC views management and board of director
separation as enhanced protection from controlling person liability as
well as protection from disclosures of material nonpublic information.
Protection from disclosures of material nonpublic information also
[[Page 66300]]
may be enhanced by the use of appropriate policies and
procedures.11
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\10\ Liability of ``controlling persons'' for securities law
violations by the persons or entities they ``control'' is found in
section 15 of the Securities Act of 1933, 15 U.S.C. 77o, and section
20 of the Securities and Exchange Act of 1934, 15 U.S.C. 78t(a).
Although the tests of liability under these statutes vary slightly,
the FDIC is concerned that under the most stringent of these
authorities liability may be imposed on a parent entity. Under the
Tenth Circuit's permissive test for controlling person liability,
any appearance of an ability to exercise influence, whether directly
or indirectly, and even if such influence cannot amount to control,
is sufficient to cause a person to be a controlling person within
the meaning of sections 15 or 20. Although liability may be avoided
by proving no knowledge or good faith, proving no knowledge requires
no knowledge of the general operations or actions of the primary
violator and good faith requires both good faith and
nonparticipation. See First Interstate Bank of Denver, N.A. versus
Pring, 969 F.2d 891 (10th Cir. 1992), rev'd on other grounds, 511
U.S. 164 (1994); Arena Land & Inv. Co. Inc. versus Petty, 906
F.Supp. 1470 (D. Utah 1994); San Francisco-Oklahoma Petroleum
Exploration Corp. versus Carstan Oil Co., Inc., 765 F.2d 962 (10th
Cir. 1985); Seattle-First National Bank versus Carlstedt, 678
F.Supp. 1543 (W.D. Okla. 1987). However, to the extent that any
securities underwriting liability may have been reduced due to the
enactment of The Private Securities Litigation Reform Act of 1995,
Pub. L. 104-67, then the FDIC's concerns regarding controlling
person liability may be reduced. It is likely that the FDIC will
want to await the development of the standards under this new law
before taking actions that could risk liability on a parent bank
that has an underwriting subsidiary.
\11\ See ``Anti-manipulation Rules Concerning Securities
Offerings'', Regulation M, 17 CFR part 242 (1997) where the SEC
grapples with limiting trading advantages that might otherwise
accrue to affiliates by limiting trading in prohibited securities by
affiliates. The SEC is attempting to prevent trading on material
nonpublic information. To reduce the danger of such trading, the SEC
has a broad ban on affiliated purchasers. To narrow that exception
while continuing to limit access to the nonpublic information that
might otherwise occur, the SEC has limited access to material
nonpublic information through restraints on common officers.
Alternatively, the SEC could prohibit trading by affiliates that
shared any common officers or employees. In narrowing this exception
to ``those officers or employees that direct, effect or recommend
transactions in securities'', the SEC stated that it ``believes that
this modification will resolve substantially commenters'' concerns
that sharing one or more senior executives with a distribution
participant, issuer, or selling security holder would preclude an
affiliate from availing itself of the exclusion''. 62 FR 520 at 523,
fn. 22 (January 3, 1997). As the SEC also stated, the requirement
would not preclude the affiliates from sharing common executives
charged with risk management, compliance or general oversight
responsibilities.
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Substantive changes to the subsidiary underwriting activities.
Generally, the regulations governing the securities underwriting
activity of state nonmember banks have been streamlined to make
compliance easier. In addition, state nonmember banks that deem any
particular constraint to be burdensome may file an application with the
FDIC to have the constraint removed for that bank and its majority-
owned subsidiary. The FDIC has eliminated those constraints that were
deemed to overlap other requirements or that could be eliminated while
maintaining safety and soundness standards. For example, the FDIC has
eliminated the notice requirement for all state nonmember bank
subsidiaries that engage in securities activities that are permissible
for a national bank. Under the final regulation, a notice is required
only of state nonmember banks with subsidiaries engaging in securities
activities that would be impermissible for a national bank. The FDIC
has determined that it can adequately monitor the other securities
activities through its regular reporting and examination processes.
As indicated in the following discussion on core eligibility
requirements, the final rule permits a state nonmember bank meeting
certain criteria to conduct, as principal, securities activities
through a subsidiary that are not permissible for a national bank after
filing an expedited notice with the FDIC, rather than a full
application. The insured state bank must be an ``eligible depository
institution'' and the subsidiary must be an ``eligible subsidiary''.
Briefly, an ``eligible depository institution'' must be chartered and
operating for at least three years, have satisfactory composite and
management ratings under the Uniform Financial Institution Rating
System (UFIRS) as well as satisfactory compliance and CRA ratings, and
not be subject to any formal or informal corrective or supervisory
order or agreement. These requirements are uniform with other part 362
notice procedures for insured state banks to engage in activities not
permissible for national banks. These requirements are not presently
found in Sec. 337.4 but the FDIC believes that only banks that are
well-run and well-managed should be given the opportunity to engage in
securities activities that are not permissible for a national bank
under the streamlined notice procedures. These criteria are imposed as
expedited processing criteria rather than substantive criteria. Other
banks that want to enter these activities should be subject to the
scrutiny of the application process. Although operations not
permissible for a national bank are conducted and managed by a separate
majority-owned subsidiary, such activities are part of the analysis of
the consolidated financial institution. The condition of the
institution and the ability of its management are an important
component in determining if the risks of the securities activities will
have a negative impact on the insured institution. The ``eligible
subsidiary'' definition, discussed below, recognizes the level of risk
present in securities underwriting activities. Commenters did not
object to using these standards for institutions that wish to engage in
these securities activities.
One of the other notable differences between the current and final
regulations is the substitution of the ``eligible subsidiary'' criteria
for that of the ``bona fide subsidiary'' definition contained in
Sec. 337.4(a)(2). The definitions are similar, but changes have been
made to the existing capital and physical separation requirements.
Also, new requirements have been added to ensure that the subsidiary's
business is conducted according to independent policies and procedures.
With regard to those subsidiaries which engage in the public sale,
distribution or underwriting of securities that are not permissible for
a national bank, additional conditions also must be met. The conditions
are that: (1) The state-chartered depository institution must adopt
policies and procedures, including appropriate limits on exposure, to
govern the institution's participation in financing transactions
underwritten or arranged by an underwriting majority-owned subsidiary;
(2) the state-chartered depository institution may not express an
opinion on the value or the advisability of the purchase or sale of
securities underwritten or dealt in by a majority-owned subsidiary
unless the state-chartered depository institution notifies the customer
that the majority-owned subsidiary is underwriting, making a market,
distributing or dealing in the security; (3) the majority-owned
corporate subsidiary is registered and is a member in good standing
with the appropriate self-regulatory organization (SRO), and promptly
informs the appropriate regional director of the Division of
Supervision (DOS) in writing of any material actions taken against the
majority-owned subsidiary or any of its employees by the state, the
appropriate SROs or the SEC; and (4) the state-chartered depository
institution does not knowingly purchase as principal or fiduciary
during the existence of any underwriting or selling syndicate any
securities underwritten by the majority-owned subsidiary unless the
purchase is approved by the state-chartered depository institution's
board of directors before the securities are initially offered for sale
to the public. These additional requirements are similar to but
simplify the requirements currently contained in Sec. 337.4. Commenters
did not offer objection to these simplified standards and they have
been adopted as proposed.
In addition, the FDIC has eliminated the five-year period limiting
the securities activities of a state nonmember bank's underwriting
subsidiary's business operations. Rather, with notice and compliance
with the safeguards, a state nonmember bank's securities subsidiary may
conduct any securities business set forth in its business plan after
the notice period has expired without an objection by the FDIC. The
reasons the FDIC initially chose the more conservative posture are
rooted in the time they were adopted. When the FDIC approved
establishment of the initial underwriting subsidiaries, it had no
experience supervising investment banking operations in the United
States. Because affiliation between banks and securities underwriters
and dealers was long considered impractical or illegal, banks had not
operated such entities since enactment of the Glass-Steagall Act in
1933. Moreover, pre-Glass-Steagall affiliations were considered to have
caused losses to the banking industry and investors, although some
modern
[[Page 66301]]
research questions this view.12 Thus, the affiliation of
banks and investment banks presented unknown risks that were considered
substantial in 1983. In addition, although the FDIC recognized that
supervision and regulation of broker-dealers by the SEC provided
significant protections, the FDIC had little experience with how these
protections operated. The FDIC has now gained experience with
supervising the securities activities of banks and is better able to
assess which safeguards are appropriate to impose on these activities
to protect the bank and the deposit insurance funds. For those reasons,
the limitations and restrictions contained in Sec. 337.4 on
underwriting other than ``investment quality debt securities'' or
``investment quality equity securities'' have been eliminated from the
regulation. It should be noted that certain safeguards have been added
to the system since Sec. 337.4 was adopted. These safeguards include
risk-based capital standards and the Interagency Statement. The FDIC
has removed the disclosures currently contained in Sec. 337.4, which
are similar to the disclosures required by the Interagency Statement.
In lieu of the prescribed disclosures, the FDIC will rely on the
Interagency Statement as applicable guidance when the subsidiary's
products are sold on bank premises, by bank employees or when the bank
receives remuneration for a referral. This change makes compliance
easier. Comments support this change and recognize that any retail sale
of nondeposit investment products to bank customers is subject to the
Interagency Statement when the subsidiary's products are sold on bank
premises, by bank employees, or as a result of a compensated referral.
---------------------------------------------------------------------------
\12\ See, e.g., George J. Benston, The Separation of Commercial
and Investment Banking: The Glass-Steagall Act Revisited and
Reconsidered 41 (1990).
---------------------------------------------------------------------------
The FDIC has changed its disclosure standards relating to
subsidiaries engaged in insurance underwriting to those found in the
Interagency Statement for reasons similar to those discussed above. In
addition, securities firms are subject to a comprehensive Federal
supervisory and regulatory system designed to inform investors of risks
inherent in their transactions. However, as was also discussed above in
connection with insurance subsidiaries, there is a risk of customer
confusion where the insured state bank and the subsidiary selling the
product have similar names. Those cases are addressed in this part by a
separation standard which is discussed below. The separation standard
requires that the subsidiary conduct its business pursuant to
independent policies and procedures designed to inform customers and
prospective customers of the subsidiary that the subsidiary is a
separate organization from the state-chartered depository institution
and that the state-chartered depository institution is not responsible
for and does not guarantee the obligations of the subsidiary. The
institution and its subsidiary should take any steps necessary to avoid
customer confusion on behalf of non-bank customers, or bank customers
in transactions not covered by the Interagency Statement.
Finally, the FDIC will continue to impose many of the safeguards
found in section 23A of the Federal Reserve Act and to impose the types
of safeguards found in section 23B of the Federal Reserve Act. Although
section 23B did not exist until 1987 and only covers transactions where
banks and their subsidiaries are on one side and other affiliates are
on the other side, the FDIC had included some similar constraints in
the original version of Sec. 337.4. Now, most of the transaction
restrictions found in section 23B are adopted by the FDIC in the final
rule to promote consistency with the restrictions imposed by other
banking agencies on similar activities. These restrictions require that
bank/subsidiary transactions be on an arm's length basis and that the
subsidiary disclose that the bank is not responsible for the
subsidiary's obligations. The bank also is prohibited from purchasing
certain products from the subsidiary. While imposing the arm's length
restrictions, the FDIC is eliminating any overlapping safeguards.
Comments received did not recommend reinstating any of the restrictions
from the current Sec. 337.4.
In contrast to the arm's length transaction restrictions,
transaction limitations did exist and were incorporated into Sec. 337.4
by reference to section 23A of the Federal Reserve Act. To simplify
compliance for transactions between state nonmember banks and their
subsidiaries, the FDIC has placed the transactions limits and arm's
length requirements in the regulatory text language and only included
the restrictions that are relevant to a particular activity. The FDIC
hopes that this restatement will clarify the standards being imposed on
state nonmember banks and their subsidiaries.
On June 11, 1998, the FRB requested comment on an interpretation of
section 23A that would exempt certain transactions between an insured
depository institution and its affiliates. These interpretations would
be published in part 250 of the FRB's regulations. 63 FR 32766 (June
16, 1998). Specifically, the interpretation would expand the exemption
of section 23A(d)(6), which permits a bank to purchase assets of an
affiliate when the assets have a ``readily identifiable and publicly
available market quotation''. The proposal would, with some caveats,
bring within the exemption securities that have a ``ready market'', as
defined by the SEC.
The second interpretation would create two exemptions to the
provision of section 23A relating to transactions with third parties
that benefit the bank (and are therefore treated as ``covered
transactions''.) The context for this exemption is an extension of
credit by a bank to a third party to purchase securities through the
bank's registered broker-dealer affiliate. The first exemption would
apply when the affiliate acts solely as broker or riskless principal in
a securities transaction. The second exemption would apply when the
extension of credit is made pursuant to a preexisting line of credit
that was not established for the purpose of buying securities from or
through an affiliate.
In light of the FRB's proposals, we have re-evaluated our proposed
coverage of similar transactions and have determined that the language
we have crafted to govern securities underwriting subsidiaries would
already allow the transactions that the FRB proposes to exempt under
these interpretations. We believe that these transactions do not raise
safety and soundness issues if conducted under the arm's length
standards that we proposed and adopt in our final rule. Thus, we will
allow a bank to purchase assets (including securities) when those
transactions are carried out on terms and conditions that are
substantially similar to those prevailing at the time for comparable
transactions with unaffiliated parties. In addition, we already allow
an extension of credit to buy an asset from the subsidiary when those
transactions are carried out on terms and conditions that are
substantially similar to those prevailing at the time for comparable
transactions with unaffiliated parties. We consider that language to be
broad enough to include purchasing securities, including when the
subsidiary acts solely as broker or riskless principal in a securities
transaction. A preexisting line of credit that was not established for
the purpose of buying securities from or through the subsidiary is also
allowed, if it otherwise meets the terms of the FDIC's exception.
[[Page 66302]]
In addition, the FDIC has sought to eliminate transaction
restrictions that would duplicate the restrictions on information flow
or transactions imposed by the SROs and/or by the SEC.13 The
FDIC does not seek to eliminate the obligation to protect material
nonpublic information nor does it seek to undercut or minimize the
importance of the restrictions imposed by the SROs and SEC. Rather, the
FDIC seeks to avoid imposing burdensome overlapping restrictions merely
because a securities underwriting entity is owned by a bank. Further,
the FDIC seeks to avoid restrictions where the risk of loss or
manipulation is small or the costs of compliance are disproportionate
to the purposes the restrictions serve. In addition, the FDIC defers to
the expertise of the SEC which has found that greater flexibility for
market activities during public offerings is appropriate due to greater
securities market transparency, the surveillance capabilities of the
SROs, and the continuing application of the anti-fraud and anti-
manipulation provisions of the federal securities laws.14
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\13\ See ``Anti-manipulation Rules Concerning Securities
Offerings,'' 62 FR 520 (January 3, 1997); 15 U.S.C. 78o(f),
requiring registered brokers or dealers to maintain and enforce
written policies and procedures reasonably designed to prevent the
misuse of material nonpublic information; and ``Broker-Dealer
Policies and Procedures Designed to Segment the Flow and Prevent the
Misuse of Material Nonpublic Information,'' A Report by the Division
of Market Regulation, U.S. SEC, (March 1990).
\14\ Id. at 520.
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Consistent with the current notice procedure found in Sec. 337.4,
an insured state nonmember bank may indirectly through a majority-owned
subsidiary engage in the public sale, distribution or underwriting of
securities that would be impermissible for a national bank provided
that the bank files notice prior to initiating the activities, the FDIC
does not object prior to the expiration of the notice period and
certain conditions are, and continue to be, met. The FDIC has shortened
the notice period from the existing 60 days to 30 days and placed
filing procedures in subpart G of part 303. Previously, specific
instructions and guidelines on the form and content of any applications
or notices required under Sec. 337.4 were found within that section.
With regard to those insured state nonmember banks that have been
engaging in a securities activity covered by the new Sec. 362.4(b)(5)
under a notice filed and in compliance with Sec. 337.4, Sec. 362.5(b)
of the regulation allows those activities to continue as long as the
bank and its majority-owned subsidiaries meet the core eligibility
requirements, the investment and transaction limitations, and capital
requirements contained in Sec. 362.4 (c), (d), and (e). The revised
regulation requires these securities subsidiaries to meet the
additional conditions specified in Sec. 362.4(b)(5)(ii) that require
securities subsidiaries to adopt appropriate policies and procedures,
register with the SEC and take steps to avoid conflicts of interest.
The revisions also require the state nonmember bank to adopt policies
concerning the financing of issues underwritten or distributed by the
subsidiary. The state nonmember bank and its securities subsidiary will
have one year from the effective date of the regulation to meet these
restrictions and would be expected to be working toward full compliance
over that time period. Failure to meet the restrictions within a year
after the adoption of a final rule will necessitate an application for
the FDIC's consent to continue those activities.
To qualify for the streamlined notice procedure, a bank must be
well-capitalized after deducting from its tier one capital the equity
investment in the subsidiary as well as the bank's pro rata share of
any retained earnings of the subsidiary. The deduction must be
reflected on the bank's consolidated report of income and condition and
the resulting capital will be used for assessment risk classification
purposes under part 327 and for prompt corrective action purposes under
part 325. However, the capital deduction will not be used to determine
whether the bank is ``critically undercapitalized'' under part 325.
Since the risk-based capital requirements had not been adopted when the
current version of Sec. 337.4 was adopted, no similar capital level was
required of banks to establish an underwriting subsidiary, although the
capital deduction has always been required. This requirement is uniform
with the requirements found in the other part 362 notice procedures for
insured state banks to engage in activities not permissible for
national banks. The well-capitalized standard and the capital deduction
recognize the level of risk present in securities underwriting
activities by a subsidiary of a state nonmember bank. This risk
includes the potential that a bank could reallocate capital from the
insured depository institution to the underwriting subsidiary. Thus, it
is appropriate for the FDIC to retain the capital deduction even though
the FRB eliminated the requirement that a holding company deduct its
investment in a section 20 subsidiary on August 21, 1997.
Comment was divided on the issue of whether the FDIC should impose
revenue limits similar to those the FRB has established for section 20
affiliates. One comment noted that in order to provide for consistency
between regulators and limit exposure to risk, the FDIC should adopt a
limitation similar to that adopted by the FRB for section 20 affiliates
that a securities subsidiary may earn no more than 25 percent of its
income from activities that are ineligible for the bank. Other comments
countered that there is not a legal or safety and soundness reason to
apply such a revenue limit. We agree that there is no legal reason for
a revenue limit. Because of the restrictions on transactions, the
capital deduction, and separations required between a bank and a
subsidiary, the FDIC does not believe that the revenue limit is
necessary to control the risk to the affected deposit insurance fund.
One comment asserts that there are significant benefits of
securities underwriting and no material disadvantages. The revisions
that have been made are intended to strike a balance between enabling
banks to compete in the financial services arena and allowing
activities without consideration of risks involved. With appropriate
safeguards, any material disadvantages can be mitigated or eliminated.
Notice for change in circumstances. The regulation requires the
bank to provide written notice to the appropriate Regional Office of
the FDIC within 10 business days of a change in circumstances in its
real estate or securities subsidiary. Under the revised regulation, a
change in circumstances is described as a material change in a
subsidiary's business plan or management. The standard of material
change would indicate such events as a change in chief executive
officer of the subsidiary or a change in investment strategy or type of
business or activity engaged in by the subsidiary. The regional
director also may address other changes that come to the attention of
the FDIC during the normal supervisory process. The FDIC received two
comments concerning the change of circumstance notice. Both comments
indicated that the notice is burdensome and unnecessary. The comments
argue that a change in the chief executive office or investment
strategies are routine. The FDIC is putting significant reliance on the
management and the business plan presented when an activity is approved
for a majority-owned subsidiary. The FDIC does not consider either
change to be routine and believes that it is important that the FDIC be
aware of material changes in the operations of the subsidiary. One
[[Page 66303]]
comment requested that the notice period be extended from ten days to
30 days. The FDIC believes that both a change in management and a
change in the business plan of the subsidiary should be matters that
have received significant prior consideration before these events
occur. It is not unreasonable to request notice of these events within
ten days of the change. Therefore, after careful consideration of the
comments, we have not changed the proposed requirement for a notice of
change of circumstances to be submitted within 10 business days after
any such change.
In the case of a state member bank, the FDIC will communicate our
concerns to the appropriate persons in the Federal Reserve System
regarding the continued conduct of an activity after a change in
circumstances. The FDIC will work with the identified persons within
the Federal Reserve System to develop the appropriate response to the
new circumstances.
The FDIC does not intend to require a bank which falls out of
compliance with eligibility conditions to immediately cease any
activity in which the bank had been engaged. The FDIC will deal with
each situation on a case-by-case basis through the supervision and
examination process. In short, the FDIC intends to utilize its
supervisory and regulatory tools in dealing with a bank's failure to
meet the eligibility requirements on a continuing basis. The issue of
the bank's ongoing activities will be dealt with in the context of that
effort. The FDIC views the case-by-case approach to whether a bank will
be permitted to continue an activity as preferable to forcing a bank
to, in all instances, immediately cease the activity. Such an
inflexible approach could exacerbate an already poor situation.
Real estate leasing. As was discussed above, the FDIC has deleted
the current exception allowing a majority-owned subsidiary to engage in
activities included on the referenced list of activities determined by
the FRB to be closely related to the business of banking under section
4(c)(8) of the Bank Holding Company Act, because the activities
included on that list are generally of a type permissible for national
banks. The one exception that clearly is not generally permissible for
a national bank involves real estate leasing. The FDIC has inserted a
real estate leasing provision to allow continuation of activities that
are permitted under the current exception but may be lost with the
elimination of the reference to the 4(c)(8) list.
For the purposes of part 362, the FDIC studied real estate leasing
to make a determination if there is a significant risk to the fund. The
FDIC's determination requires that we look at the possibility of loss
inherent in the leasing transaction.
In a real estate leasing transaction, the lessor is the owner of
the parcel subject to the lease. The FDIC has defined equity investment
to include any interest in real estate. A threshold question for the
FDIC involves whether an ownership interest as lessor carries all of
the risks and rewards of ownership when there is no lease.
By inserting a reference to the 4(c)(8) list, the FDIC consented
that real estate leasing could be conducted under the standards set by
the FRB. These standards provided that leasing real property or acting
as agent, broker, or adviser in leasing such property is allowed if:
(1) The lease is on a nonoperating basis which means that the banking
holding company may not engage in operating, servicing, maintaining, or
repairing leased property during the lease term; (2) the initial term
of the lease is at least 90 days; (3) at the inception of the lease,
the effect of the transaction will yield a return that will compensate
the lessor for not less than the lessor's full investment in the
property plus the estimated cost of financing the property over the
term of the lease from rental payments, estimated tax benefits, and the
estimated residual value of the property and the expiration of the
initial lease; and (4) the estimated residual value of the property
shall not exceed 25 percent of the acquisition cost of the property to
the lessor. In defining the real estate leasing parameters, the FRB's
definition focuses on characteristics that make the activity closely
related to banking.
In making its risk to the fund determination, the FDIC looked not
only at banking standards for leasing transactions but also at GAAP.
Under GAAP, a lease is defined as the right to use an asset for a
stated period of time. Generally, a transaction is not a lease if the
right to use the property is not transferred; the transaction involves
the right to explore natural resources; or the transaction represents
licensing agreements. Also under GAAP, leases are considered under two
broad categories: (1) Capital leases which effectively transfer the
benefits and risks of ownership from the lessor to the lessee; and (2)
operating leases which is everything that is not a capital lease and
represents a series of cash flows. If any one of the following criteria
is met, a lease may be considered to be a capital lease:
Ownership of the property is transferred to the lessee at
the end of the lease term; or
The lease contains a bargain purchase option; or
The lease term represents at least 75 percent of the
estimated economic life of the leased property; or
The present value of the minimum lease payments at the
beginning of the lease term is 90 percent of more of the fair value of
the leased property to the lessor at the inception of the lease less
any related investment tax credit retained by and expected to be
realized by the lessor.
Two other criteria must be present in order for the lessor to
determine that a lease is a capital lease: (1) Collection of minimum
lease payments is reasonably predictable; and (2) no important
uncertainties exist for unreimbursable costs to be borne by the lessor.
The FDIC has decided that a majority-owned subsidiary acting as
lessor under a real property lease which meets certain criteria does
not represent a significant risk to the deposit insurance fund. To meet
these criteria, the lease must qualify as a capital lease under GAAP
and the bank and the majority-owned subsidiary may not provide
servicing, repair, or maintenance to the property except to the extent
needed to protect the value of the property. In addition, the majority-
owned subsidiary may not acquire real estate to be leased unless it has
entered into a capital lease, or has a binding commitment to enter into
such a lease, or has a binding written agreement that indemnifies the
subsidiary against loss in connection with its acquisition of the
property. Any expenditures by the majority-owned subsidiary to make
reasonable repairs, renovations, and necessary improvements shall not
exceed 25 percent of the subsidiary's full investment in the property.
These standards provide a framework in which the risks and rewards of
ownership of the leased property have effectively been transferred from
the lessor to the lessee.
A majority-owned subsidiary that acquires property for lease under
this provision may not use this exception as a vehicle to acquire an
equity investment in real estate. Upon expiration of the initial lease,
the majority-owned subsidiary must as soon as practicable, but in any
event in less than two years, re-lease the property under a capital
lease or divest itself of the property. An application will be required
if the subsidiary cannot meet the two-year deadline.
[[Page 66304]]
Acquiring and retaining adjustable rate and money market preferred
stock. The proposed regulation text has been revised in the final rule
to provide that a majority-owned subsidiary may acquire and retain
adjustable rate and money market preferred stock and any other
instrument that the FDIC has determined to have the character of debt
securities to the same extent that these activities may be conducted by
the bank itself. Since these subsidiaries are fully consolidated with
the bank, the 15 percent of tier one capital limitation will be
calculated against the consolidated tier one capital of the bank and
subsidiary. If a bank and its majority-owned subsidiary both engage in
this activity, the authority to conduct this activity in a majority-
owned subsidiary may not be used to exceed the 15 percent limitation on
this type of activity without further consent of the FDIC. This
exception is provided to allow consistency between the authorized
activities of the bank and its majority-owned subsidiary.
Core eligibility requirements. Consistent with the proposal, the
revised regulation has been organized much differently from the current
regulation where separation standards between an insured state bank and
its subsidiary are contained in the regulation's definition of ``bona
fide'' subsidiary. The revised regulation introduces the concept of
core eligibility requirements. These requirements are defined in two
parts. The first part defines the eligible depository institution
criteria and the second part defines the eligible subsidiary standards.
Eligible depository institution. An ``eligible depository
institution'' is a depository institution that has been chartered and
operating for at least three years; received an FDIC-assigned composite
UFIRS rating of 1 or 2 at its most recent examination; received a
rating of 1 or 2 under the ``management'' component of the UFIRS at its
most recent examination; received at least a satisfactory CRA rating
from its primary federal regulator at its last examination; received a
compliance rating of 1 or 2 from its primary federal regulator at its
last examination; and is not subject to any corrective or supervisory
order or agreement. The FDIC believes that these criteria are
appropriate to ensure that expedited processing under the notice
procedures is available only to well-managed institutions that do not
present any supervisory, compliance or CRA concerns.
The standards for an ``eligible depository institution'' are being
coordinated with similar requirements for other types of notices and
applications made to the FDIC. In developing the eligibility standards,
several items have been added that previously were not a stated
standard for banks wishing to engage in activities not permissible for
a national bank.
The requirement that the institution has been chartered and
operated for three or more years reflects the experience of the FDIC
that newly formed depository institutions need closer scrutiny.
Therefore, a request by this type of institution to become involved in
activities not permissible for a national bank should receive
consideration under the application process rather than being eligible
for a notice process. Several comments noted that the provision
requiring the bank to be operating for three or more years ignores the
presence of an established bank holding company or seasoned management.
The FDIC is persuaded by the arguments that an exception is appropriate
when there is an established holding company or seasoned management is
present. Therefore, the criterion has been changed to require that the
bank must have been chartered and operating for 3 or more years unless
the appropriate regional director (DOS) finds that the bank is owned by
an established, well-capitalized, well-managed holding company or is
managed by seasoned management.
The revised regulation provides that the notice procedures should
be available only to well-managed, well-capitalized banks. Banks which
have composite and management ratings of 1 or 2 have shown that they
have the requisite financial and managerial resources to run a
financial institution without presenting a significant risk to the
deposit insurance fund. While lower-rated financial institutions may
have the requisite financial and managerial resources and skills to
undertake such activities, the FDIC believes that those institutions
should be subject to the formal part 362 application process as opposed
to the streamlined notice process. Institutions that do not meet the
eligibility criteria have been evaluated and have been determined to
have some weaknesses that may require additional attention before
allowing them to engage in additional activities. For that reason, the
FDIC has concluded that it is more prudent to require institutions
rated 3 or below to utilize the application process.
Comments received did not object to the standard of a composite
rating of 1 or 2 or a management rating of 1 or 2; however, the
regulatory language that the ratings used be assigned by the
appropriate federal banking agency was questioned. Some comments
contended that this provision fails to consider that the FDIC and FRB
recognize and generally adopt the ratings assigned by the state banking
departments under an alternate examination program. The language does
not ignore ratings assigned by the state banking authorities. All
ratings, whether state or Federal, considered by the FDIC for purposes
of processing applications must be assigned by the FDIC after reviewing
the results of an examination conducted by another banking agency.
Although the language differs between this processing criteria and the
proposal to amend our applications processing regulation (part 303),
there is no intention of establishing a different standard. To reduce
confusion, the language in the revised regulation has been changed to
reflect that the ratings are the FDIC-assigned rating at the
institution's most recent state or Federal examination.
In setting criteria to define which banks are eligible to use the
notice process, the FDIC has determined it is appropriate to take into
account all areas of managerial and operational expertise. In
particular, the revised regulation requires that the institution have a
satisfactory or better CRA rating, a 1 or 2 compliance rating, and not
be subject to any formal or informal enforcement action before it may
use the notice procedures.
The proposal to use the CRA ratings as an eligibility criteria drew
negative comments. One commenter even expressed the opinion that the
FDIC's use of a CRA rating as an eligibility criterion for expedited
processing is a violation of the CRA itself. The FDIC is not proposing
some alternative method of CRA enforcement. The CRA criterion is not
intended to ``punish'' any bank which the FDIC has previously
criticized for substandard CRA performance; nor is it intended to
``reward'' a bank with satisfactory performance. The CRA criterion acts
solely as a procedural device for application processing, in connection
with the other criteria, to identify applications for further review if
they come from banks which have not been meeting all the primary
supervisory requirements. If a bank has not complied with all of these
primary supervisory expectations, it may be a symptom of financial,
management, or operational deficiencies which could be exacerbated by
undertaking the proposed additional activities. The consequence of
failing to meet all the eligibility criteria is only that the request
will be subject to exactly the same kind and level of review to which
[[Page 66305]]
it is subject under the current rules which have no expedited
processing procedures. Therefore, the FDIC retains the same eligibility
criteria in the final regulation as proposed.
Eligible Subsidiary. The eligible subsidiary requirements are also
used to determine which institutions qualify for notice processing.
Additionally, the requirements are also criteria the FDIC is likely to
take into account when reviewing and considering applications. The
FDIC's support of the concept of the expansion of bank powers is based
in part on establishing a corporate separateness between the insured
state bank and the entity conducting activities that are not
permissible for the depository institution directly. The revised
regulation establishes these separations as well as standards for
operations through the concept of ``eligible subsidiary''. An entity is
an ``eligible subsidiary'' if it: (1) Meets applicable statutory or
regulatory capital requirements and has sufficient operating capital in
light of the normal obligations that are reasonably foreseeable for a
business of its size and character; (2) is physically separate and
distinct in its operations from the operations of the bank, provided
that this requirement shall not be construed to prohibit the bank and
its subsidiary from sharing the same facility if the area where the
subsidiary conducts business with the public is clearly distinct from
the area where customers of the bank conduct business with the
institution--the extent of the separation will vary according to the
type and frequency of customer contact; (3) maintains separate
accounting and other business records; (4) observes separate business
formalities such as separate board of directors' meetings; (5) has a
chief executive officer who is not an employee of the bank; (6) has a
majority of its board of directors who are neither directors nor
officers of the bank; (7) conducts business pursuant to independent
policies and procedures designed to inform customers and prospective
customers of the subsidiary that the subsidiary is a separate
organization from the bank and that the bank is not responsible for and
does not guarantee the obligations of the subsidiary; (8) has only one
business purpose; (9) has a current written business plan that is
appropriate to the type and scope of business conducted by the
subsidiary; (10) has adequate management for the type of activity
contemplated, including appropriate licenses and memberships, and
complies with industry standards; and (11) establishes policies and
procedures to ensure adequate computer, audit and accounting systems,
internal risk management controls, and has the necessary operational
and managerial infrastructure to implement the business plan.
The separations currently necessary between the bank and subsidiary
are outlined in the definitions of ``bona fide'' subsidiary contained
in Sec. 337.4 and part 362. The broad principles of separation upon
which the ``bona fide'' subsidiary definition and the ``eligible
subsidiary'' definition are based include: (1) Adequate capitalization
of the subsidiary; (2) separate corporate functions; (3) separation of
facilities; (4) separation of personnel; and (5) advertising the bank
and the subsidiary as separate entities. In developing the standards
for an ``eligible subsidiary'', the FDIC has modified some of the
criteria used in the current regulation. The changes are found in the
capital requirement, the physical separation requirement, the separate
employee standard, and the requirement that the subsidiary's business
be conducted pursuant to independent policies and procedures.
