This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

47969

Vol. 62, No. 177

Friday, September 12, 1997

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: Notice of proposed rulemaking.

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 is seeking public

comment on its proposal to revise and

consolidate its rules and regulations

governing activities and investments of

insured state banks and insured savings

associations. The FDIC proposes to

combine its regulations governing the

activities and investments of insured

state banks with those governing

insured savings associations. In

addition, the proposal updates the

FDIC’s regulations governing the safety

and soundness of securities activities of

subsidiaries and affiliates of insured

state nonmember banks. The FDIC’s

proposal modernizes this group of

regulations and harmonizes the

provisions governing activities that are

not permissible for national banks with

those governing the securities activities

of state nonmember banks. The

proposed regulation will make a number

of substantive changes and will revise

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 proposal establishes a number of

new exceptions and will allow

institutions to conduct certain activities

after providing the FDIC with notice

rather than filing an application. The

proposal also will revise these

regulations by deleting obsolete

provisions, rewriting the regulatory text

to make it more readable, removing a

number of the current restrictions on

those activities and conforming the

disclosures required under the current

regulation to an existing interagency

statement concerning the retail sales of

nondeposit investment products.

DATES: Comments must be received by

December 11, 1997.

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) or John Jilovec,

Examination Specialist, (202/898–8958)

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)

requires 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 has reviewed part 362 ‘‘Activities

and Investments of Insured State

Banks,’’ § 303.13 ‘‘Applications and

Notices by Savings Associations,’’ and

§ 337.4 ‘‘Securities Activities of

Subsidiaries of Insured State Banks:

Bank Transactions with Affiliated

Securities Companies’ and proposes to

make a number of changes to those

regulations. The proposal is described

in more detail below. In brief, however,

the proposal would restructure existing

part 362, placing the substance of the

text of the current regulation into new

subpart A. Subpart A would address the

Activities of Insured State Banks which

implements 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. In addition, the proposal

would move the FDIC’s regulations

governing the securities activities of

subsidiaries of insured state nonmember

banks (currently at 12 CFR 337.4) into

subpart A of part 362 and revise those

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 to conform the

required disclosures to the Interagency

Statement on the Retail Sale of

Nondeposit Investment Products

(Interagency Statement).

Safety and Soundness Rules

Governing Insured State Nonmember

Banks would be set out in new subpart

B. Subpart B would establish 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 § 337.4 of this chapter.

Existing § 303.13 of this chapter

which relates to activities of state

savings associations and filings by all

savings associations would be revised in

a number of ways and primarily placed

in new subpart C of part 362.

Procedures to be used by all savings

associations when Acquiring,

Establishing, or Conducting New

Activities through a Subsidiary would

be placed in new subpart D. Subpart E

would contain the revised provisions

concerning application and notice

procedures as well as delegations for

insured state banks. Subpart F would

contain the revised provisions

concerning application and notice

procedures as well as delegations for

insured savings associations.
47970 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

In addition, the FDIC is processing a

complete revision of part 303 of the

FDIC’s rules and regulations. Part 303

contains the FDIC’s applications

procedures and delegations of authority.

As a part of that process and for ease of

reference, the FDIC is proposing to

remove the applications procedures

relating to activities and investments of

insured state banks from part 362 and

place them in subpart G of part 303. The

procedures applicable to insured

savings associations will be

consolidated in subpart H of part 303.

We anticipate that the proposed changes

to part 303 will be published for

comment within 90 days of today’s

publication. At that time, subparts G

and H of part 303 will be designated as

the place where the text of subparts E

and F of this proposed rule eventually

will be located.

Part 362 of the FDIC’s regulations

implements the provisions of section 24

of the FDI Act (12 U.S.C. 1831a). 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. In addition, 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. 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.

Section 303.13 of the FDIC’s

regulations (12 CFR 303.13) implements

sections 28 and 18(m) of the FDI Act.

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 in the two

provisions which caused the

implementing regulations to differ in

some respects.

Section 18(m) of the FDI Act (12

U.S.C. 1828(m)) 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 (12 U.S.C. 1831e)

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 (HOLA, 12

U.S.C. 1464(t)). 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

establishes 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

establishes procedures to give prior

notice for the establishment or

acquisition of a subsidiary or the

conduct of new activities through a

subsidiary.

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 that are impermissible for

national banks under section 16 of the

Banking Act of 1933 (12 U.S.C. section

24 seventh), commonly known as the

Glass-Steagall Act. It 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 national banks, 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 national bank 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 proposed rule) to amend

part 362. Under the proposed rule a

notice procedure would have replaced

the application currently required in the

case of real estate investment, 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, wellmanaged insured state banks. Under the

proposal, all real estate activities would

be required to be conducted in a

majority-owned subsidiary, while life

insurance policies and annuity contracts

could be held directly or through a

majority-owned subsidiary. Notices

would have been filed with the

appropriate FDIC regional office. The

FDIC regional office would have had 60

days to process a notice under the

proposal, with a possible extension of

30 days. If the FDIC did not object to the
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47971

notice prior to the expiration of the

notice period (or any extension), the

bank could have proceeded with the

investment activity. In the event a bank

fell out of compliance with any of the

eligibility conditions after starting the

activity, it would have been required to

report the noncompliance to the

appropriate FDIC regional office within

10 business days of the occurrence.

With respect to investments in real

estate activities, the August proposed

rule set forth 9 conditions which banks

would have had to meet to be ‘‘eligible’’

for the notice procedure. These 9

conditions addressed the bank’s capital

levels and financial condition (must be

well-capitalized after deducting

investment in real estate and must have

a Uniform Financial Institutions Rating

System (UFIRS) rating of 1 or 2), how

the real estate activity would be

conducted (a ‘‘bona fide’’ subsidiary

which only engages in real estate

activities), management experience and

independence of the real estate

subsidiary (subsidiary must have

management with real estate experience,

a written business plan, and at least one

director with real estate experience who

is not an employee, officer or director of

the bank), and placed limits on bank

transactions with the subsidiary and

customers (sections 23A and 23B of the

Federal Reserve Act applied to

transactions between the bank and its

subsidiary and tying and insider

transactions were prohibited). The

August proposed rule also set forth the

contents of the notice that was to be sent

to the FDIC regional office. The required

information included 7 items;

information regarding the proposed

activity (general description of proposed

real estate activity, a copy of the written

business plan, and a description of the

subsidiary’s operations including

management’s expertise), the amount of

investment and impact on bank capital

(aggregate amount of investment in

activity and pro forma effect of

deducting such investments on the

bank’s capital levels) and the bank’s

authority to engage in such activity

(copy of the board of directors’

resolution authorizing activity and

identification of state law permitting the

activity). Under the August proposal,

the regional office could have requested

additional information.

After considering the comments to the

August proposed rule and reconsidering

the issues underlying the current

regulation, we have restructured the

approach we are taking under part 362.

As a result, the FDIC withdrew the

August proposed rule, which is

published elsewhere in today’s Federal

Register in favor of the more

comprehensive approach presently

proposed.

While the August proposed rule

amended existing part 362, the current

proposal would replace existing part

362. Unlike the rule proposed in

August, the current proposal is not

limited to considering the notice

procedure used under part 362. In

drafting the current proposal, we have

deleted items that are either duplicative,

unnecessary due to the passage of time,

or have proven unwarranted given our

experience in implementing section 24

over the last five years. In addition, we

have refined the notice procedure that

was proposed in August. We are no

longer recommending a life insurance

policy and annuity contract investment

notice due to recent guidance provided

by the Office of the Comptroller of the

Currency (OCC). The OCC’s guidance

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. We invite comment on

whether we are correct in concluding

that there is no longer a need for a

notice process for life insurance and

annuity investments which are

impermissible for national banks.

II. Description of Proposal

The FDIC proposes to divide part 362

into six subparts. Before describing the

reorganization of part 362, we would

like to make a few general comments

concerning the proposal. First, 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. Second, current

part 362 contains a number of

provisions relating to divesture. We

have deleted any divestiture provisions

in the current proposal that we found to

be unnecessary due to the passage of

time. Third, we are proposing to

combine the rules covering the equity

investments of banks and savings

associations into part 362 and to

regulate these investments as

consistently as possible given the

limitations imposed by statute. Fourth,

unlike the regulations promulgated by

the Office of Thrift Supervision we do

not distinguish between activities

carried out by a first tier subsidiary of

a savings association versus a lower-tier

subsidiary. 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

proposed regulation does not

incorporate sections 23A and 23B of the

Federal Reserve Act by cross-reference;

rather, the proposal adapts the

principles set forth in sections 23A and

23B to the bank/subsidiary relationship

as appropriate. In drafting the proposed

revision to part 362, 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.

The FDIC requests comment on whether

these proposals assist in the application

of the principles of 23A and 23B to the

subsidiaries of insured depository

institutions. We also request comment

on all aspects of these restrictions

including whether 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 proposed regulation

would deal 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 would

essentially become subpart A under the

current proposal. The procedural

provisions of existing part 362 have

been transferred to subpart E. As

proposed, subpart A addresses the

activities of the insured state bank in

§ 362.3. The activities carried on in a

subsidiary of the insured state bank are

addressed in a separate section (see

§ 362.4 in the proposed regulation). We

are soliciting comment on whether this

reorganization of part 362 is helpful.

The ability of insured state banks to

engage in activities as principal is

directly linked to the ability of a

national bank to engage in the same type

of activity. National banks have a

limited ability to hold equity

investments in real estate. Even so, if a

particular real estate investment has

been determined to be permissible for a

national bank, an insured state bank

only needs to document that

determination to undertake the
47972 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

investment. Insured state banks that

want to undertake a real estate

investment which is impermissible for a

national bank (or continue to hold the

real estate investment in the case of

investments acquired before enactment

of section 24 of the FDI Act), must file

an application with the FDIC for

consent. The FDIC may approve such

applications if the investment is made

through a majority-owned subsidiary,

the institution meets the applicable

capital standards set by the appropriate

Federal banking agency and the FDIC

determines that the activity does not

pose a significant risk to the appropriate

deposit insurance fund.

The FDIC has determined that real

estate investment activities may pose

significant risks to the deposit insurance

funds. For that reason, the FDIC is

proposing to establish standards that an

insured state nonmember bank must

meet before engaging in real estate

investment activities that are not

permissible for a national bank. Under

a safety and soundness standard,

subpart B of the proposed regulation

requires insured state nonmember banks

to meet the standards established by the

FDIC, even if the Comptroller of the

Currency determines that those

activities are permissible for a national

bank subsidiary. Subpart B also would

establish 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 § 337.4 of this

chapter. The new rule will only cover

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.

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 national bank unless

the standards established under the

proposed regulation are met.

Subpart C of the proposed regulation

concerns the activities and investments

of insured state savings associations.

The provisions applicable to activities

of savings associations currently

appearing in § 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 would be

treated consistently with the treatment

provided insured state banks. Thus, we

revised a number of definitions

currently contained in § 303.13 to track

the definitions used in subpart A. We

request comment on whether the

revisions made in subpart C contribute

to the efficient operation of savings

associations and their service

corporations while continuing to

implement the statutory requirements.

Subpart D of the proposal 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. We moved this

requirement to a new subpart to

accommodate Federally chartered

savings associations by limiting the

amount of regulation text they would

have to read to comply with this

statutory notice. Comment is invited on

whether this separation avoids

confusion, enhances readability and

simplifies compliance.

Subparts E and F of the proposal each

contain the notice and application

requirements and the delegations of

authority for the substantive matters

covered by the proposal for insured

state banks and state savings

associations, respectively.

The FDIC requests comments about

all aspects of the 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. Subpart A—Activities of Insured

State Banks

Section 362.1 Purpose and Scope

The purpose and scope of subpart A

is to ensure that the 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.

This subpart 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, or conducted as trustee. We

moved this language from § 362.2(c) of

the current version of part 362 where

the term ‘‘as principal’’ is 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. This

result obtains from the fact that 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 would be 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, we

have moved this language to the

purpose and scope paragraph. We
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47973

request comment on whether moving

this language to the purpose and scope

paragraph assists users of this rule in

interpreting its parameters. We also

invite comment on whether the ‘‘as

principal’’ definition still would be

necessary.

Equity investments acquired in

connection with debts previously

contracted (DPC) 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

exclusion of equity investments

acquired in connection with DPC has

been moved from the definition of

‘‘Equity investment’’ 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. However, the intent of the insured

state bank in holding equity investments

acquired in connection with DPC

continues to be relevant to the analysis

of whether the equity investment is

permitted. 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. 85,619, which

interprets and applies the National Bank

Act) or no later than the time permitted

under state law if that time period is

shorter.

In addition, any interest taken DPC

may not be held for investment

purposes. For example, while a bank

may be able to expend monies in

connection with DPC property and/or

take other actions with regard to that

property, if those expenditures and

actions are speculative in nature or go

beyond what is necessary and prudent

in order for the bank to recover on the

loan, the property will not fall within

the DPC exclusion. The FDIC expects

that bank management will document

that DPC property is being actively

marketed and 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 to highlight this issue,

provide clarity and alert the reader of

this rule, we have moved to the purpose

and scope paragraph the language

governing 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

bank or its subsidiaries 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 permissible for

national banks. 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 for 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 in no later than ten years. (12

CFR 34). We understand that the time

periods set forth in the OCC’s regulation

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 substitute its

own judgment to determine when a

reasonable time has elapsed for holding

the property.

A subsidiary of an insured state bank

may not engage in real estate investment

activities 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

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

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.

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 § 362.2 contains—

definitions. We have left most of the

definitions unchanged or edited them to

enhance clarity or readability without

changing the meaning.

To standardize as many definitions as

possible, we have incorporated several

definitions from section 3 of the FDI Act

(12 U.S. C. 1813). These definitions are

‘‘Bank,’’ ‘‘State bank,’’ ‘‘Savings

association,’’ ‘‘State savings

association,’’ ‘‘Depository institution,’’

‘‘Insured depository institution,’’

‘‘Insured state bank,’’ ‘‘Federal savings

association,’’ and ‘‘Insured state

nonmember bank.’’ This standardization

required that we delete the definitions

of ‘‘depository institution’’ and ‘‘insured

state bank’’currently found in part 362.

No substantive change was intended by

this change. The definitions that were

added by this change are ‘‘Bank,’’ ‘‘State

bank,’’ ‘‘Savings association,’’ ‘‘State

savings association,’’ ‘‘Insured

depository institution,’’ ‘‘Federal

savings association,’’ and ‘‘Insured state

nonmember bank.’’ These definitions

were added to provide clarity

throughout the proposed part 362

because we are incorporating so many

definitions from subpart A into subpart

B governing safety and soundness

concerns of insured state nonmember

banks, subpart C governing the activities

of state savings associations, and

subpart D governing subsidiaries of all

savings associations. We invite

comment on whether readers view these

definitions as needing further changes

to enhance clarity and readability. We

also invite comment on whether any of
47974 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

the changes we have made may have

changed the substance of the regulation

in ways that we may not have intended.

The definitions that have been left

unchanged or edited to enhance clarity

or readability without changing the

meaning are the following: ‘‘Control,’’

‘‘Extension of credit,’’ ‘‘Executive

officer,’’ ‘‘Director,’’ ‘‘Principal

shareholder,’’ ‘‘Related interest,’’

‘‘National Securities exchange,’’

‘‘Residents of state,’’ ‘‘Subsidiary,’’ and

‘‘Tier one capital.’’ We invite comment

on whether readers view these

definitions as needing further changes

to enhance clarity and readability. We

also invite comment on whether any of

the changes we have made may have

changed the substance of the regulation

in ways that we may not have intended.

The name of one definition has been

simplified without substantively

changing the meaning of the definition.

That definition is currently found in

§ 362.2(g) and is described as follows

‘‘An insured state bank will be

considered to convert its charter.’’ We

moved this definition to § 362.2(e) and

call this definition, ‘‘Convert its

charter.’’ The substance of the definition

is intended to remain unchanged by this

revised language. We invite comment on

whether readers view the change in this

definition as needing any further

changes to enhance clarity and

readability. We also invite comment on

whether any of the changes we have

made to this definition may have

changed the substance of the regulation

in ways that we may not have intended.

Although most of the definitions as

set out in the proposal are the same or

virtually unchanged, a few of the

definitions in the proposal have been

substantively revised. The proposed

changes to these definitions are

discussed below.

We deleted 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.’’ We moved the substance of the

information that was contained in these

definitions into the scope paragraph in

§ 362.1. We thought that including the

information that was in these

definitions in the scope paragraph made

the coverage of the rule clearer to the

reader and was consistent with the

purpose of the scope paragraph. We

expect that some readers may save time

by realizing sooner that the regulation

may be inapplicable to conduct

contemplated by a particular bank. We

also thought that the reader might be

more likely to consider the scope

paragraph than to consider the

definition section when reading the rule

to determine its applicability. We

concluded that it would be unnecessary

to duplicate this same information in

the definition section. We invite

comment on whether readers prefer to

see these concepts in the scope

paragraph and whether readers also

would prefer to see these concepts

defined.

We 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 thought that it was

unnecessary to continue to restate this

information in the definition section of

the regulation. No substantive change is

intended by this simplification of the

language. In addition, 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. We conformed

the definition of ‘‘Equity investment’’ by

deleting the reference to the deleted

definition of ‘‘Equity interest in real

estate.’’ No substantive change is

intended by shortening this language.

We invite comment on whether the

readers view the definition of ‘‘Equity

interest in real estate’’ as necessary to

enhance clarity and readability on these

issues as well as whether readers prefer

seeing these concepts in the scope

paragraph.

The remainder of the definition of

‘‘Equity investment’’ has been shortened

and edited to enhance readability. We

intend no substantive change by

shortening this language. This concept

is intended to encompass an investment

in an equity security or real estate as it

does in the current definition. We invite

comment on the changes to this

definition and whether any further

changes are needed.

With regard to the definition of

‘‘Equity security,’’ we modified this

definition by deleting the references to

permissible national bank holdings such

as equity securities being held as a

result of a foreclosure or other

arrangements concerning debt

previously contracted. Language

discussing the exclusion of DPC and

other investments that are permissible

for national banks has been relocated to

the scope paragraph for the reasons

stated above. Thus, the equity

investment definitions no longer

include these references. We intend no

substantive change through the deletion

of this redundant language. We invite

comment on whether any ambiguity or

unintended change in the meaning may

be created by removing this language

from the definition.

We added a shorter definition of

‘‘Real estate investment activity’’

meaning any interest in real estate held

directly or indirectly that is not

permissible for a national bank. This

term is used in § 362.4(b)(5) of subpart

A and in § 362.7 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 that would not be

permissible for a national bank, itself.

We invite comment on this definition,

including its meaning and clarity as

well as the underlying safety and

soundness proposal in subpart B. We

specifically invite comment on the

exclusion of real estate leasing from the

definition of real estate investment

activity. The proposal has eliminated

real estate leasing from the definition of

real estate investment activity in order

to assure that banks using the notice

procedure are not getting involved in a

commercial business. The notice

procedures are designed for institutions

that wish to hold parcels of real estate

for ultimate sale. If an institution wishes

to hold the property to lease it for

ongoing business purposes, we believe

the proposal should be considered

under the application process.

We deleted the definitions of

‘‘Investment in department’’ and

‘‘Department’’ because we thought they

were no longer needed in the revised

regulation text. The core standards

applicable to a department of a bank are

set out in detail in § 362.3(c) and

defining the term ‘‘Department’’ no

longer seems to be necessary. Regarding

the definition of ‘‘Investment in

department,’’ we also considered this

definition unnecessary. We believe that

if a calculation of ‘‘Investment in

department’’ needs to be made, we will

defer to state law on this issue. We

invite comment on whether the readers

view these definitions as necessary to

enhance clarity and readability on these

issues. We also request comment on

whether deference to state law on this

investment issue would cause any

unintended consequences that we have

not foreseen.

Similarly, we deleted the definition of

‘‘Investment in subsidiary’’ because the

definition is no longer needed in the

revised regulation text. The core

standards applicable to an insured state

bank and its subsidiary make a
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47975

definition of ‘‘Investment in subsidiary’’

superfluous. The core standards

contained in § 362.4(c) set out the

requirements in detail. Therefore,

defining the term ‘‘Investment in

subsidiary’’ no longer seems to be

necessary. We invite comment on

whether the readers view this definition

or a similar definition as necessary to

enhance clarity and readability on these

issues.

We deleted the definition of ‘‘bona

fide subsidiary’’ and chose to make

similar characteristics part of the

eligible subsidiary criteria in

§ 362.4(c)(2). We thought that including

these criteria as a part of the substantive

regulation text in that subsection, rather

than as a definition, makes reading the

rule easier and the meaning clearer. We

invite comment on whether readers

prefer to see this concept set forth in the

substantive section of the rule or the

definition section and whether readers

believe any additional definition is

necessary to enhance clarity and

readability.

The proposal substitutes the current

definition of ‘‘Lower income’’ with a

cross reference in § 362.3(a)(2)(ii) to the

definition of ‘‘low income’’ and

‘‘moderate income’’ as 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 definition ‘‘Lower income’’ is

relevant for purposes of applying the

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 would 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. We note that the

change will have the effect of expanding

the housing projects that qualify for the

exception. We invite comment on this

change.

We have simplified the definition of

the term ‘‘Activity.’’ As modified the

definition includes all investments.

Where equity investments are intended

to be excluded, we expressly exclude

those investments in the regulation text.

We invite comment on whether the

modification to the definition enhances

clarity or whether the longer definition

found in the current regulation should

be reinstated. In particular, we invite

comment on whether the definition

should be modified to take into account

in some fashion a recent interpretation

by the agency under which it was

determined that the act of making a

political campaign contribution does

not constitute an ‘‘activity’’ for purposes

of part 362. The interpretation uses a

three prong test 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. If at least two of the tests 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. 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

test 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 test

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

test 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 unto itself

as it simply is entered into in support

of the ‘‘activity’’ of taking deposits. We

also invite any other comments that

would make this definition easier to

understand and apply.

The proposal modifies the definition

of ‘‘Company’’ to add limited liability

companies to the list of entities that will

be considered a company. This change

in the definition is being proposed in

recognition of the creation of limited

liability companies and their growing

prevalence in the market place. We

invite comment on whether this

addition to the list of forms of business

enterprise is appropriate and whether

we should add any more forms of

business enterprise.

The FDIC has changed the definition

of ‘‘Significant risk to the fund’’ by

adding 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.

We invite comment on whether the

definition should be modified in some

other manner and if so how. Our

interpretation of the definition remains

unchanged. Significant risk to the

deposit insurance fund shall be

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 final indicated that the

FDIC recognized that no investment or

activity may be said to be without risk

under all circumstances and that such

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 emphasis rather is

on whether there is a high degree of

likelihood under all of the

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 will not be

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 risk to the fund only

be found if a particular activity or

investment is expected to result in the

imminent failure of a bank. The

suggestion was rejected as the FDIC

determined at that time that it was

appropriate to approach the issue

conservatively. We think that this

conservatism is more clearly articulated

in this modification to the definition.

We invite comments on whether this
47976 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

additional language is necessary and

whether any other language should be

added.

We re-defined the term ‘‘Wellcapitalized’’ 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 ‘‘wellcapitalized’’ has the same meaning as

set forth in the capital regulations

adopted by the appropriate Federal

banking agency. We decided that it

would simplify the calculations for the

various state-chartered depository

institutions if the capital definition

imported the definitions used by those

institutions when they deal with their

appropriate Federal banking agency. We

deleted the other terms defined under

§ 362.2(x) as unnecessary due to the

changes in the regulation text. We invite

comment on whether we have missed

an item that still needs to be included

in this definition.

We added definitions of the following

terms: ‘‘Change in control,’’

‘‘Institution,’’ ‘‘Majority-owned

subsidiary,’’ ‘‘Security’’ and ‘‘Statechartered depository institution.’’

Under section 24 of the FDI Act, the

grandfather with respect to common or

preferred stock listed on a national

securities exchange and shares of

registered investment companies ceases

to apply if the bank undergoes a change

in control. The phrase ‘‘Change in

control’’ is defined for the purposes of

part 362 in what is currently

§ 362.3(b)(4)(ii) of the regulation. Under

the proposal, the definition is relocated

into the definitions section and

modified.

