`[Federal Register Volume 62, Number 177 (Friday, September 12, 1997)]
[Proposed Rules]
[Pages 47969-48025]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23881]


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

[[Page 47969]]


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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.

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SUMMARY: As part of the FDIC's systematic review of its regulations and 
written policies under section 303(a) of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC 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: 
[email protected]). 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,'' Sec. 303.13 
``Applications and Notices by Savings Associations,'' and Sec. 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 Sec. 337.4 of this chapter.
    Existing Sec. 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.

[[Page 47970]]

    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, well-
managed 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

[[Page 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 
Sec. 362.3. The activities carried on in a subsidiary of the insured 
state bank are addressed in a separate section (see Sec. 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

[[Page 47972]]

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 Sec. 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 
Sec. 303.13 would be revised in a number of ways and placed in new 
subpart C. To the extent possible, activities and investments of 
insured state savings associations would be treated consistently with 
the treatment provided insured state banks. Thus, we revised a number 
of definitions currently contained in Sec. 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 Sec. 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

[[Page 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 Sec. 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

[[Page 47974]]

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 Sec. 362.2(g) and is described as follows ``An 
insured state bank will be considered to convert its charter.'' We 
moved this definition to Sec. 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 Sec. 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 Sec. 362.4(b)(5) of subpart A and in Sec. 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 Sec. 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

[[Page 47975]]

definition of ``Investment in subsidiary'' superfluous. The core 
standards contained in Sec. 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 Sec. 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 Sec. 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

[[Page 47976]]

additional language is necessary and whether any other language should 
be added.
    We re-defined the term ``Well-capitalized'' to incorporate the same 
meaning set forth in part 325 of this chapter for an insured state 
nonmember bank. For other state-chartered depository institutions, the 
term ``well-capitalized'' has the same meaning as set forth in the 
capital regulations adopted by the 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 Sec. 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 
``State-chartered 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 
Sec. 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 ``Majority-owned 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 majority-owned subsidiary requirement in 
section 24 of the FDI Act to generally require that such a subsidiary 
provide limited liability to the insured state bank. Thus, except in 
unusual circumstances, we have and will require majority-owned 
subsidiaries to adopt a form of business that provides limited 
liability to the parent bank. In assessing our experience with 
applications, we have determined that the notice procedure will be 
available only to banks that engage in activities through a majority-
owned subsidiary that takes the corporate form of business. We welcome 
applications that may take a different form of business such as a 
limited partnership or limited liability company, but would like to 
develop more experience with appropriate separations to protect the 
bank from liability under these other forms of business enterprise 
through the application process before including 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 Sec. 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

[[Page 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 Sec. 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 Sec. 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

[[Page 47978]]

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.

[[Page 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 
Sec. 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

[[Page 47980]]

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

[[Page 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 
Sec. 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 Sec. 347.3(c)(1) of the FDIC's regulations 
without filing any application under part 362. It also permits a state 
bank to offer customer-sponsored credit card programs in which the bank 
guarantees the obligations of its retail banking deposit customers. 
This provision has been deleted as unnecessary since 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 Sec. 347.103(a)(1) of this chapter in 
Sec. 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, Sec. 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.

[[Page 47982]]

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 Sec. 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

[[Page 47983]]

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 majority-owned 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.
---------------------------------------------------------------------------

    \1\ The 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.
---------------------------------------------------------------------------

    We deleted one other form of stock ownership at the majority 
subsidiary level from the current regulation by deleting the language 
now found in Sec. 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 Sec. 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 Sec. 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 majority-owned 
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

[[Page 47984]]

``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 majority-owned 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 Sec. 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 majority-owned 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 majority-owned 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 majority-owned 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

[[Page 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 majority-owned 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 majority-owned 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

[[Page 47986]]

investment activities by a majority-owned corporate subsidiary of an 
insured state bank will not present a significant risk to the deposit 
insurance fund provided certain conditions are observed. In drafting 
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 majority-owned 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 
Sec. 337.4 of the FDIC's regulations are met. Section 337.4 governs the 
manner in which subsidiaries of insured state nonmember banks must 
operate if the subsidiaries engage in securities activities that would 
not be permissible for the bank itself under section 16 of

[[Page 47987]]