The language in the current part 362 allows the subsidiary and the
parent bank to share officers so long as a majority of the subsidiary's
executive officers were neither officers nor directors of the bank.
Section 337.4 contains a requirement that there be no shared officers.
The ``eligible subsidiary'' concept adopts a standard that the chief
executive officer of the subsidiary should not be an employee of the
bank. The eligible subsidiary requirements in this regard are thus less
restrictive than those found in both Sec. 337.4 and the current version
of part 362, as well as those in many FDIC orders authorizing real
estate activities. The eligible subsidiary definition only requires
that the chief executive officer not be an employee of the bank.
Officers are employees of the bank. This limitation would allow the
chief executive officer to be an employee of an affiliated entity or be
on the board of directors of the bank. Two comments indicated that the
requirement for an independent chief executive officer is too
restrictive. One comment suggested that this requirement be dropped for
small banks. The FDIC is sympathetic to the concerns of small banks;
however, banks that desire relief from this standard may apply to the
FDIC for approval. The FDIC recognizes that there may be instances in
which this standard may not be needed. The FDIC will consider such
requests and waive the standard in appropriate situations.
The current rule's requirement that the subsidiary be adequately
capitalized was revised to provide that the subsidiary must meet any
applicable statutory or regulatory capital requirements, that the
subsidiary have sufficient operating capital in light of the normal
obligations that are reasonably foreseeable for a business of its size
and character, and that the subsidiary's capital meet any commonly
accepted industry standard for a business of its size and character.
This definition clarifies that the FDIC expects the subsidiary to meet
the capital requirements of its primary regulator, particularly those
subsidiaries involved in securities and insurance. No comments objected
to this change. This standard is unchanged in the final rule.
The physical separation requirement of the current rule was
clarified by the addition of a sentence which indicates that the extent
to which the bank and the subsidiary must carry on operations in
physically distinct areas will vary according to the type and frequency
of public contacts. The FDIC does not intend to require physical
separation where such a standard adds little value such as where a
subsidiary engaged in developing commercial real estate has little or
no customer contact. The possibility of customer confusion should be
the determining factor in deciding the physical separation requirements
for the subsidiary.
One commenter stated that this clarification is an improvement over
the existing regulation; however, the comment encourages the FDIC to
clarify that the subsidiary and the bank may conduct activities in the
same location if the subsidiary is engaging in activities that are
permissible for the bank to engage. The FDIC agrees that this point is
important. The requirements of this regulation apply to activities that
are not permissible for a national bank. Activities such as the sale of
securities are covered by the requirements of the Interagency
Statement. We have decided that no change in the regulation language is
necessary to further clarify that these standards do not apply to
subsidiaries engaging solely in activities permissible for a national
bank. We believe it is clear that the coverage of the core eligibility
requirements is for institutions to conduct as principal activities
through a subsidiary that are not permissible for a subsidiary of a
national bank.
We eliminated the provision contained in the current regulation
that required employees of the bank and subsidiary to be separately
compensated when they have contact with the public. This requirement
was imposed to
[[Page 66306]]
reduce confusion relating to whether customers were dealing with the
bank or the subsidiary. Since the adoption of the current regulation,
the Interagency Statement was issued. The Interagency Statement
recognizes the concept of employees who work both for a registered
broker-dealer and the bank. Because of the disclosures required under
the Interagency Statement informing the customer of the nature of the
product being sold and the physical separation requirements, the need
for separate public contact employees is diminished. No objections to
the proposed changes were offered, and the requirement for separate
public contact employees is dropped from the revised regulation.
Language was added that the subsidiary must conduct business in a
manner that informs customers that the bank is not responsible for and
does not guarantee the obligations of the subsidiary. This standard is
taken from section 23B of the Federal Reserve Act which prohibits banks
from entering into any agreement to guarantee the obligations of their
affiliates and prohibits banks as well as their affiliates from
advertising that the bank is responsible for the obligations of its
affiliates. In the proposal, we made this standard an affirmative duty
of disclosure. This type of disclosure is intended to reduce customer
confusion concerning who is responsible for the products purchased. Two
comments questioned the affirmative nature of the standard. The duty to
inform customers would in many cases be unnecessary. For instance, when
a transaction is covered by the Interagency Statement disclosures are
already required to inform customers that the product is not an
obligation of the bank. The commenters believe that the requirement
should be analogous to section 23B and only require that the subsidiary
not mislead its customers. The FDIC has not been persuaded by the
arguments. The affirmative requirement to make disclosures applies to
the subsidiary and the Interagency Statement disclosures apply to the
bank. One of the most important steps the subsidiary can take to assure
a separate corporate existence from the parent bank is to make
affirmative disclosures to its customers as prescribed. Therefore, the
disclosure requirement remains as proposed.
The regulation contains a standard that a majority of the board of
directors of the eligible subsidiary act as neither a director nor an
officer of the bank. Commenters suggested that this standard be
altered. One comment suggested that the standard be eliminated for
small banks. The issue of the need for management separation is not an
issue that clearly relates to the size of the bank. We recognize that
this requirement for some small banks may present a challenge. The FDIC
believes that management separations are an important safeguard. If an
institution desires a different structure than that proposed in these
standards, they may submit an application for FDIC consideration.
Another commenter suggested that the FDIC defer to the OCC standard
that permits \2/3\ of the subsidiary's board members to be directors of
the depository institution. The FDIC believes that the majority of the
board standard provides a structure in which decisions relating to the
subsidiary are being made by a majority of persons who are not
associated with the bank. This standard provides an easily identifiable
level of separation. If the standard creates a burden for a bank, the
FDIC will consider a request for relief. After considering the
comments, the FDIC has decided not to change this standard.
In a previous proposal a question was raised if this standard
prohibited directors of a subsidiary from serving as directors and
officers of the parent holding company or an affiliated entity. The
FDIC is primarily concerned about risk to the deposit insurance funds
and is therefore looking to establish separation between the insured
bank and its subsidiary. The eligible subsidiary requirement is
designed to assure that the subsidiary is in fact a separate and
distinct entity from the bank. This requirement should prevent
``piercing of the corporate veil'' and insulate the bank, and the
deposit insurance fund, from any liabilities of the subsidiary.
We recognize that a director or officer employed by the bank's
parent holding company or a sister affiliate is not as ``independent''
as a totally disinterested third party. The FDIC is, however,
attempting to strike a reasonable balance between prudential safeguards
and regulatory burden. The requirement that a majority of the board not
be directors or officers of the bank will provide certain benefits that
the FDIC thinks are very important in the context of subsidiary
operations. The FDIC expects these persons to act as a safeguard
against conflicts of interest and to be independent voices on the board
of directors. While the presence of ``independent'' directors may not,
in and of itself, prevent piercing of the corporate veil, it will add
incremental protection and in some circumstances may be key to
preserving the separation of the bank and its subsidiary in terms of
liability. In view of the other standards of separateness that have
been established under the eligible subsidiary standard as well as the
imposition of investment and transaction limits, we do not believe that
a connection between the bank's parent or affiliate will pose undue
risk to the insured bank.
In addition to the separation standards, the ``eligible
subsidiary'' concept introduces operational standards that are not part
of the current regulation. These standards provide guidance concerning
the organization of the subsidiary that the FDIC believes important to
the independent operation of the subsidiary.
The revised regulation requires that a bank that wishes to file a
notice to establish a subsidiary to engage in insurance, real estate or
securities have only one business purpose among those categories.
Several comments objected to this standard. One comment stated that the
subsidiary should be allowed to engage in similar business lines rather
than being held to a strict sole purpose standard. Other comments
encouraged a broad definition of the term ``one business purpose''.
Other comments recommended eliminating the requirement stating the FDIC
should rely on the business plan for information needed to address any
concerns. Because the FDIC is limiting a bank's transactions with
subsidiaries engaged in real estate, or securities activities
authorized under subpart A, and the aggregate limits only extend to
subsidiaries engaged in the activities subject to the investment
limits, the FDIC believes it is important to limit the scope of the
subsidiary's activities when using the expedited procedures. The FDIC
will use the business plan as a tool to review the lines of business
engaged in by the subsidiary. The FDIC will be flexible in its
interpretation of the term ``one business purpose.'' For instance, the
FDIC would consider a subsidiary engaged in underwriting a financial
product and also selling that product to have one business purpose.
The regulation contains a standard that the subsidiary have a
current written business plan that is appropriate to its type and scope
of business. The FDIC believes that an institution that is
contemplating involvement with activities that are not permissible for
a national bank or a subsidiary of a national bank should have a
carefully conceived plan for how it will operate the business. We
recognize that certain activities do not require elaborate business
plans; however, every activity should be considered by the board of the
bank to determine the scope of the
[[Page 66307]]
activity allowed and how profitability is to be attained. We received
no comments on this requirement. This standard is adopted without
change.
The requirement for adequate management of the subsidiary
establishes the FDIC's view that insured depository institutions should
consider the importance of management in the success of an operation.
The requirement to obtain appropriate licenses and memberships and to
comply with industry standards indicates the FDIC's support of
securities and insurance industry standards in determining adequacy of
subsidiary management. We received no comments, and this standard is
adopted without change.
An important factor in controlling the spread of liabilities from
the subsidiary to the insured depository institution is that the
subsidiary establishes necessary internal controls, accounting systems,
and audit standards. The FDIC does not expect to supplement this
requirement with specific guidance since the systems must be tailored
to specific activities, some of which are otherwise regulated. We
received no comments on this standard, and it is unchanged.
Investment and transaction limits. The revised regulation contains
investment limits and other requirements that apply to an insured state
bank and its subsidiaries that engage in ``as principal'' activities
that are not permissible for a national bank if the requirements are
imposed by order or expressly imposed by regulation. The provision is
not contained in the current regulation; however, Sec. 337.4 imposes by
reference the limitations of section 23A of the Federal Reserve Act
(Sec. 337.4 was adopted prior to the adoption of section 23B of the
Federal Reserve Act). Both section 23A and section 23B restrictions
have been imposed by the FDIC through its orders authorizing insured
state banks to engage in activities not permissible for a national
bank.
Some of the provisions of sections 23A and 23B are inconsistent
when applied in the context of a bank/subsidiary relationship. The FDIC
believes that merely incorporating sections 23A and 23B by reference
raises significant interpretative issues and only promotes confusion in
an already complex area.
For these reasons, the FDIC has adopted a separate subsection which
sets forth the specific investment limits and arm's length transaction
requirements. In general, the provisions impose an aggregate investment
on all subsidiaries that engage in activities covered by the investment
limits, require that extensions of credit from a bank to its
subsidiaries be fully-collateralized when made, prohibit the bank from
taking a low quality asset as collateral on such loans, and require
that transactions between the bank and its subsidiaries be on an arm's
length basis. The comments received state that the investment and
transaction limits which have been proposed are preferable to
incorporating sections 23A and 23B by reference. Two comments suggested
that this section be eliminated if the FRB adopts its proposal to
expand sections 23A and 23B coverage to subsidiaries engaged in
activities not permissible for a national bank. The FDIC will not
respond to this scenario until the FRB has issued a final regulation.
Another comment expressed the opinion that in view of the explicit
statutory exception in sections 23A and 23B for transactions between an
insured bank and its subsidiaries, the restrictions in these provisions
should not be applied in any form by the FDIC. The FDIC agrees that
section 23A and 23B should not be applied to a bank/subsidiary
relationship that is fully consolidated for capital reporting purposes.
For subsidiaries that are engaged in activities for which the FDIC
imposes a requirement that capital of the subsidiary be deducted from
the bank's capital in determining the bank's capital adequacy, we
believe that restrictions on transactions between the bank and the
subsidiary are also necessary. Another comment indicated that the
investment and transaction limits proposed are unnecessarily complex
and would make many activities uneconomic. Specifically, the cost of
collateral requirements would diminish if not eliminate the potential
profit from the permitted activity. The FDIC is concerned that an
insured bank not be allowed to easily and cheaply transfer risks from
the uninsured entity to the insured depository institution. Collateral
requirements are a method of assuring that any money lent by the bank
to its subsidiary will ultimately be repaid. This comment also suggests
that Regulation K of the FRB would provide a more appropriate analogue
than sections 23A and 23B. In this regulation, appropriate safeguards
are provided by focusing on the capital strength of the bank and the
extent of its investment in the entity. We believe that capital
strength of the bank and the extent of its investment in a subsidiary
are important considerations. The revised regulation addresses each of
those areas. In addition, restrictions on the flow of funds from an
insured bank to a subsidiary engaged in activities not permissible for
the bank itself are necessary. We have chosen to keep the investment
and transaction limitations in the final regulation.
The revised regulation expands the definition of bank for the
purposes of the investment and transaction limitations. A bank includes
not only the insured entity but also any subsidiary that is engaged in
activities that are not subject to these investment and transaction
limits. Sections 23A and 23B of the Federal Reserve Act combine the
bank and all of its subsidiaries in imposing investment limitations on
all affiliates. The FDIC is using the same concept in separating
subsidiaries conducting activities that are subject to investment and
transaction limits from the bank and any other subsidiary that engages
in activities not subject to the investment and transaction limits.
This rule will prohibit a bank from funding a subsidiary that is
subject to the investment and transaction limits through a subsidiary
that is not subject to the limits. One comment expressed support for
this concept but emphasized that there is no need to include ``eligible
subsidiaries'' in the restrictions since these entities have already
been separated from the insured depository institution. The FDIC did
not intend to extend these restrictions to transactions between
``eligible subsidiaries''. Therefore, this language has not been
changed.
Investment limit. Under the proposed rule, the FDIC limited bank
investments in certain subsidiaries. Those limits are basically the
same as would apply between a bank and its affiliates under section
23A. As is the case with covered transactions under section 23A,
extensions of credit and other transactions that benefit the bank's
subsidiary would be considered part of the bank's investment. The only
exception would be for arm's length extensions of credit made by the
bank to finance sales of assets by the subsidiary to third parties.
These transactions would not need to comply with the collateral
requirements and investment limitations of section 23A, provided that
they met certain arm's length standards.
In contrast to the bank-affiliate relationship being governed by
the statutory limits of sections 23A and 23B, inherent in the idea of a
subsidiary is the subsidiary's value to the bank as an asset. That
value increases as the subsidiary earns profits and decreases as the
subsidiary loses money. The increases are reflected in the subsidiary's
retained earnings and the consolidated retained earnings of the bank as
a whole. The FDIC wants to
[[Page 66308]]
separate the bank's equity investment in the subsidiary from any
lending to or covered transactions with the subsidiary. Thus, the FDIC
proposed to treat the bank's equity investment as a deduction from
capital, while limiting any lending to or covered transactions with the
subsidiary in a similar fashion as these transactions are limited in
the bank-affiliate relationship. Then, the question arises as to how to
properly treat retained earnings at the subsidiary level. If retained
earnings at the subsidiary level were treated as subject to the
investment limits, the bank could be forced to take the retained
earnings out of the subsidiary to stay under the applicable limits. If
retained earnings are allowed to accumulate without limit, then the
bank could declare dividends to its shareholders based on the retained
earnings at the subsidiary. Later, in the event that the subsidiary
incurred losses, the bank's capital could become inadequate based on
the subsidiary's losses. Thus, the FDIC decided that retained earnings
should be deducted from capital in the same way as the equity
investment is deducted.
Comments were supportive of the proposed concept of investment
limits for loans to and debt of the subsidiary in contrast to the
capital deduction for equity investments in and retained earnings of
the subsidiary. One commenter expressed reservations about the
structure of the investment limits. The proposal to limit transactions
between a bank and its eligible subsidiary to 10 percent of capital to
any one subsidiary and 20 percent of capital to all eligible
subsidiaries conducting the same activity was questioned. By including
the 10 percent limitation to any one subsidiary, the FDIC would only
create burden to institutions without the benefit of appreciably
limiting or diversifying risk. The commenter points out that since the
eligible subsidiaries are not subject to transaction limitations
between each other, it would be easy to structure the use of the entire
20 percent investment provision between the two subsidiaries but really
for the benefit of the same project or business. The comment accepts
that the 20 percent aggregate limit is appropriate, and recommends that
the regulation be amended to apply only the 20 percent limitation. The
FDIC is persuaded by this argument, and the final rule has dropped the
10 percent to any one subsidiary limitation.
The definition of ``investment'' under this provision has four
components. The first component is any extension of credit by the bank
to the subsidiary. The term ``extension of credit'' is defined in part
362 to have the same meaning as that under section 22(h) of the Federal
Reserve Act (12 U.S.C. 375b) and would therefore apply not only to
loans but also to commitments of credit. The second component is ``any
debt securities of the subsidiary'' held by the bank. This component
recognizes that debt securities are very similar to extensions of
credit. The third component is the acceptance of securities issued by
the subsidiary as collateral for extensions of credit to any person or
company. The fourth and final component addresses any extensions or
commitments of credit to a third party for investment in the
subsidiary, investment in a project in which the subsidiary has an
interest, or extensions of credit or commitments of credit which are
used for the benefit of, or transferred to, the subsidiary. Commenters
did not object to these components of ``investment,'' and the
definition is unchanged.
The revised regulation calculates the 20 percent limit based on
tier one capital. Also, the revisions limit the aggregate investment to
all subsidiaries conducting activities subject to the investment
limits. Comments note that the 20 percent limit is calculated against
tier one capital instead of capital and surplus as is the standard for
section 23A. One comment goes on to state that even though the FDIC has
proposed a more restrictive standard, the 20 percent limit applies to
an aggregate of the same activity rather than the section 23A standard
covering all affiliates. In that respect, the 20 percent limit in the
proposal is less restrictive. Although the FDIC does not intend to
mimic section 23A in all respects, the FDIC has determined that an
aggregate limit on activities that are covered by the investment limits
is appropriate. The standard established is intended to reflect an
appropriate limitation for subsidiary activities. The FDIC continues to
use the more restrictive tier one capital as its measure to create
consistency throughout the regulation. The FDIC does not find the
burden of this more restrictive capital base to be unreasonable.
Arm's length transaction requirement. For subsidiaries engaged in
activities covered by the investment and transactions limitations, the
revisions require that any transaction between a bank and its
subsidiary must be on terms and conditions that are substantially the
same as those prevailing at the time for comparable transactions with
unaffiliated parties. This ``arm's length transaction'' requirement is
intended to make sure that the business of the subsidiary does not take
place to the disadvantage of the bank. The types of transactions
covered by the requirement include: (1) Investments in the subsidiary;
(2) the purchase from or sale to the subsidiary of any assets,
including securities; (3) entering into any contract, lease or other
agreement with the subsidiary; and (4) paying compensation to the
subsidiary or any person who has an interest in the subsidiary. The
revised regulation indicates, however, that the restrictions do not
apply to an insured state bank giving immediate credit to a subsidiary
for uncollected items received in the ordinary course of business.
The arm's length transaction requirement is meant to protect the
bank from abusive practices. To the extent that the subsidiary offers
the parent bank a transaction which is at or better than market terms
and conditions, the bank may accept such transaction since the bank is
receiving a benefit, as opposed to being harmed. It may be the case,
however, that a bank will be unable to meet the regulatory standard
because there are no known comparable transactions between unaffiliated
parties. In these situations, the FDIC will review the transactions and
expect the bank to meet a ``good faith'' standard.
This section and the language therein is not a substantive change
from the proposal. Comments had mixed messages about this section of
the regulation. Commenters agreed that this proposal is preferable to
the incorporation by reference to section 23B. One comment stated that
if the FRB's proposal to impose section 23B on subsidiaries is
finalized, the FDIC should withdraw its regulatory language to avoid
confusion. The FDIC is aware of the FRB proposal and will react once
the final position of the FRB is known. Another comment stated that in
view of the explicit statutory exception in section 23B between an
insured depository institution and its subsidiaries, these restrictions
in any form should not be applied by the FDIC. When engaging in
transactions with a subsidiary, banks and bank counsel should be aware
of the FDIC's separate corporate existence concerns. Bank subsidiaries
should be organized and operated as separate corporate entities.
Subsidiaries should be adequately capitalized for the business they are
engaged in and separate corporate formalities should be observed.
Frequent transactions between the bank and its subsidiary which are not
on an arm's length basis may lead to questions as to whether the
subsidiary is actually a separate corporate entity or merely the alter
ego of the bank. One of the primary
[[Page 66309]]
reasons for the FDIC requiring that certain activities be conducted
through an eligible subsidiary is to provide the bank, and the deposit
insurance funds, with liability protection. To the extent a bank
ignores the separate corporate existence of the subsidiary, this
liability protection is jeopardized. We believe setting forth the exact
requirements will reduce regulatory burden and confusion as banks and
bank counsel will more readily know what requirements are to be
followed.
Banks will be prohibited from buying low quality assets from their
subsidiaries. We received no comments objecting to this standard. The
FDIC has taken the definition of ``low quality asset'' from the
proposal without modification.
The revised regulation contains provisions addressing insider
transactions and product tying. The arm's length standard addresses
transactions between an insured depository institution and its
subsidiaries. The FDIC is adding a provision that an arm's length
standard applies to transactions between the subsidiary and insiders of
the insured depository institution. The revised regulation requires
that any transactions with insiders must meet the requirements that
transactions be on substantially the same terms and conditions as
generally available to unaffiliated parties. Banks engaging in such
transactions should retain proper documentation showing that the
transactions meet the arm's length requirement. The FDIC will review
transactions with insiders in the normal course of the examination
process and take such actions as may be necessary and appropriate if
problems arise. Questionable transactions will have to be justified
under the standards of the regulation.
Comments were not supportive of this standard. One comment stated
that the new restriction is unnecessary since such insiders would
already be subject to the restrictions set forth in Regulation O. The
FDIC has recognized this overlap by excluding transactions covered by
Sec. 337.3, which implements many of the restrictions contained in
Regulation O for insured state nonmember banks. The comment also
contends that if the subsidiary is isolated from the bank as would be
required by the revised regulation, there should be no need to regulate
transactions between bank insiders and the eligible subsidiary. The
FDIC is implementing these provisions in an abundance of caution. The
standard is that insider transactions should be on the same terms and
conditions as those prevailing at the time for comparable transactions
with persons not affiliated with the insured state bank. The standard
does not prohibit transactions; it merely sets parameters that does not
allow insiders to engage in transactions that are on terms more
favorable than those available in the market. Another comment states
that, for example, this standard potentially would prohibit an
executive officer from participating in an employee benefit program
that waives trustee fees for IRA accounts if the assets of such
accounts are invested in mutual funds distributed by a securities firm
affiliate of the bank. The FDIC is persuaded by this argument and has
added an exception that the standard shall not prohibit any transaction
made pursuant to a benefit or compensation program that is widely
available to employees of the insured state bank and that does not give
preference to any insider of the insured state bank over other
employees of the insured state bank.
The proposed regulation also contained a requirement that neither
the insured state bank nor the majority-owned subsidiary may require a
customer to either buy a product or use a service from the other as a
condition of entering into a transaction. While the condition may
duplicate existing standards under applicable law for banks to some
extent, it is not clear that all circumstances addressed by the
proposed condition are covered by the existing statutory and regulatory
restrictions. Banks are subject to statutory anti-tying restrictions at
12 U.S.C. Sec. 1972. The OCC extends anti-tying provisions to national
bank subsidiaries. See OCC Bulletin 95-20. The extension of anti-tying
restrictions to savings and loan holding companies and their affiliates
in transactions involving a savings association is statutory.
Consequently, the OTS is not authorized to exempt savings and loan
holding companies and their affiliates entirely from all tying
restrictions. 62 FR 15819.
The FDIC specifically requested public comment on whether the
proposed anti-tying restriction was appropriate. The FDIC received five
comments opposed to the proposed anti-tying requirement. One commenter
objected to the requirement on general grounds. The other four asserted
that statutory tying limits imposed by Congress in 1970 (12 U.S.C.
1972) are sufficient, and that the FDIC should not impose additional
restrictions on tying by bank subsidiaries. Of these, two commenters
were of the view that statutory tying limits are based on outdated
views of banks' market power and constitute a competitive disadvantage
for banks which should not be compounded by the addition of the FDIC's
proposed tying restriction for real estate investment and securities
underwriting subsidiaries. These commenters also made note of recent
FRB action (as discussed in the FDIC's preamble to the proposed rule)
eliminating the FRB's extension of tying restrictions to bank holding
companies and their nonbank affiliates. The FRB based its action on its
experience that bank holding companies and their nonbank affiliates do
not possess the market power over credit or other unique competitive
advantages that Congress assumed that banks enjoyed in 1970, when
Congress adopted 12 U.S.C. 1972, and nonstatutory blanket anti-tying
restrictions are therefore not justified. 62 FR 9312. The commenters
suggest the FDIC take a similar approach.
The FDIC is concerned that opportunities may exist for abusive
tying arrangements. It is this concern which has caused the FDIC to
include particular tying restrictions of varying types in its approval
orders governing real estate investment activities, and in its rules
under Sec. 337.4 on securities underwriting. In the real estate orders,
the FDIC has typically prohibited the bank from conditioning an
extension of credit on the borrower's agreement to also acquire real
estate from the real estate development subsidiary. Under Sec. 337.4, a
bank could not directly or indirectly condition an extension of credit
on the borrower's agreement to contract with the securities subsidiary
to underwrite or distribute the borrower's securities, or to purchase
any security currently underwritten by the subsidiary. The inclusion of
these conditions highlighted the FDIC's concerns with these particular
practices. Because of the FDIC's concern about the potential for
abusive tying practices, and because the tying restrictions as proposed
are only used to further delineate the circumstances in which a notice,
rather than an application, is required, the FDIC has decided to adopt
the tying restriction as proposed. Any bank wishing to conduct business
on a basis different than the general rule set out in the tying
restriction may submit an application. Then, the FDIC can evaluate the
arrangement in light of its particular facts, including the
permissibility of the arrangement under other applicable tying laws,
its safety and soundness, and what risk it poses to the fund.
Collateralization requirements. The revised regulation provides
that an insured state bank is prohibited from
[[Page 66310]]
making an extension of credit to a subsidiary covered by the investment
and transaction limits unless such transaction is fully-collateralized
at the time the bank makes the loan or extension of credit. This
requirement is intended to protect the bank in the event of a loan
default. ``Fully collateralized'' under the regulation means extensions
of credit secured by collateral with a market value at the time the
extension of credit is entered into of at least 100 percent of the
extension of credit amount for government securities or a segregated
deposit in a bank; 110 percent of the extension of credit amount for
municipal securities; 120 percent of the extension of credit amount for
other debt securities; and 130 percent of the extension of credit
amount for other securities, leases or other real or personal property.
One comment objected to the fact that the FDIC proposed to use this
schedule as minimum guidance. The comment questions if the FDIC intends
to require collateral standards that are more rigid than those in
effect under section 23A. As stated, the FDIC intends to look to the
collateralization schedule as minimum guidance, but wants to retain
flexibility in making the determination if additional collateral is
necessary. Maintaining flexibility does not mean that the FDIC intends
to impose harsh new standards; however, we intend on a case-by-case
basis to reserve the ability to require greater collateral in
situations where the risk potential is higher.
Two comments were received on this issue. Both commenters believe
the collateral requirements are unnecessary. The comments argue that if
collateralization were a normal term of the transaction, it would be
required by the arms length transaction requirements. One commenter
noted that the cost of the collateral requirements would diminish if
not eliminate the potential profit from the permitted activity. The
FDIC understands the concerns about the collateral requirement;
however, this provision provides a higher level of protection to the
insured state bank. If there are instances in which the collateral
requirements are uneconomical, the insured state bank may use the
application procedures of this regulation to request relief. Therefore,
the FDIC has decided to make no change to the collateral requirements
of this section.
Capital requirements. Under the revised rule, a bank using the
notice process to invest in a subsidiary engaging in certain activities
authorized by subpart A would be required to deduct its equity
investment in the subsidiary as well as its pro rata share of retained
earnings of the subsidiary when reporting its capital position on the
bank's consolidated report of income and condition, in assessment risk
classification and for prompt corrective action purposes (except for
the purposes of determining if an institution is critically
undercapitalized). Such a capital deduction may be required as a
condition of an order issued by the FDIC, is required to use the notice
procedure to request consent for real estate investment activities and
securities underwriting and distribution, and is required to engage in
grandfathered insurance underwriting. The purpose of the restriction is
to ensure that the bank has sufficient capital devoted to its banking
operations and that it would not be adversely impacted even if its
entire investment in the subsidiary is lost.
This treatment of the bank's investment in subsidiaries engaged in
activities not permissible for a national bank creates a regulatory
capital standard. Section 37 of the FDI Act (12 U.S.C. 1831n) generally
requires that accounting principles applicable to depository
institutions for regulatory reporting purposes must be consistent with,
or not less stringent than, GAAP. The FDIC believes that this
requirement does not extend to the Federal banking agencies'
definitions of regulatory capital. It is well established that the
calculation of regulatory capital for supervisory purposes may differ
from the measurement of equity capital for financial reporting
purposes, and section 37 by its terms contemplates the necessity of
such differences. For example, statutory restrictions against the
recognition of goodwill for regulatory capital purposes may lead to
differences between the reported amount of equity capital and the
regulatory capital calculation for tier one capital. Other types of
intangible assets are also subject to limitations under the agencies'
regulatory capital rules. In addition, subordinated debt and the
allowance for loan and lease losses are examples of items where the
regulatory reporting and the regulatory capital treatments differ.
The capital deduction as contained in the revised regulation is not
a new concept for the federal banking regulators. The FDIC has required
a capital deduction for investments by state nonmember banks in
securities underwriting subsidiaries for years. See 12 CFR 325.5(c). In
addition, the OCC recently endorsed the idea of deducting from capital
a national bank's investments in certain types of operating
subsidiaries. See 12 CFR 5.34(f)(3)(i), 61 FR 60342, 60377 (Nov. 27,
1996).
The calculation of the amount deducted from capital in this
proposal includes the bank's equity investment in the subsidiary as
well as the bank's share of retained earnings. The calculation does not
require the deduction of any loans from the bank to the subsidiary or
the bank's investment in the debt securities of the subsidiary.
Several comments questioned the capital deduction requirement. One
commenter suggested that the FDIC should consider the impact of this
provision on state laws, standards and policies. For example, state
loan-to-one borrower restrictions that are determined by the bank's
capital level may be affected. The FDIC is setting a capital standard
for regulatory purposes. The effect of this standard on limitations
based on capital under state law depend on the construction of state
laws and regulations.
One comment was supportive of the capital deduction concept but
also encouraged the FDIC to reconsider activities at a future date to
determine whether it is appropriate to eliminate this requirement. The
FDIC agrees with this suggestion and will consider such requests as
experience is gained. Affected institutions also have the option of
applying to the FDIC and setting forth their arguments why the capital
deduction is unnecessary in their cases.
One other comment suggests that if the FDIC imposes the capital
deduction, then it is essential that the deduction be limited to the
bank's investment in the subsidiaries and not include retained
earnings. The commenter contends that this requirement would result in
the bank's capital being adversely affected by the subsidiary's
success. The FDIC does not agree with this conclusion. The capital
deduction required by this standard is a requirement for calculating
regulatory capital. Under GAAP, a majority-owned subsidiary is fully
consolidated with the bank and included in the amount reported on
Statements of Condition and Income in the Consolidated Reports of
Condition and Income. The subsidiary's retained earnings are
incorporated into the bank's capital through this consolidation
process. The treatment required by Sec. 362.4(e) simply isolates the
capital used to support the insured state bank from that supporting the
subsidiary for regulatory capital purposes. The referenced requirement
accomplishes that goal by subtracting both the bank's stock investment
in the
[[Page 66311]]
subsidiary and the bank's share of the subsidiary's retained earnings
from the parent bank's capital. This requirement is not punitive as the
only amounts subtracted are those equity investments already included
on the balance sheet (and thereby balance sheet capital) through
consolidation.
Other underwriting activities. The regulatory text does not
directly address the underwriting of annuities. The FDIC has opined
that annuities are not an insurance product and are not subject to
section 24(b) and 24(d)(2), prohibiting the FDIC from authorizing
insurance underwriting. The FDIC has approved two requests from insured
state banks to engage in annuity underwriting activities through a
majority-owned subsidiary. The revised regulation does not provide a
notice procedure to engage in such activities. No comment was received
on this activity. The FDIC has decided to continue handling such
requests on a case-by-case basis through the applications procedures
established under this regulation.
Section 362.5 Approvals Previously Granted
There are a number of areas in which the final rule differs in
approach from the current part 362. Because of these differing
approaches, the revised regulation contains a section dealing with
approvals previously granted.
Insured state banks that have previously received consent by order
or notice from this agency should not need to reapply to continue the
activity, including real estate investment activities, provided the
bank and subsidiary, as applicable, continue to comply with the
conditions of the order of approval. It is not the intent of the FDIC
to require insured state banks to request consent to engage in an
activity which has already been approved previously by this agency.
Section 362.5(a) of the final rule makes this clear.
One comment stated that banks that have previously received
approval from the FDIC should have the option of complying with the
original order or the new regulation. The FDIC agrees with this
approach. Because previously granted approvals may contain conditions
that are different from the standards that are established in this
proposal, in certain circumstances, the bank may elect to operate under
the restrictions of this proposal. Specifically, the bank may comply
with the investment and transaction limitations between the bank and
its subsidiaries contained in Sec. 362.4(d), the capital requirement
limitations detailed in Sec. 362.4(e), and the subsidiary restrictions
as outlined in the term ``eligible subsidiary'' and contained in
Sec. 362.4(c)(2) in lieu of similar requirements contained in its
approval order. Any conditions that are specific to a bank's situation
and do not fall within the above limitations will continue to be
effective. Language has been added to the final rule to clarify that
once a bank elects to follow the regulatory restrictions instead of
those in the approval order, the bank may not elect to revert to the
applicable conditions of the order.