Under the current regulation a

‘‘Change in control’’ that will result in

the loss of the grandfather is defined to

mean a transaction in which the bank

converts its charter, 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 regulations implementing

section 7(j), 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, a

transaction in which the bank is

acquired by or merged into a bank that

is not eligible for the grandfather, or a

transaction in which control of the

bank’s parent company changes. The

proposal would narrow the definition of

‘‘Change in control’’ by defining the

phrase to only encompass transactions

subject to section 7(j) of the FDI Act

(except for transactions which trigger

the presumptions under FDIC’s

regulations implementing section 7(j) or

the FRB’s regulations implementing

section 7(j)) and transactions in which

the bank is acquired by or merged into

a bank that is not eligible for the

grandfather. This definition change will

narrow the instances in which a bank

may lose its grandfathered ability to

invest in common or preferred stock

listed on a national securities exchange

and shares of registered investment

companies. It is our belief that the

revised definition, if adopted, will more

closely approximate when a true change

in control has occurred.

We added a definition of ‘‘Institution’’

and defined it to mean the same as a

‘‘state-chartered depository institution’’

to shorten the drafting of the rule,

particularly for those items that are

applicable to both insured state banks

and insured state savings associations.

This definition is intended to enhance

readability. We invite comment on

whether this definition creates any

confusion or ambiguity.

We added a definition of ‘‘Majorityowned subsidiary’’ and defined it to

mean any corporation in which the

parent insured state bank owns a

majority of the outstanding voting stock.

We added this definition to clarify our

intention that the expedited notice

procedures only be available when an

insured state bank interposes an entity

that gives limited liability to the parent

institution. We interpret Congress’s

intention in imposing the majorityowned 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

these entities in a notice procedure. We

have decided that there may have been

an ambiguity in the notice provisions

we proposed for comment and

published August 23, 1996, in the

Federal Register at 61 FR 43486. We

intended that an entity eligible for the

notice procedure be in corporate form

and implied that requirement by

incorporating the bona fide subsidiary

requirements that included references to

a board of directors. The addition of this

definition should make our intention

clear that the notice procedure requires

a majority-owned subsidiary to take the

corporate form. We invite comment on

this definition, our substantive decision

to require the corporate form for a

majority-owned subsidiary of an insured

state bank using the notice procedures,

and our decision to exclude other

limited liability business forms from the

notice procedure. We also invite

comment on any ambiguities or

questions that this definition may

create.

We adopted 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. We invite comment on

any ambiguities or questions that this

definition may create.

We defined ‘‘State-chartered

depository institution’’ to mean any

state bank or state savings association

insured by the FDIC to eliminate

confusion and ambiguity. We invite

comment on any ambiguities or

questions that this definition may

create.

We invite any general comment on

the proposed definitions and invite any

suggestions for additional definitions

that would be helpful to the reader of

the regulatory text.

Section 362.3 Activities of Insured

State Banks

Equity Investment Prohibition

Section 362.3(a) of the proposal

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 (restated in the

current regulation and carried forward

in the proposal) applies. The provision

is being retained. The proposal

eliminates the reference to amount that

is contained in the current version of

§ 362.3(a). We have reconsidered our

interpretation of the language of section

24 where 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
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47977

previously interpreted the language of

paragraph (f) as controlling and read

that language into the entire statute. We

reconsidered this approach, decided

that it was not the most reasonable

construction of this statute and

determined that the language of

paragraph (c) is controlling. Thus, the

language of paragraph (c) controls when

any other equity investment is being

considered. Therefore, we deleted the

amount language from prohibition in

the regulation. We request comment on

this change.

Exception for Majority-Owned

Subsidiary

The FDIC proposes to retain the

exception which allows investment in

majority-owned subsidiaries 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 is affirmatively

stating that an insured state chartered

bank may acquire or retain investments

through a majority-owned subsidiary. 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. It is our understanding that

national banks may own a minority

interest in certain types of subsidiaries.

(See 12 CFR 5.34(1997)). Therefore, an

insured state bank may hold a minority

interest in a subsidiary if a national

bank could do so. Thus, the statute 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 under the regulation. Only

investments that would not be

permissible for a national bank must be

held through a majority-owned

subsidiary.

The regulation defines the business

form of a majority-owned subsidiary to

be a corporation. There may be other

forms of business organization that are

suitable for the purposes of this

exception such as partnerships or

limited liability companies. The FDIC

does not wish to give blanket

authorization to a non-corporate form of

organization since these forms may not

provide for the same separations the

FDIC believes to be necessary to protect

the insured bank from assuming the

liabilities of its subsidiary. The proposal

anticipates that the Board will review

alternate forms of organization to assure

that appropriate separation between the

insured depository institution and the

subsidiary is in place. We are soliciting

comment on other forms of business

organization which the FDIC may allow.

Please provide a discussion of the

separations inherent in alternate forms

of business organization.

To qualify for this exception, the

majority-owned subsidiary must engage

in activities that are described in

§ 362.4(b). The allowable activities

include both statutory and regulatory

exceptions to the general prohibitions of

the regulation.

Investments in Qualified Housing

Projects

The FDIC proposes to combine the

language found in two paragraphs of the

current regulation. The FDIC proposes

to retain the combined paragraphs of the

regulation with substantially the same

language as currently in effect. The

changes that have been made reflect

practical clarifications resulting from

the implications of the technical way

the qualified housing rules work and are

not intended to be substantive. In

addition, the FDIC has modified the

language of the text to remove negative

inferences and make the text clearer.

Section 362.3(a)(2)(ii) of the proposal

provides an exception for qualified

housing projects. Under the exception,

an insured state bank is not prohibited

from investing 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 that banks use

the figure reported on the bank’s most

recent consolidated report of condition

prior to making the investment as the

measure of their total assets. If an

investment in a qualified housing

project does not exceed the limit at the

time the investment was 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.

Comment is 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.’’)

Grandfathered Investments in Listed

Common or Preferred Stock and Shares

of Registered Investment Companies

The current regulation restates 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 that is available

to certain state banks if they meet the

requirements to be eligible for the

grandfather. The statute 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 FDIC proposes

to retain the regulatory language as

currently in effect without any

substantive change. The exception is

found in § 362.3(a)(2)(iii) of the

proposal. Although there would be no

substantive change, the FDIC has

modified the language of this section to

remove negative inferences and make

the text clearer.

We deleted the reference in the

current regulation describing the notice

content and procedure because we

believe that most, if not all, of the banks

eligible for the grandfather already have

filed notices with the FDIC. Thus, we

shortened the regulation by eliminating

language governing the specific content

and processing of the notices.

Investment in common or preferred

stock listed on a national securities

exchange or shares of an investment

company is governed by the language of

the statute. Notices must conform to the

statutory requirements whether filed

previously or filed in the future. Any

bank that has filed a notice need not file

again. Comment is invited on whether

the regulatory filing requirements

should be retained and eventually

moved into part 303 of this chapter.

Section 362.3(a)(2)(iii)(A) of the

proposal implements the grandfathered

listed stock and registered shares

provision found in section 24(f)(2) of the

FDI Act. Paragraph (B) of this section of

the proposal 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
47978 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

grandfather rights terminate. State banks

should continue to be aware that,

depending upon the circumstances, the

exception may be considered lost after

a merger transaction in which an

eligible bank is the survivor. For

example, if a state bank that is not

eligible for the exception is merged into

a much smaller state bank that is

eligible for the exception, the FDIC may

determine that in substance the eligible

bank has been acquired by a bank that

is not eligible for the exception.

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 regulation without any

change except for the deletion of the

citation to specific authorities the FDIC

may rely on to order divestiture. Rather

than containing specific citations, the

proposal merely references 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.

Finally, the FDIC has moved,

simplified and shortened the limit on

the maximum permissible investment in

listed stock and registered shares. The

proposal limits the investment in

grandfathered listed stock and registered

shares to a maximum of one hundred

percent (100 percent) of tier one capital

as measured on the bank’s most recent

consolidated report of condition. The

FDIC continues to use book value as the

measure of compliance with this

limitation. 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 is being

deleted as is 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, we

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. At this time we believe that it

is not necessary to expressly state these

presumptions in the regulation.

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) is 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.

Comment is invited on whether this

grandfather exception for investment in

listed stock and registered shares should

be applied by the FDIC as an exception

that is separate and distinct from any

other exception under the regulation

that would allow a subsidiary of an

insured state bank to hold equity

securities. In short, should we allow this

exception in addition to the exception

for stock discussed below or should the

FDIC consider any listed stock held by

a subsidiary of the bank pursuant to an

exception in the regulation toward the

100 percent of tier one capital limit

under this exception? We note that the

statute does not itself impose any

conditions or restrictions on a bank that

enjoys the grandfather in terms of per

issuer limits. Comment is sought on

whether it is appropriate to impose

restrictions under the regulation that

would, for example, limit a bank to

investing in less than a controlling

interest in any given issuer. Is there

some other limit or restriction the FDIC

should consider imposing by regulation

that is important to ensuring that the

grandfathered investments do not pose

a risk? Should this be done, if at all,

solely through the notice and approval

process?

Stock Investment in Insured Depository

Institutions Owned Exclusively by

Other Banks and Savings Associations

The content of the proposed

regulation reflects 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). Section

24(f)(3)(B) of the FDI Act does not limit

the exception to voting stock. We are

not proposing to eliminate the reference

to ‘‘voting’’ in the current regulation

when referencing control of the insured

depository institution. Any other

reference to voting stock has been

eliminated in the exception to allow

holding of non-voting stock. The FDIC

seeks comment concerning retaining the

reference to ‘‘voting’’ stock when

calculating the 15 percent ownership

limitation contained in the statute.

Stock Investments in Insurance

Companies

Section 362.3(b)(2)(v) of the proposal

contains exceptions that permit state

banks to hold equity investments in

insurance companies. The exceptions

are provided by statute and

implemented in the current version of

part 362. For the most part, we brought

the exceptions forward into this

proposal with no substantive editing.

The exceptions are discussed separately

below.

Directors and Officers Liability

Insurance Corporations

The first statutory 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. 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, there is no statutory or

regulatory ‘‘aggregate’’ investment limit

in all insurance companies nor does the

statute combine this equity investment

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. The FDIC is not at this time

proposing to impose aggregate

investment limits on equity investments

which have specific statutory carve outs

nor are we proposing to combine those

investments with other equity

investments made under the exceptions

to the regulation for which aggregate

investments are being proposed. The

FDIC would like to receive comment,

however, on whether there should be an

‘‘aggregate’’ investment limit for equity

investments in insurance companies.
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47979

Stock of Savings Bank Life Insurance

Company

The second statutory exception for

equity investments in insurance

companies permits any insured state

bank located in the states of New York,

Massachusetts and Connecticut to own

stock in savings bank life insurance

companies provided that consumer

disclosures are made. Again, this

regulatory provision mirrors the specific

statutory carve out found in Section 24

and is contained in the present

regulation. We have carried this

provision forward into the proposal

with some changes.

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. The proposed

language is shorter than the existing

regulation and makes a substantive

change by clarifying what the required

disclosures are for insured banks selling

these products. As was indicated above,

insured banks located in New York,

Massachusetts and Connecticut are

permitted to invest in the stock of a

savings bank life insurance company as

long as certain disclosure requirements

are met. The FDIC proposes to amend

the regulatory language to specifically

require compliance with the Interagency

Statement in lieu of the disclosures

presently set out in the regulation.

Insured banks selling savings bank life

insurance policies, other insurance

products and annuities will be required

to provide customers with written

disclosures that are consistent with the

Interagency Statement which include a

statement that the products are not

insured by the FDIC, are not guaranteed

by the bank, and may involve risk of

loss. The last disclosure—that such

products may involve risk of loss—is

not currently required under the

regulation.

The FDIC would like to request

comment regarding the disclosure

obligations of insured banks. It is the

FDIC’s view that savings bank life

insurance, other insurance products and

annuities are ‘‘nondeposit investment

products’’ as that term is used in the

Interagency Statement. The FDIC is

aware that insurance companies

typically offer annuity products and that

many states regulate annuities through

their insurance departments. However,

the FDIC agrees with the Comptroller of

the Currency that annuities are financial

products and not insurance.

Nevertheless, annuities are nondeposit

investment products and are therefore

subject to the requirements found in the

Interagency Statement when sold to

retail customers on bank premises as

well as in other instances. On this basis,

all the requirements in the Interagency

Statement should apply to the

marketing and sale of annuities by a

financial institution.

While the existing regulatory language

is similar to the Interagency Statement

in what it requires to be disclosed, it is

not identical. The FDIC believes the

proposed changes will clarify the

standards which are to be followed by

insured state banks.

It could be argued that the regulatory

language in this part repeats existing

guidance and is unnecessary. We note,

however, that the statute requires that

disclosures be made in order for the

exception to be available. While the

Interagency Statement is enforceable in

the sense that noncompliance may

constitute an unsafe or unsound

banking practice that may give rise to a

cease and desist action, the Interagency

Statement is not itself a regulation with

the force and effect of law.

We seek comments on whether it

would be preferable for the regulation to

fully set out the disclosure requirements

rather than cross referencing the

Interagency Statement. Commenters

should address these points, as well as

discuss the differences between

enforcing specific regulatory language

versus enforcing a policy statement. We

invite comments on the applicability of

the Interagency Statement in the

absence of the language referencing it in

this regulation. We invite comment on

whether using the Interagency

Statement makes compliance easier for

banks as it provides uniform standards

applicable to multiple products. We also

invite comment on any other issues that

are of concern to the industry or the

public in using these particular

disclosures when selling insurance and

annuity products.

Other Activities Prohibition

Section 362.3(b) of the proposal

restates the statutory prohibition on

insured state banks directly or indirectly

engaging as principal in any activity

that is not permissible for a national

bank. Activity is defined in this

proposal as the conduct of business by

a state-chartered depository institution,

including acquiring or retaining any

investment. Because acquiring or

retaining an investment is an activity by

definition, language has been added to

make clear that this prohibition does not

supersede the equity investment

exception of § 362.3(b). 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

proposal) applies. The FDIC has

provided two regulatory exceptions to

the prohibition on other activities.

Consent Through Application

The limitation on activities contained

in the statute 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 of the FDI Act

which grandfathers (1) an insured state

bank 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 or before September 30,

1991, which was reinsured in whole or

in part by the Federal Crop Insurance

Corporation; and (3) well-capitalized

banks engaged in insurance

underwriting through a department of a

bank. The exception is carried over from

the current regulation with a number of

proposed modifications.

To use the savings bank life insurance

exception, an insured state bank located

in Massachusetts, New York or

Connecticut must engage in the activity

through a department of the bank that

meets core standards discussed below.

The standards for conducting this

activity are taken from the current

regulation with the exception of

disclosure standards which are

discussed below. We have moved the

requirements for a department from the

definitions to the substantive portion of

the regulation text.

The exception for underwriting

federal crop insurance reflects the

statutory exception. This exception 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 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, an insured
47980 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

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 only may

underwrite the same type of insurance

that was underwritten as of November

21, 1991 and only may operate and have

customers 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 standards. The core

operating standards for the department

require the department to provide

customers with written disclosures that

are consistent with those in the

Interagency Statement. Consistent with

the disclosure requirements of the

current regulation, the proposed rule

requires 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 obligated 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 FDIC views any financial product

that is not a deposit and entails some

investment component to be a

‘‘nondeposit investment product’’

subject to the Interagency Statement.

Part 362 was promulgated in 1992

before the Interagency Statement was

issued in February of 1994. While the

disclosures currently required by part

362 are similar to the disclosures set out

in the Interagency Statement, they are

not identical. Banks that engage in

insurance underwriting are thus covered

by the Interagency Statement and part

362 and must comply with similar but

somewhat different requirements. We

are proposing to cross reference the

Interagency Statement in part 362 to

make compliance clearer. We believe

that using the uniform standards set

forth in the Interagency Statement will

make compliance easier.

In the case of insurance underwriting

activities conducted by a department of

the bank, the disclosure required by the

Interagency Statement that the product

is not an obligation of the bank is not

correct as noted above, and the

suggested language in the regulation

does not require this disclosure. This

clarification is consistent with other

interpretations of the Interagency

Statement which stated that disclosures

should be consistent with the types of

products offered. The FDIC would like

to receive comment on whether such

clarification is necessary or whether the

regulation language is seen as

duplicating other guidance.

The FDIC notes that the consumer

disclosures are statutorily required for

savings bank life insurance. The

Interagency Statement is joint

supervisory guidance issued by the

Federal Banking Agencies, not a

regulation. The FDIC requests comment

regarding the enforceability of the

Interagency Statement versus a

regulation promulgated under the

rulemaking requirements of the

Administrative Procedures Act.

The core separation standards restate

the requirements currently found in the

definition of department. These

standards require that the department

(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 require the obligations,

liabilities and expenses be satisfied only

with the assets of the department. The

standards in the proposed regulation are

not changed from the current regulation,

but have been moved from the

definitions section of the regulation to

ensure that requirements of the rule are

shown in connection with the

appropriate regulatory exception.

Acquiring and Retaining Adjustable

Rate and Money Market Preferred Stock

by the Bank

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. At that time after reviewing

comments, 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 of the regulation and are

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, and money market preferred

shares are sold at auction.

We have modified the exception

under the proposal by limiting the 15

percent measurement to tier one capital,

rather than total capital. Throughout the

current proposal, we have measured

capital-based limitations against tier one

capital. We changed the base in this

provision to increase uniformity within

the regulation. We recognize 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, any institution that

wants to increase its holding of these

securities may submit an application to

the FDIC.

The FDIC seeks comment on whether

this treatment of money market

preferred stock and adjustable rate

preferred stock is still appropriate.

Comment is requested concerning

whether other similar types of

investments should be given similar

treatment. Comments also are requested

on whether the reduced capital base

affects any institution currently holding

these investments or is likely to affect

the investment plans of any institution.

Activities That Are Closely Related to

Banking Conducted by Bank or Its

Subsidiary

The proposed regulation continues

the language found in the current

regulation titled, ‘‘Activities that are
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47981

closely related to banking.’’ This section

permits 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)). This

exception is subject to the statutory

prohibition that does not allow the FDIC

to permit the bank to directly hold

equity securities that a national bank

may not hold and which are not

otherwise permissible investments for

insured state banks pursuant to

§ 362.3(b).

Additional language has been added

to clarify that this subsection does not

authorize an insured state bank engaged

in real estate leasing to hold the leased

property for more than two years at the

end of the lease unless the property is

re-leased. This language is added to

ensure that this provision does not

allow an insured state bank to hold an

equity interest in real estate after the

end of the lease period. The FDIC has

decided to provide a two-year period for

the bank to divest the property if the

bank cannot lease the property again.

Comment is invited on the

reasonableness of this approach. Should

the FDIC consider an alternative

approach that a bank may not enter a

non-operating lease unless title reverts

to the lessee at the end of the lease

period? Are there other standards that

the FDIC should consider in this matter?

As does the current regulation, these

provisions allow a state bank to directly

engage in any ‘‘as principal’’ activity

included on the FRB’s list of activities

that are closely related to banking

(found at 12 CFR 225.28) and ‘‘as

principal’’ in any activity with respect

to which the FRB has issued an order

finding that the activity is closely

related to banking.

However, the consent to engage in

real estate leasing directly by an insured

state bank has been modified. Comment

is requested on whether there are any

additional activities permitted under the

proposed language that should be

modified. Comment is requested on the

effect of the proposed treatment of real

estate leasing activities on banks that

may want to engage in this activity in

the future. Comment also is requested

on the perceived risks of leasing

activities and whether we should

impose standards to address those risks.

Comment is requested on whether we

should consider any other approach,

including returning to the language in

the current regulation or deleting the

references to the Bank Holding

Company Act (12 U.S.C. 1843(c)(8) and

the activities that the FRB by regulation

or order has found to be closely related

to banking for the purposes of section

4(c)(8).

Guarantee Activities by Banks

The current regulation contains a

provision that permits a state bank with

a foreign branch to directly guarantee

the obligations of its customers as set

out in § 347.3(c)(1) of the FDIC’s

regulations without filing any

application under part 362. It also

permits a state bank to offer customersponsored credit card programs in

which the bank guarantees the

obligations of its retail banking deposit

customers. This provision has been

deleted as unnecessary since we

understand that these activities are

permissible for a national bank. In its

current rule, the FDIC added this

provision to clarify that part 362 does

not prohibit these activities; however to

shorten the regulation, such clarifying

language has been deleted since the

activity is permissible for a national

bank. The FDIC seeks comment as to

whether the deletion of this language

has an adverse impact on insured state

depository institutions and if there are

specific activities that this provision

allowed that are not permissible for a

national bank.

In the FDIC’s proposal regarding the

consolidation and simplification of its

international banking regulations found

in the Federal Register on July 15, 1997,

at 62 FR 37748, a technical amendment

to the current version of part 362 is

found. This amendment updates the

reference to § 347.103(a)(1) of this

chapter in § 362.4(c)(3)(I)(A). This

amendment may become final as a part

of the consolidation and simplification

of the FDIC’s international banking

regulations to reflect the correct citation

in the current version of part 362.

Nevertheless, we propose to eliminate

the references to guarantee activities in

this proposal because we consider them

unnecessary as they duplicate powers

granted to national banks. As previously

stated, we invite comment on the

necessity of including specific language

dealing with the power to guarantee

customer obligations in the regulatory

text of part 362.

Section 362.4 Subsidiaries of Insured

State Banks

General Prohibition

The regulatory language

implementing the statutory prohibition

on ‘‘as principal’’ activities that are not

permissible for a subsidiary of a

national bank has been separated from

the prohibition on activities which are

not permissible for a national bank

conducted in the bank. By separating

bank and subsidiary activities, § 362.4

now deals exclusively with activities

that may be conducted in a subsidiary

of an insured state bank. We believe that

separating the activities that may be

conducted at the bank level from the

activities that must be conducted by a

subsidiary makes it easier for the reader

to understand the intent of the

regulation. We invite comment on

whether this structure is more useful to

the reader. We also invite comment on

whether any additional changes would

make it easier for the reader to interpret

the regulation text.

Exceptions

Prohibited activities may not be

conducted unless one of the exceptions

in the regulation applies. This language

is similar to the current part 362 and

results in no substantive change to the

prohibition.

Consent Obtained Through Application

The proposal continues to allow

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. The proposal would delete the

language expressly providing 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 will 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. Deleting

the language leaves the issue to 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 additional such subsidiaries or to

require that any additional real estate

subsidiaries must be individually

approved.

The notice procedures described

herein requires that the subsidiary must

take the corporate organizational form.

Insured state banks that organize

subsidiaries in a form other than a

corporation may make application

under this section. Any bank that does

not meet the notice criteria or that

desires relief from a limit or restriction

included in the notice criteria may also

file an application under this section

and are encouraged to do so.
47982 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

Application instructions have been

moved to subpart E.

Language has been eliminated 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. We

invite comment on whether the

language should be retained in the

regulation to make it clear to state banks

that applications to conduct such

activities will not be approved.

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 under the proposal 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 proposed regulation provides for

three statutory exceptions that allow

subsidiaries to engage in insurance

underwriting. 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. Under the current regulation,

the bank must be well-capitalized.

Under the proposal, the bank must be

well-capitalized after deducting its

investment in the insurance subsidiary.

The FDIC believes that the capital

deduction is an important element in

separating the operations of the bank

and the subsidiary. This deduction

clearly delineates 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 a

cash infusion. As a result, the bank’s

investment in the insurance subsidiary

should not be considered when

determining whether the bank has

sufficient capital to meet its needs.

Comment is invited on whether the

capital deduction is appropriate or

necessary. If the FDIC requires a capital

deduction, should it be required in the

case of any insurance underwriting

subsidiary that is given a statutory

grandfather, e.g., should title insurance

subsidiaries also be subject to the

capital deduction? Should the capital

deduction treatment depend upon what

type of insurance is underwritten (if

there is a greater risk associated with the

insurance, should the capital deduction

be required)? Is the phase-in period

appropriate and clearly written?