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 Sec. 337.4. The proposed regulation makes significant 
changes to that exception.
    Due to the existing cross reference to Sec. 337.4, FDIC reviewed 
Sec. 337.4 as a part of its review of part 362 for CDRI. The purpose of 
the review was to streamline and clarify the regulation, update the 
regulation as necessary given any changes in the law, regulatory 
practice, and the marketplace since its adoption, and remove any 
redundant or unnecessary provisions. As a result of that review, the 
FDIC 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 Sec. 337.4 as a 
separate regulation. The revised language would be relocated to part 
362 and would become what is proposed Sec. 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 
Sec. 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
---------------------------------------------------------------------------

    \2\ Representatives 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.
---------------------------------------------------------------------------

    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. 
Sec. 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).
---------------------------------------------------------------------------

    \3\ After the regulations were adopted, the representatives of 
mutual fund companies and investment bankers brought another action 
challenging the regulations allowing insured banks, which are not 
members of the Federal Reserve System, to have subsidiary or 
affiliate relationships with firms engaged in securities work. The 
United States District Court for the District of Columbia, Gerhard 
A. Gesell, J., 606 F.Supp. 683, upheld the regulations, and 
representatives appealed and also petitioned for review. The Court 
of Appeals held that: (1) representatives had standing to challenge 
regulations under both the Glass-Steagall Act and the FDI Act, but 
(2) regulations did not violate either Act. Investment Company 
Institute, v. Federal Deposit Insurance Corporation, 815 F.2d 1540 
(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 FDIC-insured 
banks and their securities-dealing ``subsidiaries'' or 
``affiliates.'' On cross motions for summary judgment, the District 
Court, Jackson, J., held that: (1) trade association had standing, 
and (2) regulations were within authority of FDIC. National Council 
of Savings Institutions v. Federal Deposit Insurance Corporation, 
664 F.Supp. 572 ( D.C. 1987).
---------------------------------------------------------------------------

    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

[[Page 47988]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    As defined in Sec. 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 Sec. 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 Sec. 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

[[Page 47989]]

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 Sec. 337.4 regulation, the 
relationships between banks and securities firms have not been a matter 
of supervisory concern due to the protections FDIC has in place. 
However, the FDIC realizes that in a time of financial turmoil these 
protections may not be adequate and a 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.
---------------------------------------------------------------------------

    \5\ August 21, 1997.
    \6\ 61 FR 57679, November 7, 1996, and 62 FR 2622, January 17, 
1997.
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    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

[[Page 47990]]

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.
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    \7\ Liability of ``controlling persons'' for securities law 
violations by the persons or entities they ``control'' is found in 
section 15 of the Securities Act of 1933, 15 U.S.C. Sec. 77o and 
section 20 of the Securities and Exchange Act of 1934, 15 U.S.C. 
Sec. 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 Sec. 77o or Sec. 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.
    \8\ See ``Anti-manipulation Rules Concerning Securities 
Offerings,'' Regulation M, 17 CFR 200 (1997) where the SEC grapples 
with limiting trading advantages that might otherwise accrue to 
affiliates by limiting trading in prohibited securities by 
affiliates. The SEC is attempting to prevent trading on material 
nonpublic information. To reduce the danger of such trading, the SEC 
has a broad ban on affiliated purchasers. To narrow that exception 
while continuing to limit access to the nonpublic information that 
might otherwise occur, the SEC has limited access to material 
nonpublic information through restraints on common officers. 
Alternatively, the SEC could prohibit trading by affiliates that 
shared any common officers or employees. In narrowing this exception 
to ``those officers or employees that direct, effect or recommend 
transactions in securities,'' the SEC stated that it ``believes that 
this modification will resolve substantially commenters'' concerns 
that sharing one or more senior executives with a distribution 
participant, issuer, or selling security holder would preclude an 
affiliate from availing itself of the exclusion.'' 62 FR 520 at 523, 
fn. 22 (January 3, 1997). As the SEC also stated, the requirement 
would not preclude the affiliates from sharing common executives 
charged with risk management, compliance or general oversight 
responsibilities.
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Substantive Changes to the Subsidiary Underwriting Activities
    Generally, the regulations governing the securities underwriting 
activity of state nonmember banks have been streamlined to make 
compliance easier. In addition, state nonmember banks that deem any 
particular constraint to be burdensome may file an application with the 
FDIC to have the constraint removed for that bank and its majority-
owned subsidiary. The FDIC has eliminated those constraints that were 
deemed to overlap other requirements or that could be eliminated while 
maintaining safety and soundness standards. For example, the FDIC 
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 Sec. 337.4 but the FDIC believes that only banks 
that are well-run and well-managed should be given the opportunity to 
engage in securities activities that are not permissible for a national 
bank under the streamlined notice procedures. 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 Sec. 337.4(a)(2). 
The definitions are similar, but changes have been made to the existing 
capital and physical separation requirements. Also, new requirements 
have been added to ensure that the subsidiary's business is conducted 
according to independent policies and procedures. With regard to those 
subsidiaries which engage in the public sale, distribution or 
underwriting of securities that are not permissible for a national 
bank, additional conditions 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 
majority-owned subsidiary is underwriting, making a market, 
distributing or dealing in the security; (3) the majority-owned 
corporate subsidiary is registered and is a member in good standing 
with the appropriate 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 majority-owned 
subsidiary unless the purchase is approved by the state-chartered 
depository institution's board of directors before the securities are 
initially offered for sale to the public. These requirements are also 
similar to but simplify the requirements currently contained in 
Sec. 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

