9290 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Reg. Y; Docket Nos. R–0935; R–0936]

Bank Holding Companies and Change

in Bank Control (Regulation Y)

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board has adopted

comprehensive amendments to

Regulation Y that improve the

competitiveness of bank holding

companies by eliminating unnecessary

regulatory burden and operating

restrictions, and by streamlining the

application/notice process. Among

other revisions, the final rule

incorporates a streamlined and

expedited review process for bank

acquisition proposals by well-run bank

holding companies with a number of

modifications intended to broaden and

improve public notice of bank

acquisition proposals, to assure that the

regulatory filing is made well within the

public comment period, and to better

assure that proposals reviewed under

the streamlined procedures do not raise

issues under the statutory factors in the

Bank Holding Company Act.

The final rule also implements the

changes enacted in the Economic

Growth and Regulatory Paperwork

Reduction Act of 1996 that eliminate

certain notice and approval

requirements and streamline others that

involve nonbanking proposals by wellrun bank holding companies. The final

rule also includes a reorganized and

expanded regulatory list of permissible

nonbanking activities and removes a

number of restrictions on those

activities that are outmoded, have been

superseded by Board order or do not

apply to insured banks that conduct the

same activity.

In addition, the final rule incorporates

several amendments to the tying

restrictions, including removal of the

regulatory extension of those

restrictions to bank holding companies

and their nonbank subsidiaries. A

number of other changes have also been

included to eliminate unnecessary

regulatory burden and to streamline and

modernize Regulation Y, including

changes to the provisions implementing

the Change in Bank Control Act and

section 914 of the Financial Institutions

Reform, Recovery, and Enforcement Act

of 1989.

EFFECTIVE DATE: April 21, 1997.

FOR FURTHER INFORMATION CONTACT:

Scott G. Alvarez, Associate General

Counsel (202/452–3583), Diane A.

Koonjy, Senior Attorney (202/452–

3274), Thomas R. Corsi, Senior Attorney

(202/452–3275), Lisa R. Chavarria,

Attorney (202/452–3904), Satish M.

Kini, Attorney (202/452–3818), Gregory

A. Baer, Managing Senior Counsel (202/

452–3236), Legal Division; Molly

Wassom, Assistant Director (202/452–

2305), Sid Sussan, Assistant Director

(202/452–2638), Nicholas A.

Kalambokidis, Project Manager (202/

452–3830), David Reilly, Supervisory

Financial Analyst (202/452–5214),

Division of Banking Supervision and

Regulation, Board of Governors of the

Federal Reserve System. For the hearing

impaired only, Telecommunication

Device for the Deaf (TDD), Dorothea

Thompson (202/452–3544), Board of

Governors of the Federal Reserve

System, 20th Street and Constitution

Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background and Summary of Final

Action

On August 28, 1996, the Board

proposed comprehensive revisions to

Regulation Y designed to eliminate

unnecessary regulatory burden and

paperwork, improve efficiency and

eliminate unwarranted constraints on

credit availability while faithfully

implementing the statutory

requirements that form the bases for

Regulation Y. (61 FR 47242 (September

6, 1996)). The Board proposed these

revisions after conducting the review of

its regulations required by section 303

of the Riegle Community Development

and Regulatory Improvement Act of

1994 (‘‘Riegle Act’’). Regulation Y

governs the corporate practices and

nonbanking activities of bank holding

companies, sets forth the procedures for

a company to become a bank holding

company and for a bank holding

company to seek Federal Reserve

System (‘‘System’’) approval for a bank

acquisition or a nonbanking proposal

under the Bank Holding Company Act

(‘‘BHC Act’’), implements the

prohibitions on tying, implements the

prior notice requirements of the Change

in Bank Control Act (governing the

acquisition of control of a bank or bank

holding company by an individual) and

section 914 of the Financial Institutions

Reform, Recovery, and Enforcement Act

of 1989 (governing appointment of

senior officers and directors of certain

banks and bank holding companies),

and implements other provisions of law

applicable to bank holding companies.

The changes proposed by the Board to

Regulation Y included removal of a

number of restrictions on the

permissible nonbanking activities of

bank holding companies, expansion and

reorganization of the regulatory list of

permissible nonbanking activities,

streamlining of the application/notice

process, revisions to the tying rules, and

streamlining of the procedures

governing change in bank control

notices and senior executive officer and

director appointments. On September

30, 1996, Congress, in the Economic

Growth and Regulatory Paperwork

Reduction Act of 1996 (‘‘Regulatory

Relief Act’’), enacted several

complementary changes to the BHC Act,

primarily reducing the burden

associated with seeking approval of

nonbanking proposals. On October 23,

1996, the Board proposed, on an interim

basis, a definition of a well-capitalized

bank holding company for purposes of

the procedures enacted in the

Regulatory Relief Act. (61 FR 56404

(November 1, 1996)).

The Board received over 300

comments regarding its proposal. The

comments reflected the views and

suggestions of a wide cross-section of

interested persons, including bank

holding companies, community groups

and representatives, trade associations,

individuals, law firms, Congressional

representatives, state and local

government and supervisory officials,

and others. The commenters

enthusiastically supported the Board’s

proposal to establish a streamlined

procedure for well-run bank holding

companies to engage in nonbanking

activities and make nonbanking

acquisitions, to remove unnecessary or

outmoded restrictions on nonbanking

activities, and to expand the regulatory

list of permissible nonbanking activities.

Commenters also applauded the

proposed amendments to the tying

provisions that would enhance the

ability of banking organizations to

provide customer discounts on services.

In addition, commenters supported the

proposed streamlining of the provisions

governing a change in control of state

member banks and bank holding

companies and the appointment of new

directors and senior executive officers.

A significant number of commenters,

representing primarily bank holding

companies and banking industry trade

associations and representatives, also

strongly supported the Board’s proposal

to establish a streamlined procedure for

well-run bank holding companies to

seek System approval to acquire

additional banks within certain limits.

On the other hand, a large number of

commenters, consisting primarily of

community representatives and groups,

and individuals, strongly opposed any

change to the Board’s current procedure
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9291

governing bank acquisitions, in general,

and adoption of the Board’s proposed

streamlined review process, in

particular.

After carefully reviewing the

comments, the Board has adopted a

final rule that largely incorporates the

initiatives contained in its proposal. The

Board has made a number of revisions

in response to concerns, suggestions and

information provided by commenters. In

particular, the Board has changed in

several respects the streamlined

procedure governing bank acquisitions

and has adopted a number of measures

designed to broaden and improve public

notice of acquisition proposals. These

changes focus on assuring that

interested persons will have a

meaningful opportunity to provide the

Board with information regarding

acquisition proposals. These and other

changes adopted by the Board in

response to concerns and suggestions

raised by commenters are discussed in

more detail below.

A number of comments addressed

matters that are better addressed in

supervisory policy statements or

guidelines governing specific activities

or in the context of an individual

proposal. Many other matters raised by

commenters, including suggestions

regarding venture capital and portfolio

investment activities and the scope of a

bank holding company’s authority to

acquire shares of investment companies

under section 4(c)(7) of the BHC Act,

were not addressed in the original

proposal and remain under active

review.

Explanation of Final Rule

A. Process for Seeking Approval of Bank

and Nonbank Acquisitions

The Board’s review of its current

procedures for evaluating applications

and notices identified two important

principles that could be applied by the

Board to reduce the burden associated

with those procedures. One principle is

that well-run bank holding companies

that meet objective and verifiable

measures for each of the criteria set

forth in the BHC Act should be able to

expect little burden or delay from the

approval process unless special

circumstances demonstrate that a closer

review is warranted. The other principle

is that the application/notice process

should focus on an analysis of the

effects of the specific proposal and

should not become a vehicle for

comprehensively evaluating and

addressing supervisory and compliance

issues that can more effectively be

addressed in the supervisory process.

These principles guided the Board’s

decision to propose both procedural and

substantive changes to the application/

notice process in August 1996. In

particular, the Board proposed to use

the application/notice process as a

gateway for identifying (and rejecting)

organizations that do not have the

resources or expertise to make an

acquisition or conduct a particular

activity, and to rely on the on-site

inspection and supervisory process as

the most effective way to determine if a

particular organization is in fact

managing its subsidiaries or conducting

an approved activity in a safe and sound

manner and within its authority.

In addition, the Board proposed to

establish a streamlined process for

reviewing proposals by well-run bank

holding companies and reducing the

information required to be filed for

proposals that qualify for the

streamlined procedure. The Board also

proposed a number of other revisions

that would eliminate unnecessary

burden from the application/notice

process, including eliminating the preacceptance procedure for all bank

acquisition proposals, permitting public

notice of an acquisition proposal to be

published up to 30 days before the final

regulatory filing was submitted to the

System, and permitting the waiver of

applications involving solely internal

corporate reorganizations.

The final rule adopted by the Board

incorporates these proposed changes

with a number of important

modifications discussed below.

1. Streamlined Procedure

The Board proposed a streamlined 15-

day notice procedure for proposals by

well-capitalized and well-managed bank

holding companies with satisfactory or

better performance ratings under the

Community Reinvestment Act of 1977

(‘‘CRA’’) to acquire banks and

nonbanking companies within certain

size limits. The Board’s original

proposal retained the Board’s current

requirements that public notice of all

bank acquisitions be provided (both by

newspaper and by Federal Register) and

that the public be provided at least a 30-

day opportunity to submit comments to

the System regarding a proposed bank

acquisition. These notice and comment

provisions applied equally to proposals

that qualified for the streamlined

procedure and to proposals reviewed

under the normal 30/60-day procedures.

Many commenters strongly supported

the establishment of a streamlined

procedure for proposals by well-run

bank holding companies that do not

raise significant issues. These

commenters indicated that the current

approval procedure is burdensome and

costly, particularly in the case of smaller

acquisitions that do not raise any

significant issue under the BHC Act.

Commenters stated that the current

process increases the risks and costs

associated with an acquisition by

imposing unnecessary delay in

consummating both bank and nonbank

acquisition proposals. This delay also

increases the potential for loss of key

employees, customer relationships and

franchise value. In addition,

commenters argued that delay in

approving clearly permissible

transactions postpones the realization

by the holding company and the

community of the benefits of the

transaction and, in the case of a

nonbanking proposal, puts bank holding

companies at a disadvantage in

competing with unregulated entities

vying for the same target company.

Moreover, commenters indicated that

the management, legal and other

resources required to prepare an

application/notice under the current

procedures are significant.

These commenters agreed that a

streamlined procedure would reduce

regulatory burden substantially by

reducing the costs to bank holding

companies of preparing applications as

well as the costs associated with the

delay inherent in the regulatory review

process. Many commenters also stated

that these changes would improve the

ability of bank holding companies to be

competitive with unregulated entities in

making nonbanking acquisitions and

engaging de novo in permissible

nonbanking activities.

Several of these commenters urged

the Board to take the additional step of

reducing or eliminating the public

comment period for proposals by

banking organizations, or permitting a

safe-harbor from comments if the

banking organization maintains

satisfactory or better CRA performance

ratings or the comment relates to a

matter that was reviewed in the CRA

examination. These commenters argued

that neither the BHC Act nor the CRA

requires that public notice be provided

for bank acquisition proposals, and that

comments on the CRA performance of

insured institutions would be more

effective if provided in the CRA

examination process. These commenters

also contended that the delay associated

with the requirement that the Board

consider all public comments under a

more protracted procedure is costly and

delays the ability of well-run

organizations to pass on benefits of an

acquisition to the affected communities.

In addition, they argued that providing

a safe harbor from public comments for
9292 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

organizations with satisfactory or better

CRA performance ratings would provide

an incentive for institutions to achieve

better CRA performance ratings.

On the other hand, a significant

number of commenters, including

various community groups, believe that

the current procedures for reviewing

bank acquisition proposals work well

and that no change to the current

process is necessary. These commenters

argued that the current 30/60-day

procedure strikes an important balance

between the banking industry’s need for

regulatory action within a limited

period of time and the community’s

need to have a meaningful opportunity

to discuss with the acquiring company

the potential effects of a proposed bank

acquisition and participate in the

System review process. These

commenters also expressed concern that

the revisions proposed by the Board

would weaken the review process for

bank acquisition proposals by reducing

the attention the System would pay to

certain proposals, and would erode the

ability of interested members of the

public to provide information to the

System for consideration in an analysis

of the convenience and needs factor, the

CRA performance record, and other

aspects of a bank acquisition proposal.

In addition, a number of these

commenters argued that the Board

should not adopt its proposed

streamlined procedure for bank

acquisition proposals by well-run bank

holding companies because the

Regulatory Relief Act adopts

streamlined procedures only for

nonbanking proposals and indicates that

Congress rejected applying a similar

streamlined approach to reviewing bank

acquisitions.

The Board believes that it is important

to address the concerns of both sets of

commenters. The Board believes that it

is sound public policy, in addition to

being consistent with the Riegle Act,

that the Board revise its application/

notice process to reduce any

unnecessary regulatory costs and

burdens associated with that process. At

the same time, the Board believes that

revisions to its application/notice

process should not diminish the quality

of its review of transactions. In addition,

the Board strongly believes that public

participation in the application/notice

process is important because it provides

the Board with useful information, in

particular, information regarding the

effect of transactions on the relevant

communities.

As the Board noted in its original

proposal, the Board reviews

approximately 1,300 applications and

notices each year under the BHC Act.

While these proposals include some

complex and large proposals, the

overwhelming preponderance are

relatively simple proposals that raise no

issues under the statutory factors that

the Board is required to consider. In

more than 90 percent of the cases

submitted to the System, no public

comment is submitted. Currently, these

cases are largely considered and

approved by the Reserve Banks under

delegated authority in a process that

involves a pre-acceptance period of on

average 25 days and final action about

30 days following the date of acceptance

of a filing.

In these cases, the Board believes that

there is room to revise the current

review process to reduce paperwork and

regulatory burden. The Board believes

that this reduction in burden can be

accomplished without diminishing the

System’s review of the statutory factors

in any case or the opportunity for the

public to provide information to the

System that is relevant to the statutory

factors. Importantly, the Board is

maintaining the public notice and

period for public comment that

currently apply to bank acquisitions,

including bank acquisitions reviewed

under the streamlined procedures.

Accordingly, the final rule adopts the

streamlined review process originally

proposed by the Board, with several

important modifications. These changes

are in response to specific concerns

raised by commenters and are designed

to provide earlier and broader public

notice of acquisition proposals, better

access to regulatory filings, and to

assure that the public continues to have

a meaningful opportunity to provide the

System with relevant information

regarding proposals subject to System

review. The Board believes that

adoption of a streamlined process for

bank acquisitions as well as all of the

other revisions proposed by the Board to

Regulation Y are within the authority of

the Board under the current BHC Act

and do not require statutory changes.

The changes to the original proposal

adopted in the final rule are discussed

more fully below and include the

following:

* Timing of Publication. The

regulatory filing for a bank or nonbank

acquisition proposal must be made

within 15 calendar days of publication

of the request for comment on the

proposal (as opposed to 7 days under

the current procedure and 30 days

under the original proposed revisions);

* New Methods of Public Notice. In

order to make public notice available

earlier, a new list of all bank and

nonbank acquisition proposals subject

to System review will be prepared

weekly and updated every 3 days, and

made available to all interested parties

using three methods: by mail (on a

weekly basis), through a dedicated faxon-demand facility (available 24 hours

every day), and on the Board’s Internet

Home Page;

* Information Regarding

Convenience and Needs. The regulatory

filing under the streamlined procedure

will retain the current requirement that

the filer briefly describe the proposed

transaction and the parties to the

transaction, and, in the case of a bank

or thrift acquisition, will require (as

under the current procedure) a brief

discussion of the effects of the proposal

on the convenience and needs of the

community and of steps that are being

taken by the acquiring company to

address weaknesses at insured

institutions that have not received at

least a satisfactory CRA performance

rating;

* Convenience and Needs Standard.

In the case of a bank or thrift

acquisition, the standards for qualifying

for the streamlined procedure have been

modified to require the acquiring bank

holding company to show that the

transaction is consistent with the

convenience and needs standard in the

BHC Act as well as requiring that the

CRA performance rating of the lead

insured institution and insured

institutions with at least 80 percent of

the assets of the acquiring bank holding

company be satisfactory or better;

* Timely Comments Require Full

Consideration. A provision has been

added specifying that a proposal filed

under the streamlined procedure will be

reviewed under the normal 30/60 day

review process if a substantive written

comment is received by the System

during the public comment period;

* Guidance in Defining Substantive

Comments. A provision has been added

describing generally the types of

comments that would be considered

substantive (this provision contemplates

that the vast majority of comments that

are now considered by the Board would

continue to be reviewed by the Board);

* Extensions to Obtain Filing. A

provision has been added incorporating

the Board’s current policy of exercising

discretion, based on the facts and

circumstances, to grant an extension of

the public comment period of 1 to 15

days to an interested member of the

public that has made a timely request

for a copy of the regulatory filing on a

proposal (this extension will not itself

disqualify a proposal from consideration

under the streamlined procedure);

* Joint Extension Requests. A

provision has been added reflecting the

Board’s current policy of permitting a
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9293

reasonable extension of the public

comment period where the extension is

jointly requested by an interested

person and the applicant (for example,

in order to permit completion of

discussions between the applicant and

the interested person); and,

* Size Limitation. A size limitation of

$7.5 billion on any individual

acquisition that may qualify for the

streamlined procedures has been added

as well as a limitation of 15 percent of

the consolidated total capital of the

acquiring company on the total

consideration that may be paid in the

case of the acquisition of a nonbanking

company.

Under the new rule, bank and thrift

acquisition proposals that meet the

qualifying criteria in the regulation

would be considered under a

streamlined procedure that allows

System action 3 business days following

the close of the public comment period.

This streamlined review process will

allow System action on a qualifying

proposal typically between 18 and 21

calendar days after the regulatory filing

is made with the System. In addition,

the regulatory filing required in these

cases includes less paperwork than

under the current procedures. Cases that

are complex, or that raise an issue of

first impression, issues of safety and

soundness or other concerns, or that

raise concerns regarding the effect of the

proposal in the relevant communities

will, as under the Board’s current rules

and policies, receive more in-depth

analysis. Moreover, the Board retains

the ability to notify a bank holding

company for any reason that the

streamlined notice procedure is not

available and that the normal 30/60-day

procedure must be followed.