The proposed regulation requires 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. The FDIC requests comment on

the effect of these additional

requirements on banks engaged in

insurance underwriting. We invite

comment on whether these

requirements appropriately separate the

subsidiary from the bank. We request

comment on whether the restrictions are

appropriate to the identified risks being

undertaken by these banks.

In lieu of the prescribed disclosures

contained in the current regulation, the

proposal prescribes that disclosures

consistent with the Interagency

Statement be made. The proposal also

eliminates the acceptance of disclosures

that are required by state law. While the

current regulation requires disclosures,

those disclosures are similar but not

identical to the disclosures required by

the Interagency Statement. Again, this

proposed change is intended to make

compliance with the Interagency

Statement and the regulation easier.

Comment is sought on whether the

disclosure requirements in the

regulation are necessary now that the

Interagency Statement has been

adopted. Any retail sale of nondeposit

investment products to bank customers

is subject to the Interagency Statement.

The FDIC recognizes that some

grandfathered insurance underwriting

subsidiaries may have a line of business

and customer base which is completely

separate from the bank’s operations. The

Interagency Statement would not

normally apply as the Statement does

not technically apply unless there is a

‘‘retail sale’’ to a ‘‘bank customer.’’ If the

FDIC were to rely wholly upon the

Interagency Statement there would be a

gap from the current coverage of the

disclosure requirements. Should that be

of concern to the FDIC?

Banks with subsidiaries engaged in

grandfathered insurance underwriting

activities are expected to meet the new

requirements of this proposal. Banks

which are not in compliance with the

requirements should provide a notice to

the FDIC pursuant to § 362.5(b). The

FDIC will consider the notices 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 into the proposal with

no substantive change. The insured state

bank is only permitted 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
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47983

1The current regulatory exception for activities

conducted not as principal provides for a test of

50% or less of the stock of a corporation which

engages solely in activities which are not

considered to be as principal. The term

‘‘corporation’’ is being changed to ‘‘company’’ to

accommodate the other forms of business enterprise

listed in the definition. The reference to 50% or less

is being deleted in order to avoid the confusion

generated by that limitation.

terminate upon a change in control of

the bank or its parent holding company.

Majority-owned Subsidiaries Which

Own a Control Interest in Companies

Engaged in Permissible Activities

The FDIC has found that it is not a

significant risk to the deposit insurance

funds if a majority-owned subsidiary

holds stock of a company that engages

in (1) any activity permissible for a

national bank; (2) any activity

permissible for the bank itself (except

engaging in insurance underwriting and

holding grandfathered equity

investments); (3) activities that are not

conducted ‘‘as principal;’’ or (4) activity

that is not permissible for a national

bank provided the Federal Reserve

Board by regulation or order has found

the activity to be closely related to

banking, if the majority-owned

subsidiary exercises control over the

issuer of the stock purchased by the

subsidiary. These exceptions are found

in the current regulation but do not

contain the provision that the majorityowned subsidiary must exercise

control.1 This change clarifies that this

exception is intended only for

subsidiaries that are operating a

business that is either permissible for

the bank itself or is considered to be

operated other than ‘‘as principal.’’ As

rewritten, the proposal differentiates

between the types of stock held by a

majority-owned subsidiary—having a

controlling interest and simply

investing in the shares of a company.

The FDIC intends that this provision

cover lower level subsidiaries that are

engaged in activities that the FDIC has

found present no significant risk to the

fund. The FDIC expects lower level

subsidiaries that engage in other

activities to conform to the application

or notice procedures of this regulation.

The FDIC recognizes that changing the

level of ownership permissible for these

activities may adversely affect some

insured state bank. We invite comment

on the effect of this change. The FDIC

invites comment on whether this

language change was necessary, whether

it should be concerned about lower

level subsidiaries, whether this

approach is appropriate to the risks

inherent in the activities and whether

any other approach, including returning

to the language in the current regulation

should be considered.

We deleted one other form of stock

ownership at the majority subsidiary

level from the current regulation by

deleting the language now found in

§ 362.4(c)(3)(iv)(C) of the current

regulation titled, ‘‘Stock of a corporation

that engages in activities permissible for

a bank service corporation.’’ Through a

majority-owned subsidiary, this section

of the current regulation allows an

insured state bank to invest in 50% or

less of the stock of a corporation which

engages solely in any activity that is

permissible for a bank service

corporation. Since bank service

corporations may engage in any activity

that is closely related to banking, this

exception also allowed majority-owned

subsidiaries to own stock in those

entities that solely engaged in activities

that were closely related to banking.

This exception has been deleted in this

proposal because the coverage of the

proposed exceptions in § 362.4(b)(3)

would duplicate the coverage of the

existing exception.

Comment is requested on whether the

proposed language clearly sets forth the

coverage of these exceptions. Comment

is requested on whether the proposed

language clearly allows the same

activities that the current exception

allows by permitting majority-owned

subsidiaries to hold stock of a company

engaged in activities permissible for a

bank service corporation. The FDIC

seeks comment on whether any

inadvertent substantive change has been

made by eliminating the specific

references permitting the ownership of

bank service company stock. We seek

comment on the use of the control test

for defining activities for lower level

subsidiaries. We invite comment on

whether any other approach, including

returning to the language in the current

regulation should be reconsidered.

Should the FDIC use a majority-owned

test for defining when a lower level

subsidiary exists?

We added clarifying language to the

exception governing activities closely

related to banking. The first exception

states that this section does not

authorize a subsidiary engaged in real

estate leasing to hold the leased

property for more than two years at the

end of the lease unless the property is

re-leased. This provision is the same at

the bank level. The second provision is

that this section does not authorize a

subsidiary to acquire or hold the stock

of a savings association other than as

allowed in § 362.4(b)(4). As is discussed

below, this subsection does not allow a

majority-owned subsidiary to have a

control interest in a savings association.

Comment is requested concerning the

effect of this change.

Majority-Owned Subsidiaries

Ownership of Equity Securities That Do

Not Represent a Control Interest

The proposed regulation significantly

changes the exception in the current

regulation involving the holding of

equity securities that do not represent a

control interest. The FDIC has

determined that the activity of holding

the equity securities at the majorityowned subsidiary level, subject to

certain limitations, does not present a

significant risk to the deposit insurance

funds.

This provision replaces two

exceptions contained in the current

regulation: (1) grandfathered

investments in common or preferred

stock and shares of investment

companies, and (2) stock of insured

depository institutions. The proposed

regulation adds an expanded exception

allowing the holding of other corporate

stock.

The current regulation provides that

an insured state bank that has obtained

approval to hold listed common or

preferred stock and/or shares of

registered investment companies under

the statutory grandfather (discussed

above) may hold the stock and/or shares

through a majority-owned subsidiary

provided that any conditions imposed

in connection with the approval are

met. The FDIC previously determined

that a majority-owned subsidiary could

be accorded the same treatment under

the grandfather provided for by section

24(f) of the FDI Act without risk to the

fund. Thus, the bank should be

permitted to invest in those securities

and investment company shares through

a majority-owned subsidiary.

The current regulation requires that

each bank file a notice with the FDIC of

the bank’s intent to make such

investments and that the FDIC

determine that such investments will

not pose a significant risk to the deposit

insurance fund before any insured state

bank may take advantage of the

‘‘grandfather’’ allowing 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.). In no

event may the bank’s investments in

such securities and/or investment

company shares, plus those of the

subsidiary, exceed one hundred percent

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
47984 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

‘‘grandfather’’ will be lost if the events

occur that are discussed above.

The proposed regulation eliminates

the notice for these activities and the

specific reference to grandfathered

activity and allows similar activity for

all insured state banks provided that the

bank’s investment in the majorityowned subsidiary is deducted from

capital and the activity is subject to the

eligibility requirements and transaction

limitations discussed below. Comment

is invited on whether this exception is

more appropriately applied by the FDIC

as an exception that is separate and

distinct from any other exception under

the regulation that would allow a

subsidiary of an insured state bank to

hold equity securities. In short, should

this exception be in addition to any

other exception for holding stock?

The FDIC proposes to expand the

current regulatory exception from the

acquisition of stock in another insured

bank through a majority-owned

subsidiary to an exception for the

acquisition of stock of insured banks,

insured savings associations, bank

holding companies, and savings and

loan holding companies. The exception

would continue to be limited to the

acquisition of no more than 10 percent

of the outstanding voting stock of any

one issuer. The acquisition would be

through a majority-owned subsidiary

which was organized for the purpose of

holding such stock.

This exception is being expanded to

cover savings association stock, bank

holding company stock and savings and

loan holding company stock in response

to the FDIC’s experience with

applications that have been presented to

the FDIC in which insured state banks

have sought approval for these kinds of

investments. In acting upon those

applications it has been the opinion of

the FDIC to date that investments in

bank holding company stock should not

present a risk to the fund given the fact

that bank holding companies are subject

to a very strong regulatory and

supervisory scheme and are limited, for

the most part, to engaging in activities

that are closely related to banking. The

FDIC proposes to allow investment in

savings association stock for similar

reasons. Comment is invited on whether

the exception should allow investments

in savings and loan holding company

stock in view of the broad range of

activities in which savings and loan

holding companies may engage.

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 position 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.

The proposal encompasses the

exceptions contained in the previous

regulation and expands the exception to

a majority-owned subsidiary of other

insured state bank to acquire corporate

stock. In order for an insured state bank

to use the exception, the bank must be

well-capitalized exclusive of the bank’s

investment in the subsidiary and must

make the capital deduction for purposes

of reporting capital on the bank’s Call

Report. For insured state banks that are

using the current exception for

grandfathered equities and holding bank

stock, the capital deduction requirement

is new. This requirement is similar to

that found in the proposed notice

procedures for state nonmember banks

to engage in activities not permissible

for national banks and recognizes the

level of risk present in securities

investment activities. Insured state

banks that are currently engaging in

these activities but are not in

compliance with the requirements

contained in the proposal should

provide notice under § 362.5(b).

The subsidiary may only invest in

corporate equity securities if the bank

and subsidiary meet the eligibility

requirements. Those requirements are:

(1) the state-chartered depository

institution may have only one majorityowned subsidiary engaging in this

activity; (2) the majority-owned

subsidiary’s investment in equity

securities (except stock of an insured

depository institution, a bank holding

company or a savings and loan holding

company) must be limited to equity

securities listed on a national securities

exchange; (3) the state-chartered

depository institution and majorityowned subsidiary may not have control

over any issuer of stock purchased; and

(4) the majority-owned subsidiary’s

equity investments (except stock of an

insured depository institution, a bank

holding company or a savings and loan

holding company) must be limited to

equity securities listed on a national

securities exchange.

The requirement that the subsidiary’s

investment be limited to 10 percent of

the outstanding voting stock of any

company. This limitation reflects the

FDIC’s intent that this exception be used

only as a vehicle for investment in

equity securities. The 10 percent

limitation was chosen because it reflects

a level of investment that is generally

recognized as not involving control of

the business. This requirement is to be

read together with the eligibility

requirement that the depository

institution may not exercise control over

any issuer of stock purchased by the

subsidiary. These requirements reflect

the FDIC’s intent that the depository

institution is not operating a business

through investments in equity

securities. Comment is requested as to

the appropriateness of the 10 percent

limitation.

The FDIC believes that only listed

securities should be allowed under this

exception. Listed securities are more

liquid than nonlisted securities and

companies whose stock is listed must

meet capital and other requirements of

the exchange. These requirements

provide some assurances as to the

quality of the investment. The

requirement that securities be listed is

not extended to bank and savings

association stock, bank holding

company stock, or stock of a savings

association holding company. These

companies are part of a highly regulated

industry which provides some

investment quality assurance. Banks

that may want to invest in unlisted

securities in other industries should be

subject to the scrutiny of the application

process.

To qualify for this exception, the

state-chartered depository institution

may not extend credit to the majorityowned subsidiary, purchase any debt

instruments from the majority-owned

subsidiary, or originate any other

transaction that is used to benefit the

majority-owned subsidiary which

invests in stock under this subpart. As

noted above, the depository institution

may have only one subsidiary engaged

in this activity. These requirements

reflect the FDIC’s desire that the scope

of the exception be limited. Institutions

that wish to have multiple subsidiaries

engaged in holding equity securities and

wish to extend credit to finance these

transactions should use the applications

procedures to request consent.

We added a provision relating to

portfolio management. The FDIC is

concerned that a majority-owned

subsidiary not engage in activities

which the FDIC has identified as

speculative. Therefore for the purposes

of this subsection, investment in the

equity securities of any company does

not include pursuing short-term trading

activities. The exception has been
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47985

created to facilitate holding of corporate

equity securities that are within the

overall investment strategies of the

state-chartered depository institution

and its subsidiaries. It is expected that

these investment strategies take account

of such factors as quality, diversification

and marketability as well as income.

Short term trading that emphasizes

income over other investment factors is

speculative and may not be pursued

through this exception.

In addition to requesting comment on

the particular exception as proposed,

the FDIC requests comment on whether

it is appropriate for the regulation to

contain any exception that would allow

an insured state bank to hold equity

securities at the subsidiary level. The

FDIC also requests comment on the

adequacy of the restrictions and

constraints that it has proposed for the

banks and subsidiaries that would hold

these investments. What additional

constraints, if any, should we consider

adding for the banks and subsidiaries

that would hold these investments? We

note that the statute does not itself

impose any conditions or restrictions on

a bank that enjoys the grandfather for

investment in equity securities in terms

of per issuer limits. Comment is sought

on whether it is appropriate to impose

the restriction that limits a bank and its

subsidiary to investing in less than a

controlling interest in any given issuer.

Is there some other limit or restriction

the FDIC should consider imposing by

regulation that is important to ensuring

that the grandfathered investments do

not pose a risk?

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 majorityowned subsidiary in compliance with

the requirements set forth. These

activities require the insured state banks

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 requirement. 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.

Engage in Real Estate Investment

Activities

Under section 24 of the FDI Act and

the current version of part 362, an

insured state bank may not directly or

indirectly engage in real estate

investment activities not permissible for

a national bank. 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 is well capitalized and the

FDIC determines that the activity does

not pose a significant risk to the deposit

insurance fund.

The FDIC approved 92 of 95

applications from December 1992

through June 30, 1997, involving real

estate investment activities. The FDIC

denied one application, approved one in

part, and one bank withdrew its

application. The real estate investment

applications generally have fallen into

three categories: (1) requests for consent

to hold real estate at the subsidiary level

while liquidating the property where

the bank expects that liquidation will be

completed later than December 19,

1996; (2) requests for consent to

continue to engage in real estate

investment activity in a subsidiary,

where such activities were initiated

prior to enactment of section 24 of the

FDI Act; and (3) requests for consent to

initiate for the first time real estate

investment activities through a majorityowned subsidiary.

The approved applications have

involved investments which have

ranged from less than 1 percent to over

70 percent of the bank’s tier one capital.

The majority of the investments,

however, involved investments of less

than 10 percent of tier one capital with

only seven applications involving

investments exceeding 25 percent of tier

one capital. The applications filed with

the FDIC have involved a range of real

estate investments including holding

residential properties, commercial

properties, raw land, the development

of both residential and commercial

properties, and leasing of previously

improved property. The applications

approved by the FDIC include 33

residential properties, 39 commercial

properties and 20 applications covering

a mix of commercial and residential

properties. The assets of the institutions

that submitted approved applications

ranged from $1 million to $6.7 billion.

The institutions which have been

approved to continue or commence new

real estate investment activity primarily

have had composite ratings of 1 or 2

ratings under the UFIRS. However, 6

institutions were rated 3, and 3

institutions were rated 4. The 4-rated

institutions submitted applications to

continue an orderly divestiture of real

estate investments after December 19,

1996. Of the approved applications, 9

were to conduct new real estate

investment activities, while 80 were

submitted to continue holding existing

real estate or to hold existing real estate

after December 19, 1996, to pursue an

orderly liquidation. The remaining 3

approved applications asked for consent

to continue existing holdings and

conduct new real estate activities. One

application was partially approved and

partially denied. This application

involved a bank that applied for consent

to continue direct real estate activities

and consent to continue indirect real

estate investment activities through a

subsidiary. The FDIC approved the

application to continue the real estate

investment activity through the

subsidiary and denied the application

for the bank to engage directly in real

estate investment activities.

To date, the FDIC has evaluated a

number of factors when acting on

applications for consent to engage in

real estate investment activities. Where

appropriate, the FDIC has fashioned

conditions designed to address potential

risks that have been identified in the

context of a given application. In

evaluating an application to conduct

equity real estate investment activity,

the FDIC considers the type of proposed

real estate investment activity to

determine if the activity is unsuitable

for an insured depository institution.

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 more

traditional banking activities.

In every instance in which the FDIC

has approved an application to conduct

a real estate investment activity, we

have determined that it was necessary to

impose 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
47986 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

investment activities by a majorityowned 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 this proposed

regulation, we have evaluated the

conditions usually imposed when

granting such approval to insured state

banks and incorporated these conditions

within the proposal where appropriate.

The FDIC requests general comment on

whether the conditions imposed under

the proposed regulation are appropriate.

Comments are invited on each

condition, especially on the

requirements that the subsidiary have

an independent chief executive officer

and that a majority of its board be

composed of individuals who are not

directors, officers, or employees of the

insured institution.

The proposed rule would allow

majority-owned subsidiaries to invest in

and/or retain equity interests in real

estate not permissible for a national

bank provided that the insured state

bank qualifies as an ‘‘eligible depository

institution,’’ as that term is defined

within the proposed regulation, and the

majority-owned subsidiary qualifies as

an ‘‘eligible subsidiary,’’ which is also

defined within the proposed rule. The

insured state bank must also abide by

the investment and transaction

limitations set forth in the proposed

regulation. Under the proposed

regulation, the insured state bank may

not invest more than 10 percent of the

bank’s tier one capital in any one

majority-owned real estate subsidiary.

In addition, the total of the insured state

bank’s investment in all of its majorityowned subsidiaries which are

conducting real estate activities may not

exceed 20 percent of its tier one capital

under the proposed regulation. Under

the proposed rule, the 20 percent

aggregate investment limit applies to

subsidiaries engaged in the same

activity.

For the purpose of calculating the

dollar amount of the investment

limitations, the bank would calculate 10

percent and 20 percent of its tier one

capital after deducting all amounts

required by the proposed regulation or

any FDIC order. We request comment on

all aspects and any implications of this

proposal.

Under the proposed regulation, the

insured state bank must file a notice

with the FDIC providing a description of

the proposed activity and the manner in

which it will be conducted. A

description of the other items required

to be contained in the notice under this

proposal are contained in subpart E of

the proposed regulation.

The FDIC recognizes that some real

estate investments or activities are more

time, management and capital intensive

than others. Our experience in

reviewing the applications filed under

section 24 has led us to conclude that

extremely 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 proposed regulation provides

relief to insured state banks having such

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 proposed

regulation. As a result, the proposed

regulation 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 proposal, 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. Under

the proposed regulation, an insured

state bank with a limited investment in

a majority-owned subsidiary need not

adhere to the requirements that the

subsidiary 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 proposed

regulation in § 362.4(c)(2)(xi). The FDIC

requests comment on the exceptions

being proposed for establishing an

eligible subsidiary whenever the bank’s

investment is of such a limited nature.

Are there any of the other requirements

necessary to establish an ‘‘eligible

subsidiary’’ that should be excepted for

banks with such limited investments?

Commenters should keep in mind that

the FDIC’s goal is to reduce regulatory

burden while maintaining adequate

protection of the deposit insurance

funds. Comment is requested on all

aspects of this real estate investment

activity authority.

Under current law, an insured state

bank must apply to the FDIC prior to

engaging in real estate investment

activities that are impermissible for a

national bank. The proposed regulation

contains a procedure under which

certain insured state banks may

participate in real estate investment

activity under specific circumstances by

filing a notice with the FDIC. To qualify

for the notice procedure proposed under

§ 362.4(b)(5), the real estate investment

activities must be conducted by a

majority-owned subsidiary that further

qualifies as an ‘‘eligible subsidiary’’

under the proposal. The characteristics

of an eligible subsidiary are set forth in

§ 362.4(c)(2) of the regulation and

further described below. If the

institution or its investment does not

meet the criteria established under the

proposed regulation for using the notice

procedure, an application may be filed

with the FDIC under § 362.4(b)(1). 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

requires a subsidiary to be established

exactly as outlined under the eligible

subsidiary definition.

Section 362.4(b)(5) of the proposal

permits certain highly rated banks

(defined in § 362.4(c)(1) of the proposal

as eligible depository institutions) to

engage, through a majority-owned

subsidiary, in real estate investment

activities not otherwise permissible for

a national bank by filing a notice

according to the procedures set forth in

subpart E of the proposed regulation.

Comment is requested on all aspects

of this proposal to allow real estate

activities through a notice procedure.

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 § 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
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47987

2Representatives of mutual fund companies and

investment bankers brought action challenging the

Federal Deposit Insurance Corporation Policy

Statement. Their suit was dismissed without

prejudice, pending the outcome of FDIC’s

rulemaking process. Investment Company Institute

v. United States, D.D.C. Civil Action No. 82–2532,

filed September 8, 1982.

3After 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 (U.S.C.A. D.C.1987).

A trade association representing Federal Deposit

Insurance Corporation-insured savings banks also

brought suit challenging FDIC regulations

respecting proper relationship between FDICinsured 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).

4 50 FR 2274, Jan. 16, 1985; 51 FR 880, Jan. 9,

1986; 51 FR 23406, June 27, 1986; 51 FR 45756,

Dec. 22, 1986; 52 FR 23544, June 23, 1987; 52 FR

39216, Oct. 21, 1987; 52 FR 47386, Dec. 14, 1987;

53 FR 597, Jan. 8, 1988; 53 FR 2223, Jan. 27, 1988.

The FDIC amended the regulations governing the

securities activities of certain subsidiaries of

insured state nonmember banks and the affiliate

relationships of insured state nonmember banks

with certain securities companies to make technical

corrections, delete the requirement that the offices

of securities subsidiaries and affiliates must be

accessed through a separate entrance from that used

by the bank (the existing requirement for physically

separate offices was retained), delete the

prohibition against securities subsidiaries and

affiliates sharing a common name or logo with the

bank, and to establish a number of affirmative

disclosure requirements regarding securities

recommended, offered, or sold by or through a

securities subsidiary or affiliate are not FDIC

insured deposits unless otherwise indicated and

that such securities are not obligations of, nor are

guaranteed by the bank.

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 fund if conducted through a

majority-owned subsidiary that operates

in accordance with § 337.4. The

proposed regulation makes significant

changes to that exception.

Due to the existing cross reference to

§ 337.4, FDIC reviewed § 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 proposes making

a number of substantive changes to the

rules which govern securities sales,

distribution, or underwriting by

subsidiaries of insured state nonmember

banks and eliminating § 337.4 as a

separate regulation. The revised

language would be relocated to part 362

and would become what is proposed

§ 362.4(b)(5)(ii). 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. We placed the

exception for securities underwriting

with the real estate exception in the

structure of the regulation to promote

uniform standards across activities,

even though it is possible that a state

member bank could qualify for the real

estate exception and not the securities

exception. We request comment on

whether this placement causes any

confusion. Of course, as the appropriate

Federal banking agency for state

member banks, the FRB may impose

more stringent restrictions on any

activity conducted by a state member

bank.

The following discussion describes

the purpose and background of § 337.4,

the conditions and restrictions imposed

by that rule on securities activities, the

language of the exception in proposed

part 362 and the proposed revisions to

the conditions and restrictions

governing this activity.