[[Page 47991]]

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 
Sec. 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 Sec. 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 Sec. 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 
Sec. 337.4 should be retained or if any additional disclosures would be 
appropriate.
---------------------------------------------------------------------------

    \9\ See, e.g., George J. Benston, The Separation of Commercial 
and Investment Banking: The Glass-Steagall Act Revisited and 
Reconsidered 41 (1990).
---------------------------------------------------------------------------

    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 Sec. 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 inter-affiliate 
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.
---------------------------------------------------------------------------

    \10\ Aug. 10, 1987, Pub. L. 100-86, Title I, s 102(a), 101 Stat. 
564.
---------------------------------------------------------------------------

    In contrast to the section 23B transaction restrictions, section 
23A did exist and was incorporated into Sec. 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 bank-subsidiary 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
---------------------------------------------------------------------------

    \11\ See ``Anti-manipulation Rules Concerning Securities 
Offerings,'' 62 FR 520 (January 3, 1997); 15 U.S.C. 78o(f), 
requiring registered brokers or dealers to maintain and enforce 
written policies and procedures reasonably designed to prevent the 
misuse of material nonpublic information; and ``Broker-Dealer 
Policies and Procedures Designed to Segment the Flow and Prevent the 
Misuse of Material Nonpublic Information,'' A Report by the Division 
of Market Regulation, U.S. SEC, (March 1990).
    \12\ Id. at 520.
---------------------------------------------------------------------------

    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 Sec. 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 Sec. 337.4, 
an insured state nonmember bank may indirectly through a majority-owned 
subsidiary engage in the public sale, distribution or underwriting of 
securities that would be impermissible for a national bank provided 
that the bank files notice prior to initiating the activities, the FDIC 
does not object prior to the expiration of the notice period and 
certain conditions are, and continue to be, met. The FDIC 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

[[Page 47992]]

and content of any applications or notices required under Sec. 337.4 
were found within that section. With regard to those insured state 
nonmember banks that have been engaging in a securities activity under 
a notice filed and in compliance with Sec. 337.4, Sec. 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 Sec. 362.4(c), (d), and (e). We will require 
these securities subsidiaries to meet the additional conditions 
specified in Sec. 362.4(b)(5)(ii) that require securities subsidiaries 
to adopt appropriate policies and procedures, register with the SEC and 
take steps to avoid conflicts of interest. 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 
well-capitalized after deducting from its tier one capital the equity 
investment in the subsidiary as well as the bank's pro rata share of 
any retained earnings of the subsidiary. The deduction must be 
reflected on the bank's consolidated report of income and condition and 
the resulting capital will be used for assessment risk classification 
purposes under part 327 and for prompt corrective action purposes under 
part 325. However, the capital deduction will not be used to determine 
whether the bank is ``critically undercapitalized'' under part 325. 
Since the risk-based capital requirements had not been adopted when the 
current version of Sec. 337.4 was adopted, no similar capital level was 
required of banks to establish an underwriting subsidiary, although the 
capital deduction has always been required. This requirement is uniform 
with the requirements found in the other part 362 notice procedures for 
insured state banks to engage in activities not permissible for 
national banks. 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.