The final rule eliminates unnecessary

delay in all bank acquisition proposals

by eliminating the current preacceptance period. Elimination of this

period reduces the System review

process by an average of 25 days. The

function of this pre-acceptance period

was to collect information regarding the

specific proposal that may not be

described in the original filing. The

Board’s experience in reviewing

nonbanking proposals (which are not

subject to a pre-acceptance review

period) indicates that this period is not

necessary and that the System is able to

request and obtain additional

information in a timely fashion during

the normal review period that begins

after acceptance of the regulatory filing.

The final rule allows the System to

continue to request additional

information at any time and to return as

incomplete any filing that does not

contain the information prescribed in

the regulation.

The final rule also adopts the

procedures established in the

Regulatory Relief Act regarding

nonbanking proposals. These provisions

eliminate the prior notice and approval

requirements of the BHC Act for any

bank holding company that meets the

qualifying criteria to engage de novo in

any nonbanking activity approved by

the Board by regulation. In addition, the

Regulatory Relief Act established a

streamlined 12-business day review

process for proposals by well-run bank

holding companies to acquire a

company (other than an insured

depository institution) engaged in

permissible nonbanking activities or to

engage de novo in nonbanking activities

approved only by order.

A company or proposal that does not

qualify for the streamlined procedure

would follow the current application

process, which provides for Reserve

Bank action within 30 days of filing and

for Board action within 60 days of filing.

In the event that the System determines

that a proposal filed under the

streamlined procedure must be

reviewed under the normal 30/60-day

procedure, the final rule provides that

the notice filed under the streamlined

procedure would be accepted under the

normal procedure and the normal

procedure would be deemed to have

begun at the time the notice was filed

under the streamlined procedure. In

cases that have been shifted from the

streamlined to the normal processing

schedule, the Reserve Bank and the

Board would determine whether

information supplementing the

streamlined filing is needed to address

the relevant issues. As in any case, the

System may request any additional

information during the processing

period necessary to resolve issues

related to the proposal.

2. Public Participation in Review

Process

a. Public Notice

The original proposal retained the

current requirement for public notice of

all acquisition proposals, including a

full 30-day public comment period for

bank acquisition proposals. As noted

above, the final rule retains the current

public notice requirement and 30-day

public comment period for bank

acquisition proposals, including

proposals that qualify for the

streamlined procedure. Public notice of

these proposals would continue to be

given through newspaper publications

in the affected communities and

through publication in the Federal

Register, as required under the Board’s

current procedures.

The Regulatory Relief Act amended

section 4 of the BHC Act to eliminate

the requirement for public notice of

certain nonbanking acquisition

proposals by qualifying bank holding

companies. The final rule implements

the statutory changes enacted by the

Regulatory Relief Act. Public notice of

all acquisitions of insured depository

institutions, including savings

associations, is still required, however,

and would mirror the notice

requirements applicable to bank

acquisition proposals. In addition,

public notice would continue to be

required for nonbank proposals that do

not qualify for the streamlined

procedures under the Regulatory Relief

Act, and for any proposal that involves

a new activity that has not previously

been determined by the Board to be

closely related to banking.

b. Steps To Improve Public Notice

In connection with its revision of the

current procedures, the Board will

implement three steps that are designed

to improve the effectiveness and

timeliness of the public notice of

acquisition proposals. First, the Board

will publish a new listing of all

acquisition proposals submitted for

System approval under the BHC Act.

This new document will include all

bank acquisition proposals that have

been published for comment, whether

submitted under the streamlined or

normal procedures, as well as proposals

to acquire a nonbanking company that

require public notice. This new

document will be updated at least

weekly and will indicate the applicant

and target organization, the date that the

public comment period closes, and the

Reserve Bank to which public

comments may be sent. The new

document will be a more

comprehensive list of cases open to

public comment than the current H–2

(which includes only application/

notices that have been filed with the

System and does not generally indicate

proposals that have been published for

comment but not yet filed), and will be

more quickly available than the current

H–2 (which includes a list of Board and

Reserve Bank final actions and other

information that often requires a longer

time to assemble). This document will

be available by mail.

Second, to expedite distribution of

this information, the Board will make

the new document available through a

fax-on-demand call-in facility. This

facility will be available 24 hours a day,

7 days a week, and will automatically

fax a copy of the new document to any
9294 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

caller. The information available on the

fax call-in facility will be updated at

least every three business days.

Third, the Board will make the new

document available on its Internet

Home Page, along with other

information, including a list of actions

taken by the System on applications and

notices. Thus, the Board’s Internet

Home Page will include a list of all

acquisition proposals requiring System

approval under the BHC Act that have

been published for public comment.

This list will identify the applicant,

target organization, closing date for the

public comment period, and the Reserve

Bank to which comments may be

submitted. This information, like the fax

call-in information, will be updated at

least every 3 business days to reflect the

addition of new proposals.

As a complement to providing

broader and earlier public notice, the

Board will make regulatory filings more

quickly available to the public. The

System expects to make the public

portion of all pending applications/

notices available to the public within 3

business days of filing.

c. Timing of Publication

Several commenters supported

allowing an applying bank holding

company to publish notice of a proposal

up to 30 days in advance of filing the

required application/notice for System

approval. This would permit

publication at a time closer to the

announcement date of a proposed

acquisition.

A large number of other commenters,

however, suggested that permitting an

applicant to publish notice 30 days

before submitting an application/notice

to the System would effectively deprive

the public of an opportunity to

comment on the information contained

in the filing. These commenters were

particularly concerned that this would

result in less informed comments and

would force commenters to express

concerns relating to factors, such as the

effect of the proposal on the

convenience and needs of the

community or CRA performance,

without reviewing the plans of an

applicant to address these matters or

discussing these plans with the

applicant.

In light of the comments, the Board

has determined to adopt a revised

approach that permits publication up to

15 days prior to the submission of the

required filing. Under the Board’s

current rules, publication may occur up

to 7 days prior to submission of the

application. Allowing a slightly earlier

publication date will allow for a shorter

regulatory process in cases that meet the

criteria for expedited action while at the

same time assuring that the required

filing will be available to the public for

a significant part of the public comment

period.

To address the possibility that a filing

may not be submitted during the first 15

days of the public comment period, the

final rule incorporates the Board’s

current policy that the Board may, in its

discretion and based on the facts and

circumstances, permit an extension of

the public comment period, of an

appropriate length up to 15 days, for an

interested person that makes a timely

request for both a copy of the required

regulatory filing and additional time to

file a comment regarding a proposal. In

considering whether to grant a request

for an extension, and the length of the

extension to be granted, the Board has

in the past and will continue to take

into account such factors as when the

proposal was announced and the

regulatory filing made available to the

public, when the request for the

regulatory filing was made, and the

specific reasons given by the requester

for being unable to file a timely

comment. A decision to grant an

extension of the public comment period

would not disqualify a proposal from

action under the streamlined procedure.

d. Joint Requests To Extend the

Comment Period

A number of commenters argued that

a shortened processing period would

frustrate the ability of community

groups to conduct discussions with

applicants in connection with a bank

acquisition proposal regarding lending

and other programs to help meet the

convenience and needs of the

community. These commenters

indicated that a shorter regulatory

review period would truncate the period

for these discussions and potentially

force premature objections to

acquisition proposals, especially in

situations that involve the initial entry

of a banking organization into the

community.

The Board believes that discussions

between an insured institution and

community representatives for purposes

of identifying and helping to serve the

banking needs of the community are

appropriately and most effectively

conducted throughout the year and

should not be confined to the period

when an acquisition proposal is under

review. In the application/notice

context, the Board has granted requests

for an extension of the public comment

period that were made jointly by an

interested party and an applicant for the

purpose of allowing completion of

discussions regarding a matter, such as

CRA performance or competitive

divestitures, that is relevant to the

statutory factors the Board must

consider in reviewing the proposal. The

final rule specifically incorporates this

policy and states that a reasonable

extension of the public comment period

will be granted upon a joint request of

an interested member of the public and

the applicant. This type of extension

will not disqualify an otherwise

qualifying proposal from consideration

under the streamlined procedure.

e. Protested Cases

The streamlined procedure proposed

by the Board provided that the Board

could require an applicant to follow the

current 30 or 60 day procedure if the

Board indicates to the applicant for any

reason that the proposal does not

qualify for the streamlined process. The

Board also stated that it expected that

proposals by well-run bank holding

companies would be disqualified only

sparingly and in extraordinary

situations. Among the situations

identified by the Board as meriting

review under the normal 30/60-day

procedure is the situation where a

timely substantive public comment is

received by the System that raises an

issue that cannot be resolved by the

Reserve Bank under its delegated

authority.

A number of commenters argued that

the Board should not disqualify a

proposal from consideration under the

streamlined process on the basis of a

public comment regarding CRA or fair

lending performance if the applicant

organization’s insured depository

institutions have satisfactory or better

CRA performance ratings or if the

comment relates to a matter that was

reviewed in the CRA examination

process. Other commenters argued that

a proposal should not be disqualified

from streamlined processing if a

comment is submitted that relates to

information that is available to the

Board outside the application process

(such as HMDA data) or a matter

uniquely within the Board’s expertise

(such as financial, managerial or

competitive matters), or if the

commenter has not first attempted to

discuss the concerns with the acquiring

organization outside the approval

process.

On the other hand, a large number of

community groups and representatives

argued that the application/notice

process provides an important

opportunity for members of the public

and representatives of affected

communities to provide information to

the System relating to the impact of a

proposal on the community. These
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9295

1The Board will develop supervisory guidance

identifying the limited types of comments that may

be considered under delegated authority.

commenters argued that it is critical to

preserve the ability of the public to have

input into the government review

process and for the Board to take a close

look at proposals that raise concern in

the affected community. These

commenters argued that the Board

should indicate in the regulation that

submission of a comment would trigger

the normal 30/60-day processing period.

The Board had indicated in its

original proposal that the filing of a

timely comment could trigger the

normal review process, and has adopted

the suggestion of commenters that this

be specifically included in the rule.

Thus, the final rule provides that the

normal 30/60-day process applies in any

case in which a timely substantive

comment regarding a proposal is

received by the System. A proposal that

is considered under the normal process

will be acted on as soon as the System

completes its review of the proposal,

which may be before expiration of the

30 or 60 day period.

The final rule provides that a

comment will be considered timely if it

is submitted in writing and is received

by the appropriate Reserve Bank or by

the Board before the expiration of the

public comment period. A comment

will be considered to be substantive

unless the comment involves individual

complaints, or raises frivolous,

previously-considered or

unsubstantiated claims, or irrelevant

issues.1 The Board notes that under this

standard the vast majority of comments

that have in the past been considered by

the Board will continue to be viewed as

substantive and will continue to be

reviewed by the Board. A comment that

is delegable will be carefully weighed in

the review process by the Reserve Bank

and any action taken by the Reserve

Bank is subject to review by the Board.

The Reserve Bank may seek additional

information necessary to evaluate any

delegable comment and may refer a

comment for investigation to the

appropriate federal banking agency or

other relevant agency, if appropriate.

f. Late Comments

In its original proposal, the Board

proposed to adhere to its current rules

governing consideration of public

comments, and to discontinue its

practice of routinely considering

comments, including supplemental

comments filed by a timely commenter,

that are filed after the close of the public

comment period. The Board’s Rules of

Procedure currently provide that the

Board is required to consider a comment

involving an application or notice only

if the comment is in writing and is

received by the System prior to the

expiration of the public comment

period.

A number of commenters argued that

the Board should continue routinely to

consider late comments. Many of these

comments focused on the potential

under the original proposal that the

public comment period could expire

prior to the time that the regulatory

filing was made and that any comment

based on the regulatory filing was,

therefore, likely to be late. Other

commenters contended that public

notice of proposals and of the closing

date of the comment period is not

adequate under the current rule, and,

consequently, that late comments

should be accepted and considered. In

addition, commenters argued that the

approval process is an important

opportunity for the community to

participate in the review of transactions

that will directly affect the community,

and that leeway should be given to the

community to submit late comments. A

number of community groups indicated

that discussions with applicants,

particularly applicants entering a

community for the first time, often

require substantial time and cannot

always be completed during the public

comment period.

The Board believes that the public

often provides the System with

important information in connection

with acquisitions subject to System

review. Consequently, the Board has

determined to provide public notice and

a significant period for public comment

for all bank acquisition proposals

subject to System review under the BHC

Act, including proposals that qualify for

the streamlined procedures.

As noted above, the Board has also

taken a number of significant steps to

improve the effectiveness of the public

notice regarding bank acquisition

proposals, including establishing a

public listing focused on acquisitions

that are subject to public comment and

System review and making this list

available by mail, Internet and fax. In

addition, the Board has amended its

original proposal to assure that the

regulatory filing will be submitted at

least 15 days prior to the expiration of

the public comment period, and has

reiterated its policies regarding

extensions of the public comment

period to accommodate joint

discussions between members of the

public and applicants as well as timely

requests for a regulatory submission that

has been filed after the start of the

public comment period.

Moreover, the Board notes that the

public may at any time submit

comments regarding the effectiveness of

an insured depository institution in

meeting the convenience and needs of

the community for consideration in

connection with the on-site examination

of the CRA performance of the

institution. The CRA examination

process involves a review of the actual

lending performance of an institution

and includes discussions by examiners

with members of the public regarding

the institution’s performance.

Comments submitted for consideration

in the CRA examination process provide

the most effective opportunity for the

public to affect the CRA performance

and CRA rating of any institution and

provide a regularly re-occurring

opportunity for public input.

For these reasons, the Board has

determined to adhere to its established

rules regarding the filing of comments

on proposals subject to System review.

Accordingly, the Board will not

consider comments, including

supplemental comments filed by a

timely commenter, that are submitted

after the close of the public comment

period and the filing of a late comment

will not disqualify a proposal from

review under the streamlined

procedure. The Board continues to

reserve the right to consider late

comments at its discretion, but expects

to exercise that discretion only in

extraordinary circumstances.

3. Information Requirements

For transactions that qualify for the

streamlined procedure, the Board

proposed to reduce substantially the

information required to be filed with the

System. For example, the Board

proposed to eliminate the requirement

that the applicant submit financial

information otherwise available to the

System and the requirement that the

applicant provide competitive data in

cases that meet the Board’s and the

Department of Justice’s policies.

Many commenters applauded the

reduction in information requirements

for proposals that meet the criteria for

streamlined processing. Commenters

noted that the costs of preparing an

application/notice are often substantial

and argued that these costs are

unnecessary in cases that meet objective

criteria and do not raise any regulatory

issue. Commenters believed that the

savings would be substantial from

reducing the paperwork associated with

applications and notices.

A number of other commenters

expressed concern that elimination of

certain information requirements from

the regulatory filing would reduce the
9296 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

2The Board specifically requested comment on

the definition of well-capitalized bank holding

company in connection with enactment of the

Regulatory Relief Act. Because the definition is

contained in Regulation Y, the Board considered

comments regarding that proposed definition in

connection with this overall revision of Regulation

Y.

ability of the System adequately to

review a proposal and of commenters to

assess the consequences of the proposal

for the communities involved. In

particular, a large number of

commenters objected to eliminating the

portion of the current application that

requires an applicant to explain the

effect of a bank acquisition on the

convenience and needs of the affected

communities. Commenters found this

information especially helpful in

understanding the effect of a proposal

by an organization located outside the

community to make its initial entry into

the community.

The original proposal retained the

requirement that applicants briefly

describe the proposed transaction and

the institutions involved, as well as the

type of funding proposed. The final rule

continues to require this information.

As an initial matter, the Board

believes that very little additional

information is needed to evaluate the

financial, managerial and competitive

factors regarding the types of noncomplex proposals that qualify for

streamlined processing. The System

already receives, through reports and

examinations, substantial information

regarding the financial and managerial

resources of bank holding companies

and their subsidiaries. In addition, in

order to qualify for the streamlined

procedure, the proposal must meet

objective competitive criteria designed

to assure that the proposal does not

raise an issue under those factors.

The Board agrees with commenters

that the information regarding the effect

of a proposal on the convenience and

needs of affected communities currently

provided by an acquiring bank holding

company in its regulatory submission is

new information relevant to the

System’s decision on the proposal that

may not otherwise be available. Bank

holding companies currently provide a

brief description of the effects of an

acquisition proposal on the convenience

and needs of affected communities in

the regulatory filing. The Board’s

experience has been that the description

provided in the initial application is

useful and is not burdensome.

Accordingly, the Board has determined

to retain the requirement that, as part of

its initial filing for approval, an

applicant briefly explain the effect of a

proposal on the convenience and needs

of the affected communities. As under

the current application/notice

procedure, this explanation may contain

a discussion of the CRA performance

record of the acquiring organization and

any actions that the organization

proposes to take in order to help address

the credit and other banking needs of

the affected communities.

In addition, the final rule requires the

applicant to outline the steps the

organization is taking to address

weaknesses in the CRA performance of

insured depository institution

subsidiaries of the acquiring holding

company that have received a less than

satisfactory CRA performance rating.

The Board currently requests this

information in the application process

and believes this information is

important for evaluating the ability of an

acquiring organization to meet the

convenience and needs of communities

in which a bank or savings association

acquisition is proposed. A holding

company may satisfy this information

requirement by filing copies of

information prepared for the primary

federal banking supervisor of the

relevant institution, other documents

already prepared by the organization, or

a summary of the steps taken and being

implemented.

The final rule also modifies, in certain

respects, the information related to the

financial, managerial and competitive

factors that must be provided. These

changes require limited information

regarding the funding of an acquisition,

certain pro forma financial information

regarding the acquiring bank holding

company and financial information

regarding any nonbanking company that

is proposed to be acquired. In addition,

limited information regarding proposed

new management is requested in certain

cases. The final rule also clarifies the

information needed for a new principal

shareholder of a bank holding company

to fulfill the notice requirement of the

Change in Bank Control Act in

connection with a transaction that is

reviewed under the streamlined

procedures of section 3 of the BHC Act.