An insured state bank that has received a previous approval and
qualifies for the exception in Sec. 362.4(b)(5)(i) relating to real
estate investment activities that do not exceed 2 percent of the bank's
tier one capital may take advantage of the exceptions contained in that
section without further application or notice to the FDIC. Additional
regulatory language clarifying this point has been added to the final
rule in Sec. 362.5(a).
The FDIC has also approved certain activities through its current
regulations. Specifically, the FDIC has incorporated and modified the
restrictions of Sec. 337.4 in this revision. The revised rule will
allow an insured state nonmember bank engaging in a securities activity
covered by Sec. 362.4(b)(5)(ii), which has engaged in such activity
prior to this rule's effective date in accordance with Sec. 337.4, to
continue those activities if the bank and its subsidiary meet the
restrictions of Sec. 362.4(b)(5)(ii), (c), (d), and (e). For securities
activity covered by Sec. 362.4(b)(5)(ii), the FDIC intends that these
requirements replace the restrictions contained in Sec. 337.4.
The FDIC recognizes that the requirements of the final rule differ
from the requirements of Sec. 337.4. Because the transition from the
current Sec. 337.4 requirements to the new regulatory requirements may
have unforeseen implementation problems, the bank and its subsidiary
will have one year from the effective date to comply with new
restrictions and conditions without further application or notice to
the FDIC. If the bank and its subsidiary are unable to comply within
the one-year time period, the bank must apply in accordance with
Sec. 362.4(b)(1) and subpart G of part 303 to continue with the
securities underwriting activity. Commenters did not object to this
transition language and it is being implemented as proposed.
The restrictions for engaging in grandfathered insurance
underwriting through a subsidiary have also been changed from the
current regulation. The current regulation prescribes disclosures,
requires that the subsidiary be a bona fide subsidiary, and requires
that the bank be adequately capitalized after deducting the bank's
investment in the grandfathered insurance subsidiary. The revisions
rely on disclosures to bank customers when required by the Interagency
Statement, require that the subsidiary meet the requirements of an
eligible subsidiary, and require that the bank be well-capitalized
after deducting its investment in the grandfathered insurance
subsidiary. The FDIC recognizes that these standards are not the same
as previous requirements, and the capital standard in particular is
more stringent. For grandfathered insurance conducted at the bank
level, the final rule also makes certain changes from the current rule,
including the requirement that the bank disclose the separate nature of
the department to insurance customers. Section 362.5(b)(2) of the final
rule provides that an insured state bank which is engaged in providing
insurance as principal may continue that activity if it complies with
the final rule within 90 days of the effective date of the regulation.
If the bank is unable to comply with these provisions setting forth the
FDIC's guidance for conducting grandfathered insurance activities in a
safe and sound manner, the bank should submit a notice to the FDIC
concerning the deficiencies.
Insured state banks that have subsidiaries that have been operating
under the exceptions relating to owning stock of a company engaged in
activities permissible for a bank service corporation or activities
that are not ``as principal'' in the current regulation are now subject
to new requirements including the requirement that the subsidiary have
at least a control interest in the company conducting the activity. The
scope of authorized activities has also been changed slightly. Any bank
affected by these changes will have 90 days to meet the requirements of
the final rule. If the bank or its subsidiary does not meet these
requirements, the bank must apply for the FDIC's consent. The FDIC does
not intend to use this request for consent as a punitive measure;
however, the FDIC would like to review a bank's investment in these
equity securities of companies that are engaged in these activities.
Comments did not indicate any circumstance in which this request for
consent may be necessary.
The FDIC also is requiring that an insured state bank that converts
from a savings association charter and engages in activities through a
subsidiary, even if such activity was permissible for a subsidiary of a
federal savings
[[Page 66312]]
association, shall make application or provide notice, whichever
applies, to the FDIC to continue the activity unless the activity and
manner and amount in which the activity is operated is one that the
FDIC has determined by regulation does not pose a significant risk to
the deposit insurance fund. Since the statutory and regulatory systems
developed for savings associations are different from the bank systems,
the FDIC believes that any institution that converts its charter should
be subject to the same regulatory requirements as other institutions
with the same type of charter.
If, prior to conversion, the savings association had received
approval from the FDIC to continue through a subsidiary the activity of
a type or in an amount that was not permissible for a federal savings
association, the converted insured state bank need not reapply for
consent provided the bank and subsidiary continue to comply with the
terms of the approval order, meet all the conditions and restrictions
for being an eligible subsidiary contained in Sec. 362.4(c)(2), comply
with the investment and transactions limits of Sec. 362.4(d), and meet
the capital requirement of Sec. 362.4(e). If the converted bank or its
subsidiary, as applicable, does not comply with all these requirements,
the bank must obtain the FDIC's consent to continue the activity. The
FDIC has imposed these conditions to fill a regulatory gap. Savings
associations and their service corporations are subject to regulatory
standards of separation, the savings association is limited in the
amount it may invest in the service corporation, and the savings
association must deduct its investment in the service corporation from
its capital if the service corporation engages in activities that are
not permissible for a national bank. The eligible subsidiary standard,
the investment and transaction limits, and the capital requirements
replace these standards once the savings association has converted its
charter to a bank.
If the bank does not receive the FDIC's consent for its subsidiary
to continue an activity, the bank must divest its nonconforming
investment in the subsidiary within two years of the date of conversion
either by divesting itself of its subsidiary or by the subsidiary
divesting itself of the impermissible activity. The FDIC did not
receive comment concerning these transition issues for charter
conversions. The final rule adopts the language as proposed.
B. Subpart B--Safety and Soundness Rules Governing State Nonmember
Banks
Section 362.6 Purpose and Scope
This subpart, along with the notice and application provisions of
subpart G of part 303, applies to certain banking practices that may
have adverse effects on the safety and soundness of insured state
nonmember banks. The FDIC intends to allow insured state nonmember
banks and their subsidiaries to undertake only safe and sound
activities and investments that would not present a significant risk to
the deposit insurance fund and that are consistent with the purposes of
federal deposit insurance and other law. The safety and soundness
standards of this subpart apply to activities undertaken by insured
state nonmember banks through a subsidiary if those activities are
permissible for a national bank subsidiary but that are not permissible
for the national bank itself. This subpart addresses only real estate
investment activities undertaken through a subsidiary; however, the
FDIC is issuing concurrently a notice of proposed rulemaking published
elsewhere in today's Federal Register which addresses securities
underwriting and distribution activities conducted by a subsidiary of
an insured state nonmember bank if those activities are permissible for
a national bank only through a subsidiary. The FDIC has a long history
of considering the risks from activities such as real estate investment
and securities underwriting and distribution to be unsafe and unsound
for a bank to undertake without appropriate safeguards to address that
risk. The FDIC also proposes a notice requirement for other activities
permissible for a national bank only through a subsidiary.
Additionally, this subpart sets forth the standards that apply when
affiliated organizations of insured state nonmember banks that are not
affiliated with a bank holding company conduct securities activities.
The collective business enterprises of these entities are commonly
described as nonbank bank holding company affiliates. The FDIC has a
long history of considering the risks from the conduct of securities
activities by affiliates of insured state nonmember banks to be unsafe
and unsound without appropriate safeguards to address those risks. This
rule incorporates many of the standards currently applicable to these
entities through Sec. 337.4 of the FDIC's regulations. This rule will
replace Sec. 337.4 although that section of the FDIC's rules will not
be eliminated until the FDIC finalizes its rule regarding securities
activities of subsidiaries. The scope of this regulation is narrower
than Sec. 337.4 due to intervening regulations promulgated by other
Federal banking agencies that render more comprehensive rules
unnecessary. In addition, the FDIC has updated the restrictions and
brought them into line with modern views of appropriate securities
safeguards between affiliates and insured banks.
Section 362.7 Definitions
The definitions of ``activity'', ``company'', ``control'', ``equity
security'', ``insured state nonmember bank'', ``real estate investment
activity'', ``security'', and ``subsidiary'' apply as is described
above in subpart A. These definitions remain consistent to avoid
confusion among the various subparts of this regulation.
This subpart introduces restrictions on activities of entities that
are commonly owned with the insured state bank by a holding company
that is not considered to be a bank holding company under the Bank
Holding Company Act. Therefore, for the purposes of this subpart,
``affiliate'' is defined as any company that directly or indirectly,
through one or more intermediaries, controls or is under common control
with an insured state nonmember bank. The proposed definition of the
term ``affiliate'' was not intended to include a subsidiary of an
insured state nonmember bank, and language expressly stating this has
been added in the final rule to clarify this point. Subsidiaries of
insured state nonmember banks engaged in these activities are already
covered by Sec. 362.4(b)(5)(ii).
Section 362.8 Restrictions on Activities of Insured State Nonmember
Banks
Real Estate. Since national banks are generally prohibited from
owning and developing real estate, insured state banks have been
required to apply to the FDIC under section 24 before undertaking or
continuing such real estate activities. The FDIC has concluded as a
result of its experience in reviewing these applications that while
real estate investments generally possess many risks that are not
readily comparable to other equity investments, institutions may
contain these risks by undertaking real estate investments within
certain parameters. The FDIC has considered the manner under which an
insured state nonmember bank may undertake real estate investment
activities and determined that insured state nonmember banks and their
[[Page 66313]]
subsidiaries should generally meet certain standards before engaging in
real estate investment activities that are not permissible for national
banks. As a result, the final rule establishes standards under which
insured state nonmember banks may participate in real estate investment
activities. These standards address the FDIC's safety and soundness
concerns with real estate investment activities permissible for a
national bank subsidiary but not for the national bank itself.
Providing this listing of such standards will allow insured state
nonmember banks to initiate investment activities with knowledge of
what the FDIC considers when evaluating the safety and soundness of the
operations of the institution and its subsidiaries. This rule
simplifies and clarifies the standards under which insured state
nonmember banks may conduct their investment activities while providing
comprehensive and flexible regulation of the dealings between a bank
and its subsidiaries.
Certain standards under the regulation also pertain to the FDIC's
willingness to allow an eligible institution to commence the activity
after expedited notice to the FDIC, rather than a full application
process. Under the FDIC's regulation, if an institution and its real
estate investment operations meet the standards established, the
institution need only file notice with the FDIC as outlined in subpart
G of part 303. However, if the institution and its operations do not
meet the general standards set forth in this rule, or if the
institution so chooses, it may file application with the FDIC for the
FDIC's consent, in accordance with procedures set out in subpart G of
part 303.
One commenter stated that establishing additional regulations on
insured state nonmember banks is excessive. Such banks are already
regulated by the state in which they are domiciled. The FDIC believes
that the risks associated with real estate investment activities are
such that it must establish standards for the conduct of that activity.
The notice of proposed rulemaking contained an extensive discussion of
these risks. In addition to the high degree of market variability, real
estate markets are, for the most part, localized; investments are
normally not securitized; financial information flow is often poor; and
the market is generally not very liquid. A financial institution--like
any other investor--faces substantial risks when it takes an equity
position in a real estate venture. Market participants face a general
trade-off: the riskier the project, the higher the required rate of
return. A key aspect of that trade-off is the notion that a riskier
project will entail a higher probability of significant losses for the
investor. Assessments of the degree of risk will depend on factors
affecting future returns such as cyclical economic developments,
technological advances, structural market changes, and the project's
sensitivity to financial market changes.
The FDIC recognizes its ongoing responsibility to ensure the safe
and sound operation of insured state nonmember banks and their
subsidiaries. Although this subpart creates new regulation for insured
state nonmember banks, the FDIC does not believe that this burden is
too great in relation to the risks of real estate investment
activities.
Another commenter expressed concern about consistency stating that
the unintended consequence of this approach may result in different
regulatory treatment applicable to insured state nonmember banks as
opposed to national banks and state member banks. Another comment
echoes this sentiment stating that it is likely that national banks
will be subject to case by case restrictions of the OCC but these
restrictions will not carry the weight and force of those set by
regulation. The commenter recommends parallel treatment between
national and state banks. The FDIC does not believe it is in the best
interest of insured state nonmember banks to automatically follow the
safety and soundness restrictions of an interpretation, order, circular
or official bulletin issued by the OCC regarding real estate investment
activities that are permissible for the subsidiary of a national bank
but are not permissible for a national bank itself. The process
established in this subpart gives insured state nonmember banks the
option to apply to the FDIC to engage in real estate investment
activities suggesting whatever criteria the applicant believes to be
appropriate for the risk involved with the activity. The standards set
forth in this regulation allow applicants to use an expedited notice
procedure. These standards are not absolute criteria that the FDIC
cannot vary. If the FDIC adopted the regulatory and interpretive
standards set by the OCC, insured state nonmember banks would have no
flexibility to request variance from these standards. The FDIC believes
that the risks may be different for different real estate investment
activities. Therefore, the flexible approach established in this
regulation is important in finding appropriate standards for the risks
presented. State nonmember banks are treated consistently with national
banks in that each must submit a request to their primary Federal
regulator to engage in real estate investment activities through a
subsidiary.
Another comment states that the regulatory differences between
state and national institutions harm the dual banking system especially
during a period of rapid interstate expansion. The FDIC is a strong
supporter of the dual banking system. For insured state nonmember banks
to compete effectively, the supervisory system should be expeditious in
its response to the industry. This regulation establishes procedures in
which insured state nonmember banks may use a notice procedure and
follow standards established in this regulation or may file an
application and request variance from these standards. The FDIC
believes that a system that allows an insured state nonmember bank to
directly petition its primary federal regulator to conduct real estate
investment activities in a subsidiary is more appropriate than a
situation in which these activities of insured state nonmember banks
are restricted by regulations, orders and interpretations of the OCC.
Section 362.8(a) of the regulation addresses the FDIC's ongoing
supervisory concerns regarding real estate investment activities and
imposes procedures to address the FDIC's concerns about the safety and
soundness of these activities. Depending upon the facts, the potential
risks inherent in a bank subsidiary's involvement in real estate
investment activities may make restrictions and limitations necessary
to protect the bank and ultimately the deposit insurance funds from
losses associated with the significant risks inherent in real estate
investment activities.
To address its safety and soundness concerns about real estate
investment activities not permissible for a national bank, the FDIC has
adopted the same standards when insured state banks conduct those real
estate investment activities regardless of whether those real estate
investment activities are permissible for a national bank subsidiary.
This subpart addresses the impact on insured state nonmember banks if
the OCC were to approve applications submitted by national banks to
conduct real estate investment activities through operating
subsidiaries.
Unless the FDIC has previously given its approval for the bank to
engage in the particular real estate investment activity that is not
permissible for a national bank, an insured state nonmember bank must
file a notice or
[[Page 66314]]
application with the FDIC in order to directly or indirectly undertake
a real estate investment activity, even if the real estate investment
activity is permissible for the subsidiary of a national bank. To
qualify for the notice provision under this new regulation, the insured
state nonmember bank and its subsidiary must meet the standards
established in Sec. 362.4(b)(5)(i). After filing a notice as provided
for in subpart G of part 303 to which the FDIC does not object, the
institution may then proceed with its investment activities. If the
insured state nonmember bank and its subsidiary do not meet the
standards established under the rule, or if the institution so chooses,
an application for the FDIC's consent may be filed under the procedures
set out in subpart G of part 303.
Affiliation With Securities Companies. Section 362.8(b) reflects
the FDIC's longstanding view that an unrestricted affiliation with a
securities company may have adverse effects on the safety and soundness
of insured state nonmembers banks. This section reiterates the
Sec. 337.4 prohibition against any affiliation by an insured state
nonmember bank with any company that directly engages in the
underwriting of stocks, bonds, debentures, notes, or other securities
which is not permissible for a national bank unless certain conditions
are met. The final rule permits the affiliation only if:
(1) The securities business of the affiliate is physically separate
and distinct in its operations from the operations of the bank,
provided that this requirement shall not be construed to prohibit the
bank and its affiliate from sharing the same facility if the area where
the affiliate conducts retail sales activity with the public is
physically distinct from the routine deposit taking area of the bank;
(2) The affiliate has a chief executive officer who is not an
employee of the bank;
(3) A majority of the affiliate's board of directors are not
directors, officers, or employees of the bank;
(4) The affiliate conducts business pursuant to independent
policies and procedures designed to inform customers and prospective
customers of the affiliate that the affiliate is a separate
organization from the bank and the state-chartered depository
institution is not responsible for and does not guarantee the
obligations of the affiliate;
(5) The bank adopts policies and procedures, including appropriate
limits on exposure, to govern their participation in financing
transactions underwritten by an underwriting affiliate;
(6) The bank does not express an opinion on the value or the
advisability of the purchase or sale of securities underwritten or
dealt in by an affiliate unless it notifies the customer that the
entity underwriting, making a market, distributing or dealing in the
securities is an affiliate of the bank;
(7) The bank does not purchase as principal or fiduciary during the
existence of any underwriting or selling syndicate any securities
underwritten by the affiliate unless the purchase is approved by the
bank's board of directors before the securities are initially offered
for sale to the public;
(8) The bank did not condition any extension of credit to any
company on the requirement that the company contract with, or agree to
contract with, the bank's affiliate to underwrite or distribute the
company's securities;
(9) The bank did not condition any extension of credit or the
offering of any service to any person or company on the requirement
that the person or company purchase any security underwritten or
distributed by the affiliate; and
(10) The bank complies with the investment and transaction
limitations of Sec. 362.4(d). These standards have been adopted as
proposed although the language of Sec. 362.8(b)(4) has been changed to
be consistent with that proposed in subpart A.
Many of the restrictions and prohibitions listed above are
contained currently in Sec. 337.4. Additionally, the conditions that
are imposed, under Sec. 362.4(b)(5)(ii), on subsidiaries which engage
in the sale, distribution, or underwriting of securities such as
adopting independent policies and procedures governing participation in
financing transactions underwritten by an affiliate, expressing
opinions on the advisability of the purchase or sale of particular
securities, and purchasing securities as principal or fiduciary only
with prior board approval have been added. As indicated earlier, the
prohibition against shared officers has been eased and now only refers
to the chief executive officer. Comments did not object to these
standards and they are not being adopted as proposed.
As written, the regulation only applies these restrictions to an
insured state nonmember bank affiliated with a company not treated as a
bank holding company pursuant to section 4(f) of the Bank Holding
Company Act (12 U.S.C. 1843(f)), that directly engages in the
underwriting of stocks, bonds, debentures, notes, or other securities
which are not permissible for a national bank. Other affiliates now
covered by the safeguards of Sec. 337.4 would no longer be covered
under the FDIC's regulations. Other affiliates are adequately separated
from the banks by the restrictions imposed by the FRB. Therefore, the
final regulation has been streamlined to eliminate duplicative coverage
of these affiliates.
Because of the bank/affiliate relationship covered by this subpart,
the term ``investment'' also includes the bank's investment in the
equity securities of the affiliate. This treatment is consistent with
section 23A. No comment was received on this treatment and the
definition of investment for subpart B is adopted as proposed.
Disclosure provisions contained in Sec. 337.4 are not contained in
this rule. If securities underwritten, distributed or sold by the
affiliate are sold on bank premises, are sold by employees of the bank,
or are sold subject to the bank receiving remuneration for the
transaction, the sale is covered by the disclosures contained in the
Interagency Statement on Retail Sales of Nondeposit Investment
Products. Sales occurring outside these parameters are not likely to
generate customer confusion; however, the affiliate is responsible for
informing its customers that the affiliate is a separate organization
from the bank and the bank is not responsible for and does not
guarantee the obligations of the affiliate whenever confusion is likely
to occur.
C. Subpart C--Activities of Insured State Savings Associations
Section 362.9 Purpose and Scope
The intent of Sec. 362.9 is to clarify that the purpose and scope
of subpart C is to ensure that activities and investments undertaken by
insured state savings associations and their service corporations do
not present a significant risk to the deposit insurance funds, are not
unsafe and are not unsound, are consistent with the purposes of federal
deposit insurance, and are otherwise consistent with law. This subpart,
together with the notice and application procedures of subpart H of
part 303, implements the provisions of section 28 of the FDI Act that
restrict and prohibit insured state savings associations and their
service corporations from engaging in activities and investments of a
type that are not permissible for federal savings associations and
their service corporations. The phrase ``activity permissible for a
federal savings association'' means any activity authorized for federal
savings associations under any statute including the Home Owners Loan
Act (HOLA), as well as activities recognized as
[[Page 66315]]
permissible for a federal savings association in regulations, official
thrift bulletins, orders or written interpretations issued by the OTS,
or its predecessor, the Federal Home Loan Bank Board.
Regarding insured state savings associations, this subpart governs
only activities conducted ``as principal'' and therefore does not
govern activities conducted as agent for a customer, conducted in a
brokerage, custodial, advisory, or administrative capacity, conducted
as trustee, or conducted in any substantially similar capacity. In the
final rule, the FDIC has added a list of examples of what types of
activities are not ``as principal.'' This change is consistent with the
addition of such material to the purpose and scope section of subpart
A. However, this subpart covers all activities regardless of whether
conducted ``as principal'' or in another capacity at the service
corporation level. This subpart does not restrict any interest in real
estate in which the real property is (a) used or intended in good faith
to be used within a reasonable time by an insured state savings
association or its service corporations as offices or related
facilities for the conduct of its business or future expansion of its
business or (b) used as public welfare investments of a type and in an
amount permissible for federal savings associations. Equity investments
acquired in connection with debts previously contracted that are held
within the shorter of the time limits prescribed by state or federal
law are not subject to the limitations of this subpart.
The FDIC intends to allow insured state savings associations and
their service corporations to undertake only safe and sound activities
and investments that do not present a significant risk to the deposit
insurance funds and that are consistent with the purposes of federal
deposit insurance and other applicable law. This subpart does not
authorize any insured state savings association to make investments or
conduct activities that are not authorized or that are prohibited by
either federal or state law.
Section 362.10 Definitions
Section 362.10 of the final regulation contains the definitions
used in this subpart. Rather than repeating terms defined in subpart A,
the definitions contained in Sec. 362.2 are incorporated into subpart C
by reference. Included in the definitions are most of the terms
currently defined in subpart G of Part 303, effective October 1, 1998,
(formerly Sec. 303.13) of the FDIC's regulations. The proposed rule
made editing changes primarily to enhance clarity without changing the
meaning. However, certain changes were made to alter the meaning of the
terms and these changes are identified in this discussion. The final
rule adopts the proposed definitions without further change.
The terms ``corporate debt securities not of investment grade'' and
``qualified affiliate'' have been directly imported into subpart C from
subpart G (Sec. 303.141) without substantive change. Substantially the
same ``control'' and ``equity security'' definitions are incorporated
by reference to subpart A. The last sentence of the current ``equity
security'' definition, which excludes equity securities acquired
through foreclosure or settlement in lieu of foreclosure, was deleted
for the same reason that similar language was deleted from several
definitions in subpart A. Language is now included in the purpose and
scope paragraph explaining that equity investments acquired through
such actions are not subject to the regulation. No substantive change
from current rules is intended by this modification.
Consistent with the proposal, modified versions of ``activity'',
``equity investment'', ``significant risk to the fund'', and
``subsidiary'' were also carried forward by reference to subpart A. As
proposed, the definition of activity was expanded to encompass all
activities including acquiring or retaining equity investments. This
change was made to conform the ``activity'' definition used in the
regulation to that provided in the governing statutes. Both sections 24
and 28 of the FDI Act define activity to include acquiring or retaining
any investment. Sections of this part governing activities other than
acquiring or retaining equity investments include statements
specifically excluding the activity of acquiring or retaining equity
investments.
Consistent with the proposal, the ``equity investment'' definition
was modified to better identify its components. The definition includes
any ownership interest in any company. This change was made to clarify
that ownership interests in limited liability companies, business
trusts, associations, joint ventures and other entities separately
defined as a ``company'' are considered equity investments.
Additionally, as proposed, the definition was expanded to include any
membership interest that includes a voting right in any company, and a
sentence was added excluding from the definition any of the identified
items when taken as security for a loan. The intended effect of these
changes is not to broaden the scope of the regulation, but instead to
clarify the FDIC's position that such investments are all considered
equity investments notwithstanding the form of business organization.
Consistent with the proposal, the definition of ``significant
risk'' was effectively retitled ``significant risk to the fund'' by the
reference to subpart A. As proposed, a second sentence was added to the
definition explaining that a significant risk to the fund may be
present either when an activity or an equity investment contributes or
may contribute to the decline in condition of a particular state-
chartered depository institution or when a type of activity or equity
investment is found by the FDIC to contribute or potentially contribute
to the deterioration of the overall condition of the banking system.
This sentence is intended to elaborate on the FDIC's position that the
absolute size of a projected loss in comparison to the deposit
insurance funds is not determinative of the issue. Additionally, it
clarifies the FDIC's position that risk to the fund may be present even
if a particular activity or investment may not result in the imminent
failure of an institution. The FDIC received four comments addressing
this definition which are detailed in the discussion of the applicable
definition in subpart A.
With the exception of substituting the separately defined term
``company'' for the list of entities such as corporations, business
trusts, associations, and joint ventures currently in the
``subsidiary'' definition, the final rule makes little change from the
current definition. It is noted that limited liability companies are
now included in the company definition and, by extension, are included
in the subsidiary definition. The only other change from current rules
is that in the definition of subsidiary, the exclusion of ``insured
depository institutions'' for purposes of Sec. 303.146 (as effective
October 1, 1998, formerly Sec. 303.13(f)) has been moved to the purpose
and scope section of proposed subpart D. No substantive changes are
intended by these modifications. The FDIC received no comments on these
definitions which are adopted as proposed.
While proposed subpart C retained substantially the same ``service
corporation'' definition as the current rule, the proposal deleted the
word ``only'' from the phrase ``available for purchase only by savings
associations''. This change was intended to make it clear that a
service corporation of an insured state savings association may invest
in lower-tier service corporations if allowed by this part or FDIC
order, and it is consistent with the recently
[[Page 66316]]
amended part 559 of the OTS' regulations (12 CFR part 559). The change
was not intended to alter the nature of the requirements governing the
savings association's equity investment in the first-tier service
corporation. No comments were received on this change and the final
rule adopts it as proposed.
As in subpart A and consistent with the proposal, the definition of
``equity interest in real estate'' was deleted in the final regulation.
The exceptions detailed in Sec. 303.141(e) (as effective October 1,
1998, formerly Sec. 303.13(a)(5)) of the current definition were moved
to the purpose and scope paragraph. As a result, readers are now
informed that these excepted real estate investments are not subject to
this regulation. The FDIC believes that the remaining content of the
current definition fails to provide any meaningful clarity or
understanding. Therefore, the FDIC will instead rely on the ``equity
investment'' definition to include relevant real estate investments. A
related change was made to the ``equity investment'' definition by
deleting the reference to ``equity interest in real estate'' and
replacing it with language to include any interest in real estate
(excluding real estate that is not within the scope of this part). No
substantive changes are intended by these modifications.
Consistent with the proposal, a definition for the term ``insured
state savings association'' is added to the final rule. Because this
term is not explicitly defined in section 3 of the FDI Act, this
definition was added to ensure readers clearly understand that an
insured state savings association means any state chartered savings
association insured by the FDIC.
Other terms that were previously undefined, but that are added by
the general incorporation of the definitions in subpart A should not
result in any substantive changes to the meanings of those terms as
currently used in subpart G of part 303, effective October 1, 1998,
(formerly Sec. 303.13) of the FDIC's regulations.
Section 362.11 Activities of Insured State Savings Associations
Equity investment prohibition. Section 362.11(a)(1) of the final
regulation replaces the provisions of Sec. 303.144(a) (as effective
October 1, 1998, formerly Sec. 303.13(d)) of the FDIC's current
regulations and restates the statutory prohibition preventing insured
state savings associations from making or retaining any equity
investment of a type, or in an amount, not permissible for a federal
savings association. The prohibition does not apply if the statutory
exception (restated in the current regulation and carried forward in
the proposal) contained in section 28 of the FDI Act applies. With the
exception of deleting items no longer applicable due to the passage of
time, this provision is retained as currently in effect without any
substantive changes.
Exception for service corporations. The final regulation retains
the exception now in Sec. 303.144(b) (as effective October 1, 1998,
formerly Sec. 303.13(d)(2)) which allows investments in service
corporations as currently in effect without any substantive change.
However, consistent with the proposal, the FDIC has modified the
language of this section using a structure paralleling that found in
proposed subpart A permitting insured state banks to invest in
majority-owned subsidiaries. Similar to the treatment accorded insured
state banks, an insured state savings association must meet and
continue to be in compliance with the capital requirements prescribed
by the appropriate federal banking agency and the FDIC must determine
that the activities to be conducted by the service corporation do not
present a significant risk to the relevant deposit insurance fund.
However, unlike the treatment accorded banks, the FDIC must also
determine that the amount of the investment does not present a
significant risk to the relevant deposit insurance fund. The criteria
identified in the preceding sentences are derived directly from the
underlying statutory language. For an insured state savings association
to invest in service corporations engaging in activities that are not
permissible for a service corporation of a federal savings association,
the service corporation must be engaging in activities or acquiring and
retaining investments described in Sec. 362.12(b) as regulatory
exceptions to the general prohibition.
We moved language currently in Sec. 303.144(b)(2) (as effective
October 1, 1998, formerly Sec. 303.13(d)) concerning the filing of
applications to acquire an equity investment in a service corporation
to Sec. 303.141 of the amended subpart H of part 303.
Activities other than equity investments. Section 362.11(b) of the
final regulation replaces the sections now found at Secs. 303.142,
303.143 and 303.144 (as effective October 1, 1998, formerly
Secs. 303.13(b), 303.13(c), and 303.13(e), respectively) of the FDIC's
regulations. As proposed, some portions of the existing sections have
been eliminated because they are no longer necessary due to the passage
of time, and other portions have been edited and reformatted in a
manner consistent with the corresponding sections of subpart A.
Language currently in the referenced sections of part 303 concerning
notices and applications has been edited, reformatted, and moved to the
amended subpart H of part 303.
Prohibited activities. Section 362.11(b)(1) of the final regulation
restates the statutory prohibition that insured state savings
associations may not directly engage as principal in any activity of a
type, or in an amount, that is not permissible for a federal savings
association unless the activity meets a statutory or regulatory
exception. Similar to language found in subpart A for insured state
banks, the proposed rule added language to clarify that this
prohibition does not supersede the equity investment exception of
Sec. 362.11(a)(2). The FDIC added this language because acquiring or
retaining any investment is defined as an activity. The language has
been adopted in the final rule without change from the proposal.
The statutory prohibition preventing state and federal savings
associations from directly, or indirectly through a subsidiary (other
than a subsidiary that is a qualified affiliate), acquiring or
retaining any corporate debt that is not of investment grade after
August 9, 1989, is also carried forward from what is now Sec. 303.145
(as effective October 1, 1998, formerly Sec. 303.13(e)) of the FDIC's
regulations. However, consistent with the proposal, the Sec. 303.145
requirement was deleted. The referenced section required savings
institutions to file divestiture plans concerning corporate debt that
was not of investment grade and that was held in a capacity other than
through a qualified affiliate. Divestiture was required by no later
than July 1, 1994, rendering that provision unnecessary due to the
passage of time.
Exceptions to the other activities prohibition. The statutory
exception to the other activities prohibition contained in section 28
of the FDI Act continues to function in a manner similar to the
relevant provisions of what is now found in subpart H of part 303. The
regulation continues to permit an insured state savings association to
retain any asset (including a nonresidential real estate loan) acquired
prior to August 9, 1989. However, corporate debt securities that are
not of investment grade may only be purchased or held by a qualified
affiliate. Whether or not the security is of investment grade is
measured only at the time of acquisition.
Additionally, the FDIC has provided regulatory exceptions to the
other
[[Page 66317]]
activities prohibition. The first exception retains the application
process now found at Sec. 303.142 (as effective October 1, 1998,
formerly Secs. 303.13(b)(1)) and provides insured state savings
associations with the option of applying to the FDIC for approval to
engage in an activity of a type that is not permissible for a federal
savings association. Additionally, the notice process currently found
at Sec. 303.143 (as effective October 1, 1998, formerly
Sec. 303.13(c)(1)) is carried forward for insured state savings
associations that want to engage in activities of a type permissible
for a federal savings association, but in an amount exceeding that
permissible for federal savings associations. The final regulation adds
a regulatory exception enabling insured state savings associations to
acquire and retain adjustable rate, money market preferred stock, and
instruments determined by the FDIC to have similar characteristics
without submitting an application to the FDIC if the acquisition is
done within the prescribed limits.
The final regulation deletes a proposed exception that would have
allowed an insured state savings association to engage as principal in
any activity that is not permissible for a federal savings association
provided that the FRB has found the activity to be closely related to
banking pursuant to 4(c)(8) of the Bank Holding Company Act (12 U.S.C.
1843(c)(8)). Upon further analysis, the FDIC determined that this
exception would have little utility because most of the activities
authorized by the FRB under the referenced authority are already
permissible for federal savings associations or are otherwise addressed
in this regulation. In the preamble to the proposal, the FDIC requested
comment from savings associations on whether the proposed standard was
appropriate and beneficial. The FDIC received only one comment,
indicating that state savings associations were generally unaware of
what is authorized by the 4(c)(8) list and that the FDIC should be more
specific. The FDIC has decided to eliminate the reference and
specifically address those activities that are allowed. The elimination
of this proposed authority is consistent with the FDIC's elimination of
the corresponding authority for state banks in subpart A.