History 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 bona fide

subsidiaries of insured state nonmember

banks are not prohibited by 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

Federal Reserve Board 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.’’2

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).3 Although the rule

does not prohibit such securities

activities outright, it does restrict that

activity in a number of ways and only

permits the activities if authorized

under state law. Banks only could

maintain ‘‘bona fide’’ subsidiaries that

engaged in securities work. The rule

defined ‘‘bona fide subsidiary’’ so as to

limit the extent to which banks and

their securities affiliates and

subsidiaries could share company

names or logos, as well as places of

business. 12 CFR 337.4(a)(2)(ii), (iii); 49

FR 46710. The definition required banks

and subsidiaries to maintain separate

accounting records and to observe

separate corporate formalities. 12 CFR

337.4(a)(2)(iv), (v). The two entities

were required not to share officers and

to conduct business pursuant to

independent policies and procedures,

including the maintenance of separate

employees and payrolls. Id.

§ 337.4(a)(2)(vi), (vii), (viii); 49 FR

46711–12. Finally, and perhaps most

importantly, the rule required a

subsidiary to be ‘‘adequately

capitalized.’’ 12 CFR 337.4(a)(2)(i).

The rule has been amended several

times since its adoption.4 The last

amendment to this rule was in 1988.

When the FDIC initially implemented
47988 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

its regulation on securities activities of

subsidiaries of insured state nonmember

banks and bank transactions with

affiliated securities companies, the FDIC

determined that some risk may be

associated with those activities. To

address that risk, the FDIC regulation:

(1) Defined bona fide subsidiary, (2)

required notice of intent to acquire or

establish a securities subsidiary, (3)

limited the permissible securities

activities of insured state nonmember

bank subsidiaries, and (4) placed certain

other restrictions on loans, extensions of

credit, and other transactions between

insured state nonmember banks and

their subsidiaries or affiliates that

engage in securities activities.

As defined in § 337.4, the term ‘‘bona

fide’’ subsidiary means a subsidiary of

an insured state nonmember bank that

at a minimum: (1) Is adequately

capitalized, (2) is physically separate

and distinct in its operations from the

operations of the bank, (3) maintains

separate accounting and other corporate

records, (4) observes separate corporate

formalities such as separate board of

directors’ meetings, (5) maintains

separate employees who are

compensated by the subsidiary, (6)

shares no common officers with the

bank, (7) a majority of the board of

directors is composed of persons who

are neither directors nor officers of the

bank, and (8) 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 investments recommended, offered

or sold by the subsidiary are not bank

deposits, are not insured by the FDIC,

and are not guaranteed by the bank nor

are otherwise obligations of the bank.

This definition was imposed 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.

The regulation provides that the

insured state nonmember bank must

give the FDIC written notice of intent to

establish or acquire a subsidiary that

engages in any securities activity at least

60 days prior to consummating the

acquisition or commencement of the

operation of the subsidiary. These

notices serve as a supervisory

mechanism to apprise the FDIC that

insured state nonmember banks are

conducting securities activities through

their subsidiaries that may expose the

banks to potential risks.

The regulation adopted a tiered

approach to the activities of the

subsidiary and limited the underwriting

of securities that would otherwise be

prohibited to the bank itself under the

Glass-Steagall Act unless the subsidiary

met the bona fide definition and the

activities were limited to underwriting

of investment quality securities. A

subsidiary may engage in additional

underwriting if it meets the definition of

bona fide 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.

A bona fide subsidiary is 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 insurance

fund, a bank’s investment in these

subsidiaries engaged in securities

activities that would be prohibited to

the bank under the Glass-Steagall Act is

not counted toward the bank’s capital,

that is, the investment in the subsidiary

is deducted before compliance with

capital requirements is measured.

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 § 337.4 from engaging in any of

the following transactions:

(1) Purchasing in its discretion as

fiduciary any security currently

distributed, underwritten or issued by

the subsidiary unless the purchase is

authorized by a trust instrument or is

permissible under applicable law;

(2) Transacting business through the

trust department with the securities firm

unless the transactions are at least

comparable to transactions with an

unaffiliated company;

(3) Extending credit or making any

loan directly or indirectly to any

company whose obligations are

underwritten or distributed by the

securities firm unless the securities are

of investment quality;

(4) Extending credit or making any

loan directly or indirectly to any

investment company whose shares are

underwritten or distributed by the

securities company;

(5) Extending credit or making any

loan where the purpose of the loan is to

acquire securities underwritten or

distributed by the securities company;

(6) Making any loans or extensions of

credit to a subsidiary or affiliate of the

bank that distributes or underwrites

securities or advises an investment

company in excess of the limits and

restrictions set by section 23A of the

Federal Reserve Act;

(7) Making any loan or extension of

credit to any investment company for

which the securities company acts as an

investment advisor in excess of the

limits and restrictions set by section

23A of the Federal Reserve Act; and

(8) Directly or indirectly conditioning

any loan or extension of credit to any

company on the requirement that the

company contract with the bank’s

securities company to underwrite or

distribute the company’s securities or

condition a loan to a person on the

requirement that the person purchase

any security underwritten or distributed

by the bank’s securities company.

An insured state nonmember bank is

prohibited under § 337.4 from becoming

affiliated with any company that

directly engages in the sale, distribution,

or underwriting of stocks, bonds,

debentures, notes, or other securities

unless: (1) The securities business of the

affiliate is physically separate and

distinct from the operation of the bank;

(2) the bank and the affiliate share no

common officers; (3) a majority of the

board of directors of the bank is

composed of persons who are neither

directors nor officers of the affiliate; (4)

any employee of the affiliate who is also

an employee of the bank does not

conduct any securities activities of the

affiliate on the premises of the bank that

involve customer contact; and (5) the

affiliate conducts business pursuant to
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47989

5August 21, 1997.

6 61 FR 57679, November 7, 1996, and 62 FR

2622, January 17, 1997.

7Liability 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 § 77o or

§ 78t(a). 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); and 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, P.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.

8See ‘‘Anti-manipulation Rules Concerning

Securities Offerings,’’ Regulation M, 17 CFR 200

Continued

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 that

investments recommended, offered or

sold by the affiliate are not bank

deposits, are not insured by the FDIC,

and are not guaranteed by the bank nor

are otherwise obligations of the bank.

The FDIC chose not to require notices

relative to affiliates because it would

normally find out about the affiliation in

a deposit insurance application or a

change of bank control notice.

The FDIC created an atmosphere

where 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, 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 FDIC usually examines the insured

state nonmember bank and primarily

relies on SEC and 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 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 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 FDIC has received notices

from 444 banks that have subsidiaries

that engage in activities that do not

require the subsidiary to meet the

definition of bona fide such as

investment advisory activities, sale of

securities, and management of the

bank’s securities portfolio.

Since implementation of the FDIC’s

§ 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

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.

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. The FDIC has

reviewed its securities underwriting

activity regulations in light of the FRB

recently adopted operating standards

that modify the FRB’s section 20

orders.5 The FDIC also reviewed the

comments received by the FRB. The

FRB conducted a comprehensive review

of the prudential limitations established

in its decisions. The FRB sought

comment on modifying these limitations

to allow section 20 subsidiaries to

operate more efficiently and serve their

customers more effectively.6 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. The FDIC is proposing other

changes consistent with the FRB

approach and will endeavor to explain

the differences in the approach taken by

the FDIC. Consistent with the approach

adopted by the FRB, the FDIC proposes

to have the securities underwriting

subsidiaries and the insured state

nonmember banks use the disclosures

adopted in the Interagency Statement

where applicable. Thus, the Interagency

Statement will be applicable when sales

of these products occur on bank

premises. The FDIC agrees with the FRB

that using these interagency disclosure

standards promotes uniformity, makes it

easier for banks to train their employees,

and enhances compliance.

In contrast, FDIC will be taking a

different approach on some of these

safeguards because it is not proposing a

separate statement of operating

standards. Thus, the FDIC will retain

safeguards in its rule that FRB is shifting

to or handling in a different way

through the FRB’s still to be released

statement of operating standards. With

respect to other safeguards that the FDIC

is proposing to continue to apply to the

securities underwriting activities

conducted by insured state nonmember

banks through their ‘‘eligible

subsidiaries,’’ FDIC has determined that

each of these safeguards provides

appropriate protections for bank

subsidiaries engaged in underwriting

activities.

For these purposes, the FDIC has

modified the safeguard requiring that

banks and their securities underwriting

subsidiaries maintain separate officers

and employees. As discussed below,

that modification would be consistent

with the Interagency Statement.

However, the chief executive officer of

the subsidiary may not be an employee

of the bank and a majority of its 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.’’ 7 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

may be enhanced by the use of

appropriate policies and procedures.8
47990 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

(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.

The FDIC requests comment on the

retention of these safeguards, 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, P.L. 104–

67, the efficacy of more limited

restrictions on officer and director

interlocks to prevent both liability and

information sharing and any related

issues.

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 majorityowned 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

proposes to eliminate the notice

requirement for all state nonmember

banks subsidiaries that engage in any

securities activities that are permissible

for a national bank. Under the proposal,

a notice would be required only of state

nonmember bank subsidiaries that

engage 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.

We invite comment on whether the

elimination of these notices is

appropriate.

As indicated in the following

discussion on core eligibility

requirements, the proposed regulation

establishes new criteria which must be

met to qualify for the notice procedures

to conduct, as principal, activities

through a subsidiary that are not

permissible for a national bank. The

insured state bank must be an ‘‘eligible

depository institution’’ and the

subsidiary must be an ‘‘eligible

subsidiary.’’ The terms are defined

below but to summarize 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 would

be uniform with other part 362 notice

procedures for insured state banks to

engage in activities not permissible for

national banks and recognize the level

of risk present in securities

underwriting activities. These

requirements are not presently found in

§ 337.4 but the FDIC believes that only

banks that are well-run and wellmanaged should be given the

opportunity to engage in securities

activities that are not permissible for a

national bank under the streamlined

notice procedures. Other banks that

want to enter these activities should be

subject to the scrutiny of the application

process. Although management and

operations not permissible for a national

bank are conducted 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.

One of the other notable differences in

the proposed regulation is the

substitution of the ‘‘eligible subsidiary’’

criteria for that of the ‘‘bona fide

subsidiary’’ definition contained in

§ 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

must also 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 majorityowned 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 SROs, 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 majorityowned 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 requirements are also similar to

but simplify the requirements currently

contained in § 337.4.

In addition, the FDIC proposes to

eliminate 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
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47991

9See, e.g., George J. Benston, The Separation of

Commercial and Investment Banking: The GlassSteagall Act Revisited and Reconsidered 41 (1990).

10Aug. 10, 1987, Pub. L. 100–86, Title I, s 102(a),

101 Stat. 564.

11See ‘‘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). 12 Id. at 520.

1933. Moreover, pre-Glass-Steagall

affiliations were considered, rightly or

wrongly, to have caused losses to the

banking industry and investors,

although some modern research

questions this view.9 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 the appropriate

safeguards to impose on these

operations to protect the bank and the

deposit insurance funds. For those

reasons, the limitations and restrictions

contained in § 337.4 on underwriting

other than ‘‘investment quality debt

securities’’ or ‘‘investment quality

equity securities’’ have been eliminated

from the proposed regulation. It should

also be noted that certain safeguards

have been added to the system since

§ 337.4 was adopted. These safeguards

include risk-based capital standards and

the Interagency Statement. The FDIC

proposes the removal of the disclosures

currently contained in § 337.4. Instead,

the FDIC will be relying on the

Interagency Statement for the

appropriate disclosures on bank

premises. 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 § 337.4

should be retained or if any additional

disclosures would be appropriate.

Finally, 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 of section

23B of the Federal Reserve Act (12

U.S.C. 371c–1). Although section 23B

did not exist until 1987 10 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

§ 337.4. Now, most of the transaction

restrictions imposed by section 23B are

being added to promote consistency

with the restrictions imposed by other

banking agencies on similar activities.

Briefly, section 23B requires interaffiliate transactions to be on arm’s

length terms, prohibits representing that

a bank is responsible for the affiliate’s

(in this case subsidiary’s) obligations,

and prohibits a bank from purchasing

certain products from an affiliate. While

imposing the 23B-like transaction

restrictions, the FDIC is eliminating any

overlapping safeguards. 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 invites comment on the

restrictions it has modeled on 23A and

23B. Specifically, the FDIC would like

to know if the restrictions it has

proposed address the identified risks

without overburdening the industry

with duplicative or ambiguous

requirements. The FDIC invites

suggestions for further improvements.

In contrast to the section 23B

transaction restrictions, section 23A did

exist and was incorporated into § 337.4

by reference. To simplify compliance for

transactions between state nonmember

banks and their own subsidiaries, the

FDIC has restated the constraints of both

sections 23A and 23B 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

without requiring banks to undertake

extensive analysis of the provisions of

sections 23A and 23B that are

inapplicable to the direct banksubsidiary relationship or to particular

activities. 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.11 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.12

The FDIC requests comment on

whether the restrictions that the FDIC

has restated from sections 23A and 23B

provide adequate restrictions for a

securities underwriting subsidiary of a

bank, whether any other restrictions

currently in § 337.4 should be retained,

whether any additional restrictions

would be appropriate, and any other

issues of concern regarding the

appropriate restrictions that should be

applicable to a bank’s securities

underwriting subsidiary. In addition,

the FDIC requests comment on the

adequacy of the best practices

requirements that would be imposed by

the SROs and, indirectly, by the SEC on

transactions and information flow. The

FDIC also requests comment on the

adequacy of the ethical walls that would

prevent the flow of information from a

securities underwriting subsidiary of a

bank to its parent, thus eliminating the

necessity of additional transaction

restrictions. To the extent that these

ethical walls may be insufficient

barriers to the flow of nonpublic

information due to management and/or

employee interlocks or other issues that

may not be readily apparent, the FDIC

requests comment on any weaknesses

that might be noted in the more limited

transaction restrictions imposed under

this proposal.

Consistent with the current notice

procedure found in § 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

proposes that the notice period be

shortened from the existing 60 days to

30 days and that required filing

procedures be contained in subpart E of

part 362. Previously, specific

instructions and guidelines on the form
47992 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

and content of any applications or

notices required under § 337.4 were

found within that section. With regard

to those insured state nonmember banks

that have been engaging in a securities

activity under a notice filed and in

compliance with § 337.4, § 362.5(b) of

the proposed regulation would allow

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 § 362.4(c),

(d), and (e). We will require these

securities subsidiaries to meet the

additional conditions specified in

§ 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. We 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 would 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 would necessitate an

application for the FDIC’s consent to

continue those activities to avoid

supervisory concern.

To qualify for the streamlined notice

procedure, a bank must be wellcapitalized 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

§ 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. We believe 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.

Additional Requests for Comments

With regard to securities activities,

the FDIC is specifically requesting

comments that address the following:

(1) Whether it is inherently unsafe or

unsound for insured state nonmember

banks to establish or acquire

subsidiaries that will engage in

securities activities or for insured state

nonmember banks to be affiliated with

a business engaged in securities

activities;

(2) Whether certain securities

activities when engaged in by

subsidiaries of insured state nonmember

banks pose safety and soundness

problems whereas others do not;

(3) Whether, and in what

circumstances, securities activities of

insured state nonmember banks should

be considered unsafe or unsound;

(4) Whether securities activities of

subsidiaries present conflicts of interest

that warrant restricting the manner in

which the bank may deal with its

securities subsidiary (or its securities

affiliate), or the manner in which

common officers or employees may

function, etc.;

(5) Should securities activities be

limited to subsidiaries of insured state

banks of a certain asset size, with a

certain composite rating, etc.;

(6) Should insured state nonmember

banks obtain the FDIC’s prior approval

before establishing or acquiring

subsidiaries that will engage in

securities activities in all cases, in some

cases, or not at all;

(7) Should revenue limits similar to

those that the FRB has established for

section 20 subsidiaries be imposed on

securities subsidiaries of insured state

nonmember banks;

(8) Do the potential benefits, if any

that would be available to insured state

nonmember banks as a result of

competing in the securities area through

subsidiaries offset potential

disadvantages to the institutions;

(9) Why haven’t more banks availed

themselves of the powers available

under 337.4 and will the proposed

regulation result in increased activity in

the securities area;

(10) Alternately, are there other

approaches or methods which would

facilitate access without compromising

traditional safety and soundness

concerns;

(11) Are there any perceived public

harms in insured state nonmember

banks embarking on such activities; and

(12) The FDIC is also requesting

comment on how to determine if a

securities subsidiary is in fact a true

subsidiary and not the alter ego of the

parent bank.

Comments addressing these issues

and any other aspects of the general

subject of permitting subsidiaries and

affiliates of insured state nonmember

banks to engage in securities activities

will be welcomed.

Notice for Change in Circumstances

The proposal requires the bank to

provide written notice to the

appropriate Regional Office of the FDIC

within 10 business days of a change in

circumstances. Under the proposal, a

change in circumstances is described as

a material change in subsidiary’s

business plan or management. The FDIC

believes that it can address a bank’s

falling out of compliance with any of

the other conditions of approval through

the normal supervision and examination

process. We request comment on

whether specific language should be

included in the regulation text that a

bank must continue to meet all

eligibility, capital, and investment and

transaction criteria.

The FDIC is concerned about changes

in circumstances which result from

changes in management or changes in a

subsidiary’s business plan. If material

changes to either condition occur, the

rule requires the institution to submit a

notice of such changes to the

appropriate FDIC regional director

(DOS) within 10 days of the material

change. 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.

In the case of a state member bank,

the FDIC will communicate our

concerns with 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.
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47993

It is not the FDIC’s intention to

require any bank which falls out of

compliance with eligibility conditions

to immediately cease any activity in

which the bank had been engaged

subject to a notice to the FDIC. The

FDIC will deal with such eventuality

rather on a case-by-case basis through

the supervision and examination

process. In short, the FDIC intends to

utilize the supervisory and regulatory

tools available to it in dealing with the

bank’s failure to meet 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 is of the opinion that

the case-by-case approach to whether a

bank will be permitted to continue an

activity is preferable to forcing a bank

to, in all instances, immediately cease

the activity in question. Such an

inflexible approach could exacerbate an

already poor situation.

Core Eligibility Requirements

The proposed 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 proposed regulation

introduces the concept of core eligibility

requirements. These requirements are

used to determine those institutions that

qualify to use the notice processes

introduced in this regulation and to

establish general criteria that the Board

will be reviewing in considering

applications. 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.

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 this

criteria is appropriate to ensure that the

notice procedures are 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

standardized 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.

The FDIC’s existing standard is that

only well-managed, well-capitalized

banks should be eligible for engaging in

activities not permissible for national

banks through a notice procedure.

Banks which have composite 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 described

herein. Such institutions are not on

their face as sound on an overall basis

as those rated 1 or 2. For that reason, the

FDIC feels that it is more prudent to

require institutions rated 3 or below to

utilize the application process.

In addition, the FDIC is adding to the

proposed rule a requirement that the

management component of the bank’s

most recent rating be a 1 or 2 also. The

FDIC believes that both capital and

management are extremely important to

the safety and soundness of a financial

institution. As noted above, a bank with

a composite rating of 1 or 2 has shown

that it is strong when taking into

account all components of the uniform

financial institutions rating system.

While there are few financial

institutions with 1 or 2 composite

ratings with weak management, we

believe that only those institutions that

are well-managed should be eligible for

the notice processes.

Banks which wish to become

involved in activities not permissible for

a national bank through the notice

process should be exemplary in all areas

of its operations. Therefore, the proposal

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.

A filing may be removed from notice

processing if: (1) A CRA protest is

received that warrants additional

investigation or review, or the

appropriate regional director of the

Division of Consumer Affairs (DCA)

determines that the filing presents a

significant CRA or compliance concern;

(2) the appropriate regional director

(DOS) determines that the filing

presents a significant supervisory

concern, or raises a significant legal or

policy issue; or (3) the appropriate

regional director (DOS) determines that

other good cause exists for removal. If

a filing is removed from notice

processing procedures, the applicant

will be promptly informed in writing of

the reason.

The FDIC specifically requests

comment on whether the standards for

eligibility are appropriate.

Eligible Subsidiary

The FDIC’s support of the concepts of

expansion of bank powers is based in

part on establishing a corporate

separateness between the insured

depository institution and the entity

conducting activities that are not

permissible for the depository

institution directly. The proposal

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 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 statechartered depository institution 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 state-
47994 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

chartered depository institution; (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 state-chartered

depository institution and that the statechartered depository institution 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 are currently outlined

in the definitions of ‘‘bona fide’’

subsidiary contained in § 337.4 and part

362. The broad principles of separtion

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.

While the ‘‘bona fide’’ subsidiary

definitions currently used are

substantially similar, there is one

substantial difference. Each regulation

has a different approach to the issue of

common officers between the bank and

the subsidiary. 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 more

limited standard. The eligible subsidiary

requirements loosen the separations

among employees and officers from

those in place under the bona fide

subsidiary definitions in both § 337.4

and part 362 and in Board orders

authorizing most real estate activities.

The eligible subsidiary only requires

that the chief executive officer not be an

employee of the institution. We

consider officers to be employees of the

institution. 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 institution.

Are there other methods of achieving

the concept of separation without

requiring different public contact

employees and officers for the bank and

the subsidiary?

In deciding the standards to become

an ‘‘eligible subsidiary,’’ the FDIC not

only has reconciled the differing

standards on shared officers, but also

has modified some of the previous

standards used in the definition of

‘‘bona fide’’ subsidiary. 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 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.

The physical separation requirement

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. It

is not the intent of the FDIC to require

physical separation where such a

standard adds little value. For instance,

a subsidiary engaged in developing

commercial real estate would not

require the same physical separation

from the bank as a subsidiary engaged

in retail securities activities. The

possibility of customer confusion

should be the determining factor in

deciding the separation requirements for

the subsidiary.

The proposal has eliminated the

provision contained in the bona fide

subsidiary definition that required the

bank and subsidiary to have separately

compensated employees who have

contact with the public. This provision

was imposed to reduce confusion

relating to whether customers were

dealing with the bank or the subsidiary.

Since the adoption of the bona fide

subsidiary definition, the Interagency

Statement was issued. This interagency

statement recognizes the concept of

employees who work both for a

registered broker-dealer and the bank.

Because of the disclosures required in

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.

Comment is requested concerning the

need for separate public contact

employees. Specifically, is there a need

for separate employees when an insured

depository institution sells a financial

instrument underwritten by a subsidiary

or real estate developed by a subsidiary?

Are the disclosures concerning the

affiliation between the bank and the

underwriter required by the Interagency

Statement sufficient to protect

customers from confusion about who is

responsible for the product?

Language was added that the

subsidiary must conduct business so as

to inform customers that the bank is not

responsible for and does not guarantee

the obligations of the subsidiary. This

language 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 and well

as their affiliates from advertising that

the bank is responsible for the

obligations of its affiliates. This type of

disclosure is intended to reduce

customer confusion concerning who is

responsible for the products purchased.

After issuing its proposal last August,

the FDIC received comment concerning

the requirement that a majority of the

board of the subsidiary be neither

directors nor officers of the bank. The

comment questioned if this restriction

extended to directors and officers of the

holding company. 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 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 operation. The FDIC expects
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47995

these persons to act as a safeguard

against conflicts of interest and 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.

The FDIC requests comment on the

appropriateness of the proposed

separation standards. In particular,

comment is requested concerning the

provision requiring that a majority of

the board of the subsidiary not be

directors or officers of the state

chartered depository institution. What

impact does this requirement have on

finding qualified directors? Should the

standard be the same for different types

of activities?

In addition to the separation

standards, the ‘‘eligible subsidiary’’

concept introduces operational

standards that were not part of the

‘‘bona fide’’ subsidiary definition. These

standards provide guidance concerning

the organization of the subsidiary that

the FDIC believes are important to the

independent operation of the

subsidiary.

The proposed regulation requires that

a subsidiary engaged in insurance, real

estate or securities have only one

business purpose among those

categories. Because the FDIC is limiting

a bank’s transactions with subsidiaries

engaged in insurance, real estate, or

securities activities that are not

permissible for a subsidiary of a

national bank, and the aggregate

limitations only extend to subsidiaries

engaged in the same type of business,

the FDIC is limiting the scope of the

subsidiary’s activities. The FDIC is

seeking comment on the effect of

limiting the subsidiary’s activities to

one business purpose. Should the term

‘‘one business purpose’’ be defined

more broadly? For instance, should a

subsidiary engaged in real estate

investment activities also be allowed to

be engaged in real estate brokerage in

the same subsidiary?