In connection with nonbanking

proposals, the final rule modifies the

requirement that market index

information be submitted in every case

in light of the fact that competition in

many nonbanking activities is broad and

is measured on a national or regional

basis that often makes calculation of

market indexes burdensome and

unnecessary. The rule requires instead a

brief description of the competitive

effects of the proposal in the relevant

market and, in markets that are local in

nature, a list of major competitors. It is

expected that the Board or the

appropriate Reserve Bank would

indicate to an applicant when market

index information is necessary. Finally,

the rule requires a bank holding

company that seeks approval under the

streamlined procedure for a nonbanking

proposal to describe briefly the public

benefits of the proposal.

4. Criteria To Qualify for Streamlined

Procedures

Many commenters lauded the use of

objective criteria for identifying

proposals that would qualify for

streamlined review. These commenters

found reliance on criteria that identify

well-run bank holding companies to be

a constructive method of rewarding

organizations that are well run and

encouraging other organizations to take

steps to meet these criteria. A significant

number of commenters also generally

agreed that the standards proposed by

the Board would establish appropriate

levels for identifying proposals that

clearly meet the statutory factors that

the Board must consider under the BHC

Act.

As discussed below, many other

commenters expressed concern that

establishing a streamlined procedure

based on objective criteria would result

in too little analysis of proposals under

the streamlined procedure. A large

number of commenters also argued that

it is inappropriate to rely on CRA

performance ratings as qualifying

criteria for the convenience and needs

standard.

The Board has adopted several

modifications to the qualifying criteria

to address concerns raised by

commenters.

a. Definition of Well-Capitalized and

Well-Managed Bank Holding Companies

In connection with its interim

implementation of the Regulatory Relief

Act,2 the Board proposed to define a

‘‘well-capitalized bank holding

company’’ for purposes of determining

qualification for the streamlined

procedure as any bank holding company

that:

* Maintains a total risk-based capital

ratio of 10.0 percent or greater and a

Tier 1 risk-based capital ratio of 6.0

percent or greater, on a consolidated

basis both before and immediately

following consummation of the

proposal;

* Maintains either a Tier 1 leverage

ratio of 4.0 percent or greater or, if the

bank holding company has a composite

examination rating of 1 or has

implemented the risk-based capital

measure for market risk, a Tier 1
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9297

leverage ratio of 3.0 percent or greater,

on a consolidated basis both before and

immediately following consummation

of the proposal; and

* Is not subject to any written

agreement, order, capital directive, asset

maintenance requirement, or prompt

corrective action directive to meet or

maintain a higher capital level for any

capital measure.

Commenters generally supported

these levels for defining a wellcapitalized bank holding company.

Commenters noted that the risk-based

levels parallel the level at which an

insured bank is considered to be wellcapitalized for purposes of various

provisions of federal law.

Most commenters that addressed

these requirements agreed that the

leverage ratio can be an inexact measure

of capital adequacy for many bank

holding companies, particularly for

holding companies that engage in

significant nonbanking activities or for

bank holding companies that have

significant trading portfolios and feegenerating off-balance sheet activities.

Accordingly, a number of commenters

requested that the Board eliminate or

further reduce the leverage requirement.

Large domestic banking organizations

contended that the arguments for

adopting a lower leverage ratio for

defining a well-capitalized bank holding

company than is used in defining a

well-capitalized bank—namely that the

leverage ratio is an inexact measure in

certain situations—also militate for

elimination of the leverage ratio.

Foreign banks in particular assert that

adoption of a leverage requirement

would violate the principle of national

treatment and would exclude strong and

well-capitalized foreign banking

organizations from the streamlined

procedure because a leverage ratio is not

required under the Capital Accord

developed by the Basle Committee on

Banking Regulations and Supervisory

Practices (‘‘Basle Capital Accord’’) and,

consequently, is not applicable to banks

in many foreign countries.

Smaller bank holding companies, on

the other hand, argued that the leverage

ratio should be applicable to all

organizations equally. These

organizations argued that eliminating or

adopting a lower leverage standard

would create an advantage for large

organizations in making acquisitions.

The Board believes that, in the limited

context of determining the qualifying

criteria for the streamlined procedure,

reliance on the risk-based capital ratios

is sufficient. As noted above, the riskbased levels adopted are the same levels

required in defining a well-capitalized

bank.

The final rule does not establish a

minimum leverage ratio for a bank

holding company to qualify for the

streamlined procedures because, as

noted above and in the Board’s original

proposal, the leverage ratio is an inexact

measure in certain situations. The Board

has thus determined to apply a

definition that applies equally to all

organizations, regardless of size, origin

or composition of balance sheet. The

Board retains the ability to disqualify

any organization from using the

streamlined procedure if any financial

or other factor, including the

organization’s leverage ratio, indicates

that a closer review of the proposal is

appropriate. The leverage ratio

continues to be a criterion in defining

whether an insured depository

institution subsidiary of the holding

company is well-capitalized.

To qualify for the streamlined

procedure, a bank holding company

must meet the risk-based capital levels

on a consolidated basis. The Board

generally will not apply these

definitions to intermediate-tier bank

holding companies involved in the

transaction. The procedure allows the

Board to notify a bank holding company

that it should follow the normal 30/60-

day procedure if the System has concern

about the financial strength of an

intermediate-tier bank holding company

that, for example, is itself an operating

company or that contains significant

debt.

Several commenters argued that the

Board should adopt a process for

granting exceptions to the capital

requirements where the applicant can

demonstrate that capital ratios do not

adequately indicate the financial

strength of the organization. In light of

the other changes that have been

adopted, the Board does not believe that

a special exceptions process is

necessary or appropriate. The capital

criteria are based on internationally

accepted risk-based standards, and are

for the limited purpose of identifying

companies that qualify for a streamlined

review process. Banking organizations

that do not qualify under these criteria

are still permitted to make acquisitions

and engage in permissible nonbanking

activities by following the normal 30/60

review process. As noted above, the

standard of 10 percent total risk-based

capital and 6 percent Tier 1 risk-based

capital applies to all organizations,

including foreign banking organizations,

seeking to take advantage of the

streamlined procedures. In its request

for comment, the Board specifically

requested comment on ways in which

the qualifying criteria should be defined

for foreign banking organizations in

order to assure national treatment of

foreign banking organizations under the

streamlined procedures. Based on these

comments, the final rule includes a

number of provisions specifically

applicable to foreign banking

organizations.

Several commenters argued that, for

purposes of determining whether a

foreign banking organization meets the

capital levels necessary to qualify for

the streamlined procedure, a foreign

banking organization should be

permitted to use the definition of capital

adopted by the home country of the

foreign banking organization. For

foreign banking organizations from

countries that have adopted capital

standards in all respects consistent with

the Basle Capital Accord, the Board

generally agrees that this permits the

least burdensome approach to applying

equivalent standards. Accordingly, the

final rule provides that, for purposes of

determining whether a foreign banking

organization meets the capital ratios

described above for a well-capitalized

bank holding company, a foreign

banking organization may use the

capital terms and definitions of its home

country provided that those standards

are consistent in all respects with the

Basle Capital Accord. If the home

country has not adopted those

standards, the foreign banking

organization may use the streamlined

procedures if it obtains from the Board

a prior determination that its capital is

equivalent to the capital that would be

required of a U.S. banking organization

for these purposes.

The Regulatory Relief Act provides

that, for purposes of determining

qualification for the streamlined

procedures for nonbanking proposals,

U.S. branches and agencies of foreign

banking organizations are considered

banks and must meet the capital and

managerial standards applicable to U.S.

banks. The Board recognizes that

branches and agencies are a part of the

foreign banking organization and that

capital is not allocated separately to a

branch or agency. Accordingly, for

purposes of determining the

qualification for the streamlined

procedures, the final rule deems the

capital ratios of U.S. branches and

agencies of foreign banking

organizations to be the same as the

capital level of the foreign banking

organization.

For purposes of determining whether

a foreign banking organization meets the

managerial definition for the

streamlined procedures, the final rule

requires that: (1) The largest U.S.

branch, agency or depository institution

controlled by the foreign bank have
9298 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

received at least a ‘‘satisfactory’’

composite examination rating from its

U.S. banking supervisor; (2) U.S.

branches, agencies and depository

institutions representing at least 80

percent of the U.S. risk-weighted assets

controlled by the foreign banking

organization at such offices have

received at least a ‘‘satisfactory’’

composite examination rating from the

U.S. banking supervisors; and (3) the

overall rating of the foreign banking

organization’s combined U.S. operations

is at least ‘‘satisfactory.’’ Further, no

branch, agency or depository institution

may have received one of the two lowest

composite ratings at its most recent

examination. In addition, as with

domestic bank holding companies, no

U.S. branch, agency or insured

depository institution may be subject to

an asset maintenance agreement with its

chartering or licensing authority. Under

the final rule, the System may disqualify

any banking organization, including a

foreign banking organization, from using

the streamlined procedure for any

appropriate reason, including if

information from the primary supervisor

of a domestic bank or home country

supervisor for a foreign bank indicates

that a more in-depth review of proposals

involving that organization is

warranted.

The final rule also retains the

requirement that, in order to qualify for

the streamlined procedure for bank

acquisition proposals, a foreign banking

organization must meet the home

country supervision and information

sufficiency requirements of the BHC

Act.

Several commenters requested

clarification of the types of supervisory

actions that would disqualify a bank

holding company from using the

streamlined procedures. In this regard,

the Regulatory Relief Act provides that,

for purposes of the streamlined

nonbanking procedures contained in

that Act, a bank holding company may

not be subject to certain types of

administrative enforcement

proceedings. The final rule clarifies that

a bank holding company may not use

the streamlined procedures for any

nonbanking proposal or any bank

acquisition proposal if any formal order,

including a cease and desist order,

written agreement, capital directive,

asset maintenance agreement or other

order or directive, is outstanding or any

formal administrative action is pending

against the bank holding company or

any of its insured depository

institutions. The System may, if

appropriate, require a bank holding

company to follow the normal 30/60-

day procedure if an informal action,

such as a memorandum of

understanding or supervisory letter,

pending against the bank holding

company or any affiliate indicates that

a more in-depth review is appropriate.

The Regulatory Relief Act permits

exclusion of recently acquired insured

depository institutions under certain

circumstances in determining whether a

bank holding company is well-managed.

This exclusion has been adopted in the

final rule for purposes of determining a

bank holding company’s qualification

for the streamlined procedures for bank

acquisition proposals as well as for

nonbanking proposals.

The Regulatory Relief Act also

permits the Board to adjust the level of

insured depository institutions that

must meet the well-managed definition

for purposes of the streamlined

nonbanking procedures, so long as the

level adopted by the Board is consistent

with safety and soundness and the

purposes of the BHC Act. For purposes

of the streamlined nonbanking

procedures, the Board had proposed

that the parent bank holding company,

the lead insured depository institution

and insured depository institutions

controlling at least 80 percent of the

insured depository institution assets of

the holding company be well-managed

(rather than 90 percent as in the

Regulatory Relief Act). In addition, no

insured depository institution

controlled by the bank holding company

(other than a recently acquired

institution, subject to the limitations

discussed above) may have received one

of the 2 lowest composite examination

ratings.

As noted above, commenters

addressing this issue were largely in

favor of this definition. The Board

believes that, in the limited context of

determining the availability of the

streamlined procedures, the definition

proposed and adopted in the final rule,

and in particular, the level of insured

depository institutions that must be

well-managed, will adequately identify

organizations that merit a more in-depth

review and is a definition that is

consistent with safety and soundness

and the purposes of the BHC Act. The

Board notes that the Board retains the

authority and discretion to require any

organization to follow the normal

procedures if appropriate.

b. Competitive Criteria

A few commenters suggested that the

Board amend the competitive criteria by

eliminating or raising the qualifying

threshold levels of the HerfindahlHirschman Index (‘‘HHI’’), by increasing

or eliminating the market share test, and

by allowing a bank holding company to

meet the competitive criteria after

making divestitures. The Board has

determined not to change its

formulation of the competitive standard

for the streamlined procedures.

The competitive criteria proposed and

adopted by the Board reflect the HHI

thresholds above which a bank

acquisition proposal comes under close

scrutiny by the Department of Justice

(‘‘DOJ’’) under the DOJ’s Horizontal

Merger Guidelines as applied to bank

acquisitions, and by the Board under its

existing delegation rules. In conducting

a competitive analysis, both the Board

and the courts have found the resulting

market share to be an important

indicator of the competitive effects of a

proposal. Finally, divestitures to

address competitive issues are not a

normal event and typically indicate a

transaction that requires an evaluation

of information and factors beyond what

may be accomplished in a streamlined

procedure.

c. Convenience and Needs

Many commenters objected to the use

of the CRA examination rating as a

measure of whether a proposal would

meet the convenience and needs of the

communities affected by a bank

acquisition proposal. These commenters

argued that CRA performance ratings are

often outdated, are as a rule too high

and, at best, represent an average of an

institution’s overall performance. These

commenters also argued that reliance on

CRA ratings would amount to a safeharbor for virtually all institutions, and

would represent a step that Congress

considered and rejected in adopting the

Regulatory Relief Act. In addition,

commenters objected that use of these

criteria would eliminate an in-depth

review of the convenience and needs

standard in all but protested cases.

Commenters also objected to permitting

an organization with up to 20 percent of

its assets in institutions with

unsatisfactory CRA performance ratings

to take advantage of streamlined

procedures.

Other commenters argued that CRA

ratings provide the most reliable

indicator of an institution’s record of

helping to meet the credit and other

banking needs of the institution’s

existing communities and represent a

strong indicator of the institution’s

willingness and ability to meet the

banking needs of new communities.

Several of these commenters also

contended that reliance on CRA

performance ratings as a criterion for

streamlined processing of acquisition

proposals would encourage

organizations to meet and maintain

satisfactory performance levels.
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9299

After review of the comments, the

Board has determined to amend the

criteria for qualifying for the

streamlined procedure. The criteria

adopted require that the record show

that the proposal is consistent with the

convenience and needs standard under

the BHC Act and that the acquiring

organization have satisfactory or

outstanding performance ratings under

the CRA at its lead insured depository

institution and insured institutions

representing at least 80 percent of the

organization’s banking assets.

As noted above, the Board has

determined to retain the portion of the

current regulatory filing in which the

applicant describes the effect of the

proposal on the convenience and needs

of the affected communities. The

System would evaluate this information

as well as other information available to

the System, including CRA performance

ratings, in determining whether a

proposal meets the convenience and

needs factor in connection with the

System’s review of the proposal. The

Board continues to believe that the CRA

performance rating is a valuable and

important measure of the record and

ability of an applicant to meet the

convenience and needs of a community,

and the Board would, as currently, give

significant weight to that performance

record in the streamlined process.

The Board believes that it may adopt

the streamlined procedures as amended

without any statutory changes to the

BHC Act. The provisions under

consideration by Congress in connection

with the Regulatory Relief Act would

have taken additional steps, including

eliminating any public notice and

opportunity for comment on bank

acquisition proposals and eliminating

consultation with the primary

supervisor for the banks involved in the

transaction.

d. Size

The Board proposed to limit to 35

percent of the acquiring holding

company’s assets the aggregate amount

of bank and nonbanking assets that may

be acquired during a 12-month period

using the streamlined procedures. This

aggregate limit would be calculated by

reference to transactions approved

under the streamlined procedure and

would not include transactions that are

reviewed under the normal 30/60-day

process.

Several commenters argued that the

35 percent asset test would allow very

significant proposals by large bank

holding companies to be considered

under the streamlined procedures,

including mergers among institutions

that rank among the ten largest banking

organizations in the United States.

These commenters contended that

transactions that are large in absolute

terms always require in-depth agency

review.

A few other commenters argued, on

the other hand, that it was important to

assure that the streamlined procedures

are available to acquisition proposals by

large bank holding companies because

acquisitions by these institutions allow

the benefits of reduced regulatory costs

to be shared by a larger number of

consumers. These commenters

suggested that the Board expand the size

criteria in various ways.

Still other commenters argued that the

size restriction would

disproportionately limit transactions by

small bank holding companies. These

commenters contended that a higher

limit should be established for small

organizations because the objective

criteria proposed by the Board are

particularly effective in identifying

transactions that would not raise

statutory issues for small bank holding

companies.

In addition to these comments, the

Board considered that the Regulatory

Relief Act applies a limit on nonbanking

acquisitions of 10 percent of the

acquiring bank holding company’s

assets, unless the Board finds that a

higher limit is consistent with safety

and soundness and the purposes of the

BHC Act. The Regulatory Relief Act also

includes a limit of 15 percent of the

holding company’s consolidated Tier 1

capital on the gross consideration that

may be paid by a bank holding company

in a nonbanking acquisition that is

reviewed under the streamlined

procedures contained in that Act.

In view of these comments and

enactment of the Regulatory Relief Act,

the Board has made two amendments to

the size criterion originally proposed.

First, the Board has adopted an absolute

limit of $7.5 billion to the size of an

individual acquisition that may be

reviewed under the streamlined

procedures. This limit would require an

in-depth review—on the basis of size

alone—of any combination between

organizations within approximately the

one-hundred largest bank holding

companies or involving nonbanking

companies with a significant amount of

assets.

The second change to the size

criterion involves adoption of a limit on

the gross consideration that may be paid

in a nonbanking acquisition by a bank

holding company under the streamlined

process. As noted above, this limit was

included in the Regulatory Relief Act.

The Board believes that, in the context

of a nonbanking acquisition, a measure

based on consideration paid often

represents a better test of the potential

impact of a proposal on the financial

resources of the acquiring organization

than a test based on the amount of assets

acquired because nonbanking

acquisitions often involve the purchase

of expertise and fee-based businesses

that do not involve significant assets.

As noted above, the Regulatory Relief

Act adopted a limit of 10 percent of

assets on the size of any individual

nonbanking acquisition that may occur

under the streamlined procedures. The

Regulatory Relief Act allows the Board,

by regulation, to adopt an asset size

limit that exceeds the 10 percent limit

if the Board determines that a different

percentage is consistent with safety and

soundness and the purposes of the BHC

Act.

The Board has determined to adopt its

proposed 35 percent limit. The size

limit adopted by the Board takes

account of the aggregate size of all

acquisitions—both bank and nonbank

acquisitions—reviewed under the

streamlined procedures over a period of

time that approximates the supervisory

examination schedule for most banking

organizations. This aggregate limit

allows better monitoring of the overall

growth of an organization than does an

individual transaction limit. As noted

above, the Board has also adopted an

absolute limit of $7.5 billion on any

individual acquisition that may be

reviewed under the streamlined

procedure, as well as a limit on the

amount of consideration that may be

paid in a nonbanking acquisition. The

Board has also retained the ability to

require review of any transaction using

the normal 30/60-day process if

warranted for safety and soundness or

other reasons. The Board believes that,

in view of these other limitations, the

aggregate 35 percent size limit is

consistent with safety and soundness

and the purposes of the BHC Act.