Consent obtained through application. Section 28 prohibits insured
state savings associations from directly engaging in activities of a
type or in an amount not permissible for a federal savings association
unless: (1) The association meets and continues to meet the capital
standards prescribed by the appropriate federal financial institution
regulator; and (2) the FDIC determines that conducting the activity in
the additional amount will not present a significant risk to the
relevant deposit insurance fund. Section 362.11(b)(2)(i) establishes an
application option for savings associations that meet the relevant
capital standards and that seek the FDIC's consent to engage in
activities that are otherwise prohibited. The substance of this process
is unchanged from the relevant sections of part 303 of the FDIC's
current regulations. The regulation is being adopted without change
from its proposed form.
Nonresidential realty loans permissible for a federal savings
association conducted in an amount not permissible. Consistent with the
proposal, the final regulation carries forward and modifies the
provision now found at Sec. 303.142 (as effective October 1, 1998,
formerly Sec. 303.13(b)(1)) of this chapter requiring an insured state
savings association that wants to hold nonresidential real estate loans
in an amount exceeding the limits described in section 5(c)(2)(B) of
HOLA (12 U.S.C. 1464 (c)(2)(B)) to apply for the FDIC's consent. Unlike
the current regulation, the final regulation enables the insured state
savings association to submit a notice to seek the FDIC's approval
instead of an application. This change is nonsubstantive and is made to
expedite the process for insured state savings associations wanting to
exceed the referenced limits. None of the comments submitted addressed
this change.
Acquiring and retaining adjustable rate and money market preferred
stock. The final regulation extends to insured state savings
associations a revised version of the proposed regulatory exception
allowing an insured state bank to invest in up to 15 percent of its
tier one capital in adjustable rate preferred stock and money market
(auction rate) preferred stock without filing an application with the
FDIC. By statute, however, insured savings associations are restricted
in their ability to purchase debt that is not of investment grade. This
regulatory exception does not override that statutory prohibition and
any instruments purchased must comply with that statutory constraint.
Additionally, this exception is only extended to savings associations
meeting and continuing to meet the applicable capital standards
prescribed by the appropriate federal financial institution regulator.
When this regulatory exception was adopted for insured state banks
in 1992, the FDIC found that adjustable rate preferred stock and money
market (auction rate) preferred stock were essentially substitutes for
money market investments such as commercial paper and that their
characteristics are closer to debt than to equity securities.
Therefore, money market preferred stock and adjustable rate preferred
stock were excluded from the definition of equity security. As a
result, these investments are not subject to the equity investment
prohibitions of the statute and the regulation, and they are considered
an ``other activity'' for the purposes of this regulation.
This exception focuses on two categories of preferred stock. This
first category, adjustable rate preferred stock refers to shares where
dividends are established by contract through the use of a formula
based on Treasury rates or some other readily available interest rate
levels. Money market preferred stock refers to those issues where
dividends are established through a periodic auction process that
establishes yields in relation to short term rates paid on commercial
paper issued by the same or a similar company. The credit quality of
the issuer determines the value of the security, and money market
preferred shares are sold at auction.
The FDIC continues to believe that the activity of investing up to
15 percent of an institution's tier one capital in the referenced
instruments does not represent a significant risk to the deposit
insurance funds. Furthermore, the FDIC believes the same funding option
should be available to insured state savings associations and extends a
similar exception to savings associations subject to the same revised
limits.
Additionally, like a similar provision in subpart A, the final
regulation allows the state savings associations to acquire and retain
other instruments of a type determined by the FDIC to have the
character of debt securities provided the instruments do not represent
a significant risk to the deposit insurance funds. A recent example of
such an instrument is trust preferred stock. Trust preferred stock is a
hybrid instrument possessing characteristics typically associated with
debt obligations. Trust preferred securities are issued by an issuer
trust that uses the proceeds to purchase subordinated deferrable
interest debentures in a corporation. The corporation guarantees the
obligations of the issuer trust and agrees to indemnify third parties
for other expenses and liabilities incurred by the issuer trust. Taken
together, the debentures, guarantee, and expense indemnity agreement
constitute a full, irrevocable, and unconditional guarantee of the
obligations of the issuer
[[Page 66318]]
trust by the issuer corporation. With the exception of credit risk,
investors in trust preferred stock are protected from changes in the
value of the instruments. Like investors in debt securities, trust
preferred stock investors do not share any appreciation in the value of
the issuer and have no voting rights in the management or ordinary
course of business of the issuer. Additionally, trust preferred stock
is not perpetual and distributions on the stock resemble the periodic
interest payments on debt. In essence, such investments are
functionally equivalent to investments in the underlying debentures.
Investments in such instruments are aggregated with investments in
adjustable rate and money market preferred stock for purposes of
applying the limit of 15 percent of tier one capital.
Guarantee activities. When drafting the proposal, the FDIC
considered adding an exception for guarantee activities including
credit card guarantee programs and comparable arrangements that would
have been similar to that which we proposed to delete from subpart A.
These programs typically involve a situation where an institution
guarantees the credit obligations of its retail customers. Although the
FDIC continues to believe that these activities present no significant
risk to the deposit insurance funds, the FDIC proposed deleting this
activity from subpart A because it was determined that national banks,
and therefore insured state banks, may already engage in the
activities. The FDIC determined that federal savings associations, and
by extension insured state savings associations, may engage in these
activities as well. The FDIC received no comments advocating the
addition of an exception for these activities and, as a result, no
exception was crafted.
Section 362.12 Service Corporations of Insured State Savings
Associations
Section 362.12 of the final regulation governs the activities of
service corporations of insured state savings associations and
generally replaces what is now found at Sec. 303.144(b) (as effective
October 1, 1998, formerly Sec. 303.13(d)(2)) of the FDIC's regulations.
The section reorganizes the substance of the current regulation and
consolidates all provisions concerning the activities of service
corporations into the same section. Language currently in
Sec. 303.144(b) (as effective October 1, 1998, formerly
Sec. 303.13(d)(2)) concerning applications was revised and moved to
Secs. 303.141 and 303.142 of subpart H of part 303. Additionally, the
FDIC extended several regulatory exceptions closely resembling similar
exceptions provided to subsidiaries of insured state banks in subpart A
of this final regulation. The FDIC notes that if the service
corporation is a new subsidiary or is a subsidiary conducting a new
activity, all of the exceptions in Sec. 362.12 remain subject to the
notice provisions contained in section 18(m) of the FDI Act which are
now being implemented in subpart D of this regulation.
General prohibition. A service corporation of an insured state
savings association may not engage in any activity that is not
permissible for a service corporation of a federal savings association
unless the savings association submits an application and receives the
FDIC's consent or the activity qualifies for a regulatory exception.
This provision does not represent a substantive change from the current
regulation. The regulatory language implementing this prohibition has
been separated from the restrictions in Sec. 362.11 prohibiting an
insured state savings association from directly engaging in activities
which are not permissible for a federal savings association. By
separating the savings association's activities and those of a service
corporation, Sec. 362.12 deals exclusively with activities that may be
conducted by a service corporation of an insured state savings
association.
Consent obtained through application. Consistent with the proposal,
the final regulation continues to allow insured state savings
associations to submit applications seeking the FDIC's consent to
engage in activities through a service corporation that are otherwise
prohibited. Section 362.12(b)(1) carries forward the substance of the
application option in Sec. 303.144(b) (as effective October 1, 1998,
formerly Sec. 303.13(d)(2)) of the FDIC's current regulations. Approval
will be granted only if: (1) The savings association meets and
continues to meet the applicable capital standards prescribed by the
appropriate federal banking agency; and (2) the FDIC determines that
conducting the activity in the requested amount will not present a
significant risk to the relevant deposit insurance fund.
Service corporations conducting unrestricted activities.
The FDIC has found that it is not a significant risk to the deposit
insurance fund if a service corporation engages in certain activities
as long as the insured state savings association continues to meet the
applicable capital standards prescribed by the appropriate federal
banking agency. One of these activities, authorized by
Sec. 362.12(b)(2)(i) of the final rule, is owning a control interest in
a company that engages in securities activities authorized by
Sec. 362.12(b)(4), provided the activity is conducted pursuant to the
limitations and requirements of Sec. 362.12(b)(4), including the
requirement that the insured state savings association files a notice
with the FDIC to which the FDIC does not object. The regulation
specifies that both the service corporation and the lower tier company
must meet the investment and transaction limits, and the capital
deduction, that would apply if the service corporation engaged in the
securities activities directly under Sec. 362.12(b)(4), to ensure that
the service corporation is not used as a conduit to the lower tier
company in derogation of these requirements. The savings association
must also meet the same core eligibility requirements that would apply
if the service corporation engaged in the activity directly, and the
savings association and the lower tier company must meet certain
additional requirements in Sec. 362.12(b)(4). However, with regard to
the core eligibility requirements applicable to a service corporation
conducting the activity under Sec. 362.12(b)(4), these may be observed
by the service corporation, or in the alternative by the lower tier
company if the company takes corporate form.
The FDIC also extended a regulatory exception enabling service
corporations to acquire and retain equity securities of a company
engaged in the following activities: (1) Activities permissible for a
federal savings association; (2) any activity permissible for the
savings association itself under Sec. 362.11(b)(2)(iii); or (3)
insurance agency activities. The service corporation must either own a
controlling interest in a company engaging in these activities, or the
company must be controlled by insured depository institutions. The FDIC
provided similar exceptions to majority-owned subsidiaries of insured
state banks in subpart A. Sections 362.12(b)(2) (i) through (ii) are
intended to cover a service corporation's investment in lower level
subsidiaries engaged in activities that the FDIC has found to present
no significant risk to the deposit insurance fund.
The final version differs from the proposal in that, as is the case
in the corresponding provision of subpart A, the FDIC created a limited
exception to the control requirement under Sec. 362.12(b)(2)(ii) if the
company is controlled by a group of insured depository institutions.
This accommodates community associations
[[Page 66319]]
wishing to form a consortium of associations to provide financial
services for their customers that one association cannot provide on a
cost effective basis.
The final version also differs from the proposal in that, as is the
case in the corresponding provision of subpart A, the activities
authorized for the lower-level company are not identical to the
activities proposed.15 The FDIC made this change to remain
consistent with subpart A. The rule as adopted does not eliminate any
authorization granted by current rules, and the FDIC received no
comments on the proposal, so the change from the proposed activities
will have no impact on state savings associations.
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\15\ The proposal would have authorized the lower tier company
to engage in any activity permissible for a federal savings
association; hold adjustable rate or money market preferred stock up
to 15 percent of tier one capital; engage in activities (subject to
certain exceptions) authorized by the FRB under section 4(c)(8) of
the Bank Holding Company Act; or engage in activity not as
principal.
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Section 28 of the FDI Act requires the FDIC's consent before a
service corporation may engage in any activity that is not permissible
for a service corporation of a federal savings association. While the
language of section 28 governs only activities conducted ``as
principal'' by insured state savings associations, the ``as principal''
language was not extended to service corporations in the governing
statute. This means that even if the activity is not conducted ``as
principal'', the subpart C prohibition applies if the activity is not
permissible for a service corporation of a federal savings association.
Because the FDIC believes that activities conducted other than ``as
principal'' present no significant risk to the relevant deposit
insurance fund, we provided an exception in Sec. 362.12(b)(2)(iii)
allowing a service corporation of an insured state savings association
to act other than ``as principal,'' if the savings association meets
and continues to meet the applicable capital standards prescribed by
its appropriate federal banking agency. The FDIC received no comments
on this exception. The final regulation also requires a savings
association to own a control interest in a service corporation
conducting the activities. The control requirement was added to more
closely approximate the treatment accorded to insured state banks and
their subsidiaries. Insured state bank subsidiaries can act other than
``as principal.'' However, a subsidiary is defined as being a company
controlled by a depository institution. Therefore, the control standard
imposed in this section equates the ownership interest requirements of
insured state savings associations and insured state banks.
Additionally, it helps differentiate between an insured state savings
association controlling a company and simply investing in the shares of
a company.
The FDIC also provided, at Sec. 362.12(b)(2)(iv) of the final rule,
an exception allowing service corporations of qualifying savings
associations to invest in adjustable rate preferred stock, money market
(auction rate) preferred stock, and other instruments of a type
determined by the FDIC to have the character of debt securities
provided the instruments do not represent a significant risk to the
deposit insurance funds. Investments by a service corporation in these
instruments are combined with and subject to the same limits applicable
to the parent savings association. The FDIC did not receive any
comments on extending this exception to insured state savings
associations and the exception is adopted as proposed.
Owning equity securities that do not represent a control interest.
For the same reasons previously stated in the preamble discussion of
subpart A, no notice procedure is being adopted at this time. Staff has
been instructed to undertake further study of the proposal.
Securities underwriting. Section 362.12(b)(4) of the final
regulation allows an insured state savings association to acquire or
retain an investment in a service corporation that underwrites or
distributes securities that would not be permissible for a federal
savings association to underwrite or distribute if notice is filed with
the FDIC, the FDIC does not object to the notice before the end of the
notice period, and a number of conditions are and continue to be met.
This exception enabling service corporations to underwrite or
distribute securities is patterned on the exception found in subpart A
(see Sec. 362.4(b)(5)(ii)). In both cases, the state-chartered
depository institution must conduct the securities activity in
compliance with the core eligibility requirements, the same additional
requirements listed for this activity in subpart A, and the investment
and transaction limits. The savings association also must meet the
capital requirements and the service corporation must meet the
``eligible subsidiary'' requirements as an ``eligible service
corporation''. Since the requirements are the same as those imposed in
subpart A and the risks of the activity are identical, the discussion
in subpart A is not repeated here.
Notice of change in circumstance. Like subpart A, the final rule
requires the insured state savings association to provide written
notice to the appropriate Regional Office of the FDIC within 10
business days of a change in circumstances concerning its securities
subsidiary authorized by Sec. 362.12(b)(4). Under the regulation, a
change in circumstances is described as a material change in the
service corporation's business plan or management. Together with the
insured state savings association's primary federal financial
institution regulator, the FDIC believes that it may address a savings
association's falling out of compliance with any of the other
conditions of approval through the normal supervision and examination
process.
The FDIC is concerned about changes in circumstances which result
from changes in management or changes in a service corporation's
business plan. If material changes to either condition occur, the
regulation requires the association to submit a notice of such changes
to the appropriate FDIC regional director (DOS) within 10 days of the
material change. The material change standard includes such events as a
change in chief executive officer of the service corporation or a
change in investment strategy or type of business or activity engaged
in by the service corporation. The FDIC received two comments
concerning the change of circumstance notice. Both comments indicated
that the notice is burdensome and unnecessary. The comments argue that
a change in the chief executive office or investment strategies are
routine. The FDIC places significant reliance on the management
structure and business plan presented when an activity is approved for
a service corporation. The FDIC does not consider either change to be
routine and believes that it is important that the FDIC be aware of
material changes in the operations of service corporations engaging in
activities that are not permissible for a service corporation of a
federal savings association. One comment requested that the notice
period be extended from 10 to 30 days. The FDIC believes that both a
change in management and a change in the business plan of the service
corporation are matters that should receive significant consideration
before these events occur. The FDIC does not believe that it is
unreasonable to require notices of these events within 10 days.
Therefore, the final regulation retains the requirement that a notice
of change of circumstances be submitted to the
[[Page 66320]]
Regional Director within 10 business days after any such change.
The FDIC will communicate its concerns regarding the continued
conduct of an activity after a change in circumstances with the
appropriate persons from the insured state savings association's
primary federal banking agency. The FDIC will work with the identified
persons from the primary federal banking agency to develop the
appropriate response to the new circumstances.
The FDIC does not intend to require any savings association which
falls out of compliance with eligibility conditions to immediately
cease any activity in which the savings association had been engaged.
Instead, the FDIC will deal with each situation on a case-by-case basis
through its supervision and examination process. In short, the FDIC
intends to utilize its supervisory and regulatory tools in dealing with
any savings association's failure to meet the eligibility requirements
on a continuing basis. The issue of the savings association's ongoing
activities will be dealt with in the context of that effort. The FDIC
believes that the case-by-case approach to whether a savings
association will be permitted to continue an activity is preferable to
forcing a savings association to, in all instances, immediately cease
the activity. Such an inflexible approach could exacerbate an already
unfortunate situation that probably is receiving supervisory attention.
Core eligibility requirements. The proposed regulation imports by
reference the core eligibility requirements listed in subpart A. Refer
to the discussion on this topic provided under subpart A for additional
information. When reading the referenced discussion, ``subsidiary'' and
``majority-owned subsidiary'' should be replaced with ``service
corporation''. Additionally, ``eligible subsidiary'' should be replaced
with ``eligible service corporation''. Finally, ``insured state savings
association'' should be read to replace ``bank'' or ``insured state
bank''. Comments addressing these provisions and the FDIC's response
are discussed in the relevant section of the preamble for subpart A.
The FDIC received no comments directly relating to the application of
these requirements to insured state savings associations.
Investment and transaction limits. The final regulation contains
investment limits and other requirements that apply to an insured state
savings association and its service corporations engaging in activities
that are not permissible for a federal savings association if the
requirements are imposed by FDIC order or expressly imposed by
regulation. In general, the provisions: (1) Impose an aggregate limit
on a savings association's investment in all service corporations that
engage in an activity that is covered by the investment limits; (2)
require extensions of credit from a savings association to these
service corporations to be fully-collateralized when made; (3) prohibit
low quality assets from being taken as collateral on such loans; and
(4) require that transactions between the savings association and its
service corporations be on an arm's length basis. The proposed limit
restricting a savings association's investment in any one service
corporation engaging in the same activity that is not permissible for a
service corporation of a federal savings association was deleted for
the same reason the requirement was dropped from subpart A.
Like the treatment accorded insured state banks, the regulation
expands the definition of insured state savings association for the
purposes of the investment and transaction limitations. A savings
association includes not only the insured entity, but also any service
corporation or subsidiary that is engaged in activities that are not
subject to these investment and transaction limits. Sections 23A and
23B of the Federal Reserve Act combine a bank and all of its
subsidiaries in imposing investment limitations and transaction
restrictions between the bank and its affiliates. The FDIC is using the
same concept in separating subsidiaries and service corporations
conducting activities that are subject to investment and transaction
limits from the insured state savings association and any other service
corporations and subsidiaries engaging in activities not subject to the
investment and transaction limits.
The only exception to these restrictions is for arm's length
extensions of credit made by the savings association to finance sales
of assets by the service corporation to third parties. These
transactions do not need to comply with the collateral requirements and
investment limitations, provided they meet certain arm's-length
standards. The imposition of section 23A-type restrictions is intended
to make sure that adequate safeguards are in place for the dealings
between the insured state savings association and its service
corporations.
Investment limits. In a manner similar to that applied to insured
state banks in subpart A, the final rule imposes limits on certain of
the insured state savings association's investments in service
corporations conducting activities that are not permissible for a
service corporation of a federal savings association. These investments
are limited to 20 percent of the association's tier one capital for the
aggregate of all activities covered by the investment limits. As is the
case with the ``investment'' definition used in the relevant section of
subpart A, investments subject to the applicable limits include: (1)
Extensions of credit to any person or company for which an insured
state savings association accepts securities issued by the service
corporation as collateral; and (2) any extensions or commitments of
credit to a third party for investment in the subsidiary, investment in
a project in which the subsidiary has an interest, or extensions of
credit or commitments of credit which are used for the benefit of, or
transferred to, the subsidiary. These provisions also resemble items
included in covered transactions subject to the section 23A limits.
However, the ``investment'' definition also is somewhat dissimilar
from that used in subpart A due to underlying statutory differences.
The definition of investment for insured state savings associations
excludes extensions of credit provided to the service corporation and
any of its debt securities owned by the savings association. While
these items are included in the investment definition in subpart A,
insured state banks are not, unlike state savings associations,
required by law to deduct these items from regulatory capital. The
investment definition coverage in subpart C has been limited because an
insured state savings association is required by the Home Owners' Loan
Act or OTS regulations to deduct from its regulatory capital any
extensions of credit provided to a service corporation and any debt
securities owned by the savings association that were issued by a
service corporation engaging in activities that are not permissible for
a national bank. 12 U.S.C. 1464(t)(5)(A). Since the regulatory
exceptions in subpart C that invoke the investment limits are not
activities permissible for a national bank, insured state savings
associations are required by the referenced statute to deduct these
items from regulatory capital. The FDIC finds no reason to impose
investment limits on amounts completely deducted from capital and
therefore imposes the investment limit only on items that are not
deducted from regulatory capital.
Like subpart A, the regulation calculates the 20 percent limit
based on tier one capital while section 23A uses total capital. As was
discussed in reference to subpart A, the FDIC is using
[[Page 66321]]
tier one capital as its standard to create consistency throughout the
regulation.
Transaction requirements. The arm's length transaction requirement,
prohibition on purchasing low quality assets, the insider transaction
restriction, and the anti-tying restriction are applicable between an
insured state savings association and a service corporation to the same
extent and in the same manner as that described in subpart A between an
insured state bank and certain majority-owned subsidiaries. The
discussion of this topic in subpart A discusses the comments and
changes from the proposal.
Collateralization requirement. The collateralization requirement in
Sec. 362.4(d)(4) also is applicable between an insured state savings
association and a service corporation to the same extent and in the
same manner as described in subpart A. Refer to the discussion of this
topic in subpart A for the treatment of the comments.
Capital requirements. Under the final rule, an insured state
savings association using the notice process to invest in a service
corporation engaging in certain activities not permissible for a
federal savings association must be ``well-capitalized'' after
deducting from its regulatory capital any investment in the service
corporation, both debt and equity, unless otherwise relieved of this
requirement. The bank's risk classification assessment under part 327
is also determined after making the same deduction. This standard
reflects the FDIC's belief that only well-capitalized institutions
should be allowed, either without notice or by using the notice
process, to engage through service corporations in activities that are
not permissible for service corporations of federal savings
associations. All savings associations failing to meet this standard
and wanting to engage in such activities should be subject to the
scrutiny of the application process. The FDIC received no comments
concerning this provision.
Approvals previously granted. The final regulation, at Sec. 362.13,
does not require insured state savings associations that have
previously received consent by order or notice from this agency to
reapply to continue the activity provided the savings association and
service corporation, as applicable, continue to comply with the
conditions of the order of approval. The FDIC does not intend to
require insured state savings associations to request consent to engage
in an activity which has already been approved.
Because previously granted approvals may contain conditions that
are different from the standards that are established in the final
rule, in certain circumstances, the insured state savings association
may elect to operate under the restrictions of the rule, instead of the
order. In that case, the insured state savings association may comply
with the investment and transaction limitations between the savings
association and its service corporations contained in Sec. 362.12(c),
the capital requirement detailed in Sec. 362.12(d), and the service
corporation restrictions as outlined in the term ``eligible service
corporation'' (by substitution) and contained in Sec. 362.4(c)(2) in
lieu of any similar requirements in its approval order. Any conditions
that are specific to a savings association's situation and do not fall
within the above limitations will continue to be effective. The FDIC
intends that once a savings association elects to follow these proposed
restrictions instead of those in the approval order, it may not elect
to revert to the applicable conditions of the order.
Real estate investment activities. Comments describing the contents
of subpart A include an extensive discussion of the FDIC's concerns
with real estate investment activities. Subpart A of the final
regulation contains significant provisions regarding the real estate
investment activities of majority-owned subsidiaries of insured state
banks. Additionally, subpart B addresses real estate activities of
majority-owned subsidiaries that may become permissible for national
bank subsidiaries.
The FDIC believes real estate investment activities present similar
risks when conducted by a service corporation of an insured state
savings association. However, subpart C of the proposal does not
incorporate any of the requirements imposed in subparts A and B on real
estate activities conducted by bank subsidiaries. While the FDIC
attempted to conform the treatment of insured state banks and their
subsidiaries and that of insured state savings associations and their
service corporations, differences in the governing statutes resulted in
some variances.
Service corporations of federal savings associations may engage in
numerous real estate investment activities and, therefore, these
activities are permissible for service corporations of insured state
savings associations. However, because real estate investment
activities are not permissible for a national bank, insured state
savings associations are required by the Home Owners' Loan Act or
regulations issued by the OTS to deduct from their regulatory capital
any investment in a service corporation engaging in these activities.
This deduction includes both the savings association's investments in
debt and equity of, and extensions of credit to, the service
corporation. There are also statutory limitations on the amount of a
savings association's investments in and credit extensions to service
corporations.
Given that: (1) Real estate investment activities are permissible
for service corporations of federal savings associations; (2) there are
statutory requirements regarding the capital deduction; and (3) there
are statutory limitations on investments and credit extensions, the
proposal did not contain any provisions concerning the real estate
investment activities of service corporations of insured savings
associations. As a result, the arm's length transaction requirements,
the prohibition on purchasing low quality assets, the insider
transaction restriction, and the collateralization requirements were
not applied to transactions between an insured savings association and
a service corporation engaging in real estate investment activities.
Additionally, neither the insured savings association nor the service
corporation was required to meet the eligibility standards; nor was a
notice required to be submitted to the FDIC (unless a notice is needed
pursuant to proposed subpart D).
The FDIC specifically requested comment on whether provisions
should be added to part 362 subjecting service corporations of insured
savings state savings associations to the eligibility requirements and
various restrictions implemented in subparts A and B. Despite this
request, no comments were received addressing this issue. After further
consideration, the FDIC has decided not to impose any of the discussed
requirements at this time. The FDIC will instead continue to defer to
the statutory authority enabling service corporations to engage in the
subject real estate activities.
Notice that a federal savings association is conducting activities
grandfathered under section 5(i)(4) of HOLA. Section 303.147 (as
effective October 1, 1998, formerly Sec. 303.13(g)) of the FDIC's
current regulations requires any federal savings association that is
authorized by section 5(i)(4) of HOLA to conduct activities that are
not normally permitted for federal savings associations to file a
notice of that fact with the FDIC. Section 5(i)(4) of HOLA provides
that any federal savings bank chartered as such prior to October 15,
1982, may continue to make investments and continue to conduct
[[Page 66322]]
activities it was permitted to conduct prior to October 15, 1982. It
also provides that any federal savings bank organized prior to October
15, 1982, that was formerly a state mutual savings bank may continue to
make investments and engage in activities that were authorized to it
under state law. Finally, the provision confers this grandfather on any
federal savings association that acquires by merger or consolidation
any federal savings bank that enjoys the grandfather.
The notice requirement contained in Sec. 303.147 (as effective
October 1, 1998, formerly Sec. 303.13(g)) was deleted in the final
regulation. The notice was not required by law and was formerly imposed
by the FDIC as an information gathering tool. The FDIC determined that
eliminating the notice will reduce burden and will not materially
affect the FDIC's supervisory responsibilities.
D. Subpart D of Part 362 Acquiring, Establishing, or Conducting New
Activities Through a Subsidiary by an Insured Savings Association
Section 362.14 Purpose and Scope
Subpart D implements the statutory requirement of section 18(m) of
the FDI Act. Section 18(m) requires that prior notice be given to the
FDIC when an insured savings association, either federal or state,
establishes or acquires a subsidiary or engages in any new activity in
a subsidiary. This requirement is based on the FDIC's role of ensuring
that activities and investments of insured savings associations do not
represent a significant risk to the affected deposit insurance fund. In
fulfilling that role, the FDIC needs to be aware of the activities
contemplated by subsidiaries of insured savings associations. It is
noted that for purposes of this subpart, a service corporation is a
subsidiary, but the term subsidiary does not include any insured
depository institution as that term is defined in the FDI Act. Because
this requirement applies to both federal and state savings
associations, the final regulation segregates the implementing
requirements of the FDIC's regulations into a separate subpart D. In
that manner, the requirement is highlighted for both federal and state
savings associations. The FDIC adopts Sec. 362.14 without change from
the proposal.
Notice of the acquisition or establishment of a subsidiary, or
notice that an existing subsidiary will conduct new activities. Section
303.146 (as effective October 1, 1998, formerly Sec. 303.13(f)) of the
FDIC's current regulations establishes an abbreviated notice procedure
concerning subsidiaries created to hold real estate acquired pursuant
to DPC (after the first notice, additional real estate subsidiaries
created to hold real estate acquired through DPC could be established
after providing the FDIC with 14 days prior notice) and lists the
content of the notice. The second item is also deleted because the FDIC
seeks to conform all notice periods used in this regulation. While
Sec. 362.15 continues to require a prior notice, the required content
of the notice was revised in a manner consistent with that required for
other notices under this regulation and moved to Sec. 303.141 of
subpart H of part 303. The FDIC wants to make it clear that any notice
or application submitted to the FDIC pursuant to a provision of subpart
C of this regulation will satisfy the notice requirement of this
subpart D.
The FDIC received no comments on either the proposed structure of
this subpart or the proposed treatment of the required notices. The
final regulation incorporates these changes as proposed, with one
exception. Consistent with the current rule, the savings association
must submit the notice at least 30 days before establishing the new
subsidiary or commencing the new activity.
Part 303
Subpart G--Activities of Insured State Banks
Overview
As a part of this rulemaking, Part 303--Filing Procedures and
Delegations of Authority, is amended to include a new subpart G
containing application procedures and delegations of authority for the
substantive matters covered by the regulation for insured state
banks.\16\ As discussed above, the FDIC has prepared a complete
revision of part 303 of the FDIC's rules and regulations containing the
FDIC's applications procedures and delegations of authority. As part of
these revisions to part 303, subpart G of part 303 has been reserved
for this purpose. The application procedures were detailed in subpart E
of the part 362 proposal but are now being relocated to subpart G of
part 303, to centralize all banking application and notice procedures
in one convenient place.
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\16\ Under the FDIC's current rules, these application
requirements are located in various sections of three different
regulations: 12 CFR 303, 12 CFR 337.4 and 12 CFR 362.
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The FDIC received four comments about its proposed application
procedures. One commenter generally applauded the FDIC's adoption of
expedited notice procedures as being consistent with congressional
intent to reduce regulatory burden on banks. The remaining three
comments are discussed in turn below. After careful consideration of
these comments, the FDIC has decided they raise no issues warranting
substantive changes to the proposed procedures. The FDIC has made
certain technical changes to the proposed procedures, but these consist
of minor revisions in order to make the procedures consistent with the
other subparts of part 303, as adopted in its final form and published
at 63 FR 44686 (August 20, 1998).
Section 303.120 Scope
This subpart contains the procedural and other information for any
application or notice that must be submitted under the requirements
specified for activities and investments of insured state banks and
their subsidiaries under subparts A and B of part 362, including the
format, information requirements, FDIC processing deadlines, and other
pertinent guidelines or instructions. The regulation also contains
delegations of authority from the Board of Directors to the director
and deputy director of the Division of Supervision.
Definitions. The proposed subpart E of part 362 contained
definitions of the following terms: ``Appropriate regional director'',
``appropriate deputy regional director'', ``appropriate regional
office'', ``associate director'', ``deputy director'', ``deputy
regional director'', ``DOS'', ``director'', and ``regional director''.
These definitions have been eliminated since these terms are defined in
part 303, and separate definitions are unnecessary.
Although other subparts of part 303 rely on part 303's definition
of an ``eligible insured depository institution'' in connection with
granting expedited processing for certain FDIC applications, subpart G
does not rely on the part 303 definition. A bank's eligibility for
expedited notice processing in connection with an approval required
under subpart A or B of part 362 is determined under the criteria
contained in part 362.
Section 303.121 Filing Procedures
This section explains to insured state banks where they should
file, how they should file and the contents of any filing, including
any copies of any application or notice filed with another agency.
This section also explains that the appropriate regional director
may request additional information. The FDIC does not anticipate that
there will
[[Page 66323]]
be a need routinely to request additional information; however, this
reservation is made in anticipation of differences in the way
activities are proposed to be conducted.
One commenter expressed concerns regarding the regulation's
requirement that the bank submit a copy of the order or other document
from the appropriate regulatory authority granting approval for the
bank to conduct the activity, if such approval is necessary and has
already been granted. The commenter was concerned that this would
foreclose the bank from making simultaneous submissions to state
regulatory authorities and the FDIC. To the contrary, the language at
the end of the sentence, ``if such approval * * * has already been
granted'' will accommodate parallel processing. The bank need not wait
until the state has issued an approval before applying to the FDIC. The
regulatory language permits the bank to make necessary submissions to
the state and FDIC in whatever order the bank sees fit. Of course,
banks are reminded that an FDIC approval under subpart A or B of part
362 is not sufficient on its own; the activity in question must still
be authorized under state law, including any approvals thereunder,
before the bank may commence the activity. Where the pendency of state
approval creates uncertainty as to the manner or extent to which the
activity will be conducted, the appropriate regional director will
request additional information from the bank concerning the state
approval, and the notice or application may not be sufficiently
complete for the FDIC to be able to process it until such uncertainties
are resolved.
Section 303.122 Processing
This section sets out the procedures for the FDIC's processing of
notices and applications. The expedited processing period for notices
will normally be 30 days, subject to extension for an additional 15
days upon written notice to the bank. If the FDIC removes a notice from
expedited processing because of significant supervisory concerns, legal
or policy issues, or other good cause, as set out in the rule, standard
processing will be used. For notices removed in this manner, or for
activities requiring a full application rather than a notice, the FDIC
will normally review and act within 60 days after receipt of a
completed application, subject to extension for an additional 30 days
upon written notice to the bank. One comment supported the notice
process as regulatory burden reduction. Two comments questioned the
time periods for processing. One stated that the 30-and 60-day time
frames do not reflect business reality. The commenter requested that
institutions have advanced approval to invest up to 10 percent of
capital. The other questioned the notice process, stating that the FDIC
will not have sufficient opportunity to review the request. Because of
the differences among the activities presented, the FDIC does not feel
that advance approval is a viable alternative. Given normal lead times
for business planning appropriate to a bank's decision to enter into a
new field of business activity, and given that the regulation does not
require FDIC approval on a project-by-project basis, the FDIC does not
believe the proposed time periods will impede banks' ability to compete
effectively. The notice and application procedures provide an expedited
processing time, but the FDIC feels the time constraints are sufficient
for appropriate supervisory consideration. Therefore, no changes have
been made to the proposed processing times.