[[Page 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 state-chartered depository institution 
conduct business with the institution--the extent of the separation 
will vary according to the type and frequency of customer contact; (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-

[[Page 47994]]

 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 state-chartered 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 Sec. 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 Sec. 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

[[Page 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, Sec. 337.4 imposes by reference the limitations of section 23A 
of the Federal Reserve Act (Sec. 337.4 was adopted prior to the 
adoption of section 23B of the Federal Reserve Act), 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

[[Page 47996]]

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 wholly-owned, 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 bank-
affiliate relationship. Then, the question arises as to how to properly 
treat retained earnings at the subsidiary level. If retained earnings 
at the subsidiary level were treated as subject to the 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

[[Page 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 anti-tying 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 anti-
tying 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 anti-competitive 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 fully-collateralized at the time the bank makes the loan or 
extension of credit. This requirement is intended to protect the bank 
in the event of a loan default. ``Fully collateralized'' under the 
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

[[Page 47998]]

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 Sec. 362.4(d), the capital requirement 
limitations detailed in Sec. 362.4(e), and the subsidiary restrictions 
as outlined in the term ``eligible subsidiary'' and contained in 
Sec. 362.4(c)(2) in lieu of similar requirements 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 
Sec. 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

[[Page 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 Sec. 337.4 in this proposal. The proposed rule will 
allow an insured state nonmember bank engaging in a securities activity 
in accordance with Sec. 337.4 to continue those activities if the bank 
and its subsidiary meet the restrictions of Sec. 362.4 (b)(5)(ii), (c), 
(d), and (e). The FDIC intends that these requirements replace the 
restrictions contained in Sec. 337.4.
    The FDIC recognizes that the requirements of this proposal differ 
from the requirements of Sec. 337.4. Because the transition from the 
current Sec. 337.4 requirements to the new regulatory requirements may 
have unforeseen implementation problems, the bank and its subsidiary 
will have one year from the effective date to comply with new 
restrictions and conditions without further application or notice to 
the FDIC. If the bank and its subsidiary are unable to comply within 
the one-year time period, the bank must apply in accordance with 
Sec. 362.4(b)(1) and subpart 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 Sec. 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 Sec. 362.4(c)(2), comply 
with the investment and transactions limits of Sec. 362.4(d), and meet 
the capital requirement of Sec. 362.4(e). If the converted bank or its 
subsidiary, as applicable, does not comply with all these requirements, 
the bank must obtain the FDIC's consent to continue the activity. The 
FDIC has imposed these conditions to fill a regulatory gap 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

[[Page 48000]]

activities by affiliates of insured state nonmember banks to be unsafe 
and unsound without appropriate safeguards to address those risks. This 
rule incorporates many of the standards currently applicable to these 
entities through Sec. 337.4 of the FDIC's regulations. The scope of 
this regulation is narrower than Sec. 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 Sec. 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 trade-off: the riskier the project, 
the higher the required rate of return. A key aspect of that trade-off 
is the notion that a riskier project will entail a higher probability 
of significant losses for the investor. Assessments of the degree of 
risk will depend on factors affecting future returns such as cyclical 
economic developments, technological advances, structural market 
changes, and the project's sensitivity to financial market changes.
    The 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

[[Page 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

[[Page 48002]]

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 
Sec. 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 Sec. 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 Sec. 337.4 prohibition against any 
affiliation by an insured state nonmember bank with any company that 
directly engages in the underwriting of stocks, bonds, debentures, 
notes, or other securities which is not permissible for a national bank 
unless certain conditions are met. 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 Sec. 362.4(d).
    Many of the restrictions and prohibitions listed above are 
currently contained in Sec. 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 Sec. 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

[[Page 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 Sec. 362.2 are incorporated into subpart C by 
reference. Included in the proposed definitions are most of the terms 
currently defined in Sec. 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 
Sec. 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 
Sec. 303.13(f) has been moved to the purpose and scope section of 
proposed subpart D. No substantive changes are intended by these 
modifications. 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

[[Page 48004]]

current definition provided by Sec. 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 362.11(b) as regulatory exceptions to the general 
prohibition.
    Language currently in Sec. 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 
Secs. 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 Sec. 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 
Sec. 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 Sec. 303.13(e) 
of the FDIC's regulations. However, the proposal deletes the 
Sec. 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 Sec. 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 Sec. 303.13(b)(1) and provides insured 
state savings associations with the option of applying to the FDIC for 
approval to engage in an

[[Page 48005]]

activity of a type that is not permissible for a federal savings 
association. The notice process from Sec. 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 Sec. 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 
Sec. 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