The proposal requires 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 given board consideration to

determine the scope of the activity

allowed and how profitability is to be

attained.

The requirement for adequate

management of the subsidiary

establishes the FDIC’s desire that the

insured depository institution 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.

An important factor in controlling the

spread of liabilites 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.

The FDIC seeks comments on the

appropriateness of the restrictions

contained in the ‘‘eligible subsidiary’’

standard. Are there other restrictions

that should be considered? Are there

standards that are unnecessary to

achieve separation between the insured

depository institution and the

subsidiary?

Investment and Transaction Limits

The proposal contains investment

limits and other requirements that apply

to an insured state bank and its

subsidiaries that engage as principal in

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, § 337.4 imposes by reference

the limitations of section 23A of the

Federal Reserve Act (§ 337.4 was

adopted prior to the adoption of section

23B of the Federal Reserve Act), and

both section 23A and section 23B

restrictions have been imposed by the

Board on insured state banks seeking

the FDIC’s consent to engage in

activities not permissible for a national

bank.

On August 23, 1996, the FDIC issued

a proposed revision to part 362. The

proposed rule would have imposed

sections 23A and 23B on bank

investments and transactions with

subsidiaries that hold equity

investments in real estate not

permissible for a national bank. The

FDIC received a significant number of

negative comments regarding the

imposition of sections 23A and 23B on

real estate subsidiaries. After a thorough

review, the FDIC has determined that

several of the major points in this area

have merit. Some of the provisions of

section 23A and 23B are inapplicable

while others duplicate existing legal

requirements. The FDIC believes that

merely incorporating sections 23A and

23B by reference raises significant

interpretative issues, as pointed out by

the commenters, and only promotes

confusion in an already complex area.

For these reasons, in this proposal the

FDIC is proposing a separate subsection

which sets forth the specific investment

limits and arm’s length transaction

requirements which the FDIC believes

are necessary. In general, the provisions

impose investment limits on any one

subsidiary and an aggregate investment

on all subsidiaries that engage in the

same activity, requires that extensions

of credit from a bank to its subsidiaries

be fully-collateralized when made,

prohibits the bank from taking a low

quality asset as collateral on such loans,

and requires that transactions between

the bank and its subsidiaries be on an

arm’s length basis.

The proposal 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 subject to the

investment and transaction limits

through a subsidiary that is not subject

to the limits. The FDIC invites comment

on the appropriateness of this restriction

on subsidiary to subsidiary transactions.

Investment Limit

Under the proposal, a bank may be

restricted in its investments in certain of

its subsidiaries. Those limits are

basically the same as would apply
47996 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

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. The imposition of

section 23A-type restrictions is intended

to make sure that adequate safeguards

are in place for the dealings between the

bank and its subsidiary.

When the August proposal was

published for comment, the FDIC

invited comment on whether all

provisions of sections 23A should be

imposed or whether just certain

restrictions are necessary. For instance,

should the regulation simply provide

that the bank’s investment in the

subsidiary is limited to 10 percent of

capital and that there is an aggregate

investment limit of 20 percent for all

subsidiaries rather than, in effect,

subjecting transactions between the

bank and its subsidiary to all of the

restrictions of section 23A. Eight of the

seventeen commenters addressed this

issue. Two commenters supported the

incorporation of all the limits and

restrictions in sections 23A stating that

it encourages uniformity in approach for

structuring transactions between the

bank and its subsidiary. The remaining

commenters generally considered the

imposition of section 23A requirements

to be unduly restrictive. One comment

challenged that the wholesale

incorporation of section 23A limitations

is inappropriate since Congress has

already determined that transactions

with subsidiaries present little risk to

banks. In fact, in the words of the

commenter, if the subsidiary is whollyowned, the bank is really dealing with

itself.

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

dissociate the bank’s equity investment

in the subsidiary from any lending to or

covered transactions with the

subsidiary. Thus, the FDIC proposes to

treat the bank’s equity investment as a

deduction from capital, while treating

any lending to or covered transactions

with the subsidiary as transactions

subject to 10% and 20% limits that are

similar to those that govern the bankaffiliate 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 10%

and 20% 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

requires that retained earnings be

deducted from capital in the same way

as the equity investment is deducted.

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 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.

Two of the components of the

definition of ‘‘investment’’ are borrowed

from and consistent with sections 23A

and 23B. It is the FDIC’s intent to

include the types of investments or

extensions of credit which would

normally be subject to the 23A and 23B

investment limits. We note in particular

that the fourth component of the

definition of ‘‘investment’’ includes

language similar to the ‘‘attribution

rule.’’ Indirect investments and

extensions of credit by a bank to its

subsidiaries will be included in the

calculation of the 10%/20% investment

limits.

In addition to the differences in

coverage created by the proposed

definition of investment versus the

section 23A covered transactions, the

percentage restrictions are calculated

differently from section 23A. The

proposal calulates the 10%/20% limits

based on tier one capital while section

23A uses total capital. As was discussed

earler, the FDIC is using tier one capital

as its measure to create consistency

throughout the regulation.

Also, the proposal limits the aggregate

investment to all subsidiaries

conducting the same activity. There is

not a ‘‘same activity’’ standard in

section 23A. The FDIC believes that the

aggregate limitations should reflect a

restriction on concentrations in a

particular activity and not a general

limitation on activities that are not

permissible for a national bank. For the

purposes of this paragraph, the FDIC

intends to interpret the ‘‘same activity’’

standard to mean broad categories of

activities such as real estate investment

activities or securities underwriting.

The FDIC specifically requests

comments on this provision of the

proposal. The FDIC has consistently

maintained that it applies section 23A

and 23B-like standards. It believes that

its proposal continues to do so, but

would like comment on the effect of the

proposed change.

Arm’s Length Transaction Requirement

A major provision of 23B of the

Federal Reserve Act is that any

transaction between a bank and its

affiliates must be on terms and

conditions that are substantially the

same as those prevailing at the time for

comparable transactions with

unaffiliated parties. This type of

requirement, which is generally referred

to as an ‘‘arm’s length transaction’’

requirement, is intended to make sure

that an affiliate does not take advantage

of the bank. The proposal requires

transactions between the bank and its

real estate subsidiaries to meet this

requirement. The arm’s length

transaction requirement found in the

proposal is modeled on the statutory

provisions of section 23B. 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 proposal indicates,

however, that the restrictions do not

apply to an insured state bank giving

immediate credit to a subsidiary for
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47997

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 the ‘‘good faith’’

standard found in section 23B.

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

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.

This section and the language therein

is not a substantive change from the

proposal. The FDIC is merely setting

forth the substantive requirements of

sections 23A and 23B which were

proposed to be incorporated by

reference. 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. The FDIC has taken the

definition of ‘‘low quality asset’’ from

section 23A without modification.

The proposal deviates from the

section 23B standards in that it contains

provisions addressing insider

transactions and product tying. The

proposal’s 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

for transactions between the subsidiary

and insiders of the insured depository

institution. The proposal requires that

any transactions with insiders must

meet the section 23B requirements that

transactions be on substantially the

same terms and conditions as available

generally to unaffiliated parties.

Rather than requiring an application

and approval by the FDIC for

transactions with insiders as we had

proposed last August, the FDIC has

decided to set forth the legal standard to

be applied to such transactions and let

banks and their legal advisors determine

whether the transactions meet the arm’s

length requirement. 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 23B standard.

The proposal also contains 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 for

banks, it is not clear that all

circumstances are adequately covered

by the existing statutory and regulatory

restrictions. The FDIC wishes to confirm

that we consider tying to be

unacceptable when there are no

alternative financial services available.

However, we recognize that a complete

prohibition may be too rigid.

Banks are subject to statutory antitying restrictions. (12 U.S.C. 1972). In

1970 when these restrictions were

enacted, Congress was concerned that

the unique role banks played in the

economy, particularly in providing

financial services, would allow them to

gain a competitive advantage in other

markets. The FRB extended the antitying restrictions to bank holding

companies and their non-banking

subsidiaries by regulation in 1971. The

FRB’s experience since extending the

anti-tying provisions has shown that

non-banking companies generally

operate in competitive markets. As a

result, the FRB eliminated the extension

of the anti-tying rules to bank holding

companies and their non-bank

subsidiaries this year (12 CFR 225),

leaving restriction of any anticompetitive behavior to the general

antitrust laws which govern the

competitors of the bank holding

companies and their non-bank

subsidiaries. The extension of the tying

restrictions to savings and loan holding

companies is statutory. Consequently,

the Office of Thrift Supervision is not

authorized to except savings and loan

holding companies and their non-bank

affiliates entirely from all tying

restrictions. 62 FR 15819. The Office of

the Comptroller of the Currency extends

anti-tying provisions to subsidiaries. See

OCC Bulletin 95–20.

Based on the competitive marketplace

in which nonbanking subsidiaries

operate and the applicability of general

antitrust laws, the FDIC is seeking

comment as to whether the anti-tying

language contained in the proposed

regulation is appropriate. If the

proposed rule is thought to be

unnecessary, should we consider

adopting a rule that would be applicable

only in situations where there are no

options for financial services?

The proposal does not contain the

advertising restrictions contained in

section 23B which prohibit a bank from

publishing advertisements which

suggest, state or infer that the bank is or

shall be responsible for the obligations

of an affiliate. Instead, the proposal

incorporates the advertising prohibition

from 23B as part of the definition of the

eligible subsidiary. An eligible

subsidiary is required to have policies

and procedures which are designed to

inform customers and potential

customers that the subsidiary is a

separate organization from the bank and

to inform customers that the bank is not

responsible for, nor guarantees, the

obligations of the subsidiary.

Collateralization Requirements

Section 23A requires that loans,

extensions of credit, guarantees or

letters of credit issued by the bank to or

on behalf of an affiliate be fullycollateralized 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

proposal 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. The FDIC intends to

look to the collateralization schedule as

minimum guidance, but wants to retain

flexibility in making the determination
47998 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

if additional collateral is necessary.

Therefore, this proposal differs from the

section 23A requirements in that the

proposal uses the collateral schedule as

a minumum requirement.

The FDIC is seeking comment as to

whether the proposal gives the industry

enough certainty to make decisions

concerning collateral adequacy? Are the

collateral requirements appropriate or

should some other measure of collateral

adequacy be used?

Capital Requirements

Under the proposed rule, a bank using

the notice process to invest in a

subsidiary engaging in certain activities

not permissible for a national bank

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). This 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

restriciton is to ensure that the bank has

sufficient capital devoted to its banking

operations and to ensure that the bank

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. After issuing its proposal last

August, the FDIC received comment that

this capital treatment is inconsistent

with generally accepted accounting

principles. Although section 37 of the

FDI Act 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 the requirements

of section 37 do 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. 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.

We note that the capital deduction as

contained in the proposal is not a new

concept for the federal banking

regulators. The FDIC has required

capital deduction for investments by

state nonmember banks in securities

underwriting subsidiaries for years. See

12 CFR 325.5(c). The FRB has required

bank holding companies to deduct from

capital their investment in section 20

subsidiaries, although the FRB

eliminated that requirement on August

21, 1997, by adopting new operating

standards. In addition, the Comptroller

of the Currency 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.

The FDIC requests comment on this

method of calculating the capital

deduction. Should there be a

differentiation in the treatment of the

bank’s equity investment in the

subsidiary and loans made to or debt

purchased from the subsidiary?

Notice of Grandfathered Insurance

Underwriting Activities

Section 362.5 of the current regulation

provides that insured state banks that

are permitted to engage in insurance

underwriting under the grandfather

found in section 24(d)(2)(B) of section

24 of the FDI Act must file a notice with

the FDIC by February 9, 1992. That

notice requirement is deleted under the

proposal as no longer necessary given

the passage of time.

Other Underwriting Activities

The proposed 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 the insurance

underwriting prohibitions of section 24.

The FDIC has approved one request

from an insured state bank to engage in

annuity underwriting activities through

a majority-owned subsidiary. The

proposed regulation does not provide a

notice procedure to engage in such

activities. Comment is requested as to

whether such a notice procedure would

be beneficial. What types of restrictions

should the Board consider if it

determines that annuities underwriting

may be conducted after submission of a

notice?

Section 362.5 Approvals Previously

Granted

As is discussed above, there are a

number of areas in which this proposal

differs in approach from the current part

362. Because of these differing

approaches, the proposal contains a

section dealing with approvals

previously granted. The FDIC proposes

that insured state banks that have

previously received consent by order or

notice from this agency should not be

required 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.

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

§ 362.4(d), the capital requirement

limitations detailed in § 362.4(e), and

the subsidiary restrictions as outlined in

the term ‘‘eligible subsidiary’’ and

contained in § 362.4(c)(2) in lieu of

similar requirements 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. The FDIC

intends that once a bank 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.

An insured state bank that qualifies

for the exception in proposed

§ 362.4(b)(4)(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. A bank which

uses this exception must limit its real

estate investment activities to one
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 47999

subsidiary and may engage in additional

real estate investment activities without

fully complying with the application or

notice requirements contained in the

proposal. The FDIC requests comment

on the appropriateness of allowing

banks which have previously received

approval from the FDIC to operate under

the guidelines of this proposal. Should

banks which have been previously

approved be allowed to use the 2% of

capital exception?

The FDIC has also approved certain

activities through its current

regulations. Specifically, the FDIC has

incorporated and modified the

restrictions of § 337.4 in this proposal.

The proposed rule will allow an insured

state nonmember bank engaging in a

securities activity in accordance with

§ 337.4 to continue those activities if the

bank and its subsidiary meet the

restrictions of § 362.4 (b)(5)(ii), (c), (d),

and (e). The FDIC intends that these

requirements replace the restrictions

contained in § 337.4.

The FDIC recognizes that the

requirements of this proposal differ

from the requirements of § 337.4.

Because the transition from the current

§ 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

§ 362.4(b)(1) and subpart E of the

proposed regulation to continue with

the securities underwriting activity.

Comment is requested concerning the

reasonableness of this transition

requirement.

The proposed restrictions for engaging

in grandfathered insurance

underwriting through a subsidiary have

also been changed. 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

proposal requires that disclosures are

consistent with, but not the same as,

those in the current regulation, that the

subsidiary meet the requirements of an

eligible subsidiary, and that the bank be

well-capitalized after deducting its

investment in the grandfathered

insurance subsidiary. The FDIC

recognizes that these requirements are

not the same as previous standards, and

the capital requirement in particular is

more stringent. An insured state bank

which is engaged in providing

insurance as principal may continue

that activity if it complies with the

proposed provisions within 90 days of

the effective date of the regulation.

Similarly, banks which have

subsidiaries that have been operating

under the bank stock and grandfathered

equity securities exemption of the

current regulation are subject to

additional requirements in the proposal.

In particular, insured state banks

continuing with these exemptions must

now deduct their investment in the

subsidiary from capital. An insured

state nonmember bank that is engaging

in securities underwriting activities

under notice filed pursuant to § 337.4

may continue those activities if the bank

and its majority-owned subsidiary

comply with the proposed restrictions

within one year of the effective date of

the regulation.

The FDIC also proposes that an

insured state bank that converts from a

savings association charter and which

engages in activities through a

subsidiary, even if such activity was

permissible for a subsidiary of a federal

savings 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

a like 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

§ 362.4(c)(2), comply with the

investment and transactions limits of

§ 362.4(d), and meet the capital

requirement of § 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

that would otherwise be present.

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.

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 E

of this chapter, 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

when conducting real estate investment

activities through a subsidiary if those

activities that are permissible for a

national bank subsidiary. Neither a

national bank nor a state bank would

not be permitted to engage in these real

estate investment activities directly. The

FDIC has a long history of considering

the risks from real estate investment

activities to be unsafe and unsound for

a bank to undertake without appropriate

safeguards to address that risk.

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
48000 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

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 § 337.4 of the FDIC’s

regulations. The scope of this regulation

is narrower than § 337.4 due to

intervening regulations by other

appropriate Federal banking agencies

that render more comprehensive rules

superfluous. 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 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

before undertaking or continuing such

real estate activities. The FDIC has

reviewed 95 applications under part 362

since December 1992 in which insured

state banks have requested permission

to undertake some type of real estate

investment activity. 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

subsidiaries should generally meet

certain standards before engaging in real

estate investment activities that are not

permissible for national banks. As a

result, the FDIC is proposing to establish

standards under which insured state

nonmember banks may participate in

real estate investment activities.

Providing notice 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. The

FDIC believes its proposal 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.

This proposal is consistent with the

views expressed by the FDIC’s then

Chairman Ricki Helfer in her letter of

May 30, 1997, to Eugene Ludwig,

Comptroller of the Currency, in regard

to the NationsBank operating subsidiary

notices. In that letter, the FDIC’s

Chairman stated her view ‘‘that real

estate development activities present

risks to the deposit insurance funds and

therefore should be permitted for bank

subsidiaries only where there is a clear

legal separation from the insured bank,

stringent firewalls and limited exposure

of the capital of the consolidated

organization.’’

Under the FDIC’s proposal, 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 E. 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 under

§ 362.4(b)(1) and subpart E. We request

comment on the overall goal of the

proposed regulation, particularly in

light of the application filed with the

Office of the Comptroller of the

Currency by NationsBank, National

Association, Charlotte, North Carolina

to engage in limited real estate

development activities and the proposal

of the Board of Governors of the Federal

Reserve System to apply sections 23A

and 23B of the Federal Reserve Act to

transactions between an insured

depository institution and its

subsidiary.

The following discussion summarizes

some of the developments that have

taken place in the area of real estate

investment that the FDIC considered in

establishing the general standards under

which an insured state nonmember

bank may undertake real estate

investment activities. We request

comment on all facets of this proposal.

The cyclical downturn in the real

estate market in the late 1980s and early

1990s, and the impact of that downturn

on financial institutions, provides an

illustration of the market risk presented

by real estate investment activities. In

addition to the high degree of

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. The function of an equity

investor is to bear the economic risks of

the venture. Economic risk is

traditionally defined as the variability of

returns on an investment. If a single

investor undertakes a project alone, all

the risk is borne by the investor. An

investor typically will have a required

rate of return based on the historical

track record of a particular company

and/or type of investment project.

Market participants face a general tradeoff: 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 actual return on an investment,

however, will depend on developments

beyond the investor’s control. If the

actual return is higher than the expected

rate, the investor benefits. If the project

falls short of expected returns, the

investor suffers. At the extreme, an

investor may lose all or some of the

original investment. Investments in real

estate ventures follow this pattern. In

fact, equity investments in commercial

real estate have long been considered

fairly risky because of the uncertainties

in the income stream they generate.

It is possible for the investor to deflect

some of the risk of the project. When a

project is partially financed by debt, the

risks are shared with the lender.

Nonetheless, the equity investor

typically still bears the bulk of the

variation in the risk and rewards of an

investment. As a rule, the lender is

compensated at an agreed amount (or

formula in the case of a variable rate

loan). The lender is paid—both interest

and principal—before the equity

investor/borrower receives any rewards

or return of investment. Thus, any

downside outcome is borne first by the

equity investor. In properly

underwritten loan arrangements, the

lender bears the economic risk of

significant losses only in the case of

extremely negative outcomes. Since the

legal priority of the debt holder is higher

in a liquidation or bankruptcy than that

of the equity holder, the debt holders

are hurt if the investment entity has

very limited resources. Of course, the

borrower/equity investor receives all of

the up-side potential returns from the

investment.

While a leveraged investor has less of

his/her own funds at stake, the use of

borrowed funds to finance an

investment greatly magnifies the

variability of the returns to the equity

investor. That is to say, leverage

increases the risks involved. For
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48001

instance, a small decline in income in

an unleveraged investment may only

mean less positive returns; to the

leveraged investor, it may mean out of

pocket losses, as debt service may have

already absorbed any income generated

by the project. Conversely, a small

increase in generated income may just

moderately increase the rate of return on

an all equity investment but have a

major positive effect on the highly

leveraged investor.

The fact that most commercial real

estate investments are highly leveraged

also affects overall market volatility. For

instance, high interest rates will lower

the expected rate of return for highly

leveraged investments which will, in

turn, lower effective demand. Thus,

prices offered for commercial real estate

during periods of high interest rates

typically are lowered. For example, to

the extent that there was a ‘‘credit

crunch’’ for commercial real estate in

the early 1990s and lenders were

unwilling to extend credit, diminished

effective demand for a property could

have resulted in the elimination of a

broad class of potential investors, rather

than simply a lower price being bid.

The economic viability of any

investment in real estate ultimately

depends on the economic demand for

the services it provides. Thus,

fluctuations in the economy in general

are translated into uncertainties in the

underlying economics of most real

estate investments. National economic

trends, regional developments, and even

local economic developments will affect

the volatility of returns. A traditional

problem for real estate investors in that

regard is that when the economy as a

whole reaches capacity during an

economic expansion, they are one of the

sectors seriously affected by the

resulting run-up in interest rates.

Much of the uncertainty associated

with real estate investment, however,

comes from the nature of the production

itself—how new supply is brought to

market. Investments in the construction

of real estate typically have a long

gestation period; this long planning

period is especially characteristic of

large commercial development projects.

Given the cyclical nature of the

economy and financial markets, the

economic prospects for an investment

may change radically during that

period, altering timing and terms of

transactions.

Moreover, real estate investors also

typically have trouble getting full

information on current market

conditions. Unlike highly organized

markets where participants may easily

obtain data on market developments

such as price and supply

considerations, information in the

commercial real estate market is often

difficult, or impossible, to obtain. Also

inherent in the investment process for

commercial real estate is the fact that

the market is relatively illiquid—

particularly for very large projects.

Thus, instead of having numerous

frequent transactions that incorporate

the latest market information and ensure

that prices reflect true economic value,

markets may be thin and the timing of

a sale or rental contract may affect the

value of the underlying investments.

In addition to the inherent illiquidity

of commercial real estate markets,

transactions often are ‘‘private deals’’ in

which the major parameters of the

investment are not available to the

public in general and, in particular, to

rival developers. For instance, the costs

of construction are a private transaction

between the developer and his

contractor. Likewise, evaluating selling

prices or rental income is difficult since:

(1) There are no statistical data on

transaction prices available as there are

for single-family structures and (2) even

if there were data available, it is

impossible to account for the many

creative financing techniques involved

in commercial sales and in rental

agreements (e.g., tenant improvements

and rent discounting).

Because of imperfect market

information and the length of the

production process, prices of existing

structures are often artificially bid up in

market upswings. That is, short-term

shortages fuel speculative price

increases. Speculative price increases

(whether it be for raw land, developed

construction sites, or completed

buildings) typically encourage even

more construction to take place, leading

to additional future overbuilding

relative to underlying demand.

In addition to the inherent cyclicality

of real estate markets, several

underlying factors create additional

uncertainties in the investment process.

Changes in tax laws will affect the

profitability of real estate investments.

For example, tax changes were a major

consideration in the 1980s, but changes

in depreciation allowances and in tax

rates have been commonplace in the

post-World War II era.

Another uncertainty is the effect of

other governmental actions, especially

in the area of regulations. A prime

example is Federal mandates requiring

clean-up of existing environmental

hazards that imposed unexpected costs

on investors at the time they were

passed. Similar uncertainties result from

state and local laws that effect real

estate and how it may be developed. For

instance, changes in environmental

restrictions of new construction may

add unexpected costs to a project or

even bar its intended use. Similarly, a

zoning change may positively or

negatively affect investment prospects

unexpectedly. All of these factors add to

the uncertainty of returns and thereby

increase the risk of the investment.

Two other considerations often play

into increasing risks in real estate

investment. First, the efficient execution

of a real estate investment usually

requires a ‘‘hands on’’ approach by an

experienced manager. This level of

involvement is especially true of a

construction project where developers

have to deal with a wide variety of

problems ranging from governmental

approvals to sub-contractors and

changing commodity markets. For an

investment in developed real estate,

maintenance problems, replacing lost

tenants, and adjusting rents to retain

tenants all must be addressed in an

environment of ever changing market

conditions.