The Board has determined not to raise

the size of its proposed exception from

the growth limit for smaller bank

holding companies. The Board proposed

to permit a qualifying bank holding

company to make acquisitions without

regard to the 35 percent of asset

limitation so long as the total assets of

the bank holding company remained

below $300 million on a pro forma

basis. The Board believes that it is

important to monitor rapid growth in

the relative size of an organization and

that an examination rating may not

accurately reflect the financial and

managerial strength of an organization

that has grown significantly since the

last examination was conducted. The

Board also notes that a significant
9300 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

number of acquisitions by smaller bank

holding companies that exceed the

growth limit are likely to continue to

qualify for the normal 30-day delegated

action procedure.

e. Notice to Primary Bank Supervisor

In the case of the acquisition of a

bank, the BHC Act requires that the

primary supervisor for the bank to be

acquired be given 30 calendar days in

which to submit comments on the

transaction. A similar provision was

enacted in the Regulatory Relief Act that

requires 30 days notice to be given to

the Director of the Office of Thrift

Supervision of a proposal by a bank

holding company to acquire a savings

association.

Financial, managerial, legal, safety

and soundness, and other concerns that

are known to the primary bank

supervisor generally are shared with the

System through ongoing arrangements

for sharing supervisory information.

Similarly, the System and the Office of

Thrift Supervision regularly coordinate

efforts and share information.

Consequently, in practice, the primary

supervisor generally allows the notice

period regarding an application to

expire without filing comments.

To implement this statutory

requirement, the final rule requires the

appropriate Reserve Bank to provide

notice of each bank acquisition proposal

to the primary supervisor for the

relevant banks and of each savings

association acquisition to the Director of

OTS. The final rule allows the System

to act on any proposal that qualifies for

the streamlined procedure even though

the period for obtaining comments from

the primary supervisor has not expired.

The final rule provides, however, that

the System’s action is subject to

revocation if the primary supervisor

objects to a transaction within the

relevant notice period. Because bank

acquisition proposals may not be

consummated for at least 15 days after

System action—which is the minimum

post-approval period permitted by

statute to allow DOJ review of a bank

acquisition—it is expected that the

notice period for the primary supervisor

will expire prior to consummation of a

bank acquisition proposal. In the case of

thrift acquisitions, the OTS is working

with the Board to streamline the

comment process.

5. Preacceptance Review Period

The Board proposed to eliminate the

current period prior to acceptance of a

regulatory filing regarding a bank

acquisition proposal during which the

Reserve Bank reviews the informational

sufficiency of the filing. Instead, the

Board proposed to accept immediately

any submission that contains the

information specified in the rule for the

proposed type of transaction. This

change eliminates a pre-acceptance

period that typically averages 25 days.

While commenters were generally in

favor of this change, a number of

commenters objected that elimination of

the pre-acceptance period would reduce

the ability of the System to obtain

information needed to evaluate properly

the merits of a proposal. The Board

disagrees. The elimination of the preacceptance period does not in any way

diminish the ability of the System at any

time to request, or the responsibility of

the applicant/notificant to provide,

additional relevant information needed

to evaluate a proposal. In addition, the

Board has retained the right to return as

incomplete any submission that does

not contain the information specified in

the regulation or appropriate form.

The Board had previously eliminated

a similar pre-acceptance period that

applied to nonbanking acquisitions. The

Board’s experience with elimination of

the pre-acceptance period for

nonbanking acquisitions has indicated

that a similar period is not necessary for

bank acquisition proposals.

6. Hart-Scott-Rodino Act

One commenter expressed concern

whether bank and nonbanking

acquisitions approved under the Board’s

streamlined procedures would be

exempt from the notification

requirements of section 7A of the

Clayton Act. Section 7A of the Clayton

Act, as added by the Hart-Scott-Rodino

Antitrust Improvements Act of 1976 (15

U.S.C. 18A) (‘‘HSR Act’’), requires that

persons contemplating certain mergers

and acquisitions provide notice of the

transaction to the Federal Trade

Commission (‘‘FTC’’) and the DOJ. The

HSR Act, however, specifically provides

an exemption from these filing

requirements for transactions that

require agency approval under section 3

of the BHC Act (i.e., the acquisition of

shares or control of a bank or bank

holding company). In addition, the HSR

Act provides an exemption for

transactions that require agency

approval under section 4 of the BHC Act

(i.e., the acquisition by a bank holding

company of a nonbanking company) if

the acquiring company provides to the

FTC and DOJ copies of all information

filed with the Board.

The Board believes that the

streamlined procedures under

Regulation Y continue to satisfy the

requirement for an exemption from the

HSR Act for both bank and nonbanking

acquisitions. The streamlined

procedures represent a more

streamlined procedure for obtaining

System approval for the acquisition of a

bank or bank holding company under

section 3 or the acquisition of a

nonbanking company under section 4 of

the BHC Act. As provided in the HSR

Act, bank holding companies would

continue to be required to file with the

DOJ and FTC the information submitted

to the Board in connection with a

nonbanking acquisition. The staff of the

DOJ and FTC have informally agreed

with this position.

7. Conditional Approval

The Board has authority to impose

conditions in connection with its action

on any proposal, and has in fact

imposed conditions that address safety

and soundness, CRA, conflicts of

interest, and competitive issues in a

number of prior cases. The final rule

incorporates this policy in order to

make clear that this authority is

available in connection with action on

any case, including a case that qualifies

for the streamlined procedure.

8. Waiver Process

The Board’s current regulation

permits bank holding companies to seek

a waiver of the application filing

requirement under the BHC Act for

transactions that involve the acquisition

of stock of a bank for an instant in time

as part of a bank-to-bank merger

reviewed by another federal banking

agency under the Bank Merger Act. The

Board proposed three changes to this

portion of the regulation. First, the

Board proposed to reduce the period for

its review of waiver requests to 10 days

from 30 days. Second, the Board

proposed to specify in the regulation the

information that must be provided with

a waiver request. Third, the Board

proposed to make the waiver process

available for certain internal corporate

reorganizations.

Commenters discussing this proposal

generally supported these changes.

Several commenters suggested that the

Board make waivers automatic and

eliminate the filing and review

requirement altogether. Another

commenter argued, on the other hand,

that the Board should not allow the

waiver of any application and should

require application filings in every case.

The Board continues to believe that

the waiver process represents a sensible

reduction in duplication of regulatory

review of proposals that are subject to

review under identical standards in two

different federal statutes. Accordingly,

the Board has determined to retain the

waiver process with the changes

proposed. The Board believes that a 10-
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9301

3Under the final rule, the waiver process is not

available for transactions by a holding company

that is organized in mutual form or for transactions

that occur outside the United States. These cases

typically raise a variety of issues that require review

in the application/notice process.

day review process is adequate and

necessary to allow the System to

identify any aspect of the proposal that

may have a material effect on the bank

holding company or otherwise fall

outside the purview of the federal

banking agency that is reviewing the

merits of the underlying transaction.

The Board also believes that, as a

general matter, corporate

reorganizations (such as the formation

of a wholly owned intermediate-tier

holding company, the merger of wholly

owned holding companies, and the

transfer of a bank from one part of an

organization to another part of the same

organization) do not generally require

agency review. In each case, the bank

holding company already has System

approval to control and operate the

banks involved in the transaction. In

these cases, the Board agrees with

commenters that a waiver should be

automatic. The supervisory process

provides the Board with ample

authority and opportunity to address

concerns that may arise from internal

corporate reorganizations. Accordingly,

the Board has adopted its proposal to

extend the waiver process to internal

corporate reorganizations and has made

these waivers available without any

filing requirement.3

9. Small Bank Holding Company Policy

Statement

As published in the proposed revision

to Regulation Y, the Board’s policy

statement on one-bank holding

companies was revised to generalize its

applicability beyond the formation of a

bank holding company to include

acquisitions by qualifying small bank

holding companies, to reduce the

burden in the applications process, to

incorporate previously informal policies

that evolved since the original

publication of the statement, and to

remove obsolete language. Specifically,

the Board proposed to permit small

bank holding companies whose

subsidiary banks are well managed and

well-capitalized and whose proposals

result in parent company debt to equity

of less than 1.0:1, to be eligible for

streamlined processing. These

companies would also be permitted to

pay dividends under certain conditions

that are more clearly defined than in the

existing statement. Proposals involving

higher parent company leverage or a

bank in less-than-satisfactory condition

would be subjected to a focused review

of the parent-level debt servicing ability,

or other issue presented, under the

Board’s normal procedures. These

organizations would also be restricted

from paying dividends until their

leverage was reduced to a 1.0:1 level

and the organization is otherwise in

satisfactory condition.

The final statement incorporates

several changes that further reduce

burden and make the policy statement

more consistent with the general

revisions to Regulation Y. It also

incorporates suggestions from

commenters and further clarifies the

statement.

The major substantive change

eliminates a disparity between larger

and smaller bank holding companies in

qualifying for the Board’s streamlined

procedures. The final statement

incorporates the requirement that, to

qualify for the new streamlined

procedure, banks controlling 80 percent

of the organization must be wellmanaged and well-capitalized, as

opposed to the requirement in the

previous version of the statement that

all banks meet these criteria.

To address concern about the

availability of the streamlined

procedures to small bank holding

companies that have not yet received an

inspection rating, the final rule permits

any unrated bank holding company,

including a small bank holding

company, to be eligible for streamlined

processing as long as its subsidiary

bank(s) are well-capitalized and wellrated and the bank holding company

obtains a determination from the System

that the company qualifies for the

streamlined procedures.

Several commenters urged the Board

to raise the $150 million size limit to

qualify as a small bank holding

company. The Board has determined

not to raise this level at this time. The

Board is concerned that an increase in

the availability of higher levels of debt

without consolidated capital

requirements would raise overall risks

to the banking system, including

increased risk to the Bank Insurance

Fund, without sufficient offsetting

public benefits.

The statement was also reformatted to

make it more understandable and

several technical and conforming

changes have been adopted.

10. One-Bank Holding Company

Formations

The Board proposed a number of

modifications to the streamlined notice

procedure governing proposals by

existing shareholders of a bank to

establish a bank holding company. To

qualify for this procedure under current

rules, the shareholders of the bank must

acquire at least 80 percent of the shares

of the new bank holding company in

substantially the same proportion as the

shareholders’ bank ownership, all

shareholders must certify that the

shareholders are not subject to any

supervisory or administrative action,

and the bank holding company must

identify the shareholders of the new

bank holding company.

The Board proposed to reduce the

percentage of the bank holding company

that must be owned by shareholders of

the bank from 80 to 67 percent and to

require only the principal shareholders

(i.e., shareholders owning in excess of

10 percent of the bank holding

company) to certify that they are not

subject to any supervisory or

administrative action. In addition, the

Board proposed to eliminate the

publication requirement for this

category of bank holding company

formation because no publication is

required for these transactions under the

Riegle Act and because no regulatory

purpose is served by requiring

publication of these transactions, which

represent only a corporate

reorganization.

Only two commenters addressed

these proposed revisions. Both

supported the revisions and stated that

the changes would help reduce

unnecessary burden on individuals

forming small bank holding companies.

Accordingly, the Board has adopted the

proposed changes in the final rule.

B. Explanation of Proposed Changes to

the Nonbanking Provisions

1. General Review and Updating of

Nonbanking Activities

Section 4(c)(8) of the BHC Act

generally provides that a bank holding

company may engage in, or acquire

shares of a company engaged in,

activities that the Board has determined,

after notice and opportunity for

comment, ‘‘to be so closely related to

banking or managing or controlling

banks as to be a proper incident

thereto.’’ The Board may make this

determination by order or by regulation.

The Board has to date determined by

regulation that 24 activities are ‘‘closely

related to banking’’ and has determined

by individual order that a number of

additional activities are also ‘‘closely

related to banking.’’

Once the Board has determined—

either by regulation or by order—that an

activity is ‘‘closely related to banking,’’

the Board need not make that

determination again in subsequent

cases. Review of subsequent cases is

limited to determining whether the
9302 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

conduct of the nonbanking activity by

the applying bank holding company

would result in public benefits that

outweigh the potential adverse effects

(the ‘‘proper incident’’ test).

The list of nonbanking activities

contained in Regulation Y (the ‘‘laundry

list’’) is intended to serve the purpose of

providing a convenient and detailed list

of most of the activities that the Board

has found to be closely related to

banking and therefore permissible for

bank holding companies. The

Regulation Y laundry list also

designates the activities that may be

approved by the Reserve Banks under

delegated authority, although the Board

has delegated authority for Reserve

Banks to act on proposals involving a

number of activities approved by order

during intervals between modifications

of Regulation Y.

The Board has adopted its proposed

reorganization and revision of the list of

permissible nonbanking activities

contained in Regulation Y. Commenters

generally agreed that reorganizing the

list into categories of functionally

related activities would make the list

easier to understand and make it easier

for bank holding companies to obtain

approval to engage in related activities.

The Board intends that this new

organization of the laundry list permit a

bank holding company to obtain

approval at one time to engage in all of

the activities on the laundry list, all

activities listed in a functional category,

or, at the holding company’s choosing,

any specific activity within a category.

As explained above, the Board has

also amended Regulation Y to

incorporate the changes enacted in the

Regulatory Relief Act that eliminate the

prior approval requirement for well-run

bank holding companies that propose to

engage de novo in nonbanking activities

that have been permitted by regulation.

This change will significantly reduce

regulatory burden and improve the

ability of well-run bank holding

companies to respond quickly to

changes in the marketplace by

eliminating the requirement that these

companies obtain System approval prior

to commencing de novo an activity

permitted by regulation. This change

will also permit a well-run bank holding

company, without any prior notice or

Board approval, to commence

immediately any activity that is

currently on the laundry list, any

activity that has been added to the

regulatory list of permissible activities

in this final rule, and any new activity

that is added to the regulatory laundry

list in the future, provided that the bank

holding company meets the qualifying

criteria at the time the nonbanking

activity is commenced. A bank holding

company that does not qualify under the

final rule may file a notice seeking

approval to engage in any or all

activities contained on the laundry list,

as reorganized in this final rule.

The Board has also adopted a

streamlined procedure for well-run bank

holding companies to obtain System

approval to make nonbanking

acquisitions that fall within the size

limits noted above. This streamlined

procedure is also available for proposals

to engage de novo in nonbanking

activities that have been permitted only

by order.

As explained more fully below, the

Board has amended the regulatory list of

permissible activities to include

nonbanking activities that previously

have been determined by order to be

closely related to banking. Among the

activities that have been included are:

(1) Riskless principal transactions; (2)

private placement services; (3) foreign

exchange trading for a bank holding

company’s own account; (4) dealing and

related activities in gold, silver,

platinum and palladium; (5) employee

benefits consulting; (6) career

counseling services; (7) asset

management, servicing and collection

activities; (8) acquiring and resolving

debt-in-default; (9) printing and selling

checks; and (10) providing real-estate

settlement services.

In addition, the Board has broadened

the scope of permissible derivatives and

foreign exchange activities to assure that

bank holding companies may conduct

these activities to the same degree as

banks. As explained below, the final

rule also removes several restrictions on

these activities that apply to bank

holding companies but do not apply to

banks that conduct these activities.

2. Removal of Restrictions Governing

Permissible Activities

The Board has determined to remove

a significant number of restrictions

currently contained in the regulation

that are outmoded, have been

superseded by Board order, or do not

apply to insured depository institutions

that conduct the same activity. The

removal of these restrictions from the

regulation does not affect the Board’s

determination that each activity

contained on the laundry list is so

closely related to banking as to be a

proper incident thereto. A detailed

discussion of the restrictions that have

been removed is contained in

subsections (3), (5) and (6), or the

section below explaining ‘‘Restrictions

Removed from Permissible Nonbanking

Activities.’’.

The Board has determined to grant

relief from these conditions to all bank

holding companies authorized to

conduct each activity, without the need

for a specific filing by any individual

bank holding company. Henceforth, a

bank holding company authorized to

conduct an activity on the revised

laundry list may conduct that activity

subject to the limitations retained in this

final rule and to other applicable laws.

This relief extends only to the

restrictions described as being removed

in subsections (3), (5) or (6), or the

section below explaining ‘‘Restrictions

Removed from Permissible Nonbanking

Activities.’’ In particular, the relief does

not extend to commitments or

conditions that relate to the financial

resources of a particular bank holding

company or its subsidiaries, or to

commitments or conditions that relate

to the risk management polices of the

organization, periods for divestiture of

impermissible assets or shares, or other

commitments or conditions that are not

discussed in subsections (3), (5), or (6)

or the section below explaining

‘‘Restrictions Removed from Permissible

Nonbanking Activities.’’ Bank holding

companies that have committed to

comply with restrictions not described

in those sections as being removed may

in writing request a determination that

the condition or commitment is no

longer appropriate.

In granting this relief, the Board notes

that some of the conditions removed

from activities on the Regulation Y

laundry list involve restrictions

imposed under other laws and

regulations, such as the federal

securities laws or the Commodity

Exchange Act. The Board’s action does

not relieve any bank holding company

of its obligation to conduct each activity

in accordance with relevant state and

federal law governing the activity. Other

restrictions that have been removed

describe good business practice but are

not required to define the lawful scope

of permissible activity. The Board will

continue through the inspection process

to monitor carefully the conduct of

nonbanking activities by individual

bank holding companies and reserves

the right to impose any condition on the

nonbanking activities or operations of

any bank holding company as

appropriate to assure that the activity is

conducted in a safe and sound manner

and within the authority granted by the

Board.