Section 303.123 Delegation of Authority
The authority to review and act upon applications and notices is
delegated in this section. One substantive change to the existing
delegation is the addition of the deputy director of the Division of
Supervision. Another change authorizes the Director (DOS) to make
determinations concerning instruments having the character of debt
securities. This authority is granted to allow the FDIC to efficiently
respond to market changes. Section 24 prohibits insured state banks
from investing in equity securities. The FDIC has found that certain
instruments have sufficient characteristics of debt securities that
they may be excluded from the prohibition of investment in equity
securities. If the capital markets create similar such instruments in
the future, this provision permits the Director (DOS), either upon
request or at the FDIC's instigation, to identify them as such and
designate them as being eligible investments for state nonmember banks,
subject to the 15 percent of tier one capital limit set under
Sec. 362.3. The FDIC would notify state banks of such determination by
issuing a Financial Institution Letter, or through other appropriate
means.
Subpart H--Activities of Insured Savings Associations
Overview
As a part of this rulemaking, part 303--Filing Procedures and
Delegations of Authority, is amended to include a revised subpart H
containing application procedures and delegations of authority for the
substantive matters covered by the regulation for insured state savings
associations. As discussed above, the FDIC has prepared a complete
revision of part 303 of the FDIC's rules and regulations containing the
FDIC's applications procedures and delegations of authority. As part of
these revisions to part 303, subpart H of part 303 has been reserved
for this purpose. The application procedures were detailed in subpart F
of the part 362 proposal but are now being relocated to subpart H of
part 303 to centralize all savings association application and notice
procedures in one convenient place.
The FDIC received no comments about its proposed application
procedures. The FDIC has made certain technical changes to the proposed
procedures, but these changes consist of minor revisions to make the
procedures consistent with the other subparts of part 303, as adopted
in its final form.
Section 303.140 Scope
This subpart contains the procedural and other information for any
application or notice that must be submitted under the requirements
specified for activities and investments of insured state savings
associations and their subsidiaries under subparts C and D or part 362,
including the format, information requirements, FDIC processing
deadlines, and other pertinent guidelines or instructions. The
regulation also contains delegations of authority from the Board of
Directors to the director and deputy director of the Division of
Supervision.
Section 303.141 Definitions
The proposed subpart F contained definitions of the following
terms: ``Appropriate regional director'', ``appropriate deputy regional
director'', ``appropriate regional office'', ``associate director'',
``deputy director'', ``deputy regional director'', ``DOS'',
``director'', and ``regional director''. These definitions have been
eliminated since these terms are defined in part 303 and separate
definitions are unnecessary.
Although other subparts of part 303 rely on part 303's definition
of an ``eligible insured depository institution'' in connection with
granting expedited processing for certain FDIC applications, subpart H
does not rely on the part 303 definition. A savings association's
eligibility for expedited notice processing in connection with an
approval required under subpart C or D of part 362 is determined under
the criteria contained in part 362.
[[Page 66324]]
Section 303.141 Filing Procedures
This section explains to insured savings associations where they
should file, how they should file and the contents of any filing,
including any copies of any application or notice filed with another
agency.
This section also explains that the appropriate regional director
may request additional information. The FDIC does not anticipate that
there will be a need routinely to request additional information;
however, this reservation is made in anticipation of differences in the
way activities are proposed to be conducted.
Section 303.142 Processing
This section sets out the procedures for the FDIC's processing of
notices and applications. The expedited processing period for notices
will normally be 30 days, subject to extension for an additional 15
days upon written notice to the bank. If the FDIC removes a notice from
expedited processing because of significant supervisory concerns, legal
or policy issues, or other good cause, as set out in the rule, standard
processing will be used. For notices removed in this manner, or for
activities requiring a full application rather than a notice, the FDIC
will normally review and act within 60 days after receipt of a
completed application, subject to extension for an additional 30 days
upon written notice to the savings association.
Section 303.148 Delegation of Authority
The authority to review and act upon applications and notices is
delegated in this section. One substantive change to the existing
delegation is the addition of the deputy director of the Division of
Supervision. Another change authorizes the Director (DOS) to make
determinations concerning instruments having the character of debt
securities. This authority is granted to allow the FDIC to efficiently
respond to market changes. Section 28 prohibits insured state
associations from investing in equity securities. The FDIC has found
that certain instruments have characteristics of debt securities and
may be excluded from the prohibition of investment in equity
securities. If the capital markets create similar such instruments in
the future, this provision permits the Director (DOS), either upon
request or at the FDIC's instigation, to identify them as such and
designate them as being eligible investments for state nonmember banks,
up to the 15 percent of tier one capital limit set under Sec. 362.3.
The FDIC would notify state banks of such determination by issuing a
Financial Institution Letter, or other appropriate means.
V. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3501 et seq.), the FDIC may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
Public comment was invited on two collections of information contained
in the part 362 notice of proposed rulemaking and the two collections
were submitted to the Office of Management and Budget (OMB) for review.
No comment was received regarding either collection. OMB approved the
first collection, Activities and Investments of Insured State Banks,
under control number 3064-0111, which will expire November 30, 2000.
OMB approved the second collection, Activities and Investments of
Insured Savings Associations, under control number 3064-0104, which
will expire November 30, 2000. The FDIC continues to welcome comment
about the PRA aspects of this regulation. Such comment should identify
the particular subpart and information collection for which
consideration is desired and should be sent to Steven F. Hanft,
Assistant Executive Secretary (Regulatory Analysis), Federal Deposit
Insurance Corporation, Room F-4062, 550 17th Street NW, Washington, DC
20429.
VI. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
FDIC certifies that this rule will not have a significant economic
impact on a substantial number of small entities. The rule streamlines
requirements for all insured state banks and insured state savings
associations. The requirements for insured federal savings associations
are statutory and remain unchanged by this rule. It simplifies the
requirements that apply when insured state banks and insured state
savings associations create, invest in, or conduct new activities
through majority-owned corporate subsidiaries and service corporations,
respectively, by eliminating requirements for any filing or reducing
the burden from filing an application to filing a notice in other
instances. The rule also simplifies the information required for both
notices and applications. Whenever possible, the rule clarifies the
expectations of the FDIC when it requires notices or applications to
consent to activities by insured state banks and insured state savings
associations. The rule will make it easier for small insured state
banks and insured state savings associations to locate the rules that
apply to their investments.
VII. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Title II, Public Law 1004-121) provides generally for
agencies to report rules to Congress for review. The reporting
requirement is triggered when a federal agency issues a final rule.
Accordingly, the FDIC will file the appropriate reports with Congress
as required by SBREFA.
The Office of Management and Budget has determined that this final
rule does not constitute a ``major rule'' as defined by SBREFA.
List of Subjects
12 CFR Part 303
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking, Bank
merger, Branching, Foreign branches, Golden parachute payments, Insured
branches, Interstate branching, Reporting and recordkeeping
requirements, Savings associations.
12 CFR Part 337
Banks, banking, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 362
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking, Insured
depository institutions, Investments, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set forth above and under the authority of 12
U.S.C. 1819(a)(Tenth), the FDIC Board of Directors hereby amends 12 CFR
chapter III as follows:
PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY
1. The authority citation for part 303 is revised to read as
follows:
Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1,
1835a, 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.
2. Revise the subpart G heading and add subpart G, consisting of
Secs. 303.120 through 303.123, to read as follows:
[[Page 66325]]
Subpart G--Activities of Insured State Banks
Sec.
303.120 Scope.
303.121 Filing procedures.
303.122 Processing.
303.123 Delegation of authority.
Subpart G--Activities of Insured State Banks
Sec. 303.120 Scope.
This subpart sets forth procedures for complying with notice and
application requirements contained in subpart A of part 362 of this
chapter, governing insured state banks and their subsidiaries engaging
in activities which are not permissible for national banks and their
subsidiaries. This subpart also sets forth procedures for complying
with notice and application requirements contained in subpart B of part
362 of this chapter, governing certain activities of insured state
nonmember banks, their subsidiaries, and certain affiliates.
Sec. 303.121 Filing procedures.
(a) Where to file. A notice or application required by subpart A or
subpart B of part 362 of this chapter shall be submitted in writing to
the appropriate regional director (DOS).
(b) Contents of filing--(1) Filings generally. A complete letter
notice or letter application shall include the following information:
(i) A brief description of the activity and the manner in which it
will be conducted;
(ii) The amount of the bank's existing or proposed direct or
indirect investment in the activity as well as calculations sufficient
to indicate compliance with any specific capital ratio or investment
percentage limitation detailed in subpart A or B of part 362 of this
chapter;
(iii) A copy of the bank's business plan regarding the conduct of
the activity;
(iv) A citation to the state statutory or regulatory authority for
the conduct of the activity;
(v) A copy of the order or other document from the appropriate
regulatory authority granting approval for the bank to conduct the
activity if such approval is necessary and has already been granted;
(vi) A brief description of the bank's policy and practice with
regard to any anticipated involvement in the activity by a director,
executive office or principal shareholder of the bank or any related
interest of such a person; and
(vii) A description of the bank's expertise in the activity.
(2) [Reserved]
(3) Copy of application or notice filed with another agency. If an
insured state bank has filed an application or notice with another
federal or state regulatory authority which contains all of the
information required by paragraph (b) (1) of this section, the insured
state bank may submit a copy to the FDIC in lieu of a separate filing.
(4) Additional information. The appropriate regional director (DOS)
may request additional information to complete processing.
Sec. 303.122 Processing.
(a) Expedited processing. A notice filed by an insured state bank
seeking to commence or continue an activity under Sec. 362.4(b)(3)(i),
Sec. 362.4(b)(5), or Sec. 362.8(a)(2) of this chapter will be
acknowledged in writing by the FDIC and will receive expedited
processing, unless the applicant is notified in writing to the contrary
and provided a basis for that decision. The FDIC may remove the notice
from expedited processing for any of the reasons set forth in
Sec. 303.11(c)(2). Absent such removal, a notice processed under
expedited processing is deemed approved 30 days after receipt of a
complete notice by the FDIC (subject to extension for an additional 15
days upon written notice to the bank) or on such earlier date
authorized by the FDIC in writing.
(b) Standard processing for applications and notices that have been
removed from expedited processing. For an application filed by an
insured state bank seeking to commence or continue an activity under
Sec. 362.3(a)(2)(iii)(A), Sec. 362.3(b)(2)(i), Sec. 362.3(b)(2)(ii)(A),
Sec. 362.3(b)(2)(ii)(C), Sec. 362.4(b)(1), Sec. 362.4(b)(2),
Sec. 362.4(b)(4), Sec. 362.5(b)(2), Sec. 362.8(a)(2), or Sec. 362.8(b)
of this chapter or for notices which are not processed pursuant to the
expedited processing procedures, the FDIC will provide the insured
state bank with written notification of the final action as soon as the
decision is rendered. The FDIC will normally review and act in such
cases within 60 days after receipt of a completed application or notice
(subject to extension for an additional 30 days upon written notice to
the bank), but failure of the FDIC to act prior to the expiration of
these periods does not constitute approval.
Sec. 303.123 Delegations of authority.
(a) Instruments having the character of debt securities. Authority
is delegated to the Director (DOS) to make determinations contemplated
under Secs. 362.2(h) and 362.3(b)(2)(iii)(B) of this chapter.
(b) Other applications, notices, and actions. The authority to
review and act upon applications and notices filed pursuant to this
subpart G and to take any other action authorized by this subpart G or
subparts A and B of part 362 of this chapter is delegated to the
Director (DOS), and except as limited by paragraph (a) of this section,
to the Deputy Director and where confirmed in writing by the Director
to an associate director and the appropriate regional director and
deputy regional director.
3. Revise subpart H to read as follows:
Subpart H--Activities of Insured Savings Associations
Sec.
303.140 Scope.
303.141 Filing procedures.
303.142 Processing.
303.143 Delegation of authority.
Subpart H--Activities of Insured Savings Associations
Sec. 303.140 Scope.
This subpart sets forth procedures for complying with the notice
and application requirements contained in subpart C of part 362 of this
chapter, governing insured state savings associations and their service
corporations engaging in activities which are not permissible for
federal savings associations and their service corporations. This
subpart also sets forth procedures for complying with the notice
requirements contained in subpart D of part 362 of this chapter,
governing insured savings associations which establish or engage in new
activities through a subsidiary.
Sec. 303.141 Filing procedures.
(a) Where to file. All applications and notices required by subpart
C or subpart D of part 362 of this chapter are to be in writing and
filed with the appropriate regional director.
(b) Contents of filing--(1) Filings generally. A complete letter
notice or letter application shall include the following information:
(i) A brief description of the activity and the manner in which it
will be conducted;
(ii) The amount of the association's existing or proposed direct or
indirect investment in the activity as well as calculations sufficient
to indicate compliance with any specific capital ratio or investment
percentage limitation detailed in subpart C or D of this chapter;
(iii) A copy of the association's business plan regarding the
conduct of the activity;
(iv) A citation to the state statutory or regulatory authority for
the conduct of the activity;
[[Page 66326]]
(v) A copy of the order or other document from the appropriate
regulatory authority granting approval for the association to conduct
the activity if such approval is necessary and has already been
granted;
(vi) A brief description of the association's policy and practice
with regard to any anticipated involvement in the activity by a
director, executive officer or principal shareholder of the association
or any related interest of such a person; and
(vii) A description of the association's expertise in the activity.
(2) [Reserved]
(3) Copy of application or notice filed with another agency. If an
insured savings association has filed an application or notice with
another federal or state regulatory authority which contains all of the
information required by paragraph (b) (1) of this section, the insured
state bank may submit a copy to the FDIC in lieu of a separate filing.
(4) Additional information. The appropriate regional director (DOS)
may request additional information to complete processing.
Sec. 303.142 Processing.
(a) Expedited processing. A notice filed by an insured state
savings association seeking to commence or continue an activity under
Sec. 362.11(b)(2)(i), Sec. 362.12(b)(2)(i), or Sec. 362.12(b)(4) of
this chapter will be acknowledged in writing by the FDIC and will
receive expedited processing, unless the applicant is notified in
writing to the contrary and provided a basis for that decision. The
FDIC may remove the notice from expedited processing for any of the
reasons set forth in Sec. 303.11(c)(2). Absent such removal, a notice
processed under expedited processing is deemed approved 30 days after
receipt of a complete notice by the FDIC (subject to extension for an
additional 15 days upon written notice to the bank) or on such earlier
date authorized by the FDIC in writing.
(b) Standard processing for applications and notices that have been
removed from expedited processing. For an application filed by an
insured state savings association seeking to commence or continue an
activity under Sec. 362.11(a)(2), Sec. 362.11(b)(2), Sec. 362.12(b)(1)
of this chapter or for notices which are not processed pursuant to the
expedited processing procedures, the FDIC will provide the insured
state savings association with written notification of the final action
as soon as the decision is rendered. The FDIC will normally review and
act in such cases within 60 days after receipt of a completed
application or notice (subject to extension for an additional 30 days
upon written notice to the bank), but failure of the FDIC to act prior
to the expiration of these periods does not constitute approval.
(c) Notices of activities in excess of an amount permissible for a
federal savings association; subsidiary notices. Receipt of a notice
filed by an insured state savings association as required by
Sec. 362.11(b)(3) or Sec. 362.15 of this chapter will be acknowledged
in writing by the appropriate regional director (DOS). The notice will
be reviewed at the appropriate regional office, which will take such
action as it deems necessary and appropriate.
Sec. 303.143 Delegations of authority.
(a) Instruments having the character of debt securities. Authority
is delegated to the Director (DOS) to make determinations contemplated
under Secs. 362.2(h) and 362.3(b)(2)(iii)(B) of this chapter.
(b) Other applications, notices, and actions. The authority to
review and act upon applications and notices filed pursuant to this
subpart H and to take any other action authorized by this subpart H or
subparts C and D of part 362 of this chapter is delegated to the
Director (DOS), and except as limited by paragraph (a) of this section,
to the Deputy Director and where confirmed in writing by the Director
to an associate director and the appropriate regional director and
deputy regional director.
PART 337--UNSAFE AND UNSOUND BANKING PRACTICES
4. The authority citation for part 337 continues to read as
follows:
Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b),
1819, 1820(d)(10), 1821(f), 1828(j)(2), 1831f, 1831f-1.
5. In Sec. 337.4, a new paragraph (i) is added to read as follows:
Sec. 337.4 Securities activities of subsidiaries of insured nonmember
banks; bank transactions with affiliated securities companies.
* * * * *
(i) Coordination with part 362 of this chapter--(1) New subsidiary
or affiliate relationships. Beginning January 1, 1999, every insured
state nonmember bank that establishes a new subsidiary relationship
subject to the provisions of Sec. 362.4(b)(4) or Sec. 362.4(b)(5)(ii)
of this chapter or a new affiliate relationship that is subject to
Sec. 362.8(b) of this chapter shall comply with Sec. 362.4(b)(4),
Sec. 362.4(b)(5)(ii) or Sec. 362.8(b) of this chapter, respectively, or
to the extent the insured state nonmember bank's planned subsidiary or
affiliate will not comply with all requirements thereunder, submit an
application to the FDIC under Sec. 362.4(b)(1) or Sec. 362.8(b) of this
chapter, respectively. This section shall not apply to such subsidiary
or affiliate.
(2) Existing insured state nonmember bank subsidiaries subject to
Sec. 362.4. Applicable transition rules for insured state nonmember
bank subsidiaries engaged, before January 1, 1999, in securities
activities pursuant to this section and also subject to Sec. 362.4 of
this chapter are set out in Sec. 362.5 of this chapter.
(3) Continued effectiveness of this section. Insured state
nonmember banks establishing or holding subsidiaries or affiliates
subject to this section, but not covered by Sec. 362.4 or Sec. 362.8 of
this chapter, remain subject to the requirements of this section,
except that to the extent such subsidiaries or affiliates engage only
in activities permissible for a national bank directly, including such
permissible activities that may require the subsidiary or affiliate to
register as a securities broker, no notice under paragraph (d) of this
section is required.
6. Part 362 is revised to read as follows:
PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS
ASSOCIATIONS
Subpart A--Activities of Insured State Banks
Sec.
362.1 Purpose and scope.
362.2 Definitions.
362.3 Activities of insured state banks.
362.4 Subsidiaries of insured state banks.
362.5 Approvals previously granted.
Subpart B--Safety and Soundness Rules Governing Insured State
Nonmember Banks
362.6 Purpose and scope.
362.7 Definitions.
362.8 Restrictions on activities of insured state nonmember banks.
Subpart C--Activities of Insured State Savings Associations
362.9 Purpose and scope.
362.10 Definitions.
362.11 Activities of insured state savings associations.
362.12 Service corporations of insured state savings associations.
362.13 Approvals previously granted.
[[Page 66327]]
Subpart D--Acquiring, Establishing, or Conducting New Activities
Through a Subsidiary by an Insured Savings Association
362.14 Purpose and scope.
362.15 Acquiring or establishing a subsidiary; conducting new
activities through a subsidiary.
Authority: 12 U.S.C. 1816, 1818, 1819(a)(Tenth), 1828(m), 1831a,
1831e.
Subpart A--Activities of Insured State Banks
Sec. 362.1 Purpose and scope.
(a) This subpart, along with the notice and application procedures
in subpart G of part 303 of this chapter, implements the provisions of
section 24 of the Federal Deposit Insurance Act (12 U.S.C. 1831a) that
restrict and prohibit insured state banks and their subsidiaries from
engaging in activities and investments that are not permissible for
national banks and their subsidiaries. The phrase ``activity
permissible for a national bank'' means any activity authorized for
national banks under any statute including the National Bank Act (12
U.S.C. 21 et seq.), as well as activities recognized as permissible for
a national bank in regulations, official circulars, bulletins, orders
or written interpretations issued by the Office of the Comptroller of
the Currency (OCC).
(b) This subpart does not cover the following activities:
(1) Activities conducted other than ``as principal,'' defined for
purposes of this subpart as activities conducted as agent for a
customer, conducted in a brokerage, custodial, advisory, or
administrative capacity, or conducted as trustee, or in any
substantially similar capacity. For example, this subpart does not
cover acting solely as agent for the sale of insurance, securities,
real estate, or travel services; nor does it cover acting as trustee,
providing personal financial planning advice, or safekeeping services;
(2) Interests in real estate in which the real property is used or
intended in good faith to be used within a reasonable time by an
insured state bank or its subsidiaries as offices or related facilities
for the conduct of its business or future expansion of its business or
used as public welfare investments of a type permissible for national
banks; and (3) Equity investments acquired in connection with debts
previously contracted (DPC) if the insured state bank does not hold the
property for speculation and takes only such actions as would be
permissible for a national bank's DPC. The bank must dispose of the
property within the shorter of the period set by federal law for
national banks or the period allowed under state law. For real estate,
national banks may not hold DPC for more than 10 years. For equity
securities, national banks must generally divest DPC as soon as
possible consistent with obtaining a reasonable return.
(c) A subsidiary of an insured state bank may not engage in real
estate investment activities that are not permissible for a subsidiary
of a national bank unless the bank does so through a subsidiary of
which the bank is a majority owner, is in compliance with applicable
capital standards, and the FDIC has determined that the activity poses
no significant risk to the appropriate deposit insurance fund. This
subpart provides standards for majority-owned subsidiaries of insured
state banks engaging in real estate investment activities that are not
permissible for a subsidiary of a national bank. Because of safety and
soundness concerns relating to real estate investment activities,
subpart B of this part reflects special rules for subsidiaries of
insured state nonmember banks that engage in real estate investment
activities of a type that are not permissible for a national bank, but
may be otherwise permissible for a subsidiary of a national bank.
(d) The FDIC intends to allow insured state banks and their
subsidiaries to undertake only safe and sound activities and
investments that do not present significant risks to the deposit
insurance funds and that are consistent with the purposes of federal
deposit insurance and other applicable law. This subpart does not
authorize any insured state bank to make investments or to conduct
activities that are not authorized or that are prohibited by either
state or federal law.
Sec. 362.2 Definitions.
For the purposes of this subpart, the following definitions will
apply:
(a) Bank, state bank, savings association, state savings
association, depository institution, insured depository institution,
insured state bank, federal savings association, and insured state
nonmember bank shall each have the same respective meaning contained in
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(b) Activity means the conduct of business by a state-chartered
depository institution, including acquiring or retaining an equity
investment or other investment.
(c) Change in control means any transaction:
(1) By a state bank or its holding company for which a notice is
required to be filed with the FDIC, or the Board of Governors of the
Federal Reserve System (FRB), pursuant to section 7(j) of the Federal
Deposit Insurance Act (12 U.S.C. 1817(j)) except a transaction that is
presumed to be an acquisition of control under the FDIC's or FRB's
regulations implementing section 7(j);
(2) As a result of which a state bank eligible for the exception
described in Sec. 362.3(a)(2)(iii) is acquired by or merged into a
depository institution that is not eligible for the exception, or as a
result of which its holding company is acquired by or merged into a
holding company which controls one or more bank subsidiaries not
eligible for the exception; or
(3) In which control of the state bank is acquired by a bank
holding company in a transaction requiring FRB approval under section 3
of the Bank Holding Company Act (12 U.S.C. 1842), other than a one bank
holding company formation in which all or substantially all of the
shares of the holding company will be owned by persons who were
shareholders of the bank.
(d) Company means any corporation, partnership, limited liability
company, business trust, association, joint venture, pool, syndicate or
other similar business organization.
(e) Control means the power to vote, directly or indirectly, 25
percent or more of any class of the voting securities of a company, the
ability to control in any manner the election of a majority of a
company's directors or trustees, or the ability to exercise a
controlling influence over the management and policies of a company.
(f) Convert its charter means an insured state bank undergoes any
transaction that causes the bank to operate under a different form of
charter than it had as of December 19, 1991, except a change from
mutual to stock form shall not be considered a charter conversion.
(g) Equity investment means an ownership interest in any company;
any membership interest that includes a voting right in any company;
any interest in real estate; any transaction which in substance falls
into any of these categories even though it may be structured as some
other form of business transaction; and includes an equity security.
The term ``equity investment'' does not include any of the foregoing if
the interest is taken as security for a loan.
(h) Equity security means any stock (other than adjustable rate
preferred stock, money market (auction rate) preferred stock, or other
newly developed instrument determined by the FDIC to have the character
of debt
[[Page 66328]]
securities), certificate of interest or participation in any profit-
sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
or voting-trust certificate; any security immediately convertible at
the option of the holder without payment of substantial additional
consideration into such a security; any security carrying any warrant
or right to subscribe to or purchase any such security; and any
certificate of interest or participation in, temporary or interim
certificate for, or receipt for any of the foregoing.
(i) Extension of credit, executive officer, director, principal
shareholder, and related interest each has the same respective meaning
as is applicable for the purposes of section 22(h) of the Federal
Reserve Act (12 U.S.C. 375b) and Sec. 337.3 of this chapter.
(j) Institution shall have the same meaning as ``state-chartered
depository institution.''
(k) Majority-owned subsidiary means any corporation in which the
parent insured state bank owns a majority of the outstanding voting
stock.
(l) National securities exchange means a securities exchange that
is registered as a national securities exchange by the Securities and
Exchange Commission pursuant to section 6 of the Securities Exchange
Act of 1934 (15 U.S.C. 78f) and the National Market System, i.e., the
top tier of the National Association of Securities Dealers Automated
Quotation System.
(m) Real estate investment activity means any interest in real
estate (other than as security for a loan) held directly or indirectly
that is not permissible for a national bank.
(n) Residents of the state includes individuals living in the
state, individuals employed in the state, any person to whom the
company provided insurance as principal without interruption since such
person resided in or was employed in the state, and companies or
partnerships incorporated in, organized under the laws of, licensed to
do business in, or having an office in the state.
(o) Security has the same meaning as it has in part 344 of this
chapter.
(p) Significant risk to the deposit insurance fund shall be
understood to be present whenever the FDIC determines there is a high
probability that any insurance fund administered by the FDIC may suffer
a loss. Such risk may be present either when an activity contributes or
may contribute to the decline in condition of a particular state-
chartered depository institution or when a type of activity is found by
the FDIC to contribute or potentially contribute to the deterioration
of the overall condition of the banking system.
(q) State-chartered depository institution means any state bank or
state savings association insured by the FDIC.
(r) Subsidiary means any company controlled by an insured
depository institution.
(s) Tier one capital has the same meaning as set forth in part 325
of this chapter for an insured state nonmember bank. For other state-
chartered depository institutions, the term ``tier one capital'' has
the same meaning as set forth in the capital regulations adopted by the
appropriate federal banking agency.
(t) Well-capitalized has the same meaning set forth in part 325 of
this chapter for an insured state nonmember bank. For other state-
chartered depository institutions, the term ``well-capitalized'' has
the same meaning as set forth in the capital regulations adopted by the
appropriate federal banking agency.
Sec. 362.3 Activities of insured state banks.
(a) Equity investments. (1) Prohibited equity investments. No
insured state bank may directly or indirectly acquire or retain as
principal any equity investment of a type that is not permissible for a
national bank unless one of the exceptions in paragraph (a)(2) of this
section applies.
(2) Exceptions. (i) Equity investment in majority-owned
subsidiaries. An insured state bank may acquire or retain an equity
investment in a subsidiary of which the bank is a majority owner,
provided that the subsidiary is engaging in activities that are allowed
pursuant to the provisions of or by application under Sec. 362.4(b).
(ii) Investments in qualified housing projects. An insured state
bank may invest as a limited partner in a partnership, or as a
noncontrolling interest holder of a limited liability company, the sole
purpose of which is to invest in the acquisition, rehabilitation, or
new construction of a qualified housing project, provided that the
bank's aggregate investment (including legally binding commitments)
does not exceed, when made, 2 percent of total assets as of the date of
the bank's most recent consolidated report of condition prior to making
the investment. For the purposes of this paragraph (a)(2)(ii),
Aggregate investment means the total book value of the bank's
investment in the real estate calculated in accordance with the
instructions for the preparation of the consolidated report of
condition. Qualified housing project means residential real estate
intended to primarily benefit lower income persons throughout the
period of the bank's investment including any project that has received
an award of low income housing tax credits under section 42 of the
Internal Revenue Code (26 U.S.C. 42) (such as a reservation or
allocation of credits) from a state or local housing credit agency. A
residential real estate project that does not qualify for the tax
credit under section 42 of the Internal Revenue Code will qualify under
this exception if 50 percent or more of the housing units are to be
occupied by lower income persons. A project will be considered
residential despite the fact that some portion of the total square
footage of the project is utilized for commercial purposes, provided
that such commercial use is not the primary purpose of the project.
Lower income has the same meaning as ``low income'' and ``moderate
income'' as defined for the purposes of Sec. 345.12(n) (1) and (2) of
this chapter.
(iii) Grandfathered investments in common or preferred stock;
shares of investment companies. (A) General. An insured state bank that
is located in a state which as of September 30, 1991, authorized
investment in:
(1)(i) Common or preferred stock listed on a national securities
exchange (listed stock); or
(ii) Shares of an investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) (registered
shares); and
(2) Which during the period beginning on September 30, 1990, and
ending on November 26, 1991, made or maintained an investment in listed
stock or registered shares, may retain whatever lawfully acquired
listed stock or registered shares it held and may continue to acquire
listed stock and/or registered shares, provided that the bank files a
notice in accordance with section 24(f)(6) of the Federal Deposit
Insurance Act in compliance with Sec. 303.121 of this chapter and the
FDIC processes the notice without objection under Sec. 303.122 of this
chapter. Approval will be granted only if the FDIC determines that
acquiring or retaining the stock or shares does not pose a significant
risk to the appropriate deposit insurance fund. Approval may be subject
to whatever conditions or restrictions the FDIC determines are
necessary or appropriate.
(B) Loss of grandfather exception. The exception for grandfathered
investments under paragraph (a)(2)(iii)(A) of this section shall no
longer apply if the bank converts its charter or the bank or its parent
holding company undergoes a change in control. If any of these events
occur, the bank may retain its existing
[[Page 66329]]
investments unless directed by the FDIC or other applicable authority
to divest the listed stock or registered shares.
(C) Maximum permissible investment. A bank's aggregate investment
in listed stock and registered shares under paragraph (a)(2)(iii)(A) of
this section shall in no event exceed, when made, 100 percent of the
bank's tier one capital as measured on the bank's most recent
consolidated report of condition (call report) prior to making any such
investment. The lower of the bank's cost as determined in accordance
with call report instructions or the market value of the listed stock
and shares shall be used to determine compliance. The FDIC may
determine when acting upon a notice filed in accordance with paragraph
(a)(2)(iii)(A)(2) of this section that the permissible limit for any
particular insured state bank is something less than 100 percent of
tier one capital.
(iv) Stock investment in insured depository institutions owned
exclusively by other banks and savings associations. An insured state
bank may acquire or retain the stock of an insured depository
institution if the insured depository institution engages only in
activities permissible for national banks; the insured depository
institution is subject to examination and regulation by a state bank
supervisor; the voting stock is owned by 20 or more insured depository
institutions, but no one institution owns more than 15 percent of the
voting stock; and the insured depository institution's stock (other
than directors' qualifying shares or shares held under or acquired
through a plan established for the benefit of the officers and
employees) is owned only by insured depository institutions.
(v) Stock investment in insurance companies--(A) Stock of director
and officer liability insurance company. An insured state bank may
acquire and retain up to 10 percent of the outstanding stock of a
corporation that solely provides or reinsures directors', trustees',
and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions.
(B) Stock of savings bank life insurance company. An insured state
bank located in Massachusetts, New York, or Connecticut may own stock
in a savings bank life insurance company, provided that the savings
bank life insurance company provides written disclosures to purchasers
or potential purchasers of life insurance policies, other insurance
products, and annuities that are consistent with the disclosures
described in the Interagency Statement on the Retail Sale of Nondeposit
Investment Products (FIL-9-94,1 February 17, 1994) or any
successor requirement which indicates that the policies, products, and
annuities are not FDIC insured deposits, are not guaranteed by the bank
and are subject to investment risks, including possible loss of the
principal amount invested.
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\ 1\ Financial institution letters (FILs) are available in the
FDIC Public Information Center, room 100, 801 17th Street, N.W.,
Washington, D.C. 20429.
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(b) Activities other than equity investments--(1) Prohibited
activities. An insured state bank may not directly or indirectly engage
as principal in any activity, that is not an equity investment, and is
of a type not permissible for a national bank unless one of the
exceptions in paragraph (b)(2) of this section applies.
(2) Exceptions--(i) Consent obtained through application. An
insured state bank that meets and continues to meet the applicable
capital standards set by the appropriate federal banking agency may
conduct activities prohibited by paragraph (b)(1) of this section if
the bank obtains the FDIC's prior written consent. Consent will be
given only if the FDIC determines that the activity poses no
significant risk to the affected deposit insurance fund. Applications
for consent should be filed in accordance with Sec. 303.121 of this
chapter and will be processed under Sec. 303.122(b) of this chapter.
Approvals granted under Sec. 303.122(b) of this chapter may be made
subject to any conditions or restrictions found by the FDIC to be
necessary to protect the deposit insurance funds from risk, to prevent
unsafe or unsound banking practices, and/or to ensure that the activity
is consistent with the purposes of federal deposit insurance and other
applicable law.