Many equity investors solve these

problems by ‘‘hiring’’ someone else to

manage the investment. The experience

of the 1980s shows that there are

specific risks involved in separating

ownership from management. For

instance, many tax-oriented investors in

the early 1980s arguably knew little

about the basic economics of the

investments they were undertaking. In a

perfect world, ‘‘passive’’ investment

would work just as efficiently as direct,

active investment. In reality, investment

outcomes are likely to be more

uncertain for equity investors when

someone else is making decisions that

affect the ultimate return. The

experience and expertise of

management is a critical factor, and

there is much anecdotal evidence to

suggest that the lack of adequate

management creates a significant level

of risk of loss.

The FDIC recognizes its ongoing

responsibility to ensure the safe and

sound operation of insured state

nonmember banks and their

subsidiaries. Thus, the Board of

Directors of the FDIC has determined

that there may be a need to restrict or

prohibit certain real estate investment

activities of subsidiaries of insured state

nonmember banks. Therefore, the FDIC

will not 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 when these activities are

not permissible for a national bank.

Section 362.7(a) of the proposal is

intended to address the FDIC’s ongoing
48002 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

supervisory concerns regarding real

estate investment activities and to

impose adequate limitations 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 these 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 is intended to

address the impact on insured state

nonmember banks if the OCC were to

approve recent applications submitted

by national banks to conduct real estate

investment activities through operating

subsidiaries. The FDIC invites comment

on its approach to its safety and

soundness concerns about real estate

investment activities.

Unless the FDIC has previously

approved the real estate investment

activity that is not permissible for a

national bank, an insured state

nonmember bank must file a notice or

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 proposed under this new

regulation, the insured state nonmember

bank and its subsidiary must meet the

standards established in § 362.4(b)(5)(i).

After filing a notice as provided for in

subpart E 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 proposed rule, or

if the institution so chooses, an

application may be filed as described in

§ 362.4(b)(1) and subpart E.

Affiliation With Securities Companies

Section 362.7(b) reflects the FDIC

Board’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 § 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.

As proposed, the affiliation is only

allowed 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) Has a chief executive officer of the

affiliate 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;

(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 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 § 362.4(d).

Many of the restrictions and

prohibitions listed above are currently

contained in § 337. 4. Additionally, the

conditions that will be imposed on

subsidiaries which engage in the public

sale, distribution, or underwriting

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 on the appropriateness of the

restrictions and prohibitions are

solicited. As written, the proposal 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 § 337.4 would no

longer be covered under the FDIC’s

regulations. We believe that these other

affiliates are adequately separated from

the banks by the restrictions imposed by

the FRB. We invite comment on

whether we should include more

entities in the coverage of these

restrictions and whether these

restrictions appropriately address the

risks being undertaken by the affiliate

and through the affiliate relationship.

C. Subpart C—Activities of Insured

State Savings Associations

Section 362.8 Purpose and Scope

This subpart, together with the notice

and application procedures of subpart F,

implements the provisions of section 28

of the FDI 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
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48003

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, or conducted as trustee. 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 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 362.9 Definitions

Section 362.9 of the proposal contains

definitions used in this subpart. Rather

than repeating terms defined in subpart

A, the definitions contained in § 362.2

are incorporated into subpart C by

reference. Included in the proposed

definitions are most of the terms

currently defined in § 303.13(a) of the

FDIC’s regulations. Editing changes are

primarily intended enhance clarity

without changing the meaning.

However, certain deliberate changes are

intended to alter the meaning of these

terms and are identified in this

discussion.

The terms ‘‘Corporate debt securities

not of investment grade’’ and ‘‘Qualified

affiliate’’ have been directly imported

into subpart C from § 303.13(a) 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,

would be deleted for the same reason

that similar language has been deleted

from several definitions in subpart A.

Similar 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

was intended by this modification.

Modified versions of ‘‘Activity,’’

‘‘Equity investment,’’ ‘‘Significant risk

to the fund,’’ and ‘‘Subsidiary’’ are also

carried forward by reference to subpart

A. The definition of activity has been

broadened to encompass all activities

including acquiring or retaining equity

investments. 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. 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. We invite comment on

whether this change enhances clarity or

whether the longer definition found in

the current regulation should be

reinstated.

The ‘‘Equity investment’’ definition

was also modified to better identify its

components. The proposed 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. The definition was

likewise expanded to include any

membership interest that includes a

voting right in any company. Finally, 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. We invite

comment on whether these changes are

helpful in defining equity investments.

Comments are also requested on

whether additional changes to this

definition are needed.

The definition of ‘‘Significant risk’’ is

effectively retitled ‘‘Significant risk to

the fund’’ by the reference to subpart A.

Additionally, a second sentence has

been 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 Board’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 a

bank. Additional comments are

included in the discussion of the

relevant definition in subpart A. We

invite comments on whether this

language is appropriate or whether is

should be further expanded.

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 ‘‘Subsidiary’’ definition

would be mostly unchanged. 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 is that the exclusion of ‘‘Insured

depository institutions’’ for purposes of

current § 303.13(f) has been moved to

the purpose and scope section of

proposed subpart D. No substantive

changes are intended by these

modifications. Comments are requested

regarding whether the FDIC has

inadvertently changed the intended

meaning through these modifications.

While proposed subpart C retains

substantially the same ‘‘Service

corporation’’ definition, the word

‘‘only’’ has been deleted from the phrase

‘‘available for purchase only by savings

associations.’’ This change is 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 amended part 559 of

the Office of Thrift Supervision’s

regulations (12 CFR 559). The change is

not intended to alter the nature of the

requirements governing the savings

association’s equity investment in the

first-tier service corporation. Comments

are requested regarding whether the

FDIC has inadvertently altered the

intended meaning through these

changes.

As in subpart A, the definition of

‘‘Equity investment in real estate’’ is

deleted in the proposal. The

descriptions of real estate investments

permissible for federal savings

associations that were excepted from the
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current definition provided by

§ 303.13(a)(5) 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 the regulation.

Additionally, the FDIC believes that the

remaining content of the current

definition fails to provide any

meaningful clarity or understanding.

Therefore, the FDIC would 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 were intended by

these modifications. The FDIC invites

comments on whether these changes

have clarified the subject definitions.

Comments are also requested

concerning whether the FDIC has

inadvertently changed the meaning of

these definitions through these actions.

The only new definition specifically

added to subpart C is the term ‘‘Insured

state savings association.’’ Because this

term is not explicitly defined in section

3 of the FDI Act, the proposal has added

this term to ensure that readers clearly

understand that an insured state savings

association means any state chartered

savings association insured by the FDIC.

Comments are invited on whether this

definition eliminates any ambiguity or

whether it is actually needed.

Additionally, applicable terms that were

previously undefined but 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 § 303.13 of the FDIC’s

regulations.

Section 362.10 Activities of Insured

State Savings Associations

Equity Investment Prohibition

Section 362.10(a)(1) of the proposal

replaces the provisions of § 303.13(d) of

the FDIC’s 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 FDIC proposes to retain the

exception now in § 303.13(d)(2) which

allows investments in service

corporations as currently in effect

without any substantive change.

However, 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 neither the amount of the

investment nor the activities to be

conducted by the service corporation

present a significant risk to the relevant

deposit insurance fund. The criteria

identified in the preceding sentence is

derived directly from the underlying

statutory language. In order for the

insured state savings association to

qualify for this exception, the service

corporation must be engaging in

activities or acquiring and retaining

investments that are described in

proposed § 362.11(b) as regulatory

exceptions to the general prohibition.

Language currently in § 303.13(d)

concerning the filing of applications to

acquire an equity investment in a

service corporation would be deleted

and moved to subpart F of this

regulation.

Divesting Impermissible Equity

Investments

Section 303.13(d)(1) of the FDIC’s

current regulations requires savings

associations to file divestiture plans

with the FDIC concerning any equity

investments held as of August 9, 1989,

that were no longer permissible.

Because divestiture was required by

statute to occur no later than July 1,

1994, the proposal omits this provision

as it is no longer necessary due to the

passage of time.

Other Activities

Section 362.10(b) of the proposal

replaces what are now §§ 303.13(b),

303.13(c), and 303.13(e) of the FDIC’s

regulations. Some portions of the

existing sections would be 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 § 303.13 concerning notices

and applications has likewise been

edited, reformatted, and moved to

subpart F of this regulation.

Other Activities Prohibition

Section 362.10(b)(1) of the proposal

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. Like

subpart A for insured state banks,

language has been added to clarify that

this prohibition does not supercede the

equity investment exception of

§ 362.10(a)(2). We added this language

because acquiring or retaining any

investment is defined as an activity.

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 § 303.13(e) of the FDIC’s

regulations. However, the proposal

deletes the § 303.13(e) requirement that

savings institutions file divestiture

plans concerning corporate debt that is

not of investment grade and that is held

in a capacity other than through a

qualified affililate. 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

We left the statutory exception to the

other activities prohibition contained in

section 28 of the FDI Act to function in

a manner similar to that now in the

relevant provisions of § 303.13; we

intend no substantive change from the

current regulation through any language

changes we have made. 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

activities prohibition. The first

exception retains the application

process currently in § 303.13(b)(1) and

provides insured state savings

associations with the option of applying

to the FDIC for approval to engage in an
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activity of a type that is not permissible

for a federal savings association. The

notice process from § 303.13(c)(1) has

been retained 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

proposal adds a regulatory exception

enabling insured state savings

associations to acquire and retain

adjustable rate and money market

preferred stock without submitting an

application to the FDIC if the

acquisition is done within the

prescribed limitations. We added an

exception to allow insured state savings

associations to engage as principal in

any activity that is not permissible for

a federal savings association provided

that the Federal Reserve has found the

activity to be closely related to banking.

This provision is similar to the

exception for insured state banks and,

similarly, this provision does not allow

an insured state savings association to

hold equity securities that a federal

savings association may not hold.

Consent Obtained Through Application

Insured state savings associations are

prohibited 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 362.10(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 § 303.13 of

the FDIC’s current regulations.

Nonresidential Realty Loans Permissible

for a Federal Savings Association

Conducted in an Amount Not

Permissible

The proposal carries forward and

modifies the provision now in

§ 303.13(b)(1) of this chapter requiring

an insured state savings association

wishing to hold nonresidential real

estate loans in amounts 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. The

proposal enables the insured state

savings association to submit a notice

instead of an application. This change is

nonsubstantive and is made simply to

expedite the process for insured state

savings associations wanting to exceed

the referenced limits.

Acquiring and Retaining Adjustable

Rate and Money Market Preferred Stock

The proposal extends to insured state

savings associations a revised version of

the 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 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 in 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 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 proposes

extending a like exception subject to the

same revised limitation. 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.

The FDIC seeks comment on whether

this treatment of money market

preferred stock and adjustable rate

preferred stock is appropriate and

whether this exception should be

extended to insured state savings

associations. Is this exception useful

and it is needed? Comment is requested

on the proposed limit, particulary

whether the limit is either too restrictive

or overly generous. Comment is also

requested concerning whether other,

similar types of investments should be

given similar treatment.

Activities That Are Closely Related to

Banking Conducted by the Savings

Association or a Service Corporation of

an Insured Savings Association

The FDIC added an exception

allowing an insured state savings

association to engage in any activity ‘‘as

principal’’ included on the FRB’s list of

activities (found at 12 CFR 225.28) or

where the FRB has issued an order

finding that the activity is closely

related to banking. This exception is

similar to that provided for insured state

banks in subpart A. The FDIC believes

that insured federal savings associations

are permitted to do most of the activities

covered by this exception and

determined that the remaining activities

do not present any substantially

different risk when conducted by an

insured savings association than when

conducted by an insured state bank. The

FDIC seeks comment on whether adding

this express exception is helpful,

redundant, or expands the powers of

insured savings associations. We note

that we did not propose a reference to

activities found by OTS regulation or

order to be reasonably related to the

operation of financial institutions.

Comment is invited on whether we

should include this exception and, if so,

how it should be incorporated into the

regulation. Comment is requested

concerning the appropriateness of the

FRB’s closely related to banking

standard for savings associations. Is

there another standard which would be

more meaningful for state-chartered

savings associations?

Guarantee Activities

The FDIC considered adding an

exception for guarantee activities
48006 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

including credit card guarantee

programs and comparable arrangements

that would have been similar to that

deleted from subpart A in this proposal.

These programs typically involve a

situation where an institution

guarantees the credit obligations of its

retail customers. While we continue to

believe that these activities present no

significant risk to the deposit insurance

funds, this provision has been deleted

from subpart A of this proposal because

the FDIC has determined that national

banks, and therefore insured state

banks, may already engage in the

activities. We determined that federal

savings associations, and by extension

insured state savings associations, may

engage in these activities as well.

Nonetheless, the FDIC seeks comment

on whether adding this language would

be helpful to make it clear that insured

state savings association may engage in

these activities. Commenters advocating

that the FDIC retain this exception in

the final rule are asked to address how

the exception might be incorporated

into the regulation.

Section 362.11 Service Corporations of

Insured State Savings Associations

Section 362.11 of the proposal

governs the activities of service

corporations of insured state savings

associations and generally replaces what

is now § 303.13(d)(2) of the FDIC’s

regulations. As proposed, the section

reorganizes the substance of the current

regulation and consolidates all

provisions concerning the activities of

service corporations into the same

section of the regulation. Language

currently in § 303.13(d) concerning

applications would be revised and

moved to subpart F of this regulation.

Additionally, the FDIC proposes

extending several regulatory exceptions

that closely resemble similar exceptions

provided to subsidiaries of insured state

banks in subpart A of this proposed

regulation. We note that if the service

corporation is a new subsidiary or is a

subsidiary conducting a new activity, all

of the exceptions in § 362.11 remain

subject to the notice provisions

contained in section 18(m) of the FDI

Act which would now be implemented

in subpart D of this proposal.

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 § 362.10 prohibiting an insured state

savings association from directly

engaging in activities which are not

permissible for federal savings

association. By separating the savings

association’s activities and those of a

service corporation, § 362.11 deals

exclusively with activities that may be

conducted by a service corporation of an

insured state savings association.

Consent Obtained Through Application

The proposal continues to allow

insured state savings associations to

submit applications seeking the FDIC’s

consent to engage in activities that are

otherwise prohibited. Section

362.11(b)(1) carries forward the

substance of the application option in

§ 303.13(d)(2)(ii) 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

corresponding 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. One of these activities

is holding the stock of a company that

engages in: (1) Any activity permissible

for a federal savings association; (2) any

activity permissible for the savings

association itself under § 362.10(b)(2)

(iii) or (iv); (3) activities that are not

conducted ‘‘as principal;’’ or (4)

activities that are not permissible for a

federal savings association provided

that the FRB by regulation or order has

found the activity to be closely related

to banking and the service corporation

exercises control over the issuer of the

purchased stock. We provided similar

exceptions to majority-owned

subsidiaries of insured state banks in

subpart A. We note that we revised the

language in subpart A from that

currently found in part 362 to clarify the

intent of this provision. The proposal

differentiates between a service

corporation holding stock that is a

control interest and investing in the

shares of a company. The FDIC intends

that this provision 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 fund. To comply

with this exception, the service

corporation must excercise control over

the lower level entity. We expect

savings associations that have lower

level subsidiaries engaging in other

activities to conform to the application

or notice procedures set forth in this

regulation.

The FDIC seeks comments on whether

it is appropriate to extend this exception

to insured state savings associations.

Comments are requested on whether the

proposed exception is overly broad,

should be further restricted and, if so,

how it should be narrowed.

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,’’

subpart C applies if the activity is not

permissible for a service corporation of

a federal savings asociation.

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

§ 362.11(b)(2)(ii) 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. Examples of such activities are

serving as a real estate agent or travel

agent. The FDIC seeks comment on

whether it is appropriate to extend this

exception to service corporations of

insured state savings associations.

Comments are also requested on

whether this exception is necessary.

Owning Equity Securities That Do Not

Represent a Control Interest

Subject to the eligibility requirements

and transaction limitations discussed

below, the FDIC has determined that the

activity of owning equity securities by a

service corporation does not present a

significant risk to the relevant deposit

insurance fund. Section 362.11(b)(3)

enables service corporations of insured

state savings associations to purchase

certain equity securities by

incorporating substantially the same

exception as that proposed in

§ 362.4(b)(4) of subpart A. This

exception permits service corporations
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48007

of eligible insured state savings

association to acquire and retain stock

of insured banks, insured savings

associations, bank holding companies,

savings and loan holding companies.

The FDIC is of the opinion that

investments in such entities should not

present significant risk to the relevant

deposit insurance fund because these

companies are subject to close

regulatory and supervisory oversight.

Furthermore, these entities mostly

engage in activities closely related to

banking.

The exception provided by this

section also allows the subject service

corporations to acquire and retain

equity stock of companies listed on a

national securities exchange. Listed

securities are more liquid than nonlisted

securities and companies whose stock is

listed must meet capital and other

requirements of the national securities

exchanges. These requirements provide

some assurances as to the quality of the

investment. Insured state savings

associations wanting to have their

service corporations invest in other

securities should be subject to the

scrutiny of the application process.

Service corporations engaging in this

activity must limit their investment to

10 percent of the voting stock of any

company. This limitation reflects the

FDIC’s intent that this exception be used

only as a vehicle to invest in equity

securities. The 10 percent limitation

was chosen because it reflects an

investment level that is generally

recognized as not involving control of

the business. Additionally, the service

corporation is not permitted to control

any issuer of investment stock. These

requirements reflect the FDIC’s intent

that the depository institution is not

operating a business through

investments in equity securities.

Comment is requested concerning the

appropriateness of the 10 percent

limitation.

To be eligible for this exception, the

insured state savings association must

be well-capitalized exclusive of its

investment in the service corporation.

Additionally, the insured state savings

association may not extend credit to the

service corporation, purchase any debt

instruments from the service

corporation, or originate any other

transaction that is used to benefit the

corporation which invests in stock

under this subpart. Finally, the savings

association may have only one service

corporation engaged in this activity.

These requirements reflect the FDIC’s

desire that the scope of the exception

should be limited. Institutions that wish

to have multiple service corporations

engaged in purchasing and retaining

equity securities and that wish to extend

credit to finance the transactions should

use the applications procedures to

request consent.

In addition to requesting comment on

the particular exception as proposed,

the FDIC requests comment on whether

it is appropriate for the regulation to

extend this exception to insured state

savings associations in the same manner

extended to insured state banks in

subpart A. The FDIC also requests

comment on the adequacy of the

restrictions and constraints that it has

proposed for the savings associations

and service corporations that would

hold these investments. What additional

constraints, if any, should we consider

adding for the savings associations and

service corporations that would hold

these investments?

Securities Underwriting

Section 362.11(b)(4) of the proposal

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.

The proposed exception enabling

service corporations to underwrite or

distribute securities is patterned on the

exception found in subpart A (see

proposed § 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 also are identical, the

discussion in subpart A will not be

repeated here.

Notice of Change in Circumstance

Like subpart A, the proposal 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. Under the proposal, 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 primiary

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

an service corporation’s business plan.

If material changes to either condition

occur, the rule 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 standard of material change

would indicate 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 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.

It is not the FDIC’s intention 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 subject to a notice to

the FDIC. The FDIC will instead deal

with such eventuality on a case-by-case

basis through the supervision and

examination process. In short, the FDIC

intends to utilize the supervisory and

regulatory tools available to it in dealing

with the savings association’s failure to

meet 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 is of the opinion 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 in question. 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
48008 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

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’’ shall be read

to replace ‘‘Bank’’ or ‘‘Insured state

bank.’’ Comments are requested

concerning whether these standards are

appropriate for insured state savings

associations and their service

corporations. Should other restrictions

be considered? Have standards been

imposed that are unnecessary to achieve

separation between an insured state

savings association and its service

corporation?

Investment and Transaction Limits

The proposal 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 impose limits on

a savings association’s investment in

any one service corporation, impose an

aggregate limit on a savings

association’s investment in all service

corporations that engage in the same

activity, require extensions of credit

from a savings association to its service

corporations to be fully-collateralized

when made, prohibit low quality assets

from being taken as collateral on such

loans, and require that transactions

between the savings association and its

service corporations be on an arm’s

length basis.

The proposal 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 the bank and all of

its subsidiaries in imposing investment

limitations on all 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.

Investment Limits

Under the proposal, a savings

association’s investment in certain

service corporations may be restricted.

Those limits are basically the same as

would apply between a bank and its

affiliates under section 23A: 10 percent

of tier one capital for each service

corporation and 20 percent for each

activity. As is the case with covered

transactions under section 23A,

extensions of credit and other

transactions with third parties that

benefit the savings association’s service

corporation would be considered as

being part of the savings association’s

investment. The only exception would

be for arm’s length extensions of credit

made by the savings association to

finance sales of assets by the service to

third parties. These transactions would

not need to comply with the collateral

requirements and investment

limitations, provided that they met

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.

The ‘‘investment’’ definition

resembles that used in the relevant

section of proposed subpart A, but it

differs somewhat due to underlying

statutory differences. The definition of

investment for insured state savings

associations includes only: (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.

The investment definition differs from

that used in subpart A in that it

excludes extensions of credit provided

to the service corporation and any debt

securities owned by the savings

association that were issued by the

service corporation. While these items

are included in the investment

definition in subpart A, insured state

banks are not required to deduct the

corresponding amounts 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 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. Since the regulatory

exceptions provided in subpart C that

invoke the investment limits are not

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 limitation only on items that

are not deducted from regulatory

capital.

The FDIC seeks comment on whether

this definition of investment is

appropriate. Commenters are asked to

address whether this treatment is

equitable given the underlying statutory

differences and the FDIC welcomes

suggested alternatives.

Like subpart A, the proposal calulates

the 10 percent and 20 percent limits

based on tier one capital while section

23A uses total capital. As was discussed

earlier, the FDIC is using tier one capital

as its measure to create consistency

throughout the regulation. The proposal

also limits the aggregate investment to

all service corporations conducting the

same activity. There is not a ‘‘same

activity’’ standard in section 23A. The

FDIC believes that the aggregate

limitations should restrict

concentrations in a particular activity

and not impose a general limitation on

activities that are not permissible for a

service corporation of a federal savings

association. For the purposes of this

paragraph, the FDIC intends to interpret

the ‘‘same activity’’ standard to mean

broad categories of activities such as

securities underwriting.

Transaction Requirements

The arm’s length transaction

requirement, prohibition on purchasing

low quality assets, anti-tying restriction,

and insider transaction 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. Refer to the discussion of

this topic in subpart A for comments.

Collateralization Requirement

The collateralization requirement in

proposed § 362.4(d)(4) is also 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. Refer to
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48009

the discussion of this topic in subpart A

for comments.

Capital Requirements

Under the proposed 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 ‘‘wellcapitalized’’ after deducting from its

regulatory capital any amount required

by section 5(t) of the Home Owners

Loan Act. 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 seeks comments on whether this

requirement is too restrictive.

Approvals Previously Granted

The FDIC proposes that insured state

savings associations that have

previously received consent by order or

notice from this agency should not be

required 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. It is

not the intent of the FDIC to require

insured state savings associations to

request consent to engage in an activity

which has already been approved

previously by this agency.

Because previously granted approvals

may contain conditions that are

different from the standards that are

established in this proposal, in certain

circumstances, the insured state savings

association may elect to operate under

the restrictions of this proposal.

Specifically, the insured state savings

association bank may comply with the

investment and transaction limitations

between the savings association and its

service corporations contained in

§ 362.11(c), the capital requirement

limitations detailed in § 362.4(d), and

the service corporation restrictions as

outlined in the term ‘‘eligible service

corporation’’ (by substitution) and

contained in § 362.4(c)(2) in lieu of

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. The FDIC requests comment on

this approach to approvals previously

granted by this agency.

Other Matters on Which the FDIC

Requests Comments

Comments describing the contents of

subpart A include an extensive

discussion of the FDIC’s concerns with

real estate investment activities. It is

also noted that subpart A of the

proposed regulation contains significant

provisions regarding the real estate

investment activities of majority-owned

subsidiaries of insured state banks.

Additionally, proposed subpart B in

part 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 this

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

has attempted to conform the treatment

of insured state banks and their

subsidiaries and that of insured state

savings associations and their service

corporation, differences in the

governing statutes result in some

variances.