3. Revision of Policy Statement

Governing Investment Advisory

Activities

The Board proposed to remove four

restrictions contained in its 1972
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9303

4Letter of May 13, 1993, [1993 Transfer Binder]

Fed. Sec. L. Rep. (CCH) Paragraph 76,683.

interpretive rule regarding the

investment advisory activities of bank

holding companies with respect to

mutual funds and other investment

companies. These restrictions prohibit a

bank holding company from:

* Owning any shares of a mutual

fund advised by the bank holding

company;

* Lending to a mutual fund advised

by the bank holding company;

* Accepting shares of a mutual fund

that the holding company advises as

collateral for any loan to a customer for

the purpose of purchasing those mutual

fund shares; and

* Serving as an investment adviser to

an investment company or mutual fund

that has a name that is similar to, or a

variation of, the name of the bank

holding company or any of its

subsidiary banks.

These restrictions are intended to

ensure that a bank holding company

does not control a mutual fund in

violation of the Glass-Steagall Act, as

well as to mitigate potential conflicts of

interests and the potential for customer

confusion about the uninsured nature of

investment company shares. The Board

had previously removed a prohibition

on a bank holding company purchasing,

as a fiduciary, shares of a mutual fund

advised by the holding company as well

as restrictions contained in a staff letter

(the ‘‘Sovran letter’’) on the sale of

mutual funds by employees of a holding

company and its affiliates.

As the Board noted in its proposal,

existing statutory provisions appear

adequate to address concerns about the

ownership of shares of a mutual fund by

the bank holding company. In

particular, the investment limitations of

section 4 of the BHC Act appear

adequate to mitigate potential conflicts

of interests that could result from

removal of the investment restriction

and limit the ability of a bank holding

company to acquire more than 5 percent

of the voting shares of or to control a

mutual fund it advises.

Removal of the two lending

restrictions would permit bank holding

companies and their affiliates to make

certain loans to the extent permissible

under applicable federal or state law.

For example, federal law permits

insured banks, within limits, to make

loans to a mutual fund advised by the

bank, and the federal securities laws

govern the extension of credit by any

broker/dealer to a customer to purchase

shares of a mutual fund. The System

expects that extensions of credit by the

holding company to a mutual fund or to

a customer who uses the shares as

collateral for the loan would be done on

a safe and sound basis.

The Board proposed to replace the

fourth restriction with a provision

permitting similar names so long as: (1)

The investment company name is not

identical to that of the holding company

or an affiliated insured depository

institution; (2) the investment company

name does not include the term

‘‘bank,’’; and (3) the holding company or

investment company discloses to

customers in writing the role of the

holding company as an adviser to the

investment company and that shares of

the investment company are not

federally insured and are not obligations

of or guaranteed by any insured

depository institution. The SEC permits

an investment company to have a name

similar to that of an insured depository

institution provided that the investment

company makes a number of disclosures

that advise customers that the

investment company is not federally

insured or guaranteed by the insured

depository institution.4

Many commenters strongly supported

these proposed revisions. Commenters

stated that these changes would remove

restrictions addressed more directly by

other provisions of law and would allow

bank holding companies to compete on

a more equal basis with other

investment advisors. Several

commenters urged the Board to allow an

investment company advised by a bank

holding company to have a name

identical to that of the bank holding

company so long as the name is not

identical to that of any subsidiary bank

of the holding company. These

commenters also contended that the

Board’s disclosure requirements in this

area are duplicative and therefore

should be eliminated. A small number

of other commenters objected that the

Board’s proposal would cause increased

confusion among customers regarding

the nature of uninsured investment

products.

After review of the comments, the

Board believes that the proposed

revisions to the interpretive rule are

appropriate, and has adopted the

revisions as proposed. The revised name

restriction will allow increased

flexibility in the marketing of

investment companies advised by bank

holding companies, and enhance the

ability of bank holding companies to

compete with other bank and nonbankaffiliated investment advisers. At the

same time, the limitation on identical

names and on the use of the word

‘‘bank,’’ when coupled with the

disclosure requirements, should

substantially mitigate the potential for

customer confusion about the uninsured nature of investment company

shares.

The Board believes that the disclosure

requirements also continue to be

appropriate to address the potential for

customer confusion in situations in

which the holding company or its

affiliates advise a mutual fund and the

sale of the mutual fund shares is not

covered by the disclosure provisions of

the Interagency Statement on Retail

Sales of Nondeposit Investment

Products. The disclosure requirements

are increasingly proving to be an

effective method for addressing

potential customer confusion and do not

appear to be onerous.

4. Procedures for Determining the

Permissibility of Nonbanking Activities

The Board has adopted two

provisions to Regulation Y to ease the

burden associated with determining the

authorization and scope of permissible

nonbanking activities. First, the

regulation specifically reflects the fact

that the Board may, on its own

initiative, begin a proceeding to find

that an activity is permissible for bank

holding companies, as the Board did in

the case of many of the earlier

nonbanking activities. As required by

the BHC Act, the Board would provide

public notice that it is considering the

permissibility of a given activity and

would provide an opportunity for

public comment.

The Board expects to consider

amending the laundry list, for example,

as new activities are authorized for

banks, as experience with a narrowly

defined activity indicates that the

activity should be more broadly defined,

or as developments occur in technology

or the marketplace for financial

products and services. The System will

actively track market developments as

well as decisions that authorize banks to

conduct new activities and evaluate

adding these activities to the laundry

list even if an individual request has not

yet been made to engage in these

activities.

Several commenters urged the Board

to add a provision limiting the

processing period for evaluating

proposals regarding the permissibility of

a particular new activity, much as the

Board has proposed for determining the

scope of a currently permissible activity.

On the other hand, other commenters

argued that the Board should seek

public comment on all proposals

involving the permissibility of new

activities or the scope of currently

permissible nonbanking activities.

The BHC Act, as amended by the

Regulatory Relief Act, requires that the
9304 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

5 In the data processing area, this 30 percent

basket would not include revenue derived from the

use of excess capacity or the sale of general purpose

hardware that is currently permitted in accordance

with the Board’s regulation and policies governing

those activities.

Board provide notice and opportunity

for public comment prior to determining

that an activity is closely related to

banking. The Regulatory Relief Act

eliminated the requirement that the

Board provide an opportunity for a

formal hearing regarding the

permissibility of an activity. The final

rule reflects both of these statutory

actions. In particular, the final rule

retains the provision currently in

Regulation Y for public notice and

opportunity for comment in connection

with consideration of the permissibility

of a new activity, and eliminates the

requirement for a hearing. The Board

retains discretion to order a formal or

informal hearing regarding the

permissibility of an activity where a

hearing may be useful in resolving

disputes of fact regarding an activity.

Because of the complexity of many of

the issues raised in determining the

permissibility of a new activity, the

Board has determined not to establish a

specific limit on the time for evaluating

these proposals.

The Board has amended the

regulation to establish a streamlined

procedure outside the application

process through which any bank

holding company or other interested

person may request an advisory opinion

from the Board that a particular

variation on an activity is permissible

under an existing authorization and is

not deemed to be a new activity. The

Board would issue an advisory opinion

within 45 days, and make this opinion

available and applicable to all similarly

situated bank holding companies. At the

time the Board reviews an activity, the

Board would determine whether it is

appropriate to permit bank holding

companies to engage in this activity

without additional approval (as, for

example, a variation of one or more

previously authorized activities) or to

require bank holding companies to

obtain approval prior to conducting the

activity (because, for example, the

activity does not fall within a previously

approved activity or category or

involves special risks or concerns). As

noted above, well-run bank holding

companies may, without prior Board

approval, engage de novo in any activity

added to the regulatory laundry list.

Commenters agreed that these two

procedures should make it easier for

bank holding companies to participate

in marketplace developments in

permissible nonbanking activities. In

addition, these procedures will

eliminate a number of applications that

are currently filed by bank holding

companies that are uncertain about the

scope of permissible activities.

5. Nonbanking Activities That Are

Incidental to a Permissible Activity

The Board has adopted its proposal to

permit a subsidiary of a bank holding

company engaged in financial data

processing or management consulting

activities, as an incidental activity, to

derive up to 30 percent of its annual

revenue from nonfinancial data

processing or management consulting

services, respectively. Commenters

discussing this aspect of the proposal

strongly supported this proposal and

contended that bank holding companies

engaged in data processing and

management consulting activities have

substantial expertise in these areas that

allow them safely and soundly to

provide these services involving

nonfinancial data or nonfinancial

customers. In addition, several

commenters argued that bank holding

companies currently are at a

competitive disadvantage in providing

data processing and management

consulting services and in hiring

employees because of the strict

limitations tying these services to

financial data and financial consulting.

A number of commenters argued that

the Board should permit a greater

amount of incidental activity, some

arguing for no limit. Two commenters

argued, on the other hand, that bank

holding companies should not be

permitted to engage in any nonfinancial

data processing because the commenters

believed that the benefits of access to

the Federal discount window and the

payments system and the unique

products that banks can provide

combine to give bank holding

companies and banks an unfair

advantage in competing with

nonfinancial firms to provide

nonfinancial products and services,

including firms owned by women and

minorities.

After considering the comments, the

Board has adopted the revisions to the

data processing and management

consulting provisions as proposed. The

Board believes that these revisions are

necessary to allow bank holding

companies to compete effectively in

providing financial data processing and

management consulting services.

The strict limitations on providing

non-financial data processing and

management consulting activities that

were previously applied to bank holding

companies inhibit the ability of bank

holding companies effectively to

compete with other providers who often

combine financial and nonfinancial

products. In a number of recent cases

reviewed by the Board, for example, the

record has indicated that it is common

practice for a software provider to

integrate financial data processing

software and nonfinancial data

processing software in the same

package. Similarly, commenters

indicated that it is common for

management consultants to provide

advice on general matters in connection

with providing advice on financial,

accounting and similar matters. The

strict limitations have also reduced the

ability of bank holding companies to

attract the most qualified employees—

who often have expertise, clients,

proprietary rights, and interests—that

span financial and nonfinancial matters.

The Board believes that its proposed

limit—30 percent of the revenue derived

from permissible financial data

processing activities, and 30 percent of

the revenue derived from permissible

financial management consulting

services, respectively—represents a

reasonable level of incidental activity

that assures that the bank holding

company is significantly involved in

financial data processing or

management consulting.5 The Board

does not believe that this limited

participation will permit bank holding

companies an unfair competitive

advantage over other providers of data

processing or management consulting

services. As the Board and the industry

gain experience in data processing and

management consulting activities, the

Board will review and adjust the level

of incidental activities as appropriate.

6. Expanded Exception for Acquisitions

of Lending Assets in the Ordinary

Course of Business

The Board proposed to revise the

regulatory language permitting a bank

holding company, without additional

approval, to acquire lending assets from

a third party in the ordinary course of

business. The Board currently permits a

bank holding company, without

additional approval, to acquire assets of

an office of another company related to

making, acquiring or servicing loans so

long as the bank holding company and

the transaction meet certain

qualifications. Among the qualifications

are that the assets relate to consumer or

mortgage lending, and that the acquired

assets represent the lesser of $25 million

or 25 percent of the consumer lending,

mortgage banking or industrial banking

assets of the acquiring bank holding

company. The office must also be
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9305

6A full-payout lease is the functional equivalent

of an extension of credit and relies primarily on

rental payments and tax benefits to recover the cost

of the leased property and related financing costs.

High residual value leasing may involve significant

reliance on the expected residual value of the

leased property—on average, under 50 percent, but

in some cases, up to the full original cost of leased

property—to recoup the cost of the leased property

and related financing costs. Under the current

regulation, bank holding companies may provide

full-payout leases for any type of personal property

or real property, and may make high residual value

leases only for personal property.

located in the geographic area served by

the bank holding company.

The Board has revised this provision

in three ways. First, since the Board no

longer limits the geographic scope of its

approval to engage in nonbanking

activities, this restriction has been

removed. Second, the scope of the

exception has been broadened to permit

the acquisition of assets related to any

lending activity. Third, the threshold

limits have been raised to permit the

acquisition of assets representing up to

the lesser of $100 million or 50 percent

of the lending assets of the bank holding

company.

Commenters generally favored the

modifications proposed by the Board for

expanding the scope and size of

transactions that could be conducted in

the ordinary course of business under

this exception. The proposed

broadening of the exception would

eliminate an unnecessary approval

requirement and paperwork for

transactions that are relatively small and

represent the ordinary course of

business.

7. Consummation Period for Certain

Proposals

The Board had originally proposed to

eliminate the requirement that a bank

holding company exercise its authority

to engage de novo in a nonbanking

activity within one year of receiving

System approval. While several

commenters expressed support for this

approach, the final rule does not

include a specific provision adopting

this change for two reasons. First, since

the date of the original proposal, the

Regulatory Relief Act eliminated

altogether the prior approval

requirement for well-run bank holding

companies that choose to engage de

novo in nonbanking activities

permissible by regulation. This statutory

change eliminates a substantial portion

of the cases that would have benefitted

by the proposal to eliminate the

consummation period. Second, the

Board may, without any regulatory

change, adjust the consummation period

on a case-by-case basis. The Board

believes this is a more appropriate

approach in cases that do not qualify for

the statutory exception in the

Regulatory Relief Act.

C. Explanation of the Restrictions

Removed From Permissible Nonbanking

Activities

As noted above, the Board has

removed restrictions contained in the

current regulation that are outmoded,

have been superseded by Board order or

would not apply to an insured

depository institution conducting the

same activity. The limitations that

remain are necessary to establish a

definition of the permitted activity or to

prevent circumvention of another

statute, such as the Glass-Steagall Act.

The following discussion explains, by

functional group of activities, the

restrictions that the Board has

eliminated as well as certain limitations

that the Board has retained. In several

areas, the Board expects to develop

supervisory policy statements to address

potential adverse effects that may be

associated with certain activities. The

Board may seek comment on those

supervisory policy statements as

appropriate.

1. Extending Credit and Servicing Loans

Lending activities are already broadly

defined and contain no restrictions.

Permissible lending activities include

the types of lending activities that were

previously listed by way of example in

Regulation Y, such as lending activities

conducted by consumer, mortgage,

commercial, factoring, and credit card

companies. Removal of those specific

examples from the proposed rule was

intended to make clear that making,

acquiring, brokering and servicing all

types of loans or extensions of credit are

considered permissible lending

activities, and elimination of these

examples from the final rule does not

diminish the scope of the activity or the

permissibility of those examples of

lending activities. Nevertheless, at the

request of a number of commenters,

factoring has been re-included as an

example of a permissible lending

activity.

2. Activities Related to Extending Credit

A new category has been added

authorizing activities that the Board

determines to be usual in connection

with making, acquiring, brokering or

servicing loans or other extensions of

credit. Without limiting the scope of

this activity, the category lists a number

of activities that the Board has

previously determined are related to

credit extending activities, including, by

way of example, credit bureau,

collection agency, appraisal, asset

management, check guarantee, and realestate settlement activities.

Restrictions governing disclosures to

customers, tying, preferential treatment

of customers of affiliates, disclosure of

confidential customer information

without customer consent and similar

restrictions previously contained in

Regulation Y have been removed from

these activities. These restrictions do

not apply to banks that conduct these

activities and, to the extent these

restrictions are appropriate, supervisory

guidance on the conduct of the activity

will be developed.

Several commenters requested that

the Board eliminate all restrictions

governing the acquisition of debt in

default, in particular, the requirement

that the period for disposing of shares

or assets securing debt in default be

calculated as of the date the defaulted

debt is acquired. The Board believes the

three restrictions adopted in the

regulation are necessary to define the

scope of the activity and to assure that

the activity remains the acquisition of

debt rather than an impermissible

acquisition of securities or other assets.

The requirement regarding the

calculation of the period for disposing

of the underlying shares or assets

subjects the activity to the same

limitations that apply under the terms of

the BHC Act to the acquisition of shares

or assets in satisfaction of a debtpreviously-contracted. During this

period, the holding company may divest

the property or, as in the case of any

debt that has been previously

contracted, restructure the debt.

3. Leasing Personal or Real Property

The changes to the leasing provision

have been adopted as proposed.

Specifically, the regulation removes a

number of restrictions from the two

types of leasing activities permissible

for bank holding companies, full-payout

leasing and high residual value leasing,6

including the following restrictions:

* The lease must serve as the

functional equivalent of an extension of

credit (permissible high residual value

leasing may not be the functional

equivalent of an extension of credit);

* The property must be acquired only

for a specific leasing transaction;

* Leased property must be re-leased

or sold within 2 years of the end of each

lease;

* The maximum lease term may not

exceed 40 years; and

* No leased property may be held for

more than 50 years.

Commenters favored removal of these

restrictions and noted that removal of

these restrictions from the regulation

would permit bank holding companies
9306 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

7The BHC Act contains an exception from the

definition of ‘‘bank’’ for industrial loan companies

and savings associations that meet requirements

listed in the BHC Act.

greater flexibility to acquire property in

quantity in the expectation of leasing

activities and would allow more

flexibility in selling or re-leasing

property at the expiration of a lease. It

is expected that supervisory guidance

would be developed to address potential

issues arising from removal of the

restrictions.

The provision limiting to 100 percent

of the initial acquisition cost the amount

of reliance that may be placed on the

residual value of leased personal

property has also been removed. This

limit does not apply to national bank

leasing activities. While commenters

favored removal of the requirement that

the estimated residual value of real

property be limited to 25 percent of the

value of the property at the time of the

initial lease, this restriction was

retained in order to distinguish real

property leasing from real estate

development and investment activities.

Two other requirements were

retained: (1) That the lease be nonoperating, and (2) that the initial lease

term be at least 90 days. These

requirements were developed in the

course of litigation regarding the leasing

activities of national banks, and were

relied on by the courts in distinguishing

bank leasing activities from general

property rental and real estate

development businesses. The

requirement that a lease be nonoperating is also a statutory requirement

limiting the high residual value leasing

activities of national banks.

The regulation has been modified at

the request of commenters to clarify

that, as a general matter, the

requirement that a lease be nonoperating means that the bank holding

company may not itself (or through a

subsidiary) repair, operate, maintain or

service the equipment or property being

leased during the lease term. The Board

has applied this interpretation since

1974 in order to help distinguish bank

holding company leasing activities from

general commercial activities. A more

detailed definition of a nonoperating

lease in the automobile rental context,

which was developed in litigation and

adopted by the courts, has also been

retained. The regulation provides that,

in either case, a bank holding company

is permitted to arrange for a third party

to provide these repair and other

services in connection with a lease.