(ii) Insurance underwriting--(A) Savings bank life insurance. An
insured state bank that is located in Massachusetts, New York or
Connecticut may provide as principal savings bank life insurance
through a department of the bank, provided that the department meets
the core standards of paragraph (c) of this section or submits an
application in compliance with Sec. 303.121 of this chapter and the
FDIC grants its consent under the procedures in Sec. 303.122(b) of this
chapter, and the department provides purchasers or potential purchasers
of life insurance policies, other insurance products and annuities
written disclosures that are consistent with the disclosures described
in the Interagency Statement on the Retail Sale of Nondeposit
Investment Products (FIL-9-94, February 17, 1994) and any successor
requirement which indicates that the policies, products and annuities
are not FDIC insured deposits, are not guaranteed by the bank, and are
subject to investment risks, including the possible loss of the
principal amount invested.
(B) Federal crop insurance. Any insured state bank that was
providing insurance as principal on or before September 30, 1991, which
was reinsured in whole or in part by the Federal Crop Insurance
Corporation, may continue to do so.
(C) Grandfathered insurance underwriting. A well-capitalized
insured state bank that on November 21, 1991, was lawfully providing
insurance as principal through a department of the bank may continue to
provide the same types of insurance as principal to the residents of
the state or states in which the bank did so on such date provided that
the bank's department meets the core standards of paragraph (c) of this
section, or submits an application in compliance with Sec. 303.121 of
this chapter and the FDIC grants its consent under the procedures in
Sec. 303.122(b) of this chapter.
(iii) Acquiring and retaining adjustable rate and money market
preferred stock. (A) An insured state bank's investment of up to 15
percent of the bank's tier one capital in adjustable rate preferred
stock or money market (auction rate) preferred stock does not represent
a significant risk to the deposit insurance funds. An insured state
bank may conduct this activity without first obtaining the FDIC's
consent, provided that the bank meets and continues to meet the
applicable capital standards as prescribed by the appropriate federal
banking agency. The fact that prior consent is not required by this
subpart does not preclude the FDIC from taking any appropriate action
with respect to the activities if the facts and circumstances warrant
such action.
(B) An insured state bank may acquire or retain other instruments
of a type determined by the FDIC to have the character of debt
securities and not to represent a significant risk to the deposit
insurance funds. Such instruments shall be included in the 15 percent
of tier one capital limit imposed in paragraph (b)(2)(iii)(A) of this
section. An insured state bank may conduct this activity without first
obtaining the FDIC's consent, provided that the bank meets and
continues to meet the applicable capital standards as prescribed by the
appropriate federal banking agency. The fact that prior consent is not
required by this subpart does not preclude the FDIC from taking any
appropriate action with respect to
[[Page 66330]]
the activities if the facts and circumstances warrant such action.
(c) Core standards. For any insured state bank to be eligible to
conduct insurance activities listed in paragraph (b)(2)(ii)(A) or (C)
of this section, the bank must conduct the activities in a department
that meets the following core separation and operating standards:
(1) The department is physically distinct from the remainder of the
bank;
(2) The department maintains separate accounting and other records;
(3) The department has assets, liabilities, obligations and
expenses that are separate and distinct from those of the remainder of
the bank;
(4) The department is subject to state statute that requires its
obligations, liabilities and expenses be satisfied only with the assets
of the department; and
(5) The department informs its customers that only the assets of
the department may be used to satisfy the obligations of the
department.
Sec. 362.4 Subsidiaries of insured state banks.
(a) Prohibition. A subsidiary of an insured state bank may not
engage as principal in any activity that is not of a type permissible
for a subsidiary of a national bank, unless it meets one of the
exceptions in paragraph (b) of this section.
(b) Exceptions--(1) Consent obtained through application. A
subsidiary of an insured state bank may conduct otherwise prohibited
activities if the bank obtains the FDIC's prior written consent and the
insured state bank meets and continues to meet the applicable capital
standards set by the appropriate federal banking agency. Consent will
be given only if the FDIC determines that the activity poses no
significant risk to the affected deposit insurance fund. Applications
for consent should be filed in accordance with Sec. 303.121 of this
chapter and will be processed under Sec. 303.122(b) of this chapter.
Approvals granted under Sec. 303.122(b) of this chapter may be made
subject to any conditions or restrictions found by the FDIC to be
necessary to protect the deposit insurance funds from risk, to prevent
unsafe or unsound banking practices, and/or to ensure that the activity
is consistent with the purposes of federal deposit insurance and other
applicable law.
(2) Grandfathered insurance underwriting subsidiaries. A subsidiary
of an insured state bank may:
(i) Engage in grandfathered insurance underwriting if the insured
state bank or its subsidiary on November 21, 1991, was lawfully
providing insurance as principal. The subsidiary may continue to
provide the same types of insurance as principal to the residents of
the state or states in which the bank or subsidiary did so on such date
provided that:
(A)(1) The bank meets the capital requirements of paragraph (e) of
this section; and
(2) The subsidiary is an ``eligible subsidiary'' as described in
paragraph (c)(2) of this section; or
(B) The bank submits an application in compliance with Sec. 303.121
of this chapter and the FDIC grants its consent under the procedures in
Sec. 303.122(b) of this chapter.
(ii) Continue to provide as principal title insurance, provided the
bank was required before June 1, 1991, to provide title insurance as a
condition of the bank's initial chartering under state law and neither
the bank nor its parent holding company undergoes a change in control.
(iii) May continue to provide as principal insurance which is
reinsured in whole or in part by the Federal Crop Insurance Corporation
if the subsidiary was engaged in the activity on or before September
30, 1991.
(3) Majority-owned subsidiaries' ownership of equity investments
that represent a control interest in a company. The FDIC has determined
that investment in the following by a majority-owned subsidiary of an
insured state bank does not represent a significant risk to the deposit
insurance funds:
(i) Equity investment in a company engaged in real estate or
securities activities authorized in paragraph (b)(5) of this section if
the bank complies with the following restrictions and files a notice in
compliance with Sec. 303.121 of this chapter and the FDIC processes the
notice without objection under Sec. 303.122(a) of this chapter. The
FDIC is not precluded from taking any appropriate action or imposing
additional requirements with respect to the activity if the facts and
circumstances warrant such action. If changes to the management or
business plan of the company at any time result in material changes to
the nature of the company's business or the manner in which its
business is conducted, the insured state bank shall advise the
appropriate regional director (DOS) in writing within 10 business days
after such change. Investment under this paragraph is authorized if:
(A) The majority-owned subsidiary controls the company;
(B) The bank meets the core eligibility criteria of paragraph
(c)(1) of this section;
(C) The majority-owned subsidiary meets the core eligibility
criteria of paragraph (c)(2) of this section (including any
modifications thereof applicable under paragraph (b)(5)(i) of this
section), or the company is a corporation meeting such criteria;
(D) The bank's transactions with the majority-owned subsidiary, and
the bank's transactions with the company, comply with the investment
and transaction limits of paragraph (d) of this section;
(E) The bank complies with the capital requirements of paragraph
(e) of this section with respect to the majority-owned subsidiary and
the company; and
(F) To the extent the company is engaged in securities activities
authorized by paragraph (b)(5)(ii) of this section, the bank and the
company comply with the additional requirements therein as if the
company were a majority-owned subsidiary.
(ii) Equity securities of a company engaged in the following
activities, if the majority-owned subsidiary controls the company or
the company is controlled by insured depository institutions, and the
bank meets and continues to meet the applicable capital standards as
prescribed by the appropriate federal banking agency. The FDIC consents
that a majority-owned subsidiary may conduct such activity without
first obtaining the FDIC's consent. The fact that prior consent is not
required by this subpart does not preclude the FDIC from taking any
appropriate action with respect to the activity if the facts and
circumstances warrant such action:
(A) Any activity that is permissible for a national bank, including
such permissible activities that may require the company to register as
a securities broker;
(B) Acting as an insurance agency;
(C) Engaging in any activity permissible for an insured state bank
under Sec. 362.3(b)(2)(iii) to the same extent permissible for the
insured bank thereunder, so long as instruments held under this
paragraph (b)(3)(ii)(C), paragraph (b)(7) of this section, and
Sec. 362.3(b)(2)(iii) in the aggregate do not exceed the limit set by
Sec. 362.3(b)(2)(iii);
(D) Engaging in any activity permissible for a majority-owned
subsidiary of an insured state bank under paragraph (b)(6) of this
section to the same extent and manner permissible for the majority-
owned subsidiary thereunder; and
(4) Majority-owned subsidiary's ownership of certain securities
that do not represent a control interest. (i) Grandfathered investments
in common or preferred stock and shares of
[[Page 66331]]
investment companies. Any insured state bank that has received approval
to invest in common or preferred stock or shares of an investment
company pursuant to Sec. 362.3(a)(2)(iii) may conduct the approved
investment activities through a majority-owned subsidiary of the bank
without any additional approval from the FDIC provided that any
conditions or restrictions imposed with regard to the approval granted
under Sec. 362.3(a)(2)(iii) are met.
(ii) Bank stock. An insured state bank may indirectly through a
majority-owned subsidiary organized for such purpose invest in up to
ten percent of the outstanding stock of another insured bank.
(5) Majority-owned subsidiaries conducting real estate investment
activities and securities underwriting. The FDIC has determined that
the following activities do not represent a significant risk to the
deposit insurance funds, provided that the activities are conducted by
a majority-owned subsidiary of an insured state bank in compliance with
the core eligibility requirements listed in paragraph (c) of this
section; any additional requirements listed in paragraph (b)(5) (i) or
(ii) of this section; the bank complies with the investment and
transaction limitations of paragraph (d) of this section; and the bank
meets the capital requirements of paragraph (e) of this section. The
FDIC consents that these listed activities may be conducted by a
majority-owned subsidiary of an insured state bank if the bank files a
notice in compliance with Sec. 303.121 of this chapter and the FDIC
processes the notice without objection under Sec. 303.122(a) of this
chapter. The FDIC is not precluded from taking any appropriate action
or imposing additional requirements with respect to the activities if
the facts and circumstances warrant such action. If changes to the
management or business plan of the majority-owned subsidiary at any
time result in material changes to the nature of the majority-owned
subsidiary's business or the manner in which its business is conducted,
the insured state bank shall advise the appropriate regional director
(DOS) in writing within 10 business days after such change. Such a
majority-owned subsidiary may:
(i) Real estate investment activities. Engage in real estate
investment activities. However, the requirements of paragraph (c)(2)
(ii), (v), (vi), and (xi) of this section need not be met if the bank's
investment in the equity securities of the subsidiary does not exceed 2
percent of the bank's tier one capital; the bank has only one
subsidiary engaging in real estate investment activities; and the
bank's total investment in the subsidiary does not include any
extensions of credit from the bank to the subsidiary, any debt
instruments issued by the subsidiary, or any other transaction
originated by the bank that is used to benefit the subsidiary.
(ii) Securities activities. Engage in the public sale, distribution
or underwriting of securities that are not permissible for a national
bank under section 16 of the Banking Act of 1933 (12 U.S.C. 24
Seventh), provided that the following additional conditions are, and
continue to be, met:
(A) The state-chartered depository institution adopts policies and
procedures, including appropriate limits on exposure, to govern the
institution's participation in financing transactions underwritten or
arranged by an underwriting majority-owned subsidiary;
(B) The state-chartered depository institution may not express an
opinion on the value or the advisability of the purchase or sale of
securities underwritten or dealt in by a majority-owned subsidiary
unless the state-chartered depository institution notifies the customer
that the majority-owned subsidiary is underwriting or distributing the
security;
(C) The majority-owned subsidiary is registered with the Securities
and Exchange Commission, is a member in good standing with the
appropriate self-regulatory organization, and promptly informs the
appropriate regional director (DOS) in writing of any material actions
taken against the majority-owned subsidiary or any of its employees by
the state, the appropriate self-regulatory organizations or the
Securities and Exchange Commission; and
(D) The state-chartered depository institution does not knowingly
purchase as principal or fiduciary during the existence of any
underwriting or selling syndicate any securities underwritten by the
majority-owned subsidiary unless the purchase is approved by the state-
chartered depository institution's board of directors before the
securities are initially offered for sale to the public.
(6) Real estate leasing. A majority-owned subsidiary of an insured
state bank acting as lessor under a real property lease which is the
equivalent of a financing transaction, meeting the lease criteria of
paragraph (b)(6)(i) of this section and the underlying real estate
requirements of paragraph (b)(6)(ii) of this section, does not
represent a significant risk to the deposit insurance funds. A
majority-owned subsidiary may conduct this activity without first
obtaining the FDIC's consent, provided that the bank meets and
continues to meet the applicable capital standards as prescribed by the
appropriate federal banking agency. The fact that prior consent is not
required by this subpart does not preclude the FDIC from taking any
appropriate action with respect to the activity if the facts and
circumstances warrant such action.
(i) Lease criteria--(A) Capital lease. The lease must qualify as a
capital lease as to the lessor under generally accepted accounting
principles.
(B) Nonoperating basis. The bank and the majority-owned subsidiary
shall not, directly or indirectly, provide or be obligated to provide
servicing, repair, or maintenance to the property, except that the
lease may include provisions permitting the subsidiary to protect the
value of the leased property in the event of a change in circumstances
that increases the subsidiary's exposure to loss, or the subsidiary may
take reasonable and appropriate action to salvage or protect the value
of the leased property in such circumstances.
(ii) Underlying real property requirements--(A) Acquisition. The
majority-owned subsidiary may acquire specific real estate to be leased
only after the subsidiary has entered into:
(1) A lease meeting the requirements of paragraph (b)(6)(i) of this
section;
(2) A legally binding written commitment to enter into such a
lease; or
(3) A legally binding written agreement that indemnifies the
subsidiary against loss in connection with its acquisition of the
property.
(B) Improvements. Any expenditures by the majority-owned subsidiary
to make reasonable repairs, renovations, and improvements necessary to
render the property suitable to the lessee shall not exceed 25 percent
of the majority-owned subsidiary's full investment in the real estate.
(C) Divestiture. At the expiration of the initial lease (including
any renewals or extensions thereof), the majority-owned subsidiary
shall, as soon as practicable but in any event no less than two years,
either:
(1) Re-lease the property under a lease meeting the requirement of
paragraph (b)(6)(i)(B) of this section; or
(2) Divest itself of all interest in the property.
(7) Acquiring and retaining adjustable rate and money market
preferred stock and similar instruments. The FDIC has determined it
does not present a significant risk to the deposit insurance
[[Page 66332]]
funds for a majority-owned subsidiary of an insured state bank to
engage in any activity permissible for an insured state bank under
Sec. 362.3(b)(2)(iii), so long as instruments held under this
paragraph, paragraph (b)(3)(ii)(C) of this section, and
Sec. 362.3(b)(2)(iii) in the aggregate do not exceed the limit set by
Sec. 362.3(b)(2)(iii). A majority-owned subsidiary may conduct this
activity without first obtaining the FDIC's consent, provided that the
bank meets and continues to meet the applicable capital standards as
prescribed by the appropriate federal banking agency. The fact that
prior consent is not required by this subpart does not preclude the
FDIC from taking any appropriate action with respect to the activity if
the facts and circumstances warrant such action.
(c) Core eligibility requirements. If specifically required by this
part or by FDIC order, any state-chartered depository institution that
wishes to be eligible and continue to be eligible to conduct as
principal activities through a subsidiary that are not permissible for
a subsidiary of a national bank must be an ``eligible depository
institution'' and the subsidiary must be an ``eligible subsidiary''.
(1) A state-chartered depository institution is an ``eligible
depository institution'' if it:
(i) Has been chartered and operating for three or more years,
unless the appropriate regional director (DOS) finds that the state-
chartered depository institution is owned by an established, well-
capitalized, well-managed holding company or is managed by seasoned
management;
(ii) Has an FDIC-assigned composite rating of 1 or 2 assigned under
the Uniform Financial Institutions Rating System (UFIRS) (or such other
comparable rating system as may be adopted in the future) as a result
of its most recent federal or state examination for which the FDIC
assigned a rating;
(iii) Received a rating of 1 or 2 under the ``management''
component of the UFIRS as assigned by the institution's appropriate
federal banking agency;
(iv) Has a satisfactory or better Community Reinvestment Act rating
at its most recent examination conducted by the institution's
appropriate federal banking agency;
(v) Has a compliance rating of 1 or 2 at its most recent
examination conducted by the institution's appropriate federal banking
agency; and
(vi) Is not subject to a cease and desist order, consent order,
prompt corrective action directive, formal or informal written
agreement, or other administrative agreement with its appropriate
federal banking agency or chartering authority.
(2) A subsidiary of a state-chartered depository institution is an
``eligible subsidiary'' if it:
(i) Meets applicable statutory or regulatory capital requirements
and has sufficient operating capital in light of the normal obligations
that are reasonably foreseeable for a business of its size and
character within the industry;
(ii) Is physically separate and distinct in its operations from the
operations of the state-chartered depository institution, provided that
this requirement shall not be construed to prohibit the state-chartered
depository institution and its subsidiary from sharing the same
facility if the area where the subsidiary conducts business with the
public is clearly distinct from the area where customers of the state-
chartered depository institution conduct business with the institution.
The extent of the separation will vary according to the type and
frequency of customer contact;
(iii) Maintains separate accounting and other business records;
(iv) Observes separate business entity formalities such as separate
board of directors' meetings;
(v) Has a chief executive officer of the subsidiary who is not an
employee of the institution;
(vi) Has a majority of its board of directors who are neither
directors nor officers of the state-chartered depository institution;
(vii) Conducts business pursuant to independent policies and
procedures designed to inform customers and prospective customers of
the subsidiary that the subsidiary is a separate organization from the
state-chartered depository institution and that the state-chartered
depository institution is not responsible for and does not guarantee
the obligations of the subsidiary;
(viii) Has only one business purpose within the types described in
paragraphs (b)(2) and (b)(5) of this section;
(ix) Has a current written business plan that is appropriate to the
type and scope of business conducted by the subsidiary;
(x) Has qualified management and employees for the type of activity
contemplated, including all required licenses and memberships, and
complies with industry standards; and
(xi) Establishes policies and procedures to ensure adequate
computer, audit and accounting systems, internal risk management
controls, and has necessary operational and managerial infrastructure
to implement the business plan.
(d) Investment and transaction limits--(1) General. If specifically
required by this part or FDIC order, the following conditions and
restrictions apply to an insured state bank and its subsidiaries that
engage in and wish to continue to engage in activities which are not
permissible for a national bank subsidiary.
(2) Investment limits--(i) Aggregate investment in subsidiaries. An
insured state bank's aggregate investment in all subsidiaries
conducting activities subject to this paragraph (d) shall not exceed 20
percent of the insured state bank's tier one capital.
(ii) Definition of investment. (A) For purposes of this paragraph
(d), the term ``investment'' means:
(1) Any extension of credit to the subsidiary by the insured state
bank;
(2) Any debt securities, as such term is defined in part 344 of
this chapter, issued by the subsidiary held by the insured state bank;
(3) The acceptance by the insured state bank of securities issued
by the subsidiary as collateral for an extension of credit to any
person or company; and
(4) Any extensions of credit by the insured state bank to any third
party for the purpose of making a direct investment in the subsidiary,
making any investment in which the subsidiary has an interest, or which
is used for the benefit of, or transferred to, the subsidiary.
(B) For the purposes of this paragraph (d), the term ``investment''
does not include:
(1) Extensions of credit by the insured state bank to finance sales
of assets by the subsidiary which do not involve more than the normal
degree of risk of repayment and are extended on terms that are
substantially similar to those prevailing at the time for comparable
transactions with or involving unaffiliated persons or companies;
(2) An extension of credit by the insured state bank to the
subsidiary that is fully collateralized by government securities, as
such term is defined in Sec. 344.3 of this chapter; or
(3) An extension of credit by the insured state bank to the
subsidiary that is fully collateralized by a segregated deposit in the
insured state bank.
(3) Transaction requirements--(i) Arm's length transaction
requirement. With the exception of giving the subsidiary immediate
credit for uncollected items received in the ordinary course of
business, an insured state bank may not carry out any of the following
transactions with a subsidiary subject to this paragraph (d) unless the
[[Page 66333]]
transaction is on terms and conditions that are substantially the same
as those prevailing at the time for comparable transactions with
unaffiliated parties:
(A) Make an investment in the subsidiary;
(B) Purchase from or sell to the subsidiary any assets (including
securities);
(C) Enter into a contract, lease, or other type of agreement with
the subsidiary;
(D) Pay compensation to a majority-owned subsidiary or any person
or company who has an interest in the subsidiary; or
(E) Engage in any such transaction in which the proceeds thereof
are used for the benefit of, or are transferred to, the subsidiary.
(ii) Prohibition on purchase of low quality assets. An insured
state bank is prohibited from purchasing a low quality asset from a
subsidiary subject to this paragraph (d). For purposes of this
subsection, ``low quality asset'' means:
(A) An asset classified as ``substandard'', ``doubtful'', or
``loss'' or treated as ``other assets especially mentioned'' in the
most recent report of examination of the bank;
(B) An asset in a nonaccrual status;
(C) An asset on which principal or interest payments are more than
30 days past due; or
(D) An asset whose terms have been renegotiated or compromised due
to the deteriorating financial condition of the obligor.
(iii) Insider transaction restriction. Neither the insured state
bank nor the subsidiary subject to this paragraph (d) may enter into
any transaction (exclusive of those covered by Sec. 337.3 of this
chapter) with the bank's executive officers, directors, principal
shareholders or related interests of such persons which relate to the
subsidiary's activities unless:
(A) The transactions are on terms and conditions that are
substantially the same as those prevailing at the time for comparable
transactions with persons not affiliated with the insured state bank;
or
(B) The transactions are pursuant to a benefit or compensation
program that is widely available to employees of the bank, and that
does not give preference to the bank's executive officers, directors,
principal shareholders or related interests of such persons over other
bank employees.
(iv) Anti-tying restriction. Neither the insured state bank nor the
majority-owned subsidiary may require a customer to either buy any
product or use any service from the other as a condition of entering
into a transaction.
(4) Collateralization requirements. (i) An insured state bank is
prohibited from making an investment in a subsidiary subject to this
paragraph (d) unless such transaction is fully-collateralized at the
time the transaction is entered into. No insured state bank may accept
a low quality asset as collateral. An extension of credit is fully
collateralized if it is secured at the time of the transaction by
collateral having a market value equal to at least:
(A) 100 percent of the amount of the transaction if the collateral
is composed of:
(1) Obligations of the United States or its agencies;
(2) Obligations fully guaranteed by the United States or its
agencies as to principal and interest;
(3) Notes, drafts, bills of exchange or bankers acceptances that
are eligible for rediscount or purchase by the Federal Reserve Bank; or
(4) A segregated, earmarked deposit account with the insured state
bank;
(B) 110 percent of the amount of the transaction if the collateral
is composed of obligations of any state or political subdivision of any
state;
(C) 120 percent of the amount of the transaction if the collateral
is composed of other debt instruments, including receivables; or
(D) 130 percent of the amount of the transaction if the collateral
is composed of stock, leases, or other real or personal property.
(ii) An insured state bank may not release collateral prior to
proportional payment of the extension of credit; however, collateral
may be substituted if there is no diminution of collateral coverage.
(5) Investment and transaction limits extended to insured state
bank subsidiaries. For purposes of applying paragraphs (d)(2) through
(d)(4) of this section, any reference to ``insured state bank'' means
the insured state bank and any subsidiaries of the insured state bank
which are not themselves subject under this part or FDIC order to the
restrictions of this paragraph (d).
(e) Capital requirements. If specifically required by this part or
by FDIC order, any insured state bank that wishes to conduct or
continue to conduct as principal activities through a subsidiary that
are not permissible for a subsidiary of a national bank must:
(1) Be well-capitalized after deducting from its tier one capital
the investment in equity securities of the subsidiary as well as the
bank's pro rata share of any retained earnings of the subsidiary;
(2) Reflect this deduction on the appropriate schedule of the
bank's consolidated report of income and condition; and
(3) Use such regulatory capital amount for the purposes of the
bank's assessment risk classification under part 327 of this chapter
and its categorization as a ``well-capitalized'', an ``adequately
capitalized'', an ``undercapitalized'', or a ``significantly
undercapitalized'' institution as defined in Sec. 325.103(b) of this
chapter, provided that the capital deduction shall not be used for
purposes of determining whether the bank is ``critically
undercapitalized'' under part 325 of this chapter.
Sec. 362.5 Approvals previously granted.
(a) FDIC consent by order or notice. An insured state bank that
previously filed an application or notice under part 362 in effect
prior to January 1, 1999 (see 12 CFR part 362 revised as of January 1,
1998), and obtained the FDIC's consent to engage in an activity or to
acquire or retain a majority-owned subsidiary engaging as principal in
an activity or acquiring and retaining any investment that is
prohibited under this subpart may continue that activity or retain that
investment without seeking the FDIC's consent, provided that the
insured state bank and its subsidiary, if applicable, continue to meet
the conditions and restrictions of the approval. An insured state bank
which was granted approval based on conditions which differ from the
requirements of Sec. 362.4(c)(2), (d) and (e) will be considered to
meet the conditions and restrictions of the approval relating to being
an eligible subsidiary, meeting investment and transactions limits, and
meeting capital requirements if the insured state bank and subsidiary
meet the requirements of Sec. 362.4(c)(2), (d) and (e). If the
majority-owned subsidiary is engaged in real estate investment
activities not exceeding 2 percent of the tier one capital of a bank
and meeting the other conditions of Sec. 362.4(b)(5)(i), the majority-
owned subsidiary's compliance with Sec. 362.4(c)(2) under the preceding
sentence may be pursuant to the modifications authorized by
Sec. 362.4(b)(5)(i). Once an insured state bank elects to comply with
Sec. 362.4 (c)(2), (d), and (e), it may not revert to the corresponding
provisions of the approval order.
(b) Approvals by regulation--(1) Securities underwriting. If an
insured state nonmember bank engages in securities activities covered
by Sec. 362.4(b)(5)(ii), and prior to January 1, 1999, engaged in
securities activities under and in compliance with the restrictions of
Sec. 337.4 (b) through (c), Sec. 337.4(e), or Sec. 337.4(h) of this
chapter,
[[Page 66334]]
having filed the required notice under Sec. 337.4(d) of this chapter,
the insured state bank may continue those activities if the bank and
its majority-owned subsidiaries comply with the restrictions set forth
in Secs. 362.4(b)(5)(ii) and 362.4 (c), (d), and (e) by January 1,
2000. During the one-year period of transition between January 1, 1999,
and January 1, 2000, the bank and its majority-owned subsidiary must
meet the restrictions set forth in Sec. 337.4 of this chapter until the
requirements of Secs. 362.4(b)(5)(ii) and 362.4 (c), (d) and (e) are
met. If the bank will not meet these requirements, the bank must obtain
the FDIC's consent to continue those activities under Sec. 362.4(b)(1).
(2) Grandfathered insurance underwriting. An insured state bank
which is directly providing insurance as principal pursuant to
Sec. 362.4(c)(2)(i) in effect prior to January 1, 1999 (see 12 CFR part
362 revised as of January 1, 1998), may continue that activity if it
complies with the provisions of Sec. 362.3(b)(2)(ii)(C) by April 1,
1999. An insured state bank indirectly providing insurance as principal
through a subsidiary pursuant to Sec. 362.3(b)(7) in effect prior to
January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998),
may continue that activity if it complies with the provisions of
Sec. 362.4(b)(2)(i) by April 1, 1999. During the ninety-day period of
transition between January 1, 1999 and April 1, 1999, the bank and its
majority-owned subsidiary must meet the restrictions set forth in
Sec. 362.4(c)(2)(i) or Sec. 362.3(b)(7) in effect prior to January 1,
1999 (see 12 CFR part 362 revised as of January 1, 1998), as
applicable, until the requirements of Sec. 362.3(b)(2)(ii)(C) or
Sec. 362.4(b)(2)(i) are met. If the insured state bank or its
subsidiary will not meet these requirements, as applicable, the insured
state bank must submit an application in compliance with Sec. 303.121
of this chapter and obtain the FDIC's consent in accordance with
Sec. 303.122(b) of this chapter.
(3) Stock of certain corporations. An insured state bank owning
indirectly through a majority-owned subsidiary stock of a corporation
that engages solely in activities permissible for a bank service
corporation pursuant to Sec. 362.4(c)(3)(iv)(C) in effect prior to
January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), or
stock of a corporation which engages solely in activities which are not
``as principal'' pursuant to Sec. 362.4(c)(3)(iv)(D) in effect prior to
January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998),
may continue that activity if it complies with the provisions of
Sec. 362.4(b)(3) by April 1, 1999. During the ninety-day period of
transition between January 1, 1999 and April 1, 1999, the bank and its
majority-owned subsidiary must meet the restrictions set forth in
Sec. 362.4(c)(3)(iv)(C) or Sec. 362.4(c)(3)(iv)(D) in effect prior to
January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), as
applicable, until the requirements of Sec. 362.4(b)(3) are met. If the
insured state bank or its subsidiary will not meet these requirements,
as applicable, the insured state bank must apply for the FDIC's consent
under Sec. 362.4(b)(1).
(4) [Reserved]
(5) [Reserved]
(6) Adjustable rate or money market preferred stock. An insured
state bank owning adjustable rate or money market (auction rate)
preferred stock pursuant to Sec. 362.4(c)(3)(v) in effect prior to
January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), in
excess of the amount limit in Sec. 362.3(b)(2)(iii) may continue to
hold any overlimit shares of such stock acquired before January 1,
1999, until redeemed or repurchased by the issuer, but such stock shall
be included as part of the amount limit in Sec. 362.3(b)(2)(iii) when
determining whether the bank may acquire new stock thereunder.
(c) Charter conversions. (1) An insured state bank that has
converted its charter from an insured state savings association may
continue activities through a majority-owned subsidiary that were
permissible prior to the time it converted its charter only if the
insured state bank receives the FDIC's consent. Except as provided in
paragraph (c)(2) of this section, the insured state bank should apply
under Sec. 362.4(b)(1), submit any notice required under Sec. 362.4(b)
(4) or (5), or comply with the provisions of Sec. 362.4(b) (3), (6), or
(7) if applicable, to continue the activity.
(2) Exception for prior consent. If the FDIC had granted consent to
the savings association under section 28 of the Federal Deposit
Insurance Act (12 U.S.C. 1831(e)) prior to the time the savings
association converted its charter, the insured state bank may continue
the activities without providing notice or making application to the
FDIC, provided that the bank and its subsidiary as applicable are in
compliance with:
(i) The terms of the FDIC approval order; and
(ii) The provisions of Sec. 362.4(c)(2), (d), and (e) regarding
operating as an ``eligible subsidiary'', ``investment and transaction
limits'', and ``capital requirements'.
(3) Divestiture. An insured state bank that does not receive FDIC
consent shall divest of the nonconforming investment as soon as
practical but in no event later than two years from the date of charter
conversion.
Subpart B--Safety and Soundness Rules Governing Insured State
Nonmember Banks
Sec. 362.6 Purpose and scope.
This subpart, along with the notice and application procedures in
subpart G of part 303 of this chapter apply to certain banking
practices that may have adverse effects on the safety and soundness of
insured state nonmember banks. The FDIC intends to allow insured state
nonmember banks and their subsidiaries to undertake only safe and sound
activities and investments that would not present a significant risk to
the deposit insurance fund and that are consistent with the purposes of
federal deposit insurance and other law. The following standards shall
apply for insured state nonmember banks to conduct real estate
investment activities through a subsidiary if those activities are
permissible for a national bank subsidiary but are not permissible for
the national bank parent itself. Additionally, the following standards
shall apply to affiliates of insured state nonmember banks that are not
affiliated with a bank holding company if those affiliates engage in
the public sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities.
Sec. 362.7 Definitions.
For the purposes of this subpart, the following definitions apply:
(a) Affiliate shall mean any company that directly or indirectly,
through one or more intermediaries, controls or is under common control
with an insured state nonmember bank, but does not include a subsidiary
of an insured state nonmember bank.
(b) Activity, company, control, equity security, insured state
nonmember bank, real estate investment activity, security, and
subsidiary have the same meaning as provided in subpart A of this part.
Sec. 362.8 Restrictions on activities of insured state nonmember
banks.
(a) Real estate investment activities by subsidiaries of insured
state nonmember banks. The FDIC has found that real estate investment
activities may have adverse effects on the safety and soundness of
insured state nonmember banks. Notwithstanding any interpretations,
orders, circulars or official bulletins issued by the Office of the
Comptroller of the Currency regarding activities permissible for
[[Page 66335]]
subsidiaries of a national bank that are not permissible for the parent
national bank itself under 12 CFR 5.34(f), insured state nonmember
banks may not establish or acquire a subsidiary that engages in such
real estate investment activities unless the insured state nonmember
bank:
(1) Has an approval previously granted by the FDIC and continues to
meet the conditions and restrictions of the approval; or
(2) Meets the requirements for engaging in real estate investment
activities as set forth in Sec. 362.4(b)(5), and submits a
corresponding notice in compliance with Sec. 303.121 of this chapter
and the FDIC processes the notice without objection under
Sec. 303.122(a) of this chapter; or submits an application in
compliance with Sec. 303.121 of this chapter and the FDIC grants its
consent under the procedure in Sec. 303.122(b) of this chapter.