Service corporations of federal

savings associations may engage in

numerous real estate investment

activities and, therefore, the 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 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) 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 the fact 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, this proposal does 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,

prohibition on purchasing low quality

assets, anti-tying restriction, insider

transaction restriction, and the

collateralization requirements are not

applicable 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 are required to meet

the eligibility standards; nor is a notice

required to be submitted to the FDIC

(unless a notice is needed pursuant to

proposed subpart D).

Comment is invited on whether

provisions should be added to part 362

subjecting service corporations of

insured savings associations to the

eligibility requirements and various

restrictions that the FDIC has found

necessary to implement in the proposed

subparts A and B. Comments are

requested regarding how the FDIC

should implement any such provisions.

If provisions are added, they would

implement section 18(m) of the FDI Act

which provides the FDIC with authority

to adopt regulations prohibiting any

specific activity that poses a serious

threat to the Savings Association

Insurance Fund.

Notice That a Federal Savings

Association is Conducting Activities

Grandfathered Under Section 5(I)(4) of

HOLA

Section 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

activities it was permitted to conduct

prior 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

§ 303.13(g) is deleted under the
48010 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

13Under 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.

proposal. The notice is not required by

law and is currently imposed by the

FDIC as an information gathering tool.

The FDIC has 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 362.13 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, both federal

and 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 proposal would

segregate 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.

Notice of the Acquisition or

Establishment of a Subsidiary, or Notice

That an Existing Subsidiary Will

Conduct New Activities

Section 303.13(f) of the FDIC’s current

regulations (1) requires savings

associations to file a notice with the

FDIC by January 29, 1990, listing

subsidiaries held by the association at

that time (essentially a ‘‘catch up’’

notice), (2) 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 (3) lists

the content of the notice. The proposed

section would delete the first item

because it no longer necessary due to

the passage of time. The second item is

also deleted because the FDIC seeks to

conform all notice periods used in this

regulation. While proposed § 362.14

continues to require a prior notice, the

required content of the notice would be

revised in a manner consistent with that

required for other notices under this

regulation and moved to subpart F of

this regulation. 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 seeks comment on whether

deleting the abreviated notice period

currently in § 303.13(f) imposes a

substantial burden, or if the benefits

gained by applying the concept of

uniform notice periods exceed any

potential burden. Comment is also

requested on whether explicit references

are needed in the regulation to clarify

that the notice required under this

subpart also applies to newly acquired

or established service corporations and

service corporations conducting new

activitities.

E. Subpart E—Applications and Notices;

Activities and Investments of Insured

State Banks

Overview

This proposed rule includes a

separate subpart E containing

application procedures and delegations

of authority for the substantive matters

covered by the proposal for insured

state banks.13 As discussed above, the

FDIC is currently preparing 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 will

address application requirements

relating to the activities of insured state

nonmember banks. It is the FDIC’s

intent that at such time as part 362 and

part 303 are both final, the application

procedures proposed in subpart E of this

proposal will be relocated to subpart G

of part 303 to centralize all banking

application and notice procedures in

one convenient place.

Section 362.15 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,

including the format, information

requirements, FDIC processing

deadlines, and other pertinent

guidelines or instructions. The proposal

also contains delegations of authority

from the Board of Directors to the

director and deputy director of the

Division of Supervision.

Section 362.16 Definitions

This subpart contains practical,

procedural 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 should be selfexplanatory. When this subpart is

moved to part 303 as subpart G, most,

if not all, of these definitions should be

contained in the general definitions to

that part and will no longer be necessary

in the subpart. Comments are requested

on the clarity of these definitions.

Section 362.17 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.

Comments are requested on the clarity

of these explanations.

Section 362.18 Processing

This section explains the procedures

for the expedited processing of notices

and the regular processing of

applications and notices that have been

removed from expedited processing.

This section also explains how a notice

is removed from expedited processing.

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.

The FDIC will normally review and act

on applications within 60 days after

receipt of a completed application,

subject to extension for an additional 30

days upon written notice to the bank.

Comments are requested on the clarity

of these explanations of the processing

procedures.

Section 362.19 Delegations of

Authority

The authority to review and act upon

applications and notices is delegated in

this section. The only substantive

change to the existing delegation is the

addition of the deputy director of the

Division of Supervision.
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48011

F. Subpart F—Applications and Notices;

Activities and Investments of Insured

Savings Associations

Overview

This proposed rule includes a

separate subpart F containing

application procedures and delegations

of authority for the substantive matters

covered by the proposal for savings

associations. As discussed above, the

FDIC is currently preparing 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 will

address application requirements

relating to the activities of savings

associations. It is the FDIC’s intent that

at such time as part 362 and part 303 are

both final, the application procedures

proposed in subpart F of this proposal

will be relocated to subpart H of part

303 to centralize application and notice

procedures governing all savings

associations in one convenient place.

Section 362.20 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 savings associations and their

subsidiaries under subparts C and D,

including the format, information

requirements, FDIC processing

deadlines, and other pertinent

guidelines or instructions. The proposal

also contains delegations of authority

from the Board of Directors to the

director and deputy director of the

Division of Supervision.

Section 362.21 Definitions

This subpart contains practical,

procedural 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 should be selfexplanatory. When this subpart is

moved to part 303 as subpart H, most,

if not all, of these definitions should be

contained in the general definitions to

that part and will no longer be necessary

in the subpart. Comments are requested

on the clarity of these definitions.

Section 362.22 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. Comments are requested

on the clarity of these explanations.

Section 362.23 Processing

This section explains the procedures

for the expedited processing of notices

and the regular processing of

applications and notices that have been

removed from expedited processing.

This section also explains how a notice

is removed from expedited processing.

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.

The FDIC will normally review and act

on applications within 60 days after

receipt of a completed application,

subject to extension for an additional 30

days upon written notice to the bank.

Comments are requested on the clarity

of these explanations of the processing

procedures.

Section 362.24 Delegations of

Authority

The authority to review and act upon

applications and notices is delegated in

this section. The only substantive

change to the existing delegation is the

addition of the deputy director of the

Division of Supervision.

The FDIC requests public comments

about all aspects of the proposal. In

addition, the FDIC is raising specific

questions for public comment

throughout the preamble discussion.

IV. Paperwork Reduction Act

The collection of information

contained in this proposed rule and

identified below have been submitted to

the Office Of Management and Budget

(OMB) for review and approval in

accordance with the requirements of the

Paperwork Reduction Act of 1995 (PRA)

(44 U.S.C. 3501 et. seq.). Comments are

invited on: (a) Whether the collection of

information is necessary for the proper

performance of the FDIC’s functions,

including whether the information has

practical utility; (b) the accuracy of the

estimates of the burden of the

information collection; (c) ways to

enhance the quality, utility, and clarity

of the information to be collected; and

(d) ways to minimize the burden of the

information collection on respondents,

including through the use of automated

collection techniques or other forms of

information technology.

Comments should be addressed to the

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Attention: Desk Officer

Alexander Hunt, New Executive Office

Building, Room 3208, Washington, D.C.

20503, with copies of such comments to

Steven F. Hanft, Assistant Executive

Secretary (Regulatory Analysis), Federal

Deposit Insurance Corporation, room F–

400, 550 17th Street, NW, Washington,

D.C. 20429. All comments should refer

to ‘‘Part 362.’’ OMB is required to make

a decision concerning the collections of

information contained in the proposed

regulations between 30 and 60 days

after the publication of this document in

the Federal Register. Therefore, a

comment to OMB is best assured of

having its full effect if OMB receives it

within 30 days of this publication. This

does not affect the deadline for the

public to comment to the FDIC on the

proposed regulation.

Title of the collection of information:

Activities and Investments of Insured

State Banks, OMB Control number

3064–0111.

Summary of the collection: A

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, as

detailed at § 362.17.

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 § 24 of the

FDI Act and proposed Part 362.

Respondents: Banks or their

subsidiaries desiring to engage in

activities that would be impermissible

absent the FDIC’s consent or

nonobjection.

Estimated annual burden:

Frequency of response: Occasional

Number of responses: 18

Average number of hours to

prepare an application or

notice: 7 hours

Total annual burden: 126 hours

Title of the collection of information:

Activities and Investments of Insured

Savings Associations, OMB Control

number 3064–0104.

Summary of the collection: A

description of the activity in which an

insured state savings association or its

service corporation proposes to engage

that would be impermissible absent

notification to the FDIC or absent the

FDIC’s consent or nonobjection and

information about the relationship of

the proposed activity to the savings

association’s and/or service
48012 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

corporation’s operation and compliance

with applicable laws and regulations, as

detailed at § 362.22 and § 362.23(c).

Also, a notice of the new activities to be

conducted by a subsidiary or the

activities to be conducted by a newly

formed or acquired subsidiary of

insured state and federal savings

associations in accordance with

§ 362.23(c).

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

savings association or its service

corporation to engage in the proposed

activity that otherwise would be

impermissible for the savings

association or service corporation under

§ 28 of the FDI Act and proposed Part

362. The FDIC also collects information

under § 18(m) of the FDI Act regarding

activities of existing or acquired

subsidiaries to monitor the types of

activities being conducted by

subsidiaries of savings associations.

Respondents: Insured state savings

associations or their subsidiaries

desiring to engage in activities that

would be impermissible absent

notification or the FDIC’s consent or

nonobjection. All insured savings

associations must give notice prior to

acquiring or establishing a new

subsidiary or initiating a new activity

through a subsidiary.

Estimated annual burden:

Frequency of response: Occasional

Number of responses: 24

Average number of hours to

prepare an application or

notice: 5 hours

Total annual burden: 120 hours

V. 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 impact on a

substantial number of small entities.

The proposed 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 proposed rule

will make it easier for small insured

state banks and insured state savings

associations 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, 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.

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—APPLICATIONS,

REQUESTS, SUBMITTALS,

DELEGATIONS OF AUTHORITY, AND

NOTICES REQUIRED TO BE FILED BY

STATUTE OR REGULATION

1. The authority citation for part 303

continues to read as follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816,

1817(j), 1818, 1819 (Seventh and Tenth),

1828, 1831e, 1831o, 1831p-1; 15 U.S.C. 1607.

§ 303.13 [Removed]

2. § 303.13 is removed.

PART 337—UNSAFE AND UNSOUND

BANKING PRACTICES

3. 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, 1819, 1820(d)(10),

1821(f), 1828(j)(2), 1831f, 1831f–1.

§ 337.4 [Removed and Reserved]

4. § 337.4 is removed and reserved.

5. 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 Restrictions on activities of insured

state nonmember banks.

Subpart C—Activities of Insured State

Savings Associations

362.8 Purpose and scope.

362.9 Definitions.

362.10 Activities of insured state savings

associations.

362.11 Service corporations of insured state

savings associations.

362.12 Approvals previously granted.

Subpart D—Acquiring, Establishing, or

Conducting New Activities through a

Subsidiary by an Insured Savings

Association

362.13 Purpose and scope.

362.14 Acquiring or establishing a

subsidiary; conducting new activities

through a subsidiary.

Subpart E—Applications and Notices;

Activities of Insured State Banks

362.15 Scope.

362.16 Definitions.

362.17 Filing procedures.

362.18 Processing.

362.19 Delegations of authority.

Subpart F—Applications and Notices;

Activities of Insured Savings Associations

362.20 Scope.

362.21 Definitions.

362.22 Filing procedures.

362.23 Processing.

362.24 Delegations of authority.

Authority: 12 U.S.C. 1816, 1818, 1819

(Tenth), 1828(m), 1831a, 1831(e).

Subpart A—Activities of Insured State

Banks

§ 362.1 Purpose and scope.

(a) This subpart, along with the notice

and application procedures in subpart

E, 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.),
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48013

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.’’ Therefore, this subpart

does not restrict activities conducted as

agent for a customer, conducted in a

brokerage, custodial, advisory, or

administrative capacity, or conducted as

trustee;

(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 that are held within the

shorter of the time limits prescribed by

state or federal law.

(c) A majority-owned 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 majority-owned subsidiary, 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. Subpart A provides standards for

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

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.

§ 362.2 Definitions.

(a) For the purposes of this subpart,

the terms ‘‘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), and the

following definitions shall apply:

(b) Activity means the conduct of

business by a state-chartered depository

institution, including acquiring or

retaining an equity investment or other

investment.

(c) As principal means any activity

conducted other than as agent for a

customer, is conducted other than in a

brokerage, custodial, advisory, or

administrative capacity, or is conducted

other than as trustee.

(d) Change in control means (1) any

transaction 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), or (2) any transaction as a

result of which a depository institution

eligible for the exception described in

§ 362.3(b)(2)(B) is acquired by or merged

into a depository institution that is not

eligible for the exception.

(e) Company means any corporation,

partnership, limited liability company,

business trust, association, joint

venture, pool, syndicate or other similar

business organization.

(f) Control means the power to vote,

directly or indirectly, 25 per cent 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.

(g) 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.

(h) 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.

(i) Equity security means any stock

(other than adjustable rate preferred

stock and money market (auction rate)

preferred stock) 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.

(j) 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. 375) and

§ 337.3 of this chapter.

(k) Institution shall have the same

meaning as ‘‘state-chartered depository

institution.’’

(l) Majority-owned subsidiary means

any corporation in which the parent

insured state bank owns a majority of

the outstanding voting stock.

(m) 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.

(n) 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 and is not real estate

leasing.

(o) 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.

(p) Security has the same meaning as

it has in part 344 of this chapter.
48014 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

(q) 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.

(r) State-chartered depository

institution means any state bank or state

savings association insured by the FDIC.

(s) Subsidiary means any company

controlled by an insured depository

institution.

(t) 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.

(u) 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 ‘‘wellcapitalized’’ has the same meaning as

set forth in the capital regulations

adopted by the appropriate Federal

banking agency.

§ 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 § 362.3(a)(2)

applies.

(2) Exceptions. (i) Equity investment

in majority-owned subsidiaries. An

insured state bank may acquire or retain

an equity investment in a majorityowned subsidiary, provided that the

majority-owned subsidiary is engaging

in activities that are allowed pursuant to

the provisions of or application under

§ 362.4(b).

(ii) Investments in qualified housing

projects. An insured state bank may

invest as a limited partner in a

partnership 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, 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 § 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 and the FDIC does not object. The

content of the notice and procedures to

process the notice shall conform to the

requirements of § 362.18(a). Approval

will not be granted unless the FDIC

determines that acquiring or retaining

the stock or shares does not pose a

significant risk to the 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

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 prior to

making any such investment. Book

value of the investment shall be used to

determine compliance. The total book

value of the bank’s investment in the

listed stock and registered shares is

calculated in accordance with the

instructions for the preparation of the

consolidated report of condition. The

FDIC may determine when acting upon

a notice filed in accordance with

§ 362.18(a) 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
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48015

1Financial institution letters (FILs) are available

in the FDIC Public Information Center, room 100,

801 17th Street, N.W., Washington, D.C. 20429.

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

statement which indicate that the

policies, products, and annuities are not

FDIC insured deposits, are not

guaranteed by the bank and may involve

risk of loss.

(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

§ 362.3(b)(1) if the bank obtains the

FDIC’s prior 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 § 362.18(b).

Approvals granted under § 362.18(b)

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.

(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 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.

(iii) Acquiring and retaining

adjustable rate and money market

preferred stock. 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.

(iv) Activities that are closely related

to banking. An insured state bank may

engage as principal in any activity that

is not permissible for a national bank

provided that the Federal Reserve Board

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)) provided that this exception:

(A) Shall not be construed to permit

an insured state bank to directly hold

equity securities of a type that a national

bank may not hold;

(B) Does not authorize an insured

state bank engaged in real estate leasing

to hold the leased property for more

than two years at the end of the lease

unless the property is re-leased; and

(C) Does not authorize an insured

state bank to directly hold equity debt

investments in corporations or projects

designed primarily to promote

community welfare if such investments

are of a type that a national bank may

not hold.

(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 operating standards’’ and ‘‘core

separation standards’.

(1) The ‘‘core operating standards’’ for

a department are:

(i) 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 statement which indicate that

the policies, products and annuities are

not FDIC insured deposits, are not

guaranteed by the bank, and may

involve risk of loss; and

(ii) The department informs its

customers that only the assets of the

department may be used to satisfy the

obligations of the department.

(2) The ‘‘core separation standards’’

for a department are:

(i) The department is physically

distinct from the remainder of the bank;

(ii) The department maintains

separate accounting and other records;

(iii) The department has assets,

liabilities, obligations and expenses that

are separate and distinct from those of

the remainder of the bank; and

(iv) The department is subject to state

statute that requires its obligations,

liabilities and expenses be satisfied only

with the assets of the department.

§ 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 § 362.18(b). Approvals granted

under § 362.18(b) 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.
48016 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

(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) The bank meets the capital

requirements of paragraph (e) of this

section;

(B) The subsidiary is an ‘‘eligible

subsidiary’’ as described in paragraph

(c)(2) of this section; and

(C) The subsidiary 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) or any

successor statement which indicate that

the policies, products and annuities are

not FDIC insured deposits, are not

guaranteed by the bank, and may

involve risk of loss.

(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 or 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

which own a control interest in

companies engaged in permissible

activities. The FDIC has determined that

the following investment activities do

not represent a significant risk to the

deposit insurance funds. The following

listed activities may be conducted by a

majority-owned subsidiary of an insured

state bank 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, and the majority-owned

subsidiary controls the issuer of the

stock purchased by the subsidiary. 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.

(i) Stock of a company that engages in

authorized activities. A majority-owned

subsidiary may own the stock of a

company that engages in any activity

permissible for an insured state bank

under § 362.3(b)(2)(iii).

(ii) Stock of a company that engages

in activities closely related to banking.

A majority-owned subsidiary may own

the stock of a company that engages as

principal in any activity that is not

permissible for a national bank provided

that the Federal Reserve Board 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)) provided that this exception:

(A) Does not authorize a subsidiary

engaged in real estate leasing to hold the

leased property for more than two years

at the end of the lease unless the

property is re-leased; and

(B) Does not authorize a subsidiary to

acquire or hold the stock of a savings

association other than as allowed by

paragraph (b)(4) of this section.

(4) Majority-owned subsidiaries

ownership of equity securities that do

not represent a control interest. The

FDIC has determined that a majorityowned subsidiary’s investment in the

equity securities of any company,

including an insured depository

institution, a bank holding company (as

that term is defined for purposes of the

Bank Holding Company Act, 12 U.S.C.

1841 et seq.), or a savings and loan

holding company (as that term is

defined in 12 U.S.C. 1467a), does not

represent a significant risk to the

deposit insurance funds and may be

conducted by a majority-owned

subsidiary of an insured state bank

without first obtaining the FDIC’s

consent, provided that the insured state

bank and its majority-owned subsidiary

meet the eligibility requirements of

paragraph (b)(4)(i) of this section and

transaction limitation of paragraph

(b)(4)(ii) of this section; and the insured

state bank meets the capital

requirements of paragraph (e) of this

section. 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.

(i) Eligibility requirements. (A) The

state-chartered depository institution

may have only one majority-owned

subsidiary engaging in this activity;

(B) The majority-owned subsidiary’s

investment in equity securities (except

stock of an insured depository

institution, a bank holding company or

a savings and loan holding company)

must be limited to equity securities

listed on a national securities exchange.

(C) The state-chartered depository

institution and/or the majority-owned

subsidiary do not control any issuer of

equity securities purchased by the

subsidiary.

(D) The majority-owned subsidiary

may not purchase equity securities

representing more than 10% of the

outstanding voting stock of any one

issuer.

(ii) Transaction limitation. A statechartered depository institution and any

of its subsidiaries may not extend credit

to the majority-owned subsidiary,

purchase any debt instruments issued

by the majority-owned subsidiary, or

originate any other transaction that is

used to benefit the majority-owned

subsidiary which invests in stock under

paragraph (b)(4) of this section.

(iii) Portfolio management. For the

purposes of this section, investment in

the equity securities of any company

does not include pursuing active shortterm trading strategies.

(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 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. Subject to the stated

requirements and limitations, 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

§ 362.18(a) and the FDIC does not object

to the notice. 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

(Supervision) in writing within 10

business days after such change. Such a

majority-owned subsidiary may:

(i) Engage in real estate investment

activities. However, the requirements of
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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) 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 majorityowned subsidiary unless the statechartered 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 selfregulatory organization, and promply

informs the appropriate regional

director (Supervision) 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 statechartered depository institution’s board

of directors before the securities are

initially offered for sale to the public.

(6) Subsidiaries may engage in

authorized activities. A subsidiary of an

insured state bank may engage in any

activity permissible for an insured state

bank under § 362.3(b)(2)(iii) or

§ 362.3(b)(2)(iv), provided that this

exception does not authorize a

subsidiary to acquire or hold the stock

of a savings association other than as

allowed by paragraph (b)(4) of this

section.

(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 3 or more years;

(ii) Has a 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 by the

institution’s appropriate Federal

banking agency;

(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 statechartered 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 statechartered 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

majority-owned 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) Investment

in one subsidiary. An insured state bank

may not invest more than 10 percent of

the insured state bank’s tier one capital

in any majority-owned subsidiary

subject to this paragraph (d).

(ii) Aggregate investment in

subsidiaries. An insured state bank’s

investments in majority-owned

subsidiaries conducting the same

activity subject to this paragraph (d)
48018 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

shall not exceed, in the aggregate, 20

percent of the insured state bank’s tier

one capital.

(iii) Definition of investment. (A) For

purposes of this subsection, the term

investment means:

(1) Any extension of credit to the

majority-owned subsidiary by the

insured state bank;

(2) Any debt securities, as such term

is defined in part 344 of this chapter,

issued by the majority-owned subsidiary

held by the insured state bank;

(3) The acceptance by the insured

state bank of securities issued by the

majority-owned 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 majority-owned

subsidiary, making any investment in

which the majority-owned subsidiary

has an interest, or which is used for the

benefit of, or transferred to, the

majority-owned subsidiary.

(B) For the purposes of paragraph

(d)(2) of this section, the term

‘‘investment’’ does not include:

(1) Extensions of credit by the insured

state bank to finance sales of assets by

the majority-owned 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 a majority-owned

subsidiary that is fully collateralized by

government securities, as such term is

defined in § 344.3 of this chapter; or

(3) An extension of credit by the

insured state bank to a majority-owned

subsidiary that is fully collateralized by

a segregated deposit in the insured state

bank.

(3) Transaction requirements—(i)

Arm’s length transaction requirement.

An insured state bank may not:

(A) Make an investment in a majorityowned subsidiary;

(B) Purchase from or sell to a

majority-owned subsidiary any assets

(including securities);

(C) Enter into a contract, lease, or

other type of agreement with a majorityowned subsidiary; or

(D) Pay compensation to a majorityowned subsidiary or any person or

company who has an interest in the

majority-owned subsidiary unless the

transaction is on terms and conditions

that are substantially the same as those

prevailing at the time for comparable

transactions with unaffiliated parties,

provided that an insured state bank may

give immediate credit to a majorityowned subsidiary for uncollected items

received in the ordinary course of

business. This requirement also shall

apply in the case of any transaction the

proceeds of which are used for the

benefit of, or that are transferred to, the

majority-owned subsidiary.

(ii) Prohibition on purchase of low

quality assets. An insured state bank is

prohibited from purchasing a low

quality asset from a majority-owned

subsidiary. For purposes of this

subsection, low quality asset means:

(A) An asset classified as

‘‘substandard’’, ‘‘doubtful’’, or ‘‘loss’’ or

treated as ‘‘other loans 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) Anti-tying restriction. Neither the

insured state bank nor the majorityowned 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.

(iv) Insider transaction restriction.

Neither the insured state bank nor the

majority-owned subsidiary may enter

into any transaction (exclusive of those

covered by § 337.3 of this chapter) with

the bank’s executive officers, directors,

principal shareholders or related

interests of such persons which relate to

the majority-owned subsidiary’s

activities unless the transactions are on

terms and conditions that are

substantially the same as those

prevailing at the time for comparable

transaction with persons not affiliated

with the insured state bank.