4. Operating Nonbank Depository

Institutions

This category permits ownership of a

savings association and an industrial

loan company. The proposed regulation

retains the restrictions in the BHC Act

that the institution not be operated as a

‘‘bank’’ for purposes of the BHC Act 7

and that the activities of the institution

conform to the relevant statutory

provisions of the BHC Act. As noted

above, by the terms of the Regulatory

Relief Act, the operation of a savings

association requires prior System

approval.

5. Trust Company Functions

The current regulation limits the

deposit-taking and lending activities of

trust companies. These limitations are

already encompassed in the requirement

in the BHC Act that the trust company

not be a ‘‘bank’’ for purposes of the BHC

Act and have, therefore, been deleted

from the regulation.

6. Financial and Investment Advisory

Activities

Like the initial proposal, the final rule

groups together all investment and

financial advisory activities and broadly

permits acting as investment or

financial adviser to any person, without

restriction. Without limiting the breadth

of the advisory authority, the rule also

lists specific examples of certain types

of investment or financial advice,

counseling and related services that

previously had been separately

authorized. These examples are:

* Advising an investment company

and sponsoring, organizing and

managing a closed-end investment

company;

* Furnishing general economic

information and forecasts;

* Providing financial advice

regarding mergers and similar corporate

transactions;

* Providing advice regarding

commodities and derivatives

transactions; and

* Providing consumer educational

courses and providing tax-planning and

tax-preparation.

The final rule removes the few

restrictions that have in the past been

imposed by the Board on financial and

investment advisory activities. These

restrictions do not apply to banks that

provide investment advisory services.

Specifically, the final rule removes

the restriction that discretionary

investment advice be provided only to

institutional customers, thereby

allowing bank holding companies to

manage retail customer accounts outside

of the trust department of an affiliated

bank (to the extent otherwise permitted

by law). This activity would continue to

be governed by the fiduciary principles

in relevant state law. Moreover, the final

rule permits bank holding companies to

provide retail customers with

investment advice concerning

derivatives transactions and to provide

discretionary investment advice

regarding derivatives transactions to

institutional or retail customers as an

investment adviser, commodity trading

advisor, or otherwise. This includes

providing discretionary investment

advice to any person regarding contracts

relating to financial or nonfinancial

assets. The conduct of these activities

would, of course, be subject to the

requirements of applicable law,

including applicable state and federal

laws governing fiduciary activities or

advisory activities.

The final rule permits bank holding

companies to engage in any

combination of permissible nonbanking

activities listed in Regulation Y.

Accordingly, bank holding companies

may provide financial and investment

advice (including discretionary

investment advice) together with

permissible agency transactional

services, investment or trading

transactions as principal, or any other

listed activities. Supervisory guidance

may be developed, as needed, to address

conflicts of interest that may arise from

providing certain services in

combination.

The final rule also deletes restrictions

in the areas of tax-planning, taxpreparation and consumer counseling

services that prohibited bank holding

companies from promoting specific

products and services and from

obtaining or disclosing confidential

customer information without the

customer’s consent. These restrictions

do not apply to banks that engage in

these activities.

The commenters addressing this

activity strongly supported the

consolidation of the various advisory

activities, the expansion of permissible

advisory activities, and the removal of

existing restrictions imposed by the

Board on these activities. These

commenters argued that the provision of

all types of financial and investment

advice is within the expertise of banking

organizations and, therefore, closely

related to banking.

Several commenters requested further

guidance on the scope of permissible

advisory activities and urged the

inclusion of examples of additional

specific types of advisory activities,

such as advisory activities related to real

estate, in order to clarify the

permissibility of these activities. Other

commenters requested clarification that

the use of examples did not imply that

advisory activities that are omitted from

the list of examples are not permissible.
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9307

8The Bank of New York Company, Inc., 82

Federal Reserve Bulletin 748 (1996).

As noted above and in the original

proposal, the final rule includes any

investment or financial advisory activity

without restriction. The examples

included in the final rule are not

intended in any way to limit the scope

of the financial and investment advisory

activity. The examples are illustrative

rather than exclusive examples of

permissible advisory activities, and

have been retained to recognize that

certain advisory activities have been

specifically approved under other

provisions of Regulation Y and continue

to be permissible.

Some commenters suggested revisions

to the proposal’s description of certain

examples. In response to these

comments, the final rule clarifies that

the provision regarding advice on

mergers, acquisitions and other

transactions includes ‘‘other similar

transactions.’’ At the suggestion of

several commenters, the final rule has

been revised to clarify the permissibility

of providing investment advice

regarding transactions with respect to

any transactions in foreign exchange,

swaps and similar transactions,

commodities, and forwards contracts,

futures, options, options on futures, and

similar instruments.

Several commenters noted that there

currently is uncertainty regarding the

jurisdiction of the CFTC over some

transactions involving foreign exchange.

The final rule is not affected by the

scope of CFTC jurisdiction. The Board

intends that references to transactions

‘‘in foreign exchange’’ throughout the

regulation include transactions in

foreign exchange, options on foreign

exchange, futures on foreign exchange,

options on futures on foreign exchange,

swaps in foreign exchange, and similar

foreign exchange-related instruments. A

bank holding company must, of course,

comply with the rules of any other

federal or state agency to the extent that

the bank holding company conducts an

activity subject to that agency’s

jurisdiction, as determined by the

relevant statute, agency rule or court

decision.

7. Agency Transactional Services for

Customer Investments

The final rule reorganizes into a single

functional category the various

transactional services that a bank

holding company may provide as agent.

This category includes securities

brokerage activities, private placement

activities, riskless principal activities,

execution and clearance of derivatives

contracts, foreign exchange execution

services, and other transactional

services.

a. Securities Brokerage Activities

The current regulation differentiates

between securities brokerage services

provided alone (i.e., discount brokerage

services) and securities brokerage

services provided in combination with

investment advisory services (i.e., fullservice brokerage activities). The final

rule permits securities brokerage

without distinguishing between

discount and full-service brokerage

activities.

Under the current regulation, bank

holding companies providing fullservice brokerage services must make

certain disclosures to customers

regarding the uninsured nature of

securities and may not disclose

confidential customer information

without the customer’s consent. These

requirements were deleted in the

proposal.

The Board sought comment on

whether elimination of these restrictions

from the regulation would lead to

adverse effects, including customer

confusion about the uninsured nature of

non-deposit investment products sold

through bank holding companies.

Several commenters opposed the

elimination of the disclosure

requirements in the regulation,

contending that the interagency policy

statement and SEC regulations are not

providing adequate consumer

protection. A number of commenters,

however, supported the elimination of

the disclosure requirements in the

regulation on the basis that these

requirements were duplicative of

requirements contained in the

interagency policy statement and SEC

regulations.

The final rule deletes the disclosure

requirements. The disclosure

requirements—along with a number of

other requirements that specifically

address the potential for customer

confusion, training requirements,

suitability requirements and other

matters—are already contained in an

interagency policy statement that

governs the sale of securities and other

non-deposit investment products on

bank premises as well as in rules

adopted by the SEC. In addition, similar

disclosure requirements are required by

the Board’s policy statement governing

the sale by bank holding companies of

shares of mutual funds and other

investment companies that the bank

holding company advises.

Recent supervisory experience

indicates that banking organizations and

their affiliates, in general, are becoming

more effective in implementing the

regulatory disclosure requirements and

that customers are becoming

increasingly aware that investment

products purchased at banking

organizations and their affiliates are not

federally insured. Moreover, the Board

and the SEC have adequate supervisory

authority to ensure that bank holding

companies comply with the regulatory

disclosure requirements. To the extent

that disclosures to customers are

appropriate in areas not covered by the

regulatory policy statements or SEC

regulations, the Board will consider

whether to develop supervisory

guidance, on an interagency basis where

appropriate.

b. Riskless Principal Activities

The Board recently reduced the

restrictions that govern riskless

principal activities.8 The restrictions

that were retained were designed to

ensure that bank holding companies do

not avoid the Glass-Steagall Act

provisions by classifying underwriting

and dealing activities as riskless

principal activities. The restrictions that

the proposal retained prohibit:

* Selling bank-ineligible securities at

the order of a customer who is the issuer

or in a transaction in which the bank

holding company has an agreement to

place the securities of the issuer;

* Acting as riskless principal in any

transaction involving a bank-ineligible

security for which the bank holding

company or an affiliate makes a market;

* Acting as riskless principal for any

bank-ineligible security carried in the

inventory of the bank holding company

or any affiliate; and

* Acting as riskless principal on

behalf of any U.S. affiliate that engages

in bank-ineligible securities

underwriting or dealing activities or any

foreign affiliate that engages in

securities underwriting or dealing

activities outside the U.S.

The Board requested comment on

whether these restrictions, and in

particular the second and third

restrictions, are necessary to assure

compliance with the Glass-Steagall Act.

The majority of commenters discussing

the riskless principal activity argued for

the deletion of all four restrictions,

contending that none of the restrictions

are necessary to ensure that a

nonbanking subsidiary does not engage

in underwriting or dealing through its

riskless principal transactions and that

any concern in this regard would be

addressed by a requirement that the

subsidiary not hold itself out as a dealer

with respect to any security. Several

commenters noted that the restrictions

would prohibit riskless principal
9308 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

transactions on behalf of a section 20

affiliate even if this affiliate was not the

underwriter or dealer for the security in

question. These commenters maintained

that this would put bank holding

companies with section 20 affiliates at

a competitive disadvantage.

Several commenters also suggested

that the Board permit riskless principal

transactions in the primary market

generally. Some of these commenters

specifically urged the Board to allow

bank holding companies to act as

riskless principal for the sale of

commercial paper in the primary market

because commercial paper tends to have

short maturities.

The final rule retains the requirement

that riskless principal transactions be

conducted in the secondary market. The

Board has determined, however, to

eliminate all but two restrictions in the

final rule. The final rule retains the first

proposed restriction, which prohibits a

bank holding company from using its

riskless principal authority to sell bankineligible securities at the order of a

customer who is the issuer or in a

transaction in which the bank holding

company has an agreement to place the

securities of the issuer. This restriction,

as well as the requirement that the

transactions be conducted in the

secondary market, is designed to

distinguish riskless principal activities

from private placement and

underwriting or dealing activities. This

classification of riskless principal

transactions does not prevent bank

holding companies from engaging

pursuant to other authority in

permissible private placement activities

or in underwriting and dealing

activities, both of which permit

transactions in the primary market and

with an issuer.

The Board has also determined to

revise the second restriction to focus on

transactions involving a bank-ineligible

security for which the bank holding

company or any affiliate acts as

underwriter (during the underwriting

period and for 30 days thereafter) or

dealer. This revision narrows the scope

of the restriction while addressing the

Board’s concern that a nonbanking

subsidiary not use its riskless principal

authority to engage in underwriting or

dealing activities. As modified, this

provision also addresses the concerns

covered by the third and fourth

restrictions. Consequently, the final rule

deletes the last two restrictions in the

proposal.

c. Private Placement Activities

The Board proposed to add private

placement activities to the laundry list,

using the definition of private

placement activities adopted by the SEC

and the federal securities laws. The

proposal removed all but one restriction

that had been imposed by Board order

on the conduct of this activity. That

restriction prohibits a bank holding

company from purchasing for its own

account securities that it is placing and

from holding in inventory unsold

portions of securities it is attempting to

place.

Among the restrictions that the

proposal removes from the conduct of

private placement activities are

prohibitions on:

* Extending credit that enhances the

marketability of a security being placed;

* Lending to an issuer for the

purposes of covering the funding lost

through the unsold portion of securities

being placed;

* Lending to the issuer for the

purpose of repurchasing securities being

placed;

* Acquiring securities through an

account for which the bank holding

company has fiduciary authority;

* Providing advice to any purchaser

regarding a security the bank holding

company is placing; and

* Placing securities with any noninstitutional investors (the SEC rules

allow sales to institutional investors and

up to 35 non-institutional investors).

None of these restrictions have been

applied to national banks that conduct

private placement activities.

The Board sought comment on

whether any of these restrictions must

be retained to address potential adverse

effects, including potential conflicts of

interest or customer confusion, or to

assure fulfillment of fiduciary duties.

The commenters discussing private

placement activities strongly supported

the removal of these restrictions from

private placement activities.

Several comments urged the Board,

however, not to adopt the definition of

private placement in the federal

securities statutes, contending that such

definition is too restrictive. The final

rule, as the proposal, defines private

placement in accordance with the

Securities Act of 1933 (1933 Act) and

the rules of the SEC. For purposes of

including private placement activities

on the laundry list, the Board believes

it is reasonable to look to the definition

of private placement adopted by the

SEC, the primary federal regulator of

securities activities, and the distinctions

the SEC has drawn between private

placement and underwriting or dealing

activities. This definition does not limit

bank holding companies from seeking to

engage in other securities activities

pursuant to Board order.

One commenter also requested that

the definition of private placement be

broadened to include private resales of

securities to institutional buyers and

private placements of securities of

registered investment companies. The

final rule would permit private resales

of privately placed securities if the

transaction is conducted in accordance

with the requirements of the 1933 Act

and the rules of the SEC, the bank

holding company acts only as agent for

such private resales by third parties, and

the bank holding company neither

purchases for its own account securities

that it is placing nor holds in inventory

unsold portions of securities it is

attempting to place. This would not

include acting as a dealer with respect

to resales of privately placed securities,

an activity that bank holding companies

may seek to engage in pursuant to Board

order. Similarly, the final rule would

permit bank holding companies to act as

agent for the private placement of

securities issued by any company,

including an investment company, to

the extent that these private placements

are conducted in accordance with the

requirements of the 1933 Act and the

SEC rules and the Board’s restrictions

on purchasing or inventorying such

securities.

Some commenters also recommended

that the Board remove the prohibition

on a bank holding company purchasing

or repurchasing the securities it places.

Several of these commenters contended

that such purchases should be

permissible if the company made the

decision to purchase the securities for

its own account simultaneously with or

after, and separate from, the decision to

engage in the private placement. One

commenter maintained that a company

engaged in private placement activities

should be permitted to invest in the

securities being placed so long as it had

a bona fide expectation of and made a

bona fide effort in placing the securities.

The final rule retains the proposal’s

restriction on purchasing or

repurchasing the securities that are

privately placed. The Board believes

this restriction is appropriate to prevent

a bank holding company from

classifying as private placement

activities its securities underwriting

activities, which are governed by the

Glass-Steagall Act and the Board’s

section 20 decisions.

The final rule does not contain a

limitation on the amount of a particular

issue of securities that a company may

place with an affiliate. As the Board

noted when it first authorized a bank

holding company to place securities

with an affiliate, banks privately place

securities with affiliates and no
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9309

9 J.P. Morgan & Company Inc., 76 Federal Reserve

Bulletin 26, 28 (1990)

particular supervisory problem appears

to have arisen from these investments.9

The Board continues to recognize the

increased potential for certain conflicts

of interests if affiliates purchase a

substantial portion of an issue of

securities placed by an affiliate. In this

regard, insured depository institutions

that purchase securities privately placed

by an affiliate must comply with section

23B of the Federal Reserve Act as well

as the limitations in the Glass SteagallAct relating to the purchase of

investment securities. The Board

expects that nonbank affiliates that

purchase these securities will do so in

accordance with appropriate internal

policies and procedures.

d. Futures Commission Merchant

Activities

i. In General

The current regulation authorizes

bank holding companies to execute and

clear derivatives on certain financial

instruments on major exchanges, subject

to a number of restrictions. The Board

has, by order, broadened this authority

in two key respects. First, the Board has

by order permitted bank holding

companies to execute and clear

derivative contracts on a broad range of

nonfinancial commodities. Second, the

Board has permitted bank holding

companies to clear derivative contracts

without simultaneously providing

execution services, and to provide

execution services without also

providing clearing services.

Commenters strongly favored

modification of the current regulation to

reflect these Board orders.

As noted above, the final rule removes

the restriction in the current regulation

prohibiting a bank holding company

from providing foreign exchange

transactional services in the same

subsidiary that provides advice

regarding foreign exchange. Banks are

not subject to this restriction. The final

rule also would permit a bank holding

company to perform permissible futures

commission merchant (‘‘FCM’’)

activities through a section 20

subsidiary.

The final rule permits a nonbanking

subsidiary to act as an FCM regarding

any exchange-traded futures contract

and options on a futures contract based

on a financial or nonfinancial

commodity. The final rule also deletes

the restriction that a bank holding

company not act as an FCM on any

exchange unless the rules of the

exchange have been reviewed by the

Board. All U.S. commodities exchanges

are supervised by the CFTC and a

review by the Federal Reserve System of

the rules of an exchange, whether

domestic or foreign, would not be the

most effective method for addressing the

safety of conducting FCM activities on

the exchange. A more effective method

for addressing the risks of FCM

activities—whether on domestic or

foreign exchanges—is through the onsite inspection and supervision of the

risk management systems of the bank

holding company. Accordingly, the

Board would use the supervisory

process, which includes regular

inspections of the holding company and

its affiliates, to address concerns about

the effectiveness of the holding

company’s risk management systems.

The final rule removes several other

requirements, including that the FCM

subsidiary:

* Time stamp all orders and execute

them in chronological order;

* Not trade for its own account;

* Not extend margin credit to

customers; and

* Maintain adequate capital.

The CFTC has not found it necessary

to prohibit FCMs from trading for their

own account, and removal of that

restriction from the Board’s regulation

allows an FCM affiliated with a bank

holding company to compete on the

same basis as an FCM not affiliated with

a holding company. Experience has not

indicated that the affiliation of an FCM

with a bank holding company itself

increases the risks or conflicts that

could arise from the combination of

FCM and proprietary trading activities.

Conduct in the other areas listed above

is addressed in rules of the CFTC or the

relevant self-regulatory organizations,

which are applicable to any FCM.

Like the initial proposal, the final rule

retains the requirements of the current

regulation that a bank holding company

conduct its FCM activities through a

separately incorporated subsidiary (i.e.,

not through the parent bank holding

company). The proposal retained the

requirement of the current regulation

that the subsidiary not become a

member of an exchange that requires the

parent bank holding company also to

become a member of the exchange. The

purpose of this restriction was to limit

the bank holding company’s exposure to

contingent obligations under the loss

sharing rules of exchange

clearinghouses in order to preserve the

holding company’s ability to serve as a

source of strength to its subsidiary

insured depository institutions. The

Board invited comment, however, on

whether this restriction was appropriate

and on whether the Board’s concern

could be addressed more effectively by

an alternative restriction, such as a

requirement that the parent bank

holding company not provide a

guarantee of non-proprietary trades

conducted by an FCM subsidiary.