[[Page 48006]]

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 Sec. 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 Sec. 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 Sec. 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 Sec. 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, 
Sec. 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 
Sec. 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 
Sec. 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 Sec. 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 Sec. 362.4(b)(4) 
of subpart A. This exception permits service corporations

[[Page 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 Sec. 362.4(b)(5)(ii)). In both cases, the state-
chartered depository institution must conduct the securities activity 
in compliance with the core eligibility requirements, the same 
additional requirements listed for this activity in subpart A, and the 
investment and transaction limits. The savings association also must 
meet the capital requirements and the service corporation must meet the 
``eligible subsidiary'' requirements as an ``eligible service 
corporation.'' Since the requirements are the same as those imposed in 
subpart A and the risks of the activity 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

[[Page 48008]]

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 Sec. 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

[[Page 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 ``well-capitalized'' 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 Sec. 362.11(c), the capital 
requirement limitations detailed in Sec. 362.4(d), and the service 
corporation restrictions as outlined in the term ``eligible service 
corporation'' (by substitution) and contained in Sec. 362.4(c)(2) in 
lieu of 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 Sec. 303.13(g) is deleted under 
the

[[Page 48010]]

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 
Sec. 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 Sec. 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.
---------------------------------------------------------------------------

    \13\ Under the FDIC's current rules, these application 
requirements are located in various sections of three different 
regulations: 12 CFR 303, 12 CFR 337.4 and 12 CFR 362.
---------------------------------------------------------------------------

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 self-explanatory. 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.

[[Page 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 self-explanatory. 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 Sec. 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 Sec. 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

[[Page 48012]]

corporation's operation and compliance with applicable laws and 
regulations, as detailed at Sec. 362.22 and Sec. 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 
Sec. 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 Sec. 28 of the FDI Act 
and proposed Part 362. The FDIC also collects information under 
Sec. 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.


Sec. 303.13  [Removed]

    2. Sec. 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.


Sec. 337.4  [Removed and Reserved]

    4. Sec. 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


Sec. 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.),

[[Page 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.


Sec. 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 Sec. 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 Sec. 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.

[[Page 48014]]

    (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 ``well-capitalized'' has 
the same meaning as set forth in the capital regulations adopted by the 
appropriate Federal banking agency.


Sec. 362.3  Activities of insured state banks.

    (a) Equity investments. (1) Prohibited equity investments. No 
insured state bank may directly or indirectly acquire or retain as 
principal any equity investment of a type that is not permissible for a 
national bank unless one of the exceptions in Sec. 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 majority-owned subsidiary, provided that the majority-
owned subsidiary is engaging in activities that are allowed pursuant to 
the provisions of or application under Sec. 362.4(b).
    (ii) Investments in qualified housing projects. An insured state 
bank may invest as a limited partner in a partnership 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 Sec. 345.12(n) (1) 
and (2) of this chapter.
    (iii) Grandfathered investments in common or preferred stock; 
shares of investment companies. (A) General. An insured state bank that 
is located in a state which as of September 30, 1991, authorized 
investment in:
    (1)(i) Common or preferred stock listed on a national securities 
exchange (listed stock); or
    (ii) Shares of an investment company registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) (registered 
shares); and
    (2) Which during the period beginning on September 30, 1990, and 
ending on November 26, 1991, made or maintained an investment in listed 
stock or registered shares, may retain whatever lawfully acquired 
listed stock or registered shares it held and may continue to acquire 
listed stock and/or registered shares, provided that the bank files a 
notice in accordance with section 24(f)(6) of the Federal Deposit 
Insurance Act and the FDIC does not object. The content of the notice 
and procedures to process the notice shall conform to the requirements 
of Sec. 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 
Sec. 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

[[Page 48015]]

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.
---------------------------------------------------------------------------

    \1\ Financial institution letters (FILs) are available in the 
FDIC Public Information Center, room 100, 801 17th Street, N.W., 
Washington, D.C. 20429.
---------------------------------------------------------------------------

    (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 Sec. 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 Sec. 362.18(b). Approvals granted under Sec. 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.


Sec. 362.4  Subsidiaries of insured state banks.