(4) Collateralization requirements. (i)

An insured state bank is prohibited from

making an extension of credit to or on

behalf of a majority-owned subsidiary

unless such transaction is fullycollateralized 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 member 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 dimunition 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 and its categorization as a ‘‘wellcapitalized’’, an ‘‘adequately

capitalized’’, an ‘‘undercapitalized’’, or

a ‘‘significantly undercapitalized’’

institution as defined in § 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.

§ 362.5 Approvals previously granted.

(a) FDIC consent by order or notice.

An insured state bank that previously

filed an application or notice and

obtained the FDIC’s consent to engage in
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48019

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 § 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

§ 362.4(c)(2), (d) and (e).

(b) Approvals by regulation—(1)

Securities underwriting. An insured

state nonmember bank engaging in

securities activities under a notice filed

under and in compliance with the

restrictions of former § 337.4 of this

chapter may continue those activities if

the bank and its majority-owned

subsidiaries comply with the

restrictions set forth in §§ 362.4(b)(5)(ii)

and 362.4 (c), (d), and (e) by [insert date

one year after the effective date of the

final rule]. During the one-year period of

transition between the effective date of

this regulation and [insert date one year

after the effective date of the final rule],

the bank and its majority-owned

subsidiary must meet the restrictions set

forth in the former § 337.4 of this

chapter until §§ 362.4(b)(5)(ii) and 362.4

(c), (d) and (e) are met. If the banks fails

to meet these restrictions, the bank must

apply for the FDIC’s consent to continue

those activities under §§ 362.4(b)(1) and

362.18(b).

(2) Grandfathered insurance

underwriting. An insured state bank

which is directly providing insurance as

principal pursuant to former

§ 362.4(c)(2)(i) may continue that

activity if it complies with the

provisions of § 362.3(b)(2)(ii)(C) by

[insert date ninety days after the

effective date of the final rule]. An

insured state bank indirectly providing

insurance as principal through a

subsidiary pursuant to former

§ 362.3(b)(7) may continue that activity

if it complies with the provisions of

§ 362.4(b)(2)(i). During the ninety-day

period of transition between [insert the

effective date of the final rule] and

[insert date ninety days after the

effective date of the final rule], the bank

and its majority-owned subsidiary must

meet the restrictions set forth in former

§ 362.4(c)(2)(i) or § 362.3(b)(7), as

applicable, of this chapter until the

requirements of §§ 362.3(b)(2)(ii)(C) or

362.4(b)(2)(i) are met. If the insured

state bank or its subsidiary fails to

comply with the restrictions, as

applicable, the insured state bank must

apply for the FDIC’s consent under

§§ 362.4(b)(1) and 362.18(b).

(3) Equity securities. An insured state

bank, indirectly through a subsidiary,

owning equity securities pursuant to

former § 362.4(c)(3)(iv) (A) and (B) may

continue that activity if it complies with

the provisions of § 362.4(b)(4) by [insert

date one year after the effective date of

the final rule]. During the one-year

period of transition between the

effective date of this regulation and

[insert date one year after the effective

date of the final rule], the bank and its

majority-owned subsidiary must meet

the restrictions set forth in former

§ 362.4(c)(3)(iv)(A) and (B) of this

chapter until § 362.4(b)(4) is met. If the

insured state bank or its subsidiary fails

to meet these restrictions, the insured

state bank must apply for the FDIC’s

consent under §§ 362.4(b)(1) and

362.18(b).

(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

§ 362.4(b)(1), submit a notice required

under § 362.4(b)(5), or comply with the

provisions of § 362.4(b) (3), (4), or (6), 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 it

converted its charter, the insured state

bank may continue the activities

without providing notice or making

application to the FDIC, provided that

the bank is in compliance with:

(i) The terms of the FDIC approval

order and

(ii) The provisions of § 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 any event no

later than two years from the date of

charter conversion.

Subpart B—Safety and Soundness

Rules Governing Insured State

Nonmember Banks

§ 362.6 Purpose and scope.

This subpart, along with the notice

and application procedures in subpart E

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 different from

activities permissible for the national

bank parent itself. Additionally, the

following standards shall apply for

insured state nonmember banks that are

not affiliated with a bank holding

company to conduct securities activities

in an affiliated organization.

§ 362.7 Restrictions on activities of

insured state nonmember banks.

(a) Real estate investment made by

subsidiaries of insured state nonmember

banks. The FDIC Board of Directors has

found that real estate investment

activity 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

operating subsidiaries of a national bank

but different from activities 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 real

estate investment activities not

permissible for a national bank itself

unless the insured state nonmember

bank:

(1) Has an approval previously

granted by the FDIC; or

(2) Meets the requirements for

engaging in real estate investment

activities that are not permissible for

national banks as set forth in

§ 362.4(b)(5), and submits a

corresponding notice under § 362.18(a)

without objection, or files an

application under §§ 362.4(b)(1) and

362.18(b) and receives approval to

engage in the activity.

(b) Affiliation with securities

companies. The Board of Directors of
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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:

(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) Has a chief executive officer of the

affiliate 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;

(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 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 § 362.4(d). For the purposes of

applying these restrictions, the term

‘‘affiliate’’ shall be substituted wherever

the terms ‘‘subsidiary’’ or ‘‘majorityowned subsidiary’’ are used in

§ 362.4(d)(2), (3), and (4). For the

purposes of applying these limitations,

the term ‘‘investment’’ as defined in

§ 362.4(d)(2)(iii) shall also include any

equity securities of the affiliate held by

the insured state bank.

(c) Definitions. For the purposes of

this section, the following definitions

apply:

(1) 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.

(2) Company, Control, Equity

Security, Insured state nonmember

bank, Security, and Subsidiary have the

same meaning as provided in subpart A.

Subpart C—Activities of Insured State

Savings Associations

§ 362.8 Purpose and scope.

(a) This subpart, along with the notice

and application procedures in subpart

F, 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’’. Therefore,

regarding insured state savings

associations, this subpart does not

restrict activities conducted as agent for

a customer, conducted in a brokerage,

custodial, advisory, or administrative

capacity, or conducted as trustee.

(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 that are held within the

shorter of the time limits prescribed by

state or federal law.

(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 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.

§ 362.9 Definitions.

For the purposes of this subpart, the

definitions provided in § 362.2 apply.

Additionally, the following definitions

apply to this subpart:

(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 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 Federal

Deposit Insurance Corporation.

(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
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48021

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.

§ 362.10 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 § 362.11(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

§ 362.23(b). Approvals granted under

§ 362.23(b) 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 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 § 362.22. Approvals

granted under § 362.23(b) 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

that described in section 5(c)(2)(B) of

HOLA (12 U.S.C. 1464 (c)(2)(B)), if the

savings association files a notice in

compliance with § 362.23(a) and the

FDIC does not object to the notice.

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. 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 relevant deposit insurance

fund. 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.

(iv) Activities that are closely related

to banking. An insured state savings

association may engage as principal in

any activity that is not permissible for

a federal savings association provided

that the Federal Reserve Board 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)), except that the insured state

savings association shall make no equity

investment directly which is not

permissible for a federal savings

association.

(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

(Supervision) under the procedure in

§ 362.23(c) 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.

§ 362.11 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
48022 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

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 relevant deposit insurance fund.

Applications for consent should be filed

in accordance with § 362.23(b).

Approvals granted under § 362.23(b)

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. The FDIC

consents that the following activities

may be conducted by a service

corporation of an insured state savings

association without first obtaining the

FDIC’s consent, provided that the

savings 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.

(i) Service corporations which own a

control interest in companies engaged in

permissible activities. Provided the

service corporation controls the issuer

of owned stock, a service corporation

may directly acquire and retain

ownership interests in:

(A) Stock of a company that engages

in permissible activities. A service

corporation may own the stock of a

company that engages in any activity

permissible for a federal savings

association or any activity permissible

for an insured state savings association

under § 362.10(b)(2)(iii) or (iv).

(B) Stock of a company engaged in

activities conducted not as principal. A

service corporation may own the stock

of a company that engages solely in

activities which are not conducted as

principal.

(ii) Activities that are not conducted

‘‘as principal’’. A service corporation

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.

(iii) Service corporations may engage

in authorized activities. A service

corporation may engage in any activity

permissible for an insured state savings

association under § 362.10(b)(2)(iii) or

§ 362.10(b)(2)(iv), provided that this

exception does not authorize a service

corporation to acquire or hold the stock

of a savings association other than as

allowed by paragraph (b)(3) of this

section.

(3) Service corporation ownership of

equity securities that do not represent a

control interest. The FDIC has

determined that a service corporation’s

investment in the equity securities of

any company, including an insured

depository institution, a bank holding

company (as that term is defined for

purposes of the Bank Holding Company

Act, 12 U.S.C. 1841, et seq.), or a savings

and loan holding company (as that term

is defined in 12 U.S.C. 1467a), does not

represent a significant risk to the

deposit insurance funds and may be

conducted by a service corporation

without first obtaining the FDIC’s

consent provided that the insured state

savings association or its service

corporation meets the eligibility

requirements of § 362.4(b)(4)(i) and the

transaction limitation contained in

§ 362.4(b)(4)(ii); and the savings

association meets the capital

requirements of paragraph 362.11(d) of

this section. 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. For purposes of

applying § 362.4(b)(4) (i) and (ii), the

term ‘‘majority-owned subsidiary’’ shall

be replaced with ‘‘service corporation’’.

(4) Service corporations conducting

securities underwriting. The FDIC has

determined that it does not represent a

significant risk to the relevant deposit

insurance fund for a service corporation

of an insured state savings association to

engage in the public sale, distribution or

underwriting of securities provided that

the activity is conducted by the service

corporation in compliance with the core

eligibility requirements listed in

§ 362.4(c); any additional requirements

listed in § 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. Subject to the stated

requirements and limitations, 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 § 362.23(a) and the

FDIC does not object to the notice. 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

(Supervision) in writing within 10

business days after such change. For

purposes of applying § 362.4 (b)(5)(ii)

and (c) to this paragraph, the terms

‘‘subsidiary’’ and ‘‘majority-owned

subsidiary’’ shall be replaced with

‘‘service corporation’’. For the purposes

of applying § 362.4(c), ‘‘eligible

subsidiary’’ shall be replaced with

‘‘eligible service corporation’’.

(c) Investment and transaction limits.

The restrictions detailed in § 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 detailed

by § 362.4(d)(2), the term ‘‘investment’’

includes only those items described in

§ 362.4(d)(2)(iii)(A) (3) and (4). For

purposes of applying § 362.4(d) (2), (3),

and (4) to this paragraph, the terms

‘‘insured state bank’’ and ‘‘majorityowned subsidiary’’ shall be replaced,

respectively, with ‘‘insured state savings

association’’ and ‘‘service corporation’’.

For purposes of applying § 362.4(d)(5),

the term ‘‘insured state bank’’ shall be

replaced by ‘‘insured state savings

association’’, and ‘‘subsidiary’’ shall be

replaced by ‘‘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 amount required by

section 5(t) of HOLA.

(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.
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48023

§ 362.12 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 contine 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 §§ 362.4(c)(2) and

362.11 (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

§§ 362.4(c)(2) and 362.11 (c) and (d). For

the purposes of applying § 362.4(c)(2),

‘‘eligible subsidiary’’ and ‘‘subsidiary’’

shall be replaced with ‘‘eligible service

corporation’’ and ‘‘service corporation’’,

respectively.

Subpart D—Acquiring, Establishing, or

Conducting New Activities Through a

Subsidiary by an Insured Savings

Association

§ 362.13 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 the

subpart, the term ‘‘subsidiary’’ does not

include any insured depository

institution as that term is defined in the

Federal Deposit Insurance Act. Unless

otherwise indictated, the definitions

provided in § 362.2 apply to this

subpart.

§ 362.14 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 § 362.23(c)

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.

Subpart E—Applications and Notices;

Activities of Insured State Banks

§ 362.15 Scope.

This subpart sets out the procedures

for complying with the notice and

application requirements for activities

and investments of insured state banks

and their subsidiaries under subparts A

and B.

§ 362.16 Definitions.

For the purposes of this subpart, the

following definitions shall apply:

(a) Appropriate regional director,

appropriate deputy regional director,

and appropriate regional office mean

the regional director of DOS, deputy

regional director of DOS, and FDIC

regional office which the FDIC

designates as follows:

(1) When an institution that is the

subject of a notice or application is not

part of a group of related institutions,

the appropriate region for the institution

and any individual associated with the

institution is the FDIC region in which

the institution or proposed institution is

or will be located; or

(2) When an institution that is the

subject of a notice or application is part

of a group of related institutions, the

appropriate region for the institution

and any individual associated with the

institution is the FDIC region in which

the group’s major policy and decision

makers are located, or any other region

the FDIC designates on a case-by-case

basis.

(b) Associate director means any

associate director of DOS, or in the

event such title becomes obsolete, any

official of equivalent authority within

the division.

(c) Deputy Director means the Deputy

Director of DOS, or in the event such

title becomes obsolete, any official of

equivalent or higher authority within

the division.

(d) Deputy regional director means

any deputy regional director of DOS, or

in the event such title becomes obsolete,

any official of equivalent authority

within the same FDIC region of DOS.

(e) DOS means the Division of

Supervision, or in the event the Division

of Supervision is reorganized, any

successor division.

(f) Director means the Director of

DOS, or in the event such title becomes

obsolete, any official of equivalent or

higher authority within the division.

(g) Regional director means any

regional director in DOS, or in the event

such title becomes obsolete, any official

of equivalent authority within the

division.

§ 362.17 Filing procedures.

(a) Where to file. All applications and

notices required by subpart A or subpart

B of this part are to be in writing and

filed with the appropriate regional

director .

(b) Contents of filing—(1) Filings

generally. All applications or notices

required by subpart A or subpart B may

be in letter form and shall contain 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;

(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) 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)

or (b)(2) of this section, the insured state

bank may submit a copy to the FDIC in

lieu of a separate filing.

(3) Additional information. The

appropriate regional director may

request additional information.

§ 362.18 Processing.

(a) Expedited processing—(1) Notices.

Where subparts A and B permit an

insured state bank or its subsidiary to

commence or continue an activity after

notice to the FDIC, and the appropriate

regional director does not require any

additional information with respect to

the notice, the appropriate regional

director will provide written

acknowledgment that the FDIC has

received the notice. The

acknowledgment will indicate the date

after which the bank or its subsidiary

may commence the activity or continue
48024 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules

the activity as proposed if the FDIC has

not withdrawn the notice from

expedited processing in the interim in

accordance with paragraph (a)(2). This

period will normally be 30 days, subject

to extension for an additional 15 days

upon written notice to the bank. If the

appropriate regional director requests

additional information, the written

acknowledgment will be provided to the

bank once complete information has

been received.

(2) Removal from expedited

processing. Upon prompt written notice

to the insured state bank, the

appropriate regional director may

remove the notice from expedited

processing because:

(i) The notice presents a significant

supervisory concern, policy issue, or

legal issue; or

(ii) Other good cause exists for

removal.

(b) Standard processing for

applications and notices that have been

removed from expedited processing.

Where subparts A and B permit an

insured state bank or its subsidiary to

commence or continue an activity after

application to the FDIC, 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 taken. The FDIC will normally

review and act on such applications

within 60 days after receipt of a

completed application, subject to

extension for an additional 30 days

upon written notice to the bank. Failure

of the FDIC to act on an application

prior to the expiration of these periods

does not constitute approval of the

application.

§ 362.19 Delegations of authority.

The authority to review and act upon

applications and notices filed pursuant

to this subpart E and to take any other

action authorized by this subpart E or

subparts A and B is delegated to the

Director, the Deputy Director, and,

where confirmed in writing by the

Director, to an associate director, and to

the appropriate regional director and

deputy regional director.

Subpart F—Applications and Notices;

Activities of Insured Savings

Associations

§ 362.20 Scope.

This subpart sets out the procedures

for complying with the notice and

application requirements for activities

and investments of insured state savings

associations and their service

corporations under subpart C. This

subpart also sets out the procedures for

complying with the notice requirements

for establishing or engaging in new

activities through a subsidiary of an

insured savings association under

subpart D.

§ 362.21 Definitions.

For the purposes of this subpart, the

following definitions shall apply:

(a) Appropriate regional director,

appropriate deputy regional director,

and appropriate regional office,

respectively, mean the regional director

of DOS, deputy regional director of

DOS, and FDIC regional office which

the FDIC designates as follows:

(1) When an institution that is the

subject of a notice or application is not

part of a group of related institutions,

the appropriate region for the institution

and any individual associated with the

institution is the FDIC region in which

the institution or proposed institution is

or will be located; or

(2) When an institution that is the

subject of a notice or application is part

of a group of related institutions, the

appropriate region for the institution

and any individual associated with the

institution is the FDIC region in which

the group’s major policy and decision

makers are located, or any other region

the FDIC designates on a case-by-case

basis.

(b) Associate director means any

associate director of DOS, or in the

event such title becomes obsolete, any

official of equivalent authority within

the division.

(c) Deputy Director means the Deputy

Director of DOS, or in the event such

title becomes obsolete, any official of

equivalent or higher authority within

the division.

(d) Deputy regional director means

any deputy regional director of DOS, or

in the event such title becomes obsolete,

any official of equivalent authority

within the same FDIC region of DOS.

(e) DOS means the Division of

Supervision, or in the event the Division

of Supervision is reorganized, such

successor division.

(f) Director means the Director of

DOS, or in the event such title becomes

obsolete, any official of equivalent or

higher authority within the division.

(g) Regional director means any

regional director in DOS, or in the event

such title becomes obsolete, any official

of equivalent authority within the

division.

§ 362.22 Filing procedures.

(a) Where to file. All applications and

notices required by subpart C or subpart

D of this part are to be in writing and

filed with the appropriate regional

director .

(b) Contents of filing—(1) Filings

generally. All applications or notices

required by subpart C or subpart D of

this part may be in letter form and shall

contain the following information:

(i) A brief description of the activity,

the manner in which it will be

conducted, and the expected volume or

level of the activity;

(ii) The amount of the savings

assocation’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 subparts C or D;

(iii) A copy of the savings

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;

(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 savings

association’s policy and practice with

regard to any anticipated involvement

in the activity by a director, executive

office or principal shareholder of the

savings association or any related

interest of such a person; and

(vii) A description of the savings

association’s expertise in the activity.

(2) 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) or (b)(2) of

this section, the insured savings

association may submit a copy to the

FDIC in lieu of a separate filing.

(3) Additional information. The

appropriate regional director may

request additional information.

§ 362.23 Processing.

(a) Expedited processing.—(1)

Notices. Where subparts C and D permit

an insured savings association, service

corporation, or subsidiary to commence

or continue an activity after notice to

the FDIC, and the appropriate regional

director does not require any additional

information with respect to the notice,

the appropriate regional director will

provide written acknowledgment that

the FDIC has received the notice. The

acknowledgment will indicate the date

after which the savings association,

service corporation, or subsidiary may

commence the activity or continue the

activity as proposed if the FDIC has not

withdrawn the notice from expedited
Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Proposed Rules 48025

processing in the interim in accordance

with paragraph (d)(2). This period will

normally be 30 days, subject to

extension for an additional 15 days

upon written notice to the bank. If the

appropriate regional director requests

additional information, the written

acknowledgment will be provided to the

savings association once complete

information has been received.

(2) Removal from expedited

processing. Upon prompt written notice

to the insured savings association, the

appropriate regional director may

remove the notice from expedited

processing because:

(i) The notice presents a significant

supervisory concern, policy issue, or

legal issue; or

(ii) Other good cause exists for

removal.

(b) Standard processing for

applications, and notices removed from

expedited processing. Where subpart C

and D permit an insured savings

association, service corporation, or

subsidiary to commence or continue an

activity after application to the FDIC, or

for notices which are not processed

pursuant to the expedited processing

procedures, the FDIC will provide the

insured savings association with written

notification of the final action taken.

The FDIC will normally review and act

on such applications within 60 days

after receipt of a completed application,

subject to extension for an additional 30

days upon written notice to the bank.

Failure of the FDIC to act on an

application prior to the expiration of

these periods does not constitute

approval of the application.

(c) Notices of activities in excess of an

amount permissible for a federal savings

association; subsidiary notices. For

notices required by § 362.10(b)(3) or

§ 362.14, the appropriate regional

director will provide written

acknowledgement that the FDIC has

received the notice. The notice will be

reviewed at the appropriate regional

office, which will take such action as it

deems necessary and appropriate.

§ 362.24 Delegations of authority.

The authority to review and act upon

applications and notices filed pursuant

to this subpart F and to take any other

action authorized by this subpart F or

subparts C and D is delegated to the

Director, the Deputy Director, and,

where confirmed in writing by the

Director, to an associate director, and to

the appropriate regional director and

deputy regional director.

Dated at Washington, D.C. this 26th day of

August, 1997.

By order of the Board of Directors.

Federal Deposit Insurance Corporation

Valerie J. Best,

Assistant Executive Secretary.

[FR Doc. 97–23881 Filed 9–11–97; 8:45 am]

BILLING CODE 6714–01–p

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 362

RIN 3064–AB75

Activities and Investments of Insured

State Banks

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Proposed rule; withdrawal.

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 is withdrawing its

proposed rule published August 23,

1996, in the Federal Register at 61 FR

43486 to amend its regulations

governing the activities and investments

of insured state banks. The FDIC has

decided to withdraw this proposal to

amend the regulation and to propose a

comprehensive restructuring of the

regulation. The new proposal is

published elsewhere in today’s Federal

Register.

DATES: Proposed amendment to part 362

is withdrawn on September 12, 1997.

FOR FURTHER INFORMATION CONTACT:

Curtis Vaughn, Examination Specialist,

(202) 898–6759 or John Jilovec,

Examination Specialist (202) 898–8958,

Division of Supervision, FDIC 550 17th

Street, N.W., Washington, D.C. 20429;

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:

Background

On August 23, 1996, the FDIC

published for comment a proposal (61

FR 43486) to amend part 362 (12 CFR

part 362) of its regulations governing the

activities and investments of insured

banks. In general, subject to certain

exceptions, insured state banks are

prohibited from making equity

investments of a type that are not

permissible for national banks or

engaging as principal in activities of a

type not permissible for national banks.

The proposed amendment substituted a

notice for an application in the case of

particular real estate, life insurance and

annuity investment activities if banks

met specified requirements. If the FDIC

did not object during the notice period,

the bank would have been allowed to

proceed with the planned investment

activities.

Proposed Rule Part 362

The FDIC is conducting a systematic

review of its regulations and written

policies. Section 303(a) of the CDRI (12

U.S.C. 4803(a)) requires the FDIC to

streamline and modify its regulations

and written policies in order to improve

efficiency, reduce unnecessary costs,

and eliminate unwarranted constraints

on credit availability. Section 303(a)

also requires the FDIC to remove

inconsistencies and outmoded and

duplicative requirements from its

regulations and written policies.

As part of this review, and concurrent

with the FDIC’s withdrawal of its

proposed rule amending its regulations

governing the activities and investments

of insured state banks, the FDIC is

proposing a new rule that completely

revises part 362, combining the

regulations now found in §§ 303.13 and

337.4 of the FDIC’s regulations (12 CFR

303.13 and 337.4 ) into part 362 and

moving the application and notice

procedures to part 303. The issues dealt

with in the August, 1996 proposed

amendment are addressed in the

proposed overall revision to part 362.

Withdrawal of the Proposed Rule

In light of the FDIC’s complete

revision of the regulatory text of part

362, the FDIC withdraws its proposal

published in the Federal Register on

August 23, 1996 at 61 FR 43486.

Dated at Washington, D.C., this 26th day of

August, 1997.

By Order of the Board of Directors.

Federal Deposit Insurance Corporation.

Valerie J. Best,

Assistant Executive Secretary.

[FR Doc. 97–23880 Filed 9–11–97; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 71

[Airspace Docket No. 97–ASO–13]

Proposed Establishment of Class E

Airspace; Guntersville, AL

AGENCY: Federal Aviation

Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking.

SUMMARY: This notice proposes to

establish Class E airspace at