Most commenters that discussed FCM

activities supported the alternative

restriction as sufficient to address a

bank holding company’s potential

exposure to contingent obligations

under loss sharing rules of

clearinghouses and to establish clear

parameters for a bank holding

company’s involvement on an exchange

or clearing association. Four

commenters suggested that bank

holding companies be given the option

of choosing which restriction is more

suitable to business conducted on a

particular exchange. If a choice must be

made between a prohibition against

membership or against a guarantee of

non-proprietary trades, these

commenters generally preferred the

latter, noting that holding company

membership is a prerequisite on a

number of exchanges for receiving

reductions in fees or other benefits.

Based on its experience and a review

of the comments, the Board has

determined that an alternative

restriction that prohibits the parent bank

holding company from guaranteeing or

otherwise becoming liable for nonproprietary trades conducted by or

through its FCM subsidiary more

effectively addresses the Board’s

concern about a parent bank holding

company’s exposure to an exchange’s or

clearinghouse’s loss sharing rules than

the current provision limiting the

holding company’s membership on an

exchange. This alternative restriction

effectively protects the parent bank

holding company from potential

exposure from customer trades and

open-ended contingent liability under

loss sharing rules while recognizing that

most exchanges require a parent to

guarantee proprietary trades.

Accordingly, the final rule revises the

regulation to prohibit the parent bank

holding company from guaranteeing or

otherwise becoming liable to an

exchange or clearinghouse for trades

other than those conducted by the

subsidiary for its own account or for the

account of an affiliate. The final rule

eliminates the existing prohibition on

an FCM subsidiary becoming a member

of an exchange that requires the parent

bank holding company also to become

a member.

Other commenters requested

confirmation that an FCM subsidiary

may, as an incidental activity, provide

various futures-related financing to

customers, such as financing to cover

margin obligations. Lending is a
9310 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

10Stichting Prioriteit ABN AMRO Holding, 77

Federal Reserve Bulletin 189 (1991).

11A commenter requested that the Board clarify

in the regulation that the securities brokerage

activity permitted in Regulation Y encompasses

clearing apart from executing trades in securities.

Both the current and final rule permit securities

brokerage activities broadly, including executingwithout-clearing and clearing-without-executing

trades in securities. The final rule specifies this.

permissible activity for bank holding

companies, and the final rule would not

prohibit permissible lending activities

in combination with FCM activities.

This permits an FCM owned by a bank

holding company to compete on the

same terms with an FCM that is not

affiliated with a bank holding company.

The Board notes, however, that some

exchanges prohibit FCMs from

providing margin financing, and CFTC

rules require full capitalization for any

extensions of credit to customers. An

FCM controlled by a bank holding

company must continue to abide by the

rules of the CFTC and any exchange on

which the FCM is a member or trades.

Several commenters requested

clarification that the authority for an

FCM subsidiary to become a member of

an exchange included authority to open

an office in the country were the

exchange is located. In addition, several

commenters requested clarification that

the expanded FCM activities permitted

under Regulation Y also would be

permitted under the Board’s Regulation

K.

Regulation Y currently provides, and

the final rule continues to provide, that

a nonbanking company permitted under

section 4(c)(8) of the BHC Act to engage

in a nonbanking activity may open

offices outside the United States to

conduct that same activity unless the

bank holding company has not received

approval to conduct the activity outside

the United States. A bank holding

company that currently has authority to

engage in FCM activities on a

geographically limited basis may, if it

qualifies for the streamlined procedures,

conduct these activities de novo outside

the U.S. through direct offices of its

4(c)(8) affiliate without further approval.

The scope of FCM and other activities

that fall under Regulation K will be

considered by the Board in connection

with its review of Regulation K.

ii. Clearing-Only Activities

The Board has by order permitted

bank holding companies to clear trades

that the FCM has not executed itself,

and the final rule incorporates this

activity in the laundry list. The proposal

retained two restrictions currently

imposed by Board order. These

restrictions: (1) Prohibit the clearing

subsidiary from serving as the primary

or qualifying clearing firm for a

customer; and (2) require the clearing

subsidiary to have a contractual right to

decline to clear any trade that the

subsidiary believes poses unacceptable

risks (a so-called ‘‘give-up’’ agreement).

The Board adopted these restrictions

to ensure that the clearing subsidiary of

a bank holding company could limit its

exposure to traders that execute trades

themselves or through third parties. In

particular, these restrictions prevent a

bank holding company from clearing

trades executed by exchange locals or

market makers. In 1991, the Board

rejected a proposal by a bank holding

company to engage in clearing trades for

exchange locals and market makers

because of concerns about the inability

of the bank holding company to monitor

and control its credit exposures during

the trading day. The Board found that

the activity was closely related to

banking, but believed that the potential

adverse effects of conducting the

activity outweighed the potential public

benefits.10

The Board sought comment on

whether these two restrictions on the

conduct of clearing-only activities by

bank holding companies should be

retained. The Board also invited

comment on whether and how bank

holding companies are able to monitor

and limit adequately the potential

exposure from conducting these

activities.

Commenters who discussed FCM

activities strongly supported the

removal of these two restrictions on

clearing-only activities in favor of the

Board relying on on-site examination

and supervision of a clearing

subsidiary’s risk management systems

for monitoring and managing its credit

exposures. Commenters maintained that

the Board’s restrictions are not

necessary in light of the risk

management tools currently available to

clearing firms. They contended that

clearing firms can effectively monitor

and limit their potential credit

exposures through various risk

management procedures, including:

establishment of trading limits for each

customer; adjustment of such limits

based on market conditions and ongoing

credit evaluations; monitoring of

customer market risk, trading exposure

and compliance with trading limits;

assessment and collection of initial and

maintenance performance bond or

margin; and payment of gains and

collection of losses associated with open

positions through a mark-to-market

process on both an intra-day and endof-day basis.

Commenters explained that all

exchanges provide clearing members

with complete information regarding

trades cleared through that member’s

account at the end of the trading day,

which thereby limits a clearing FCM’s

exposure to a client to the trading

transactions on that day. Commenters

noted that technological improvements

have enabled a growing number of

exchanges to develop systems that

collect and report intra-day trade

matching information. Commenters also

noted that, in many markets, a clearing

firm can, pursuant to exchange rules or

contractual arrangements, advise an

executing broker that it will not accept

further trades of that customer. In

agreements with customers, clearing

brokers also typically reserve the right

to liquidate a customer’s position if the

required margin is not posted promptly.

Commenters added that potential

exposure is further mitigated by various

exchange rules relating to position

limits, and large trading position

reporting. In addition, commenters

contended that oversight by the CFTC or

the SEC, which includes capital,

reporting, performance bond and

margin, and recordkeeping

requirements, assists in monitoring the

management of risks associated with

acting as a primary clearing firm,

including clearing trades executed by

exchange locals and market makers.

In light of these comments, the final

rule deletes the proposal’s restrictions

relating to primary clearing or

qualifying firm activities and customer

‘‘give-up’’ agreements.11 Examiners will

assess and supervise FCM policies,

procedures and practices relating to

clearing-only activities, taking into

consideration the nature of the FCM’s

clients, the particular exchanges

through with the subsidiary provides

clearing services, and the related risks

involved. It is expected that the Board

would develop supervisory guidance on

management of risks involved in

clearing-only activities.

e. Other Transactional Services

The proposal added a provision

allowing a bank holding company to

provide transactional services for

customers involving any derivative or

foreign exchange transaction that a bank

holding company is permitted to

conduct for its own account.

Commenters supported the inclusion of

these activities on the regulatory

laundry list. Inclusion of this activity is

not intended to limit the securities

brokerage, FCM, private placement or

riskless principal activities permitted

under the final rule.
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9311

12See The Bessemer Group, Incorporated, 82

Federal Reserve Bulletin 569 (1996).

13For example, the limitations in the case cited

above included a requirement to consolidate, for

regulatory capital purposes, the assets and

liabilities of subsidiary partnerships for which a

wholly owned subsidiary of the bank holding

company would serve as a general partner. The

subsidiary partnerships were to employ leverage

(including margin debt and short sales) in making

investments.

14See Swiss Bank Corporation, 82 Federal

Reserve Bulletin 685 n. 8 (1996).

15E.g., Swiss Bank Corporation, 81 Federal

Reserve Bulletin 185 (1995).

Several commenters suggested that

the scope of this provision be expanded

to include acting as a broker with

respect to forward contracts based on

financial and nonfinancial commodities,

regardless of whether the bank holding

company could invest in or trade such

instrument as principal. The

commenters contended that providing

brokerage services, as agent, to

customers with respect to forward

contracts on either financial or

nonfinancial commodities should not be

dependent on whether the bank holding

company may take a principal position

in the contract. In view of these

comments, the final rule clarifies that a

bank holding company may act as a

broker with respect to forward contracts

based on a financial or nonfinancial

commodity that also serves as the basis

for an exchange-traded futures contract.

This permits a bank holding company to

act as agent in a forward contract that

involves the same commodities and

assessment of risk that underlay the

permissible FCM activities of bank

holding companies without extending

this authority to forward contracts for

the delayed sale of commercial products

(such as automobiles, consumer

products, etc.) or real estate.

Several commenters requested that

acting as a commodity pool operator

(‘‘CPO’’), including acting as the general

partner of a partnership that invests in

commodities as well as futures and

options on financial and nonfinancial

commodities, be added to the list of

permissible activities. The commenters

noted that the Board recently permitted

by order a bank holding company to act

as a CPO, subject to a number of

limitations.12 Although some proposals

to act as a CPO may involve a

combination of permissible activities,

certain proposals raise supervisory

issues and open-end pool structures

may raise Glass-Steagall Act issues. In

addition, some proposals raise questions

about the proper treatment of the CPO’s

interest in the commodity pool for

capital adequacy purposes.13 These

issues can be evaluated more effectively

on a case-by-case basis through the

application review process.

Accordingly, the Board has determined

not to add acting as a CPO as a separate

activity on the laundry list at this time.

8. Investment or Trading Transactions

as Principal

The final rule, as the proposal,

incorporates decisions by the Board that

permit bank holding companies broadly

to invest as principal in derivatives on

financial and nonfinancial commodities.

The proposal would allow a bank

holding company to invest or trade as

principal in a derivative contract on a

financial or nonfinancial commodity or

index of commodities, so long as any

one of three conditions is met:

* The underlying asset is a

permissible investment for state member

banks;

* The derivative contract requires

cash settlement; or

* The derivative contract allows for

assignment, termination or offset prior

to expiration and the bank holding

company makes every reasonable effort

to avoid delivery.

Some commenters were concerned

that the proposal as worded would not

include trading as principal in

derivatives based on or linked to bank

ineligible securities, such as certain

equity index swaps or equity index

futures contracts, an activity that the

Board has approved by order. The final

rule clarifies that a bank holding

company may trade as principal a

derivatives contract on an index of rates,

prices or the value of any financial or

nonfinancial asset or group of assets, so

long as the contract requires cash

settlement. This does not include acting

as a dealer in options based on indexes

of bank-ineligible securities when the

options are traded on securities

exchanges. These options are securities

for purposes of federal securities laws

and are bank-ineligible securities for

purposes of the Glass-Steagall Act.14

Similarly, activities authorized by this

rule do not include acting as a dealer in

any other instruments that are bankineligible securities for purposes of

section 20. Thus, dealing in securities,

including acting as a market-maker,

specialist or registered options trader on

an exchange, would be governed by the

Board’s orders regarding bank-ineligible

securities underwriting and dealing

activities. Under the final rule, the three

alternative conditions would not apply

to derivative contracts based on an

index, but would apply to all other

derivative contracts.

Several commenters suggested that an

additional alternative be added that

permits trading as principal in a

derivative contract that involves an

asset that is a permissible investment for

a national bank or for a bank holding

company. The final rule adopts a

provision that would include any other

instruments approved by the Board.

In addition, some commenters

requested clarification that the

alternative conditions apply only to a

bank holding company’s trading

activities and not to investments for the

company’s own account. Other

commenters maintained that trading for

a bank holding company’s own account

should not be viewed as a nonbanking

activity subject to section 4(c)(8) but as

a servicing activity under section

4(c)(1)(C) of the BHC Act.

Bank holding companies have

increasingly proposed to acquire

companies engaged in, or to engage

through an existing subsidiary in,

derivatives trading and investment

activities that would be beyond the

scope of investment or trading activities

encompassed within the bank servicing

exemption.15 The addition of

proprietary trading activities to the

regulation clarifies the permissibility of

this activity as a separate business

activity.

The final rule, as the proposal, also

includes authority that the Board has

previously granted by order permitting

bank holding companies to buy, sell and

store gold, silver, platinum and

palladium bullion, coins, bars and

rounds. To enable the regulation to

remain current with relevant regulatory

pronouncements regarding the

permissible activities of banks, several

commenters suggested that the proposed

list of metals be expanded to include

copper (recently permitted for national

banks) and any other permissible

investments for national banks or bank

holding companies. In view of these

comments, the final rule adds copper

and includes any other metal approved

by the Board.

Some commenters requested that the

Board add to the regulatory laundry list

underwriting and dealing to a limited

extent in certain municipal revenue

bonds, one-to-four family mortgagerelated securities, consumer receivable

securities, and commercial paper

because the Board, by order, has

permitted these activities. Several

commenters also urged the Board to add

accepting delivery of commodities to

the list of activities because national

banks may take delivery of physical

commodities by warehouse receipt or

‘‘pass-through delivery’’ to another

party when hedging financial exposures
9312 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

16 12 U.S.C. § 1972.

arising from otherwise permissible

activities. The final rule does not

expand the laundry list to include these

activities because these activities raise

issues involving risk management

policies and procedures that are more

appropriately addressed through the

application review process.

In this regard, the Board believes that,

at this time, all proposals to engage de

novo or to make an initial acquisition of

a company engaged in corporate debt

and/or equity securities underwriting

and dealing activities should be

reviewed under the normal procedures,

and not under the streamlined

procedures. This will allow the System

to conduct a review of the riskmanagement systems of the bank

holding company in connection with

the initial entry of a bank holding

company into this activity. Bank

holding companies that have already

received Board approval to engage in

these broad securities activities may

acquire companies engaged in these

activities if the bank holding company

and the proposed acquisition qualify for

the streamlined procedure, unless the

System notifies the company that the

normal procedure should be used.

9. Management Consulting and

Counseling Activities

The current regulation authorizes

bank holding companies to provide

management consulting services on any

matter to any depository institution or

affiliate of a depository institution. The

rule has been expanded in two respects.

First, bank holding companies may

provide management consulting

services regarding financial, economic,

accounting, or audit matters to any

company. These are financial activities

that are directly related to the activities

and expertise of bank holding

companies. Commenters discussing this

issue agreed that this activity is closely

related to banking for purposes of

section 4(c)(8) of the BHC Act.

Second, for the reasons explained

above, the final rule permits a bank

holding company to derive up to 30

percent of its management consulting

revenue from management consulting

services provided to any customer on

any matter. As noted above, commenters

discussing this activity strongly

supported this provision as necessary to

permit bank holding companies to

attract and retain the most qualified

personnel, and to compete effectively

against unregulated companies that offer

a broad array of management consulting

services to customers of bank holding

companies. For the reasons explained

above, the Board has determined not to

raise the 30 percent limit on this basket

of permitted incidental activities at this

time, and will monitor the scope and

nature of these activities.

Two restrictions have been retained

governing interlocks with and

investments in client companies. While

several commenters argued for removal

of these restrictions, the Board

continues to believe that these limits are

necessary in the context of management

consulting arrangements in order to

ensure that a bank holding company

does not exercise control over a client

company through a management

consulting contract and to prevent

conflicts of interest. These restrictions

do not limit the ability of a bank holding

company to provide management

consulting services to an affiliate, which

is a servicing activity permitted under

section 4(c)(1)(C) of the BHC Act.

10. Support Services

This category includes courier

services (other than armored car

services) and printing checks and

related documents. Both services are

included in the laundry list as they were

authorized by the Board, without

change.

11. Insurance Agency and Underwriting

Activities

The insurance provisions reflect the

detailed restrictions on insurance

activities of bank holding companies

specified in the BHC Act. The current

regulation has not been changed.

Several commenters urged the Board to

take a variety of steps to authorize

broader insurance activities. The Board

will continue to consider these

suggestions in light of the specific terms

of the BHC Act.

12. Community Development Activities

The current regulation permits bank

holding companies to make equity and

debt investments in corporations and

projects designed primarily to promote

community welfare. The Board has

adopted its proposal clarifying that this

activity includes providing advisory and

related services to community

development programs. The Board has

permitted these advisory services by

order.

13. Money Orders, Savings Bonds and

Traveler’s Checks

The current regulation limits the sale

and issuance of money orders and

similar consumer payment instruments

to instruments with a face value of less

than $1,000. The Board has by order

authorized this activity for payment

instruments of any face amount.

Accordingly, the limitation on the face

amount of these instruments has been

removed.

14. Data Processing Activities

The current regulation broadly

authorizes bank holding companies to

provide data processing and data

transmission services by any

technological means so long as the data

processed or furnished are financial,

banking, or economic. The final rule

clarifies that a bank holding company

may render advice to anyone on

processing and transmitting banking,

financial and economic data.

The following two restrictions on

permissible data processing activities

have been deleted:

* All data processing services must

be provided pursuant to a written

agreement with the third party that

describes and limits the services; and

* Data processing facilities must be

designed, marketed and operated for

processing and transmitting financial,

banking, or economic data.

As explained above, the data

processing activity has also been revised

to permit bank holding companies to

derive up to 30 percent of their data

processing revenues from processing

and transmitting data that are not

financial, banking, or economic. As

explained above, most commenters

addressing this activity strongly

supported all of these changes and, in

particular, the proposal to permit the

conduct of some nonfinancial data

processing activities as an incident to

financial data processing activities.

D. Changes to Tying Restrictions

The Board has adopted significant

amendments to its rules regarding tying

arrangements. The amendments remove

Board-imposed tying restrictions on

bank holding companies and their

nonbank subsidiaries; create exceptions

from the statutory restriction on bank

tying arrangements to allow banks

greater flexibility to package products

with their affiliates; and establish a safe

harbor from the tying restrictions for

certain foreign transactions. These

amendments are designed to enhance

competition in banking and nonbanking

products and allow banks and their

affiliates to provide more efficient and

lower-cost service to customers.