    (a) Prohibition. A subsidiary of an insured state bank may not 
engage as principal in any activity that is not of a type permissible 
for a subsidiary of a national bank, unless it meets one of the 
exceptions in paragraph (b) of this section.
    (b) Exceptions--(1) Consent obtained through application. A 
subsidiary of an insured state bank may conduct otherwise prohibited 
activities if the bank obtains the FDIC's prior written consent and the 
insured state bank meets and continues to meet the applicable capital 
standards set by the appropriate Federal banking agency. Consent will 
be given only if the FDIC determines that the activity poses no 
significant risk to the affected deposit insurance fund. Applications 
for consent should be filed in accordance with Sec. 362.18(b). 
Approvals granted under Sec. 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.

[[Page 48016]]

    (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 
Sec. 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 
majority-owned 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 state-chartered 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 short-term 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 
Sec. 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

[[Page 48017]]

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 majority-owned subsidiary 
unless the state-chartered depository institution notifies the customer 
that the majority-owned subsidiary is underwriting or distributing the 
security;
    (C) The majority-owned subsidiary is registered with the Securities 
and Exchange Commission, is a member in good standing with the 
appropriate self-regulatory organization, and 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 state-
chartered 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 Sec. 362.3(b)(2)(iii) or Sec. 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 state-
chartered depository institution conduct business with the institution. 
The extent of the separation will vary according to the type and 
frequency of customer contact;
    (iii) Maintains separate accounting and other business records;
    (iv) Observes separate business entity formalities such as separate 
board of directors' meetings;
    (v) Has a chief executive officer of the subsidiary who is not an 
employee of the institution;
    (vi) Has a majority of its board of directors who are neither 
directors nor officers of the state-chartered depository institution;
    (vii) Conducts business pursuant to independent policies and 
procedures designed to inform customers and prospective customers of 
the subsidiary that the subsidiary is a separate organization from the 
state-chartered depository institution and that the state-chartered 
depository institution is not responsible for and does not guarantee 
the obligations of the subsidiary;
    (viii) Has only one business purpose within the types described in 
paragraphs (b)(2) and (b)(5) of this section;
    (ix) Has a current written business plan that is appropriate to the 
type and scope of business conducted by the subsidiary;
    (x) Has qualified management and employees for the type of activity 
contemplated, including all required licenses and memberships, and 
complies with industry standards; and
    (xi) Establishes policies and procedures to ensure adequate 
computer, audit and accounting systems, internal risk management 
controls, and has necessary operational and managerial infrastructure 
to implement the business plan.
    (d) Investment and transaction limits.--(1) General. If 
specifically required by this part or FDIC order, the following 
conditions and restrictions apply to an insured state bank and its 
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)

[[Page 48018]]

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 Sec. 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 majority-owned 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 
majority-owned subsidiary; or
    (D) Pay compensation to a majority-owned 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 majority-owned 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 majority-owned subsidiary may require a customer to either buy any 
product or use any service from the other as a condition of entering 
into a transaction.
    (iv) Insider transaction restriction. Neither the insured state 
bank nor the majority-owned subsidiary may enter into any transaction 
(exclusive of those covered by Sec. 337.3 of this chapter) with the 
bank's executive officers, directors, principal shareholders or related 
interests of such persons which relate to the 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 fully-
collateralized at the time the transaction is entered into. No insured 
state bank may accept a low quality asset as collateral. An extension 
of credit is fully collateralized if it is secured at the time of the 
transaction by collateral having a market value equal to at least:
    (A) 100 percent of the amount of the transaction if the collateral 
is composed of:
    (1) Obligations of the United States or its agencies;
    (2) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest;
    (3) Notes, drafts, bills of exchange or bankers acceptances that 
are eligible for rediscount or purchase by the Federal Reserve Bank; or
    (4) A segregated, earmarked deposit account with the 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 ``well-capitalized'', an ``adequately 
capitalized'', an ``undercapitalized'', or a ``significantly 
undercapitalized'' institution as defined in Sec. 325.103(b) of this 
chapter, provided that the capital deduction shall not be used for 
purposes of determining whether the bank is ``critically 
undercapitalized'' under part 325.