(b) Affiliation with securities companies. The FDIC has found that
an unrestricted affiliation between an insured state nonmember bank and
a securities company may have adverse effects on the safety and
soundness of insured state nonmember banks. An insured state nonmember
bank which is affiliated with a company that is not treated as a bank
holding company pursuant to section 4(f) of the Bank Holding Company
Act (12 U.S.C. 1843(f)) is prohibited from becoming or remaining
affiliated with any company that directly engages in the public sale,
distribution or underwriting of stocks, bonds, debentures, notes, or
other securities which is not permissible for a national bank unless it
submits an application in compliance with Sec. 303.121 of this chapter
and the FDIC grants its consent under the procedure in Sec. 303.122(b)
of this chapter, or:
(1) The securities business of the affiliate is physically separate
and distinct in its operations from the operations of the bank,
provided that this requirement shall not be construed to prohibit the
bank and its affiliate from sharing the same facility if the area where
the affiliate conducts retail sales activity with the public is
physically distinct from the routine deposit taking area of the bank;
(2) The affiliate has a chief executive officer who is not an
employee of the bank;
(3) A majority of the affiliate's board of directors are not
directors, officers, or employees of the bank;
(4) The affiliate conducts business pursuant to independent
policies and procedures designed to inform customers and prospective
customers of the affiliate that the affiliate is a separate
organization from the bank and the state-chartered depository
institution is not responsible for and does not guarantee the
obligations of the affiliate;
(5) The bank adopts policies and procedures, including appropriate
limits on exposure, to govern its participation in financing
transactions underwritten by an underwriting affiliate;
(6) The bank does not express an opinion on the value or the
advisability of the purchase or sale of securities underwritten or
dealt in by an affiliate unless it notifies the customer that the
entity underwriting, making a market, distributing or dealing in the
securities is an affiliate of the bank;
(7) The bank does not purchase as principal or fiduciary during the
existence of any underwriting or selling syndicate any securities
underwritten by the affiliate unless the purchase is approved by the
bank's board of directors before the securities are initially offered
for sale to the public;
(8) The bank does not condition any extension of credit to any
company on the requirement that the company contract with, or agree to
contract with, the bank's affiliate to underwrite or distribute the
company's securities;
(9) The bank does not condition any extension of credit or the
offering of any service to any person or company on the requirement
that the person or company purchase any security underwritten or
distributed by the affiliate; and
(10) The bank complies with the investment and transaction
limitations of Sec. 362.4(d). For the purposes of applying these
restrictions, references to the term ``subsidiary'' in
Sec. 362.4(d)(2), (3), and (4) shall be deemed to refer to the
affiliate. For the purposes of applying these limitations, the term
``investment'' as defined in Sec. 362.4(d)(2)(ii) shall also include
any equity securities of the affiliate held by the insured state bank.
Subpart C--Activities of Insured State Savings Associations
Sec. 362.9 Purpose and scope.
(a) This subpart, along with the notice and application procedures
in subpart H of part 303 of this chapter, implements the provisions of
section 28 of the Federal Deposit Insurance Act (12 U.S.C. 1831e) that
restrict and prohibit insured state savings associations and their
service corporations from engaging in activities and investments of a
type that are not permissible for federal savings associations and
their service corporations. The phrase ``activity permissible for a
federal savings association'' means any activity authorized for federal
savings associations under any statute including the Home Owners' Loan
Act (HOLA, 12 U.S.C. 1464 et seq.), as well as activities recognized as
permissible for a federal savings association in regulations, official
thrift bulletins, orders or written interpretations issued by the
Office of Thrift Supervision (OTS), or its predecessor, the Federal
Home Loan Bank Board.
(b) This subpart does not cover the following activities:
(1) Activities conducted by the insured state savings association
other than ``as principal'', defined for purposes of this subpart as
activities conducted as agent for a customer, conducted in a brokerage,
custodial, advisory, or administrative capacity, or conducted as
trustee, or in any substantially similar capacity. For example, this
subpart does not cover acting solely as agent for the sale of
insurance, securities, real estate, or travel services; nor does it
cover acting as trustee, providing personal financial planning advice,
or safekeeping services.
(2) Interests in real estate in which the real property is used or
intended in good faith to be used within a reasonable time by an
insured savings association or its service corporations as offices or
related facilities for the conduct of its business or future expansion
of its business or used as public welfare investments of a type and in
an amount permissible for federal savings associations.
(3) Equity investments acquired in connection with debts previously
contracted (DPC) if the insured savings association or its service
corporation takes only such actions as would be permissible for a
federal savings association's or its service corporation's DPC
holdings.
(c) The FDIC intends to allow insured state savings associations
and their service corporations to undertake only safe and sound
activities and investments that do not present significant risks to the
deposit insurance funds and that are consistent with the purposes of
federal deposit insurance and other applicable law. This subpart does
not authorize any insured state savings association to make investments
or conduct activities that are not authorized or that are prohibited by
either federal or state law.
Sec. 362.10 Definitions.
For the purposes of this subpart, the definitions provided in
Sec. 362.2 apply. Additionally, the following definitions apply to this
subpart:
(a) Affiliate shall mean any company that directly or indirectly,
through one
[[Page 66336]]
or more intermediaries, controls or is under common control with an
insured state savings association.
(b) Corporate debt securities not of investment grade means any
corporate debt security that when acquired was not rated among the four
highest rating categories by at least one nationally recognized
statistical rating organization. The term shall not include any
obligation issued or guaranteed by a corporation that may be held by a
federal savings association without limitation as to percentage of
assets under subparagraphs (D), (E), or (F) of section 5(c)(1) of HOLA
(12 U.S.C. 1464(c)(1) (D), (E), (F)).
(c) Insured state savings association means any state-chartered
savings association insured by the FDIC.
(d) Qualified affiliate means, in the case of a stock insured state
savings association, an affiliate other than a subsidiary or an insured
depository institution. In the case of a mutual savings association,
``qualified affiliate'' means a subsidiary other than an insured
depository institution provided that all of the savings association's
investments in, and extensions of credit to, the subsidiary are
deducted from the savings association's capital.
(e) Service corporation means any corporation the capital stock of
which is available for purchase by savings associations.
Sec. 362.11 Activities of insured state savings associations.
(a) Equity investments--(1) Prohibited investments. No insured
state savings association may directly acquire or retain as principal
any equity investment of a type, or in an amount, that is not
permissible for a federal savings association unless the exception in
paragraph (a)(2) of this section applies.
(2) Exception: Equity investment in service corporations. An
insured state savings association that is and continues to be in
compliance with the applicable capital standards as prescribed by the
appropriate federal banking agency may acquire or retain an equity
investment in a service corporation:
(i) Not permissible for a federal savings association to the extent
the service corporation is engaging in activities that are allowed
pursuant to the provisions of or an application under Sec. 362.12(b);
or
(ii) Of a type permissible for a federal savings association, but
in an amount exceeding the investment limits applicable to federal
savings associations, if the insured state savings association obtains
the FDIC's prior consent. Consent will be given only if the FDIC
determines that the amount of the investment in a service corporation
engaged in such activities does not present a significant risk to the
affected deposit insurance fund. Applications should be filed in
accordance with Sec. 303.141 of this chapter and will be processed
under Sec. 303.142(b) of this chapter. Approvals granted under
Sec. 303.142(b) of this chapter may be made subject to any conditions
or restrictions found by the FDIC to be necessary to protect the
deposit insurance funds from significant risk, to prevent unsafe or
unsound practices, and/or to ensure that the activity is consistent
with the purposes of federal deposit insurance and other applicable
law.
(b) Activities other than equity investments--(1) Prohibited
activities. An insured state savings association may not directly
engage as principal in any activity, that is not an equity investment,
of a type not permissible for a federal savings association, and an
insured state savings association shall not make nonresidential real
property loans in an amount exceeding that described in section
5(c)(2)(B) of HOLA (12 U.S.C. 1464(c)(2)(B)), unless one of the
exceptions in paragraph (b)(2) of this section applies. This section
shall not be read to require the divestiture of any asset (including a
nonresidential real estate loan), if the asset was acquired prior to
August 9, 1989; however, any activity conducted with such asset must be
conducted in accordance with this subpart. After August 9, 1989, an
insured state savings association directly or through a subsidiary
(other than, in the case of a mutual savings association, a subsidiary
that is a qualified affiliate), may not acquire or retain any corporate
debt securities not of investment grade.
(2) Exceptions--(i) Consent obtained through application. An
insured state savings association that meets and continues to meet the
applicable capital standards set by the appropriate federal banking
agency may directly conduct activities prohibited by paragraph (b)(1)
of this section if the savings association obtains the FDIC's prior
consent. Consent will be given only if the FDIC determines that
conducting the activity designated poses no significant risk to the
affected deposit insurance fund. Applications should be filed in
accordance with Sec. 303.141 of this chapter and will be processed
under Sec. 303.142(b) of this chapter. Approvals granted under
Sec. 303.142(b) of this chapter may be made subject to any conditions
or restrictions found by the FDIC to be necessary to protect the
deposit insurance funds from significant risk, to prevent unsafe or
unsound practices, and/or to ensure that the activity is consistent
with the purposes of federal deposit insurance and other applicable
law.
(ii) Nonresidential realty loans permissible for a federal savings
association conducted in an amount not permissible. An insured state
savings association that meets and continues to meet the applicable
capital standards set by the appropriate federal banking agency may
make nonresidential real property loans in an amount exceeding the
amount described in section 5(c)(2)(B) of HOLA, if the savings
association files a notice in compliance with Sec. 303.141 of this
chapter and the FDIC processes the notice without objection under
Sec. 303.142(a) of this chapter. Consent will be given only if the FDIC
determines that engaging in such lending in the amount designated poses
no significant risk to the affected deposit insurance fund.
(iii) Acquiring and retaining adjustable rate and money market
preferred stock. (A) An insured state savings association's investment
of up to 15 percent of the association's tier one capital in adjustable
rate preferred stock or money market (auction rate) preferred stock
does not represent a significant risk to the deposit insurance funds.
An insured state savings association may conduct this activity without
first obtaining the FDIC's consent, provided that the association meets
and continues to meet the applicable capital standards as prescribed by
the appropriate federal banking agency. The fact that prior consent is
not required by this subpart does not preclude the FDIC from taking any
appropriate action with respect to the activities if the facts and
circumstances warrant such action.
(B) An insured state savings association may acquire or retain
other instruments of a type determined by the FDIC to have the
character of debt securities and not to represent a significant risk to
the deposit insurance funds. Such instruments shall be included in the
15 percent of tier one capital limit imposed in paragraph
(b)(2)(iii)(A) of this section. An insured state savings association
may conduct this activity without first obtaining the FDIC's consent,
provided that the association meets and continues to meet the
applicable capital standards as prescribed by the appropriate federal
banking agency. The fact that prior consent is not required by this
subpart does not preclude the FDIC from taking any appropriate action
with respect to the activities if the facts and circumstances warrant
such action.
[[Page 66337]]
(3) Activities permissible for a federal savings association
conducted in an amount not permissible. Except as provided in paragraph
(b)(2)(ii) of this section, an insured state savings association may
engage as principal in any activity, which is not an equity investment
of a type permissible for a federal savings association, in an amount
in excess of that permissible for a federal savings association, if the
savings association meets and continues to meet the applicable capital
standards set by the appropriate federal banking agency, the
institution has advised the appropriate regional director (DOS) under
the procedure in Sec. 303.142(c) of this chapter within thirty days
before engaging in the activity, and the FDIC has not advised the
insured state savings association that conducting the activity in the
amount indicated poses a significant risk to the affected deposit
insurance fund. This section shall not be read to require the
divestiture of any asset if the asset was acquired prior to August 9,
1989; however, any activity conducted with such asset must be conducted
in accordance with this subpart.
Sec. 362.12 Service corporations of insured state savings
associations.
(a) Prohibition. A service corporation of an insured state savings
association may not engage in any activity that is not permissible for
a service corporation of a federal savings association, unless it meets
one of the exceptions in paragraph (b) of this section.
(b) Exceptions--(1) Consent obtained through application. A service
corporation of an insured state savings association may conduct
activities prohibited by paragraph (a) of this section if the savings
association obtains the FDIC's prior written consent and the insured
state savings association meets and continues to meet the applicable
capital standards set by the appropriate federal banking agency.
Consent will be given only if the FDIC determines that the activity
poses no significant risk to the affected deposit insurance fund.
Applications for consent should be filed in accordance with
Sec. 303.141 of this chapter and will be processed under
Sec. 303.142(b) of this chapter. Approvals granted under
Sec. 303.142(b) of this chapter may be made subject to any conditions
or restrictions found by the FDIC to be necessary to protect the
deposit insurance funds from risk, to prevent unsafe or unsound banking
practices, and/or to ensure that the activity is consistent with the
purposes of federal deposit insurance and other applicable law.
(2) Service corporations conducting unrestricted activities. The
FDIC has determined that the following activities do not represent a
significant risk to the deposit insurance funds:
(i) A service corporation of an insured state savings association
may acquire and retain equity securities of a company engaged in
securities activities authorized in paragraph (b)(4) of this section if
the bank complies with the following restrictions and files a notice in
compliance with Sec. 303.141 of this chapter and the FDIC processes the
notice without objection under Sec. 303.142(a) of this chapter. The
FDIC is not precluded from taking any appropriate action or imposing
additional requirements with respect to the activity if the facts and
circumstances warrant such action. If changes to the management or
business plan of the company at any time result in material changes to
the nature of the company's business or the manner in which its
business is conducted, the insured state savings association shall
advise the appropriate regional director (DOS) in writing within 10
business days after such change. Investment under this paragraph is
authorized if:
(A) The service corporation controls the company;
(B) The savings association meets the core eligibility criteria of
Sec. 362.4(c)(1);
(C) The service corporation meets the core eligibility criteria of
Sec. 362.4(c)(2) (with references to the term ``subsidiary'' deemed to
refer to the service corporation), or the company is a corporation
meeting such criteria;
(D) The savings association's transactions with the service
corporation comply with the investment and transaction limits of
paragraph (c) of this section, and the savings association's
transactions with the company comply with such limits as if it were a
service corporation;
(E) The savings association complies with the capital requirements
of paragraph (d) of this section with respect to the service
corporation and the company; and
(F) The savings association and the company comply with the
additional requirements of Sec. 362.4(b)(5)(ii) (with references to the
term ``majority-owned subsidiary'' deemed to refer to the company).
(ii) A service corporation of an insured state savings association
may acquire and retain equity securities of a company engaged in the
following activities, if the service corporation controls the company
or the company is controlled by insured depository institutions, and
the association continues to meet the applicable capital standards as
prescribed by the appropriate federal banking agency. The FDIC consents
that such activity may be conducted by a service corporation of an
insured state savings association without first obtaining the FDIC's
consent. The fact that prior consent is not required by this subpart
does not preclude the FDIC from taking any appropriate action with
respect to the activities if the facts and circumstances warrant such
action.
(A) Equity securities of a company that engages in permissible
activities. A service corporation may own the equity securities of a
company that engages in any activity permissible for a federal savings
association.
(B) Equity securities of a company that acquires and retains
adjustable-rate and money market preferred stock. A service corporation
may own the equity securities of a company that engages in any activity
permissible for an insured state savings association under
Sec. 362.11(b)(2)(iii) so long as instruments held under this paragraph
(b)(2)(ii)(B), paragraph (b)(2)(iv) of this section, and
Sec. 362.11(b)(2)(iii) in the aggregate do not exceed the limit set by
Sec. 362.11(b)(2)(iii).
(C) Equity securities of a company acting as an insurance agency. A
service corporation may own the equity securities of a company that
acts as an insurance agency.
(iii) Activities that are not conducted ``as principal''. A service
corporation controlled by the insured state savings association may
engage in activities which are not conducted ``as principal'' such as
acting as an agent for a customer, acting in a brokerage, custodial,
advisory, or administrative capacity, or acting as trustee, or in any
substantially similar capacity.
(iv) Acquiring and retaining adjustable-rate and money market
preferred stock. A service corporation may engage in any activity
permissible for an insured state savings association under
Sec. 362.11(b)(2)(iii) so long as instruments held under this paragraph
(b)(2)(iv), paragraph (b)(2)(ii)(B) of this section, and
Sec. 362.11(b)(2)(iii) in the aggregate do not exceed the limit set by
Sec. 362.11(b)(2)(iii).
(3) [Reserved]
(4) Service corporations conducting securities underwriting. The
FDIC has determined that it does not represent a significant risk to
the deposit insurance funds for a service corporation to engage in the
public sale, distribution or underwriting of securities provided that
the activity is conducted by a service corporation of an insured state
savings association in compliance with the core eligibility
requirements listed in
[[Page 66338]]
Sec. 362.4(c); any additional requirements listed in
Sec. 362.4(b)(5)(ii); the savings association complies with the
investment and transaction limitations of paragraph (c) of this
section; and the savings association meets the capital requirements of
paragraph (d) of this section. The FDIC consents that these listed
activities may be conducted by a service corporation of an insured
state savings association if the savings association files a notice in
compliance with Sec. 303.141 of this chapter and the FDIC processes the
notice without objection under Sec. 303.142(a) of this chapter. The
FDIC is not precluded from taking any appropriate action or imposing
additional requirements with respect to the activities if the facts and
circumstances warrant such action. If changes to the management or
business plan of the service corporation at any time result in material
changes to the nature of the service corporation's business or the
manner in which its business is conducted, the insured state savings
association shall advise the appropriate regional director (DOS) in
writing within 10 business days after such change. For purposes of
applying Sec. 362.4 (b)(5)(ii) and (c) to this paragraph (b)(4),
references to the terms ``subsidiary'' and ``majority-owned
subsidiary'' in Secs. 362.4(b)(5)(ii) and (c) shall be deemed to refer
to the service corporation. For the purposes of applying Sec. 362.4(c),
references to the term ``eligible subsidiary'' in Sec. 362.4(c) shall
be deemed to refer to the eligible service corporation.
(c) Investment and transaction limits. The restrictions detailed in
Sec. 362.4(d) apply to transactions between an insured state savings
association and any service corporation engaging in activities which
are not permissible for a service corporation of a federal savings
association if specifically required by this part or FDIC order. For
purposes of applying the investment limits in Sec. 362.4(d)(2), the
term ``investment'' includes only those items described in
Sec. 362.4(d)(2)(ii)(A) (3) and (4). For purposes of applying
Sec. 362.4(d) (2), (3), and (4) to this paragraph (c), references to
the terms ``insured state bank'' and ``subsidiary'' in
Sec. 362.4(d)(2), (3), and (4), shall be deemed to refer, respectively,
to the insured state savings association and the service corporation.
For purposes of applying Sec. 362.4(d)(5), references to the terms
``insured state bank'' and ``subsidiary'' in Sec. 362.4(d)(5) shall be
deemed to refer, respectively, to the insured state savings association
and the service corporations or subsidiaries.
(d) Capital requirements. If specifically required by this part or
by FDIC order, an insured state savings association that wishes to
conduct as principal activities through a service corporation which are
not permissible for a service corporation of a federal savings
association must:
(1) Be well-capitalized after deducting from its capital any
investment in the service corporation, both equity and debt.
(2) Use such regulatory capital amount for the purposes of the
insured state savings association's assessment risk classification
under part 327 of this chapter.
Sec. 362.13 Approvals previously granted.
FDIC consent by order or notice. An insured state savings
association that previously filed an application and obtained the
FDIC's consent to engage in an activity or to acquire or retain an
investment in a service corporation engaging as principal in an
activity or acquiring and retaining any investment that is prohibited
under this subpart may continue that activity or retain that investment
without seeking the FDIC's consent, provided the insured state savings
association and the service corporation, if applicable, continue to
meet the conditions and restrictions of approval. An insured state
savings association which was granted approval based on conditions
which differ from the requirements of Secs. 362.4(c)(2) and 362.12 (c)
and (d) will be considered to meet the conditions and restrictions of
the approval if the insured state savings association and any
applicable service corporation meet the requirements of
Secs. 362.4(c)(2) and 362.12 (c) and (d). For the purposes of applying
Sec. 362.4(c)(2), references to the terms ``eligible subsidiary'' and
``subsidiary'' in Sec. 362.4(c)(2) shall be deemed to refer,
respectively, to the eligible service corporation and the service
corporation.
Subpart D--Acquiring, Establishing, or Conducting New Activities
Through a Subsidiary by an Insured Savings Association
Sec. 362.14 Purpose and scope.
This subpart implements section 18(m) of the Federal Deposit
Insurance Act (12 U.S.C. 1828(m)) which requires that prior notice be
given the FDIC when an insured savings association establishes or
acquires a subsidiary or engages in any new activity in a subsidiary.
For the purposes of this subpart, the term ``subsidiary'' does not
include any insured depository institution as that term is defined in
the Federal Deposit Insurance Act. Unless otherwise indicated, the
definitions provided in Sec. 362.2 apply to this subpart.
Sec. 362.15 Acquiring or establishing a subsidiary; conducting new
activities through a subsidiary.
No state or federal insured savings association may establish or
acquire a subsidiary, or conduct any new activity through a subsidiary,
unless it files a notice in compliance with Sec. 303.142(c) of this
chapter at least 30 days prior to establishment of the subsidiary or
commencement of the activity and the FDIC does not object to the
notice. This requirement does not apply to any federal savings bank
that was chartered prior to October 15, 1982, as a savings bank under
state law or any savings association that acquired its principal assets
from such an institution.
By order of the Board of Directors.
Dated at Washington, D.C. this 5th day of November, 1998.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-31152 Filed 11-30-98; 8:45 am]
BILLING CODE 6714-01-P
[Federal Register: December 1, 1998 (Volume 63, Number 230)]
[Proposed Rules]
[Page 66339-66346]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de98-36]
[[Page 66339]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303, 337, and 362
RIN 3064-AC20
Activities of Insured State Banks and Insured Savings
Associations
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The FDIC is seeking public comment on its proposal to amend
its rules and regulations governing activities and investments of
insured state banks. The FDIC proposes to add safety and soundness
standards to govern insured state nonmember banks that engage in the
public sale, distribution or underwriting of stocks, bonds, debentures,
notes or other securities through a subsidiary if those activities are
permissible for a national bank subsidiary but are not permissible for
the national bank itself. In addition, the FDIC proposes to require
that insured state nonmember banks file a notice before commencing any
activities permissible for subsidiaries of a national bank that are not
permissible for the parent national bank itself. The FDIC also proposes
to remove and reserve the provisions addressing, ``Securities
Activities of Subsidiaries of Insured State Banks: Bank Transactions
with Affiliated Securities Companies.'' The proposed effect of these
amendments will be to require banks to notify the FDIC prior to
conducting securities or other activities through subsidiaries that are
not permissible for the bank itself. These amendments also will
consolidate all securities activities regulation.
DATES: Comments must be received by February 1, 1999.
ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments
may be hand delivered to the guard station at the rear of the 17th
Street Building (located on F Street), on business days between 7:00
a.m. and 5:00 p.m. (Fax number (202) 898-3838; Internet Address:
comments@fdic.gov). Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, N.W.
Washington, D.C. 20429, between 9:00 a.m. and 4:30 p.m. on business
days.
FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist,
(202/898-6759), Division of Supervision; Linda L. Stamp, Counsel, (202/
898-7310) or Jamey Basham, Counsel, (202/898-7265), Legal Division,
FDIC, 550 17th Street, N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Recently, the FDIC reassessed part 362 of its rules, ``Activities
and Investments of Insured State Banks'' (12 CFR part 362) and
Sec. 337.4 of its rules, ``Securities Activities of Subsidiaries of
Insured State Banks: Bank Transactions with Affiliated Securities
Companies'' (12 CFR 337.4). That reassessment resulted in an amended
part 362 that is published as a final rule elsewhere in this issue of
the Federal Register. Although, in connection with that reassessment,
FDIC proposed removing Sec. 337.4, the FDIC decided to leave that rule
in place to retain the safety and soundness standards governing
securities activities that are not subject to section 24 of the Federal
Deposit Insurance Act (FDI Act) (12 U.S.C. 1831a) (discussed below)
during a further comment period on rules that would govern those
activities.
In this proposal, the FDIC seeks comment on proposed safety and
soundness standards governing an insured state nonmember bank
subsidiary engaging in the public sale, distribution or underwriting of
stocks, bonds, debentures, notes or other securities permissible for a
subsidiary of a national bank that are not permissible for the parent
national bank directly. The proposal also requests comment on a
proposed requirement that a notice be filed before an insured state
nonmember bank subsidiary engages in any other activity permissible for
a subsidiary of a national bank that is not permissible for the parent
national bank directly. Under the proposal, the FDIC would remove and
reserve Sec. 337.4. The proposal is described in more detail below.
Part 362 of the FDIC's regulations implements the provisions of
section 24 of the FDI Act. Section 24 was added to the FDI Act by the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
(Pub. L. 102-242). With certain exceptions, section 24 limits the
direct equity investments of state chartered insured banks to equity
investments of a type permissible for national banks. In addition, with
certain exceptions, section 24 prohibits an insured state bank from
engaging as principal in any type of activity that is not permissible
for a national bank unless the bank meets applicable capital
requirements and the FDIC determines that the activity will not pose a
significant risk to the appropriate deposit insurance fund. Section 24
also prohibits an insured state bank subsidiary from engaging as
principal in any activity or making any equity investment of a type
that is not permissible for a national bank subsidiary unless the bank
meets applicable capital requirements and the FDIC determines that the
activity will not pose a significant risk to the appropriate deposit
insurance fund.
Since section 24 was enacted, the Office of the Comptroller of the
Currency (OCC) has confirmed--through its rule governing operating
subsidiaries--that there may be activities that are not permissible for
a national bank itself, but that are permissible for national bank
subsidiaries. Effective December 31, 1996, the OCC amended its
regulations governing the acquisition and establishment of operating
subsidiaries by national banks. 12 CFR part 5. These regulations
establish a process through which a national bank may seek approval to
conduct activities in an operating subsidiary that are part of or
incidental to the business of banking as determined by the OCC pursuant
to 12 U.S.C. 24 (Seventh) or other statutory authority but that differ
from the activities that are permissible for the national bank itself.
The OCC always requires an application from a bank seeking to conduct a
bank-impermissible activity in an operating subsidiary. If the activity
proposed for the operating subsidiary has not been approved previously
by the OCC, the OCC will publish a notice of the application in the
Federal Register and solicit comment. The OCC may also follow this
notice and comment procedure if the activity is one that the OCC has
previously approved. 12 CFR 5.34(f).
The framework in the regulation sets up a review process that has
two, equally important components. First, the OCC reviews operating
subsidiary applications to determine whether the proposed activities
are legally permissible for an operating subsidiary. Second, the OCC
evaluates the proposal to determine whether it is consistent with safe
and sound banking practices and OCC policy and does not endanger the
safety or soundness of the particular parent national bank.
The operating subsidiary rule sets out a number of conditions, or
firewalls, that the OCC will impose each time it approves the conduct
of an activity in an operating subsidiary that the parent
[[Page 66340]]
bank could not do directly.1 In addition, the rule
contemplates the imposition of other bank-specific conditions tailored
to the facts and circumstances presented by the individual application.
To date, the OCC has received and published notice of three
applications to conduct activities, through an operating subsidiary,
which would not be permissible for a national bank. Two applications
were filed by NationsBank, National Association, (Charlotte, North
Carolina) to engage in limited real estate development activities in
connection with bank premises and to provide real estate lease
financing through operating subsidiaries of the bank. The FDIC, in its
final rule published elsewhere in today's Federal Register, dealt with
state nonmember banks which seek to engage in real estate activities
permissible for a national bank only through a subsidiary (subpart B of
the amended part 362).
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\1\ Under these conditions, the Sec. 5.34(f) operating
subsidiary generally must: be physically separate from the parent;
hold itself out as a separate and distinct entity; use a different
name; have adequate capital; maintain separate accounting and
corporate records; have independent policies and procedures designed
to inform customers of the independence of the subsidiary; negotiate
contracts with the parent at arm's length; hold separate board
meetings; have at least one-third of the members of the board who
are not directors of the bank who have relevant expertise; and have
internal controls to manage financial and operational risks.
Moreover, if the operating subsidiary will be conducting activities
as principal, additional safety and soundness conditions are
imposed, including that the bank's equity investment in the
subsidiary must be deducted from the bank's capital and assets, and
the assets and liabilities of the subsidiary may not be consolidated
with those of the bank. In addition, the OCC will apply sections 23A
and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) to
transactions between the parent bank and its operating subsidiary.
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Another application was filed by Zions First National Bank, (Salt
Lake City, Utah) (Zions) to conduct municipal revenue bond underwriting
activities on April 8, 1997. The OCC published notice and requested
comment in the Federal Register on April 18, 1997. 62 FR 19171. On
December 11, 1997, the OCC announced its approval of the Zions'
application allowing an operating subsidiary of a national bank to
engage in the activities of underwriting, dealing in, and investing in
state and municipal revenue bonds, subject to certain safety and
soundness requirements.2
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\2\ Zions applied to the OCC pursuant to 12 CFR 5.34(f) to
commence a new activity in an existing operating subsidiary. The
subsidiary would underwrite, deal in, and invest in securities of
states and their political subdivisions. These securities include
the following: (1) Obligations presently defined by the OCC as
general obligations of states and political subdivisions (General
Obligation Securities); and (2) other obligations of states and
their political subdivisions that do not qualify under the OCC's
current definitions as general obligations (Revenue Bonds). The OCC
determined that the activity was permissible for an operating
subsidiary under the authority of 12 U.S.C. 24 (Seventh) that allows
a national bank to own operating subsidiaries that conduct
activities that are incidental to the business of banking. In this
case, the OCC determined that the activity of underwriting revenue
bonds is incidental to banking by finding that underwriting revenue
bonds is the functional equivalent or a logical outgrowth of
activities that are currently conducted by national banks. However,
the OCC reiterated that section 20 of the Glass-Steagall Act
prohibits the affiliation of member banks with firms that
principally engage in underwriting bank-ineligible securities. As a
result, the OCC imposed a 25 percent revenue limitation on the
Zions' subsidiary to conform to the limitation for section 20
subsidiaries set by Board of Governors of the Federal Reserve
System. The OCC imposed the conditions set forth in Sec. 5.34(f),
including corporate separateness requirements and the applications
of sections 23A and 23B of the Federal Reserve Act to transactions
between the bank and its subsidiary. In addition, the OCC imposed
other conditions tailored to the Zions' application. For example, it
required disclosures to customers, including use of the Interagency
Statement on Retail Sales of Nondeposit Investment Products
(Interagency Statement), and limited opinions on the bonds by bank
directors, officers and employees.
---------------------------------------------------------------------------
This OCC approval means that the requirement under section 24 and
subpart A of part 362, that an insured state nonmember bank apply to
the FDIC for consent to engage in this activity through a subsidiary,
no longer applies. However, the FDIC did not remove Sec. 337.4 as
proposed, but instead left Sec. 337.4 in place to require that an
insured state nonmember bank file a notice and comply with the FDIC's
safety and soundness requirements to engage in the distribution or
underwriting of stocks, bonds, debentures, notes or other securities
through a subsidiary.3
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\3\ Section 362.4 of the final regulation establishes rules by
which subsidiaries of insured state banks may conduct certain
securities activities which are not permissible for a national bank
subsidiary. Section 362.8(b) established similar rules for
securities affiliates of insured state nonmember bank subsidiaries
of so-called ``nonbank bank holding companies.'' As is specified in
Sec. 337.4(i), the activities of such subsidiaries and affiliates
are controlled by part 362, not Sec. 337.4.
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Section 337.4 of the FDIC's regulations governs securities
activities of subsidiaries of insured state nonmember banks as well as
transactions between insured state nonmember banks and their securities
subsidiaries and affiliates. The regulation was adopted in 1984 (49 FR
46723) and is designed to promote the safety and soundness of insured
state nonmember banks that have subsidiaries which engage in securities
activities that are impermissible for banks directly, under section 16
of the Banking Act of 1933 (12 U.S.C. 24 (Seventh)), commonly known as
the Glass-Steagall Act. Section 337.4 requires that these subsidiaries
qualify as bona fide subsidiaries; establishes transaction restrictions
between a bank and its subsidiaries or other affiliates that engage in
securities activities that are prohibited for banks under section 16;
requires that an insured state nonmember bank give prior notice to the
FDIC before establishing or acquiring any securities subsidiary;
requires that disclosures be provided to securities customers in
certain instances; and requires that a bank's investment in a
securities subsidiary engaging in activities that are impermissible for
a bank under section 16 be deducted from the bank's capital.
Under the current version of Sec. 337.4, a subsidiary of a state
nonmember bank that wanted to underwrite, deal in, and invest in
municipal revenue bonds (securities of states and their political
subdivisions that do not qualify under the OCC's current definition of
general obligation bonds) would have to file a notice under Sec. 337.4
and meet its requirements. To underwrite, deal in, or invest in
municipal revenue bonds, the bank and its subsidiary would be required
to:
1. File a notice at least 60 days prior to the consummation of the
operation of the subsidiary;
2. Meet the ``bona fide subsidiary'' requirements as set forth in
definition in Sec. 337.4;
3. Deduct the capital invested in subsidiary from bank's total
capital;
4. Underwrite only debt securities of investment grade, unless the
subsidiary has been in continuous operation for the five year period
preceding the notice.4
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\4\ According to the information provided in the application,
the Zions' subsidiary appears to meet the 5-year operation test that
Sec. 337.4 would apply to a state nonmember bank subsidiary. Section
337.4 has no procedure for a bank to file an application to be
relieved of the five year operation requirement; however, there is a
waiver application procedure in Sec. 337.10. Any such application
would be granted at the discretion of the FDIC's Board of Directors.
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The applicability of Sec. 337.4 is not impacted by the OCC's
approval of the Zions application. The application of Sec. 337.4 is
independent of and was adopted prior to section 24 of the FDI Act and
part 362. Section 337.4 is invoked based on the securities activities
of the bank subsidiary and was adopted pursuant to an analysis of the
Glass-Steagall Act undertaken in the early 1980s. In short, the
regulation lists securities underwriting and distribution as an
activity that will not pose a significant risk to the fund if conducted
through a majority-owned subsidiary that operates in accordance with
Sec. 337.4. Now, in this rulemaking proceeding, the FDIC proposes to
remove and reserve Sec. 337.4 and address
[[Page 66341]]
the FDIC's standards governing bank subsidiary activities through part
362.