Sec. 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

[[Page 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 Sec. 362.4(c)(2), (d) and (e) will be 
considered to meet the conditions and restrictions of the approval 
relating to being an eligible subsidiary, meeting investment and 
transactions limits, and meeting capital requirements if the insured 
state bank and subsidiary meet the requirements of Sec. 362.4(c)(2), 
(d) and (e).
    (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 
Sec. 337.4 of this chapter may continue those activities if the bank 
and its majority-owned subsidiaries comply with the restrictions set 
forth in Secs. 362.4(b)(5)(ii) and 362.4 (c), (d), and (e) by [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 Sec. 337.4 of this chapter until 
Secs. 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 Secs. 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 
Sec. 362.4(c)(2)(i) may continue that activity if it complies with the 
provisions of Sec. 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 Sec. 362.3(b)(7) may continue that activity if it complies with 
the provisions of Sec. 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 Sec. 362.4(c)(2)(i) or Sec. 362.3(b)(7), as 
applicable, of this chapter until the requirements of 
Secs. 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 Secs. 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 
Sec. 362.4(c)(3)(iv) (A) and (B) may continue that activity if it 
complies with the provisions of Sec. 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 Sec. 362.4(c)(3)(iv)(A) and (B) of this chapter until 
Sec. 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 Secs. 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 Sec. 362.4(b)(1), submit a notice required under 
Sec. 362.4(b)(5), or comply with the provisions of Sec. 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 Sec. 362.4(c)(2), (d), and (e) regarding 
operating as an ``eligible subsidiary'', ``investment and transaction 
limits'', and ``capital requirements''.
    (3) Divestiture. An insured state bank that does not receive FDIC 
consent shall divest of the nonconforming investment as soon as 
practical but in any event no later than two years from the date of 
charter conversion.

Subpart B--Safety and Soundness Rules Governing Insured State 
Nonmember Banks


Sec. 362.6  Purpose and scope.

    This subpart, along with the notice and application procedures in 
subpart 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.


Sec. 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 
Sec. 362.4(b)(5), and submits a corresponding notice under 
Sec. 362.18(a) without objection, or files an application under 
Secs. 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

[[Page 48020]]

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 Sec. 362.4(d). For the purposes of applying these 
restrictions, the term ``affiliate'' shall be substituted wherever the 
terms ``subsidiary'' or ``majority-owned subsidiary'' are used in 
Sec. 362.4(d)(2), (3), and (4). For the purposes of applying these 
limitations, the term ``investment'' as defined in 
Sec. 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


Sec. 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.


Sec. 362.9  Definitions.

    For the purposes of this subpart, the definitions provided in 
Sec. 362.2 apply. Additionally, the following definitions apply to this 
subpart:
    (a) Affiliate shall mean any company that directly or indirectly, 
through one 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

[[Page 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.


Sec. 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 Sec. 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 Sec. 362.23(b). Approvals granted under Sec. 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 Sec. 362.22. Approvals granted under Sec. 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 
Sec. 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 Sec. 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.


Sec. 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

[[Page 48022]]

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 
Sec. 362.23(b). Approvals granted under Sec. 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 
Sec. 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 Sec. 362.10(b)(2)(iii) or 
Sec. 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 Sec. 362.4(b)(4)(i) and the transaction 
limitation contained in Sec. 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 Sec. 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 Sec. 362.4(c); any additional 
requirements listed in Sec. 362.4(b)(5)(ii); the savings association 
complies with the investment and transaction limitations of paragraph 
(c) of this section; and the savings association meets the capital 
requirements of paragraph (d) of this section. 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 Sec. 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 Sec. 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 Sec. 362.4(c), ``eligible subsidiary'' shall be replaced with 
``eligible service corporation''.
    (c) Investment and transaction limits. The restrictions detailed in 
Sec. 362.4(d) apply to transactions between an insured state savings 
association and any service corporation engaging in activities which 
are not permissible for a service corporation of a federal savings 
association if specifically required by this part or FDIC order. For 
purposes of applying the investment limits detailed by 
Sec. 362.4(d)(2), the term ``investment'' includes only those items 
described in Sec. 362.4(d)(2)(iii)(A) (3) and (4). For purposes of 
applying Sec. 362.4(d) (2), (3), and (4) to this paragraph, the terms 
``insured state bank'' and ``majority-owned subsidiary'' shall be 
replaced, respectively, with ``insured state savings association'' and 
``service corporation''. For purposes of applying Sec. 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.

[[Page 48023]]

Sec. 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 Secs. 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 
Secs. 362.4(c)(2) and 362.11 (c) and (d). For the purposes of applying 
Sec. 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


Sec. 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 Sec. 362.2 apply to this subpart.


Sec. 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 Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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

[[Page 48024]]

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.


Sec. 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


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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

[[Page 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 Sec. 362.10(b)(3) or Sec. 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.


Sec. 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`