II. Description of the Proposal
In this proposal, the FDIC imposes safety and soundness constraints
on insured state nonmember bank subsidiaries that engage in the public
sale, distribution or underwriting of stocks, bonds, debentures, notes
or other securities that may be permissible for a national bank
subsidiary but are not permissible for a national bank directly. In
this proposal, the FDIC also requires that an insured state nonmember
bank file a 30-day advance notice before the bank's subsidiary may
engage in other activities not permissible for a national bank directly
that may be permissible for a national bank subsidiary. This 30-day
advance notice is designed to allow the FDIC to review any such
activity and consider whether safety and soundness considerations make
it prudent that conditions be placed on FDIC's consent to allow such
activities. The FDIC believes it gave sufficient notice in its August
26, 1997, proposal to amend part 362 that the FDIC could adopt a final
rule governing the insured state nonmember bank subsidiaries that
engage in the public sale, distribution or underwriting of stocks,
bonds, debentures, notes or other securities that are not permissible
for a national bank that are permissible for national bank
subsidiaries. However because regulatory text was not provided in its
earlier proposal, the FDIC believes that it is appropriate to provide
an additional opportunity for public comment before approving a final
rule to govern insured state nonmember bank subsidiaries that engage in
the public sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities that may be permissible for a
national bank subsidiary but are not permissible for a national bank.
A. Requirements for Securities Activities
There are three general reasons the FDIC proposes the imposition of
certain standards upon a state nonmember bank seeking to engage in the
sale, distribution or underwriting of stocks, bonds, debentures, notes
or other securities that may be permissible for a national bank
subsidiary but are not permissible for a national bank itself: to
ensure the bank is independent and operated in a manner consistent with
safe and sound banking practices; to protect the insurance fund (the
FDIC wants to avoid claims against the bank arising out of the public's
misperception as to with whom it is dealing and in what capacity); and
to comply with section 21 of the Glass-Steagall Act (12 U.S.C. 378),
which prohibits securities companies from taking deposits and banks
from engaging in certain securities activities. The FDIC has attempted
to meet these goals in a manner that minimizes the burden to insured
state nonmember banks without jeopardizing the FDIC's goals.
Thus, the FDIC proposal contains more flexible physical separation
standards than exist in the current version of Sec. 337.4. The FDIC
views these proposed physical separation standards, coupled with the
comprehensive requirements that include affirmative disclosures,
investment limits, transaction requirements and capital standards, as
adequate to protect bank safety and soundness, maintain the legal
separation between the bank and its subsidiary and avoid customer
confusion.
The FDIC also proposes to eliminate the different treatment of
state nonmember bank subsidiaries depending upon the type of securities
underwritten by the subsidiary. Instead, the FDIC is focusing on
prudent management policies and practices, and the sufficiency of the
subsidiary's capitalization. Additionally, the FDIC proposes to
eliminate the tiered approach to the securities activities of the
subsidiary, which limited for five years the underwriting by a new
subsidiary to investment quality debt securities, investment quality
equity securities, mutual funds that invest exclusively in investment
quality equity securities and/or investment quality debt securities.
Section 337.4 currently does not permit a subsidiary to engage in the
public sale, distribution or underwriting of stocks, bonds, debentures,
notes or other securities that are not permissible for a bank under
section 16 of the Glass-Steagall Act, unless the subsidiary meets the
bona fide definition and the activities are limited to underwriting of
investment quality securities. Later, a subsidiary can engage in
additional underwriting if it meets the definition of a bona fide
subsidiary and the following additional conditions are met:
(a) The subsidiary is a member in good standing of the National
Association of Securities Dealers (NASD);
(b) The subsidiary has been in continuous operation for a five-year
period preceding the notice to the FDIC;
(c) No director, officer, general partner, employee or 10 percent
shareholder has been convicted within five years of any felony or
misdemeanor in connection with the purchase or sale of any security;
(d) Neither the subsidiary nor any of its directors, officers,
general partners, employees, or 10 percent shareholders is subject to
any state or federal administrative order or court order, judgment or
decree arising out of the conduct of the securities business;
(e) None of the subsidiary's directors, officers, general partners,
employees or 10 percent shareholders are subject to an order entered
within five years issued by the Securities and Exchange Commission
(SEC) pursuant to certain provisions of the Securities Exchange Act of
1934 or the Investment Advisors Act of 1940; and
(f) All officers of the subsidiary who have supervisory
responsibility for underwriting activities have at least five years
experience in similar activities at NASD member securities firms.
Current Sec. 337.4 requires a bona fide subsidiary to be adequately
capitalized, and therefore, these subsidiaries are required to meet the
capital standards of the NASD and SEC. As a protection to the insurance
fund, a bank's investment in these subsidiaries engaged in securities
activities that would be prohibited to the bank under section 16 are
not counted toward the bank's capital; that is, the investment in the
subsidiary is deducted before compliance with capital requirements is
measured.
The FDIC views its established separations for banks and securities
firms as creating an environment in which the FDIC's responsibility to
protect the insurance fund has been met without creating too much
overlapping regulation for the securities firms. The FDIC maintains an
open dialogue with the NASD and the SEC concerning matters of mutual
interest. To that end, the FDIC entered into an agreement in principle
with the NASD concerning examination of securities companies affiliated
with insured institutions and has begun a dialogue with the SEC
concerning the exchange of information which may be pertinent to the
mission of the FDIC.
The number of banks which have subsidiaries engaging in securities
activities that cannot be conducted by the bank itself is very small.
These subsidiaries engage in the underwriting of debt and equity
securities and distribution and management of mutual funds.
Since implementation of the FDIC's Sec. 337.4 regulation, the
relationships between banks and securities firms have not been a matter
of supervisory concern due to the protections FDIC has in place.
However, the FDIC realizes that in a time of financial turmoil these
protections may not be adequate and a
[[Page 66342]]
program of direct examination could be necessary to protect the
insurance fund. Thus, the continuation of the FDIC's examination
authority in that area is important.
B. Notice Requirement for Other Activities Generally
Under a safety and soundness standard, subpart B of the revised
part 362 requires insured state nonmember bank subsidiaries engaging in
certain enumerated activities to meet certain standards established by
the FDIC, even if the OCC has determined that the activity in question
is permissible for a subsidiary of a particular national bank. Under
the modifications contained in this proposal, the FDIC would obtain the
opportunity to review situations in which a state nonmember bank
subsidiary seeks to engage in any activity determined by the OCC to be
permissible for a national bank through its subsidiary, rather than
through the national bank itself. This review would be analogous to the
safety and soundness evaluation undertaken by the OCC with respect to
operating subsidiary applications filed under Sec. 5.34(f) of its rules
(12 CFR 5.34(f)). It also would provide the FDIC with an opportunity to
impose appropriate conditions on the operations of the subsidiary. The
FDIC's Board of Directors wants to ensure that the FDIC can make a
determination if there are adverse effects on the safety and soundness
of the insured state nonmember bank and reserve authority to impose
appropriate conditions.
C. Authority
The FDIC's action in proposing this regulation is fully within the
agency's authority and is consistent with its stated goal of
safeguarding the safety and soundness of insured state nonmember banks.
The courts have recognized that defining what constitutes an unsafe or
unsound banking practice in a particular fact situation is within the
domain of the banking agencies. The United States Court of Appeals for
the Fifth Circuit, on two occasions, stated that ``[o]ne of the
purposes of the banking acts is clearly to commit the progressive
definition and eradication of such practices to the expertise of the
appropriate regulatory agencies.'' Groos National Bank v. Comptroller
of the Currency, 573 F.2d 880, 897 (5th Cir. 1978); First National Bank
of LaMargue v. Smith, 610 F.2d 1258, 1265 (5th Cir. 1980). The United
States Court of Appeals for the D.C. Circuit has stated with regard to
the OCC's authority under section 8 of the Federal Deposit Insurance
Act (12 U.S.C. 1818)--one of the statutory provisions from which the
FDIC derives authority for this rulemaking--that ``the Comptroller is
entitled to accomplish his regulatory responsibilities over ``unsafe
and unsound'' practices both by cease and desist proceedings and by
rules defining and explicating the practices which in his discretion he
finds threatening to a stable and effective national banking system.''
Independent Bankers Association of America v. Heimann, 613 F.2d 1164,
1169 (D.C. Cir. 1979). In his testimony on financial modernization, the
FDIC's Chairman recently confirmed the view that barriers between
banking and commerce should be lowered cautiously and incrementally
with safeguards to protect the insured bank.5
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\5\ See ``Testimony on Financial Modernization'' of Andrew C.
Hove, Jr., Chairman, Federal Deposit Insurance Corporation, Before
the Subcommittee on Finance and Hazardous Materials, Committee on
Commerce, United States House of Representatives, July 17, 1997.
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Under the proposed regulation, the FDIC is not waiving its right to
address on a case-by-case basis practices, conduct, or acts that are
not specifically addressed by this regulation which it finds constitute
unsafe and unsound practices. The FDIC will continue to monitor bank
direct and indirect involvement in securities activities and will take
whatever future action is appropriate.
The FDIC requests comments about all aspects of this proposed
revision to part 362. In addition, the FDIC is raising specific
questions for public comment as set out in connection with the analysis
of the proposal below.
III. Section by Section Analysis
A. Majority-owned Subsidiaries Engaging in the Public Sale,
Distribution or Underwriting of Stocks, Bonds, Debentures, Notes or
Other Securities That Are Not Permissible for a National Bank Under
Section 16 of the Banking Act of 1933
1. Description of the Rule
In connection with its recent adoption of restrictions, under
subpart A of part 362, for insured state bank subsidiaries seeking to
engage in the sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities that are not permissible for a
national bank and its subsidiary, the FDIC has determined that such
activities may involve risk. The FDIC consequently requires insured
state banks to file a notice to conduct this activity through a
majority-owned subsidiary. As long as the FDIC does not object to the
notice, the bank may conduct the activity in compliance with the
requirements set out in the rule. The fact that prior consent is not
required by subpart A does not preclude the FDIC from taking any
appropriate action with respect to the activities if the facts and
circumstances warrant such action.
In developing the proposed amendments under consideration here, the
FDIC did not see a need for differing treatment based on whether the
insured state nonmember bank subsidiaries that engage in the public
sale, distribution or underwriting of stocks, bonds, debentures, notes
or other securities that are not permissible for a national bank are
engaging in a similar activity that is permissible for a national bank
subsidiary. In either instance, the proposal would provide the same
comprehensive structure for insured state nonmember bank subsidiaries
that engage in the public sale, distribution or underwriting of stocks,
bonds, debentures, notes or other securities that are not permissible
for a national bank.
Thus, the standards being proposed as amendments to subpart B
addressing safety and soundness concerns are the same as those that
were adopted in subpart A in the final rule. The difference is that the
activities addressed in subpart A are not permissible for a national
bank subsidiary while the activities addressed in subpart B are those
that are permissible for a national bank subsidiary. Thus, the
activities addressed in subpart A are addressed primarily under the
authority found in section 24 of the FDI Act whereas the activities
addressed in subpart B are addressed under the authority found in
section 8 of the FDI Act.
The revised language would be located in subpart B of part 362 and
would become part of proposed Sec. 362.8(a).
Subpart A of part 362 does not grant authority to conduct
activities or make investments; subpart A only gives relief from the
prohibitions of section 24 of the FDI Act. In subpart A, the FDIC
grouped the exception for insured state bank subsidiaries that engage
in the public sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities that are not permissible for a
national bank together with the real estate exception in the structure
of the regulation to promote uniform standards across activities. In a
parallel fashion in subpart B, the FDIC proposes to group the exception
for insured state nonmember banks that acquire or establish
subsidiaries that engage in the public sale, distribution or
underwriting of stocks, bonds, debentures, notes or other securities
that are permissible for
[[Page 66343]]
a national bank only through a subsidiary together with the real estate
exception in the structure of the regulation, to promote uniform
standards across activities.
Similarly, the authority, constraints and notice process refers
back to subpart A and incorporates the same requirements and
limitations as govern securities underwriting activities thereunder. In
both instances the proposal would require the insured state nonmember
bank and its subsidiary to meet and continue to meet the following
standards to engage in the activity after notice to the FDIC, rather
than making a full application:
1. The bank must meet the requirements for an ``eligible depository
institution;'' 6
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\6\ An ``eligible depository institution'' is a depository
institution that: (1) Has been chartered and operating for at least
three years or is in an acceptable holding company structure; (2)
received an FDIC-assigned composite UFIRS rating of 1 or 2 at its
most recent examination; (3) received a rating of 1 or 2 under the
``management'' component of the UFIRS at its most recent
examination; (4) received at least a satisfactory CRA rating from
its primary federal regulator at its last examination; (5) received
a compliance rating of 1 or 2 from its primary federal regulator at
its last examination; and (6) is not subject to any corrective or
supervisory order or agreement.
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2. The bank must be well capitalized after deducting its investment
in the subsidiary;
3. The subsidiary must be an ``eligible subsidiary;'' 7
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\7\ An entity is an ``eligible subsidiary'' if it: (1) Meets the
capital requirements; (2) is physically separate and distinct in its
operations; (3) maintains separate accounting and other records; (4)
observes separate business formalities; (5) has a chief executive
officer who is not an employee of the bank; (6) has a majority of
its board of directors who are neither directors nor officers of the
state-chartered depository institution; (7) conducts business
pursuant to independent policies and procedures; (8) has only one
business purpose; (9) has a current written business plan that is
appropriate to the type and scope of business conducted by the
subsidiary; (10) has adequate management; and (11) establishes
policies and procedures to ensure adequate computer, audit and
accounting systems, internal risk management controls, and has the
necessary operational and managerial infrastructure to implement the
business plan.
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4. The bank and the subsidiary must comply with the investment
limits, transaction requirements and collateralization requirements in
dealing with each other;
5. The bank must adopt policies and procedures to govern its
participation in financing transactions arranged by the subsidiary;
6. The bank may not express an opinion of value or advisability of
securities underwritten by the subsidiary unless the customer is
notified of the bank's relationship with the subsidiary;
7. The subsidiary must be registered with SEC and agree to notify
the regional office of any material actions against the subsidiary by
any state authorities or the SEC; and
8. The bank may not buy securities underwritten by the subsidiary
as principal or fiduciary unless the bank's board of directors
approves.
The proposed requirements are uniform with other part 362 notice
procedures for insured state bank subsidiaries to engage in activities
not permissible for national banks or their subsidiaries, and would
recognize the level of risk present in subsidiaries that engage in the
public sale, distribution or underwriting of stocks, bonds, debentures,
notes or other securities that are not permissible for a national bank
itself. These requirements are not all presently found in Sec. 337.4
but the FDIC believes that only banks that are well-run and well-
managed should be given the opportunity to engage in securities
activities that are not permissible for a national bank under the
streamlined notice procedures. These criteria are imposed as expedited
processing criteria rather than substantive criteria. Banks not meeting
these criteria that want to engage in these activities should be
subject to the scrutiny of the application process. Although operations
not permissible for a national bank are conducted and managed by a
separate majority-owned subsidiary, such activities are part of the
analysis of the consolidated financial institution. The condition of
the institution and the ability of its management are an important
component in determining if the risks of the securities activities will
have a negative impact on the insured institution.
When the FDIC initially implemented Sec. 337.4 on securities
activities of subsidiaries of insured state nonmember banks, the FDIC
determined that some risk may be associated with those activities. The
FDIC continues to see a need to address that risk. The FDIC requests
comment on the application of these safeguards to these activities,
including the utility of management and board separations to limit
controlling person liability and the inappropriate disclosure of
material nonpublic information; the extent that any securities
underwriting liability may have been reduced due to the enactment of
The Private Securities Litigation Reform Act of 1995, Public Law 104-
67; and the efficacy of more limited restrictions on officer and
director interlocks to prevent both liability and information sharing
and any related issues.8
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\8\ Liability of ``controlling persons'' for securities law
violations by the persons or entities they ``control'' is found in
section 15 of the Securities Act of 1933, 15 U.S.C. 77o and section
20 of the Securities and Exchange Act of 1934, 15 U.S.C. 78t(a).
Although the tests of liability under these statutes vary slightly,
the FDIC is concerned that liability may be imposed on a parent
entity that is a bank under the most stringent of these authorities
in the securities underwriting setting. Under the Tenth Circuit's
permissive test for controlling person liability, any appearance of
an ability to exercise influence, whether directly or indirectly,
and even if such influence cannot amount to control, is sufficient
to cause a person to be a controlling person within the meaning of
section 15 or section 20. Although liability may be avoided by
proving no knowledge or good faith, proving no knowledge requires no
knowledge of the general operations or actions of the primary
violator and good faith requires both good faith and
nonparticipation. See First Interstate Bank of Denver, N.A. v.
Pring, 969 F.2d 891 (10th Cir. 1992), rev'd on other grounds, 511
U.S. 164 (1994); Arena Land & Inv. Co. Inc. v. Petty, 906 F. Supp.
1470 (D. Utah 1994); San Francisco-Oklahoma Petroleum Exploration
Corp. v. Carstan Oil Co., Inc., 765 F.2d 962 (10th Cir. 1985);
Seattle-First National Bank v. Carlstedt, 978 F. Supp. 1543 (W.D.
Okla. 1987). However, to the extent that any securities underwriting
liability may have been reduced due to the enactment of The Private
Securities Litigation Reform Act of 1995, Pub .L. 104-67, then the
FDIC's concerns regarding controlling person liability may be
reduced. It is likely that the FDIC will want to await the
development of the standards under this new law before taking
actions that could risk liability on a parent bank that has a
subsidiary that engages in the public sale, distribution or
underwriting of stocks, bonds, debentures, notes or other securities
that are not permissible for a national bank.
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2. Substantive Changes to the Subsidiary Underwriting Activities
Generally, these proposed amendments to subpart B, as compared to
the current provisions of Sec. 337.4 governing the state nonmember bank
subsidiaries that engage in the public sale, distribution or
underwriting of stocks, bonds, debentures, notes or other securities
that are not permissible for a bank under section 16 of Glass-Steagall,
have been streamlined to make compliance easier. In addition, state
nonmember banks that deem any particular constraint to be burdensome
may file an application with the FDIC to have the constraint removed
for that bank and its majority-owned subsidiary.
The FDIC has proposed to eliminate those constraints that were
deemed to overlap with other requirements or that could be eliminated
and still maintain safety and soundness. The FDIC has determined that
it can adequately monitor other securities activities through its
regular reporting and examination processes. We invite comment on
whether the elimination of the other notices now found in Sec. 337.4,
such as the notice requirement for any
[[Page 66344]]
securities activity in Sec. 337.4(d), is appropriate.
The FDIC proposes the removal of the customer disclosures currently
contained in Sec. 337.4. Instead, the FDIC will be relying on the
Interagency Statement on the Retail Sale of Nondeposit Investment
Products (FIL-9-94,9 February 17, 1994) (or any successor
requirement) as applicable guidance to ensure that appropriate
disclosures are made when the subsidiary's products are sold on bank
premises, are sold by bank employees or are sold when the bank receives
a referral fee. While the current regulation requires disclosures,
those disclosures are similar but not identical to the disclosures
required by the Interagency Statement. This change makes compliance
easier. Comments submitted to the FDIC in connection with its recent
revisions to subpart A of part 362 support this change and recognize
that any retail sale of nondeposit investment products to bank
customers under such circumstances are subject to the Interagency
Statement. The FDIC requests comment on whether the Interagency
Statement provides adequate disclosures for retail sales in a
securities subsidiary and whether required compliance with that policy
statement needs to be specifically mentioned in the regulatory text.
Comment is invited on whether any other disclosures currently in
Sec. 337.4 should be retained or if any additional disclosures would be
appropriate.
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\9 \ Financial institution letters (FILs) are available in the
FDIC Public Information Center, room 100, 801 17th Street, N.W.,
Washington, D.C. 20429.
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The FDIC proposes to continue to impose many of the safeguards
found in section 23A of the Federal Reserve Act (12 U.S.C. 371c) and to
impose the safeguards similar to section 23B of the Federal Reserve Act
(12 U.S.C. 371c-1). The FDIC requests comment on the restrictions that
have been removed, including whether any of these restrictions should
be reimposed for securities activities. The FDIC also invites
suggestions for further improvements.
The FDIC proposes that the notice period be shortened from the
existing 60 days to 30 days and that the required notice and
application procedures be located in subpart G of part 303. Previously,
specific instructions and guidelines on the form and content of any
applications or notices required under Sec. 337.4 were found within
that section.
With regard to any insured state nonmember banks that have been
engaging in these activities under a notice filed and in compliance
with Sec. 337.4, the proposed regulation would allow those activities
to continue under the terms of that approval. This result differs from
the approach set out in Sec. 362.5(b) (applicable to state banks
engaging in securities activities impermissible for a national bank and
its subsidiary), which requires that the bank and its majority-owned
subsidiaries meet the core eligibility requirements, the investment and
transaction limitations, and capital requirements contained in
Sec. 362.4(c), (d), and (e). The FDIC did not consider the additional
requirements to be necessary in subpart B, because we are not aware of
any insured state nonmember banks having subsidiaries that are
underwriting only securities that would fall under subpart B. We
believe that any subsidiaries that are underwriting the types of
securities regulated under subpart B already are required to follow the
continuation requirements found in subpart A.
3. Notice for Change in Circumstances
The final rule in subpart A applicable to state banks engaging in
securities activities impermissible for a national bank and its
subsidiary (Sec. 362.4(b)(5)) requires the bank to provide written
notice to the appropriate Regional Office of the FDIC within 10
business days of a change in circumstances. A change in circumstances
is described as a material change in a subsidiary's business plan or
management. Under the proposal, subpart B incorporates this requirement
by reference. The FDIC believes that it can address a bank's falling
out of compliance with any of the other requirements of the regulation
through the normal supervision and examination process.
B. Other Activities Permissible for Subsidiaries of a National Bank
That Are Not Permissible for a National Bank
In this proposal, the FDIC requires that an insured state nonmember
bank file a 30-day advance notice before the bank's subsidiary may
engage in other activities not permissible for a national bank that may
be permissible for a national bank subsidiary. This 30-day advance
notice is designed to allow FDIC to review any such activity and
consider whether safety and soundness considerations make it prudent
that conditions be placed on FDIC's consent to allow such activities.
Since section 24 was enacted, the OCC has confirmed through its
rule governing operating subsidiaries that there may be activities that
are permissible for national bank subsidiaries even though the parent
national bank may not conduct them directly. The FDIC needs to review
the activities and assess their safety and soundness in determining
whether the activity is appropriate for an insured state nonmember
bank's subsidiary. The FDIC also needs to determine whether any
conditions should be placed on the conduct of that activity. The FDIC
cannot assess the activities that may be approved in the future and
adopt specific standards to govern those activities. This safety and
soundness review and, if appropriate, the imposition of conditions
should be done on a case-by-case basis. The FDIC has elected to limit
its review to a 30-day period to limit the burden from this
requirement.
IV. Additional Requests for Comments
The FDIC is specifically requesting comments that address the
following:
(1) What criteria should the FDIC use to decide whether an activity
that is permissible for a national bank subsidiary but not permissible
for the national bank may be conducted in a safe and sound fashion by a
subsidiary of an insured state nonmember bank?
(2) Should activities that are permissible for a national bank
subsidiary but are not permissible for the national bank be limited to
subsidiaries of insured state nonmember banks of a certain asset size,
with a certain composite rating, etc.?
(3) What are the likely competitive effects of authorizing insured
state nonmember banks to engage (through subsidiaries) in activities
that are permissible for a national bank subsidiary but are not
permissible for the national bank?
(4) Alternately, are there other approaches or methods which would
facilitate access without compromising traditional safety and soundness
concerns?
Comments addressing these issues and any other aspects of the
general subject of permitting subsidiaries of insured state nonmember
banks to engage in activities that are permissible for a national bank
subsidiary but are not permissible for the national bank will be
welcomed.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1980 (44 U.S.C.
3501 et seq.) the FDIC may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid Office of Management and Budget (OMB) control number.
The collection of information contained in this proposed rule has been
submitted to
[[Page 66345]]
OMB for review. Comments on the collection of information should be
sent to the desk officer for the agencies: Alexander T. Hunt, Office of
Information and Regulatory Affairs, Office of Management and Budget,
New Executive Office Building, Room 3208, Washington, DC 20503. Copies
of comments should also be sent to: Steven F. Hanft, FDIC Clearance
Officer, Office of the Executive Secretary, Federal Deposit Insurance
Corporation, 550 17th Street, NW, Washington, DC 20429, (202) 898-3907.
Comments may be hand-delivered to the guard station at the rear of the
17th Street building (located on F Street) on business days between
7:00 a.m. and 5:00 p.m. [Fax number (202) 898-3838; Internet address:
COMMENTS@FDIC.GOV]. For further information on the Paperwork Reduction
Act aspect of this rule, contact Steven F. Hanft at the above address.
Comment is solicited on:
(i) Whether the proposed collection of information is necessary for
the proper performance of the functions of the agency, including
whether the information will have practical utility;
(ii) The accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used;
(iii) The quality, utility, and clarity of the information to be
collected; and
(iv) Ways to minimize the burden of the collection of information
on those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Title of the collection: The proposed rule will modify an
information collection previously approved by OMB titled ``Activities
and Investments of Insured State Banks'' under control number 3064-
0111.
Summary of the collection: Generally, the collection includes the
description of the activity in which an insured state bank or its
subsidiary proposes to engage that would be impermissible absent the
FDIC's consent or nonobjection, and information about the relationship
of the proposed activity to the bank's and /or subsidiary's operation
and compliance with applicable laws and regulations.
Need and Use of the information: The FDIC uses the information to
determine whether to grant consent or provide a nonobjection for the
insured state bank or its subsidiary to engage in the proposed activity
that otherwise would be impermissible pursuant to section 8 of the FDI
Act and 12 CFR part 362.
Proposed changes to the collection: The proposed rule will modify
the collection in two ways. First, by adding, at Sec. 362.8(a)(2), the
requirement of a notice to the FDIC before the state nonmember bank
through a subsidiary engages in either the public sale, distribution or
underwriting of stocks, bonds, debenture, notes or other securities if
those activities are permissible for a national bank subsidiary but are
not permissible for the national bank itself. Second, by adding, at
Sec. 362.8(b), the requirement of a notice to the FDIC before the state
nonmember bank through a subsidiary engages in activities that are
permissible for a national bank subsidiary but are not permissible for
the national bank itself. The contents of both notices are described at
Sec. 303.121(b) of the final part 362 rule also published in today's
Federal Register.
Respondents: Banks or their subsidiaries desiring to engage in
activities that would be impermissible absent the FDIC's consent or
nonobjection.
Estimated annual burden resulting from this proposed rulemaking:
Frequency of response: Occasional
Number of responses: 1
Average number of hours to prepare a response: 8 hours
Total annual burden: 8 hours
VI. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
FDIC certifies that this proposed rule will not have a significant
economic impact on a substantial number of small entities. As noted
above in connection with the Paperwork Reduction Act, the FDIC
estimates that the incidences in which insured state nonmember banks
will be required to file a notice under the rule will be infrequent,
and will not require significant time to complete. Furthermore, the
proposed rule streamlines requirements for insured state nonmember
banks. It simplifies the requirements that apply when insured state
nonmember banks conduct certain securities activities through majority-
owned corporate subsidiaries. Whenever possible, the rule clarifies the
expectations of the FDIC when it requires notices or applications to
consent to activities by insured state banks. The proposed rule will
make it easier for small insured state banks to locate the rules that
apply to their investments.
List of Subjects
12 CFR Part 303
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking, Bank
merger, Branching, Foreign branches, Golden parachute payments, Insured
branches, Interstate branching, Reporting and recordkeeping
requirements, Savings associations.
12 CFR Part 337
Banks, banking, Reporting and recordkeeping requirements, Savings
associations, Securities.
12 CFR Part 362
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking, Insured
depository institutions, Investments, Reporting and recordkeeping
requirements.
For the reasons set forth above and under the authority of 12
U.S.C. 1819(a) (Tenth), the FDIC Board of Directors hereby proposes to
amend 12 CFR chapter III as follows:
PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY
1. The authority citation for part 303 continues to read as
follows:
Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1,
1835a, 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.
2. In Sec. 303.122, the first sentence of paragraph (a) and the
first sentence of paragraph (b) are revised to read as follows:
Sec. 303.122 Processing.
(a) Expedited processing. A notice filed by an insured state bank
seeking to commence or continue an activity under Sec. 362.4(b)(3)(i),
Sec. 362.4(b)(5), Sec. 362.8(a)(2), or Sec. 362.8(b) of this chapter
will be acknowledged in writing by the FDIC and will receive expedited
processing, unless the applicant is notified in writing to the contrary
and provided a basis for that decision. * * *
(b) Standard processing for applications and notices that have been
removed from expedited processing. For an application filed by an
insured state bank seeking to commence or continue an activity under
Sec. 362.3(a)(iii)(A), Sec. 362.3(b)(2)(i), Sec. 362.3(b)(2)(ii)(C),
Sec. 362.4(b)(1), Sec. 362.4(b)(2), Sec. 362.4(b)(4), Sec. 362.5(b)(2),
Sec. 362.8(a)(2), or Sec. 362.8(c) of this chapter or for notices which
are not processed pursuant to the expedited
[[Page 66346]]
processing procedures, the FDIC will provide the insured state bank
with written notification of the final action as soon as the decision
is rendered. * * *
PART 337--UNSAFE AND UNSOUND BANKING PRACTICES
4. The authority citation for part 337 continues to read as
follows:
Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b),
1819, 1820(d)(10), 1821(f), 1828(j)(2), 1831f, 1831f-1.
Sec. 337.4 [Removed and Reserved]
5. Sec. 337.4 is removed and reserved.
PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS
ASSOCIATIONS
6. The authority citation for part 362 continues to read as
follows:
Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(m),
1831a, 1831e.
Subpart B--Safety and Soundness Rules Governing Insured State
Nonmember Banks
7. In Sec. 362.6, remove the third sentence and add two sentences
in its place to read as follows:
Sec. 362.6 Purpose and scope.
* * * The following standards shall apply for insured state
nonmember banks to conduct either real estate investment or to engage
in the public sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities through a subsidiary if those
activities are permissible for a national bank subsidiary but are not
permissible for the national bank itself. The FDIC also requires that
notices be filed before insured state nonmember banks conduct any other
activities through a subsidiary if those activities are permissible for
a national bank subsidiary but are not permissible for a national bank.
* * *
8. In Sec. 362.8, revise paragraph (a), redesignate paragraph (b)
as paragraph (c) and add new paragraph (b) to read as follows:
Sec. 362.8 Restrictions on activities of insured state nonmember
banks.
(a) Real estate investment or engaging in the public sale,
distribution or underwriting of stocks, bonds, debentures, notes or
other securities through a subsidiary if those activities are
permissible for a national bank subsidiary but are not permissible for
the national bank itself. The FDIC Board of Directors has found that,
depending on the facts and circumstances presented by a particular
case, real estate investment or engaging in the public sale,
distribution or underwriting of stocks, bonds, debentures, notes or
other securities activities may have adverse effects on the safety and
soundness of an insured state nonmember bank. Therefore, an insured
state nonmember bank may not establish or acquire a subsidiary that
engages in such real estate investment or in the public sale,
distribution or underwriting of stocks, bonds, debentures, notes or
other securities activities unless the insured state nonmember bank:
(1) Has an approval previously granted by the FDIC and continues to
meet the conditions and restrictions of the approval; or
(2) Meets the requirements for engaging in real estate investment
or securities underwriting activities (as relevant) as set forth in
Sec. 362.4(b)(5), and submits a corresponding notice under Sec. 303.121
and Sec. 303.122(a) of this chapter to which no objection is taken by
FDIC, or applies for and obtains the FDIC's consent in accordance with
the procedures of Sec. 303.121 and Sec. 303.122(b) of this chapter.
(b) Other activities permissible for subsidiaries of a national
bank that are not permissible for a national bank. The FDIC Board of
Directors has found that depending on the facts and circumstances of a
particular case, the conduct of an activity in a subsidiary of an
insured state nonmember bank that is not permissible for a national
bank may have adverse effects on the safety and soundness of the
insured state nonmember bank. The FDIC Board of Directors has found
that the FDIC cannot make a determination whether there are adverse
effects on the safety and soundness of an insured state nonmember bank
engaging through a subsidiary in an activity not permissible for a
national bank but permissible for a subsidiary of a national bank,
unless the FDIC has had an opportunity for prior review of the
activities. Therefore, an insured state nonmember bank may not
establish or acquire a subsidiary that engages in such an activity
unless the insured state nonmember bank obtains the FDIC's consent.
Consent will be given only if the FDIC determines the activity poses no
adverse effects on the safety and soundness of the insured state
nonmember bank. Notices should be filed in compliance with
Secs. 303.121 and 303.122(a) of this chapter. Approvals granted under
Sec. 303.122(a) of this chapter may be made subject to any conditions
or restrictions found by the FDIC to be necessary to protect the
deposit insurance funds from risk, prevent unsafe or unsound banking
practices, and/or ensure that the activity is consistent with the
purposes of federal deposit insurance and other applicable law. If the
FDIC previously granted an approval to the insured state nonmember bank
to engage in the activity, the bank need not file another notice under
this section.
* * * * *
By order of the Board of Directors.
Dated at Washington, DC, this 5th day of November 1998.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-31151 Filed 11-30-98; 8:45 am]
BILLING CODE 6714-01-P