Section 106 of the BHC Act

Amendments of 1970 contains five

restrictions intended to prohibit anticompetitive behavior by banks: Two

prohibit tying arrangements; two

prohibit reciprocity arrangements; and

one prohibits exclusive dealing

arrangements.16 The tying restrictions,
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9313

17 36 FR 10777 (June 3, 1971).

18See S. Rep. No. 1084, 91st Cong., 2d Sess.

(1970).

19 In recent years, the Board has enacted limited

relief from the anti-tying restrictions on nonbanks

within bank holding company structures. For

example, the Board has permitted a nonbanking

subsidiary to offer discounts on products and

services based on the customer’s obtaining some

other product or service from that subsidiary or

another nonbank affiliate. 12 CFR 225.7(b)(3).

However, even with this relief, tying between a

bank holding company or its nonbank subsidiary

and an affiliated bank has remained restricted, as

has any tying arrangement not limited to the

offering of a discount.

20 In addition, a community group generally

opposed the Board’s proposed changes to the tying

rules on the basis of concerns about relationships

between banks and their consumer finance

company affiliates. These concerns focused on fair

lending and equal credit opportunity, appropriate

disclosure of referral fees and other matters, and

compliance with various consumer lending statutes

and regulations. The Board does not believe, and

this commenter has provided no basis for

concluding, that the anti-tying statute or regulations

are intended to address or have the effect of

addressing these concerns. Moreover, these

concerns are already addressed by separate statutes

and regulations, including the Equal Credit

Opportunity Act, Home Mortgage Disclosure Act,

and Real Estate Settlement Procedures Act of 1974.

21With respect to fair competition between

banking and nonbanking organizations, the

commenter asserted that banking organizations

have an inherent competitive advantage from being

able to conduct the business of banking. This

commenter also noted the increasing concentration

of resources within the banking industry itself, and

indicated that the existing anti-tying rules may have

contributed to the competitive vitality of the

markets in which nonbank affiliates operate.

which have the greatest effect on

industry practices, prohibit a bank from

restricting the availability or varying the

consideration for one product or service

(the ‘‘tying product’’) on the condition

that a customer purchase another

product or service offered by the bank

or by any of its affiliates (the ‘‘tied

product’’). Although section 106 applies

only when a bank offers the tying

product, the Board in 1971 extended

these special restrictions to bank

holding companies and their nonbank

subsidiaries.17

Section 106 was adopted in 1970

when Congress expanded the authority

of the Board to approve proposals by

bank holding companies to engage in

nonbanking activities. Section 106 was

based on congressional concern that

banks’ unique role in the economy, in

particular their power to extend credit,

would allow them to create a

competitive advantage for their affiliates

in the new, nonbanking markets that

they were being allowed to enter.18

Congress therefore imposed special

limitations on tying by banks—

restrictions beyond those imposed by

the antitrust laws. Section 106 is a

broader prohibition, unlike the antitrust

laws, a plaintiff in action under section

106 need not show that: (1) the seller

has market power in the market for the

tying product; (2) the tying arrangement

has had an anti-competitive effect in the

market for the tied product; or (3) the

tying arrangement has had a substantial

effect on interstate commerce.

The Board has authority to grant

exceptions to section 106 and, in the

past few years, has used its exemptive

authority to allow banking organizations

to package their products when doing so

would benefit the organization and its

customers without anti-competitive

effects. For example, the Board has

allowed arrangements that included

discounts on brokerage services and

other products based on a customer’s

relationship with the bank or bank

holding company. The final rule would

build on this recent history by

permitting broader categories of

packaging arrangements that also do not

raise the concerns that section 106 was

intended to address.

1. Rescind the Board’s Regulatory

Extension of the Statute

As noted above, the Board has by

regulation extended the restrictions of

section 106 to bank holding companies

and their nonbank subsidiaries as if they

were banks. This extension was adopted

at the same time that the Board

approved by regulation the first laundry

list of nonbanking activities under

section 4(c)(8) of the BHC Act,

apparently as a prophylactic measure

addressed at potential anti-competitive

practices by companies engaging in

nonbanking activities.19

As noted in the preamble to the

proposed rule, the Board has gained

extensive experience with bank holding

companies, their nonbank affiliates, and

the markets in which they operate.

Based on this experience, the Board has

concluded that these nonbank

companies do not possess the market

power over credit or other unique

competitive advantages that Congress

assumed that banks enjoyed in 1970.

Accordingly, the Board has decided that

applying the special bank anti-tying

rules to such companies is no longer

justified. Any competitive problems that

might arise would be isolated cases,

better addressed not through a special

blanket prohibition but rather through

the same general antitrust laws that bind

the non-bank-affiliated competitors of

these entities.

Commenters discussing the tying

proposal overwhelmingly supported the

Board’s proposal to rescind its

regulatory extension of the anti-tying

rules to nonbanks. Commenters noted

that, in rescinding its rule, the Board

would not be granting an ‘‘exception’’ to

section 106, which never envisioned

that nonbank affiliates would be

covered by the special anti-tying rules

applicable to banks, but rather returning

the coverage of the statute to that

intended by Congress. Commenters

argued that the proposed rescission

would benefit banking organizations

and the public by permitting bank

holding companies and their nonbank

subsidiaries to package products and

services more flexibly—particularly in

packages with products and services of

bank affiliates—thereby enabling the

provision of more efficient and lowercost products and services to their

business and retail customers.

Commenters also generally agreed

that removal of these special restrictions

on bank holding companies and their

nonbank subsidiaries would eliminate a

competitive disadvantage by allowing

them the same freedom to package

products that their non-bank-affiliated

competitors currently enjoy. Some of

these commenters noted that the

Sherman Act would continue to

prohibit bank holding companies and

their subsidiaries from engaging in any

tying arrangement that had an anticompetitive effect.

Only two commenters opposed the

Board’s proposal to rescind the

regulatory extension of bank anti-tying

rules to nonbank affiliates.20 One

commenter, a law firm representing a

nonbanking corporation, opposed the

Board’s proposal to free nonbank

affiliates from the special tying rules

applicable to banks, as well as the other

proposed changes to the anti-tying

regulation. This commenter stated that

the proposed changes should not be

adopted without a comprehensive study

of their potential ramifications. The

commenter also maintained that the

Board’s regulatory extension of the antitying rules to nonbank affiliates is

consistent with the legislative history of

section 106, which evinced concern

over possible unfair business practices

of nonbank affiliates as well as banks

themselves. In addition, the commenter

questioned whether the general antitrust

laws and the nature of the competition

faced by banking organizations would

be adequate to prevent unfair or anticompetitive practices, and whether the

proposal would produce efficiency,

lower costs, and fair competition

between banking and nonbanking

organizations.21

Another law firm, representing a

group of insurance industry trade

associations, also opposed the Board’s

proposal to remove the special antitying rules applicable to nonbank
9314 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

22This commenter also advanced several

arguments for not rescinding these rules with

respect to packaged offerings that include insurance

products, specifically: (1) That such packaging

arrangements may violate state insurance laws that

prohibit insurance agents from offering rebates on

the sale of insurance products; and (2) that

permitting insurance premium payments as part of

a discount package may similarly violate state antirebate and insurance advertising laws, and could

result in customer confusion and a conflict with the

Interagency Statement on Retail Sales of

Nondeposit Investment Products. The commenter

also argued that the proposal could enable banks to

coerce customers to purchase insurance in order to

obtain a loan, and that permitting a combination of

insured deposit and uninsured investment products

in a single package could obscure the differences

between these products and produce confusion

among customers of banking organizations.

23The Board also notes that these commenters

have not provided any reason to conclude that an

increased concentration of resources in the banking

industry itself warrants an extension of anti-tying

rules to the nonbanking markets in which bank

affiliates operate.

Other matters raised by commenters also provide

no basis for extending the special bank anti-tying

rules to nonbank affiliates. The Board does not

believe that the rescission of this extension or other

aspects of the proposed rule would preempt state

laws regarding insurance or other matters.

Furthermore, concerns about possible customer

confusion are effectively addressed through more

direct means such as the Interagency Statement on

Retail Sales of Nondeposit Investment Products.

The Board also notes that section 106 would

continue to prohibit banks from using their power

over credit to induce customers to purchase

insurance products.

24 104 Pub. L. 193, 110 Stat. 2105; 7 U.S.C.

§ 2016(i)(11).

25 12 U.S.C. 1972(1)(A).

26 12 U.S.C. 1464(q)(1)(A).

affiliates. This commenter maintained

that the bank anti-tying rules should

continue to apply to nonbank affiliates

because these affiliates may appear to

the public to be indistinguishable from

the banks themselves and because the

same public policy concern regarding

banks’ power over credit warrants the

extension of the prophylactic rule for

banks to entities having an affiliate

relationship with banks.22

The Board does not believe that these

concerns warrant retention of special

anti-tying rules for nonbank affiliates of

banks. In particular, the Board’s

experience as regulator and supervisor

of banks, bank holding companies, and

their subsidiaries provides an adequate

basis for judgments about the

competitive nature of markets in which

banking organizations operate.

Commenters have not provided

evidence to the contrary or proposed

specific subjects for further study.

Moreover, commenters opposing the

proposal have produced no evidence

that the antitrust rules and the nature of

the nonbanking markets in which bank

affiliates operate would not be sufficient

to prevent unfair or anti-competitive

practices, or that the proposed

liberalization of the Board’s tying rules

would not yield efficiencies and

corresponding lower costs for

customers. The Board does not believe,

and commenters have provided no basis

for concluding, that affiliation with a

bank creates a competitive advantage

warranting the application of special

bank anti-tying rules to nonbank

affiliates.23 Finally, while the legislative

history of section 106 may evince

concern with the competitive practices

of banks and their affiliates, the statute

itself clearly applies only to tying by

banks themselves.

For the foregoing reasons, the Board is

rescinding its extension of bank antitying rules to bank holding companies

and their nonbank subsidiaries.

2. Retain Limited Prohibition on Tying

Arrangements Involving Electronic

Benefit Transfer Services

In the proposed rule, the Board sought

comment on whether it should retain its

regulatory extension of the statute for

purposes of one type of tying

arrangement. Section 825(a)(3) of the

Personal Responsibility and Work

Opportunity Reconciliation Act of 1996,

signed into law on August 22, 1996,

amended the Food Stamp Act of 1977 to

prohibit tying the availability of

electronic benefit transfer services to

other point-of-sale services.

Enforcement of the Food Stamp Act is

assigned to the Secretary of

Agriculture.24 Banks, bank holding

companies, and nonbank subsidiaries of

bank holding companies were exempted

from the statute, apparently because

they were already restricted by section

106 (in the case of banks) and the

Board’s regulation (in the case of bank

holding companies and their nonbank

subsidiaries). Thus, unless the Board

were to retain a restriction on bank

holding companies and their nonbank

subsidiaries, they would be the only

companies not subject to a special

restriction on tying of electronic benefit

transfer services.

Commenters either supported or

expressly did not object to this limited

retention of a special anti-tying rule for

electronic benefit transfer services.

Commenters acknowledged that the

principle of competitive equality

underlying the general rescission of

special anti-tying rules for nonbank

entities dictated retention of the special

rules in this limited context.

The Board has decided to retain this

restriction.

3. Treat Inter-affiliate Tying

Arrangements the Same as Intra-bank

Arrangements

Section 106 contains an explicit

exception (the ‘‘statutory traditional

bank product exception’’) that permits a

bank to tie any product or service to a

loan, discount, deposit, or trust service

offered by that bank.25 For example, a

bank could condition the use of its

messenger service on a customer’s

maintaining a deposit account at the

bank. Although the statutory traditional

bank product exception appears to have

been effective in preserving traditional

relationships between a customer and

bank, the exception is limited in an

important way: it does not extend to

transactions involving products offered

by affiliates.

The Board has adopted a ‘‘regulatory

traditional bank product exception’’ that

generally extends the statutory

exception to transactions involving

affiliates. However, the Board placed

two restrictions on the regulatory

exception. First, the Board required that

both products involved in the tying

arrangement be traditional bank

products. Second, the Board required

that the arrangement consist of

discounting the tying product rather

than restricting its availability.

However, as noted in the preamble to

the proposed rule, Congress decided not

to apply these two restrictions to the

statutory traditional bank product

exception for intra-bank transactions,

and it is difficult to argue that interaffiliate transactions pose any greater

risk of anti-competitive behavior than

those intra-bank transactions. Moreover,

Congress has already extended the

statutory traditional bank product

exception to cover inter-affiliate

transactions, without restriction, for

savings associations and their

affiliates.26 For these reasons, the Board

proposed eliminating the above

restrictions so that any tying

arrangement within a banking

organization would be permissible if the

tied product is a loan, discount, deposit,

or trust service.

Commenters discussing this proposal

overwhelmingly supported this aspect

of the proposal, agreeing with the Board

that there is no reason to subject interaffiliate tying arrangements to

restrictions that are not applicable to

intra-bank arrangements. Three

commenters raised general objections to

the elimination of these restrictions.

These objections were similar to those

advanced against the proposed

rescission of the tying rules applicable

to nonbank affiliates. The Board notes

that, because insurance products are not

among the traditional bank products

listed in the statute or the rule, this

aspect of the proposal would not
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9315

27Some commenters also suggested that the Board

issue interpretations to clarify the scope of the

statutory list of four traditional bank products.

28 12 U.S.C. 1972(1)(C) and (D).

29 12 U.S.C. 1972(1)(C).

30See Gushi Bros. Co. v. Bank of Guam, 28 F.3d

1535, 1542–43 (9th Cir. 1994).

enhance a banking organization’s ability

to leverage possible market power in

other product markets to engage in anticompetitive behavior in insurance

markets.

A substantial number of commenters

urged the Board to adopt an expanded

definition of the ‘‘traditional bank

products’’ which may be tied to other

offerings under the statutory and

regulatory exceptions. Some of these

commenters proposed a specific list of

additional products—such as foreign

exchange, interest rate swaps and other

derivative products, and investment

advisory services—to be exempted by

the rule. Other commenters proposed a

more general approach for expanding

this definition: for example, exempting

products authorized as part of the

business of banking under relevant

chartering laws. Others urged the Board

to exempt all but a limited set of tying

arrangements from the statutory

restrictions—for example, by covering

only transactions where the tying

product is a consumer or small business

loan.27 The Board believes that these

suggestions warrant serious

consideration, but intends to study this

issue and provide notice and seek

comment before adopting any changes

not suggested in the proposed rule.

For the foregoing reasons, the Board

has decided to adopt the extension of

the traditional bank product exception

as proposed.

4. Extend the Expanded Regulatory

‘‘Traditional Bank Product’’ Exception

to Reciprocity Arrangements

As noted above, section 106 prohibits

not only tying arrangements but also

reciprocity arrangements (conditioning

the availability of or varying the

consideration for one product on the

providing of another by the customer).28

Like the tying prohibition, the

prohibition on reciprocity arrangements

contains an exception intended to

preserve traditional banking

relationships. The exception provides

that a bank may condition the

availability of a product or service on

the customer’s providing to the bank

some product or service ‘‘related to and

usually provided in connection with’’ a

loan, discount, deposit, or trust

service.29 The Board noted in the

proposed rule that it had received only

one request to extend this exception,

and commenters confirmed that these

types of reciprocity arrangements are

not common in the industry.

Like the statutory traditional bank

product exception to the tying

prohibition, this exception to the

reciprocity prohibition does not apply

to inter-affiliate transactions, and, in the

proposed rule, the Board proposed to

extend the statutory exception for

traditional banking relationships to

cover such inter-affiliate transactions.

For reasons similar to those advanced

with respect to the extension of the

statutory exception for tying

arrangements, most commenters

discussing this aspect of the proposal

strongly supported the extension of

permitted reciprocity arrangements,

while a small number of commenters

opposed this aspect of the proposal. The

opposing comments did not raise any

objections specific to reciprocity

arrangements.

For the foregoing reasons, and

because the Board does not believe that

inter-affiliate reciprocity arrangements

pose any greater anti-competitive threat

than similar intra-bank arrangements

permitted by Congress, the Board is

adopting substantially as proposed the

extension of the statutory exception for

certain reciprocity arrangements. The

Board has decided to make technical

changes to the proposed exception to

make clear that the regulatory exception

is co-extensive with the statutory

exception.

5. Coverage of Foreign Transactions

Under Section 106

In response to a request that the Board

clarify whether section 106 restricts

foreign transactions, the Board sought

comment on whether it should establish

a ‘‘safe harbor’’ with respect to some set

of foreign transactions. In particular, the

Board sought comment on whether the

safe harbor should define ‘‘foreign

transactions’’ according to the location

of the customer, the location of the

market where any potential anticompetitive effects would occur, or

some other factor.

Federal legislation is presumed to

apply only within the territorial

jurisdiction of the United States, unless

the legislation clearly expresses a

contrary intent on the part of Congress.

No such intent is evident in section

106.30 However, determining whether a

series of transactions has sufficient

connection to the United States to

trigger section 106 can be a difficult

process. The proposed safe harbor was

intended to provide certainty with

respect to a defined set of transactions.

Thus, the proposed safe harbor was not

intended to be an interpretation of

section 106, as some transactions

outside the safe harbor may not be

covered by the statute.

Commenters addressing this issue

overwhelmingly supported the creation

of a safe harbor. Commenters argued

that a safe harbor would provide needed

certainty to banking organizations

operating abroad and permit these

organizations to compete with foreign

firms. One commenter noted that U.S.

banks sometimes cannot participate in

lending syndicates dominated by

foreign banks because the loan

agreement contains conditions that

would violate section 106. Furthermore,

in some countries it is customary for a

financial advisor or credit provider to

link services in formulating proposals

and a U.S. bank’s inability to do so

places it at a competitive disadvantage.

In terms of how the safe harbor would

be defined, commenters strongly urged

that the locus of the customer be

determinative. Commenters uniformly

rejected any test based on the locus of

any anti-competitive effects, on two

grounds. First, such a test assumes that

there will be anti-competitive effects

from the tying arrangements, which is

by definition true in the case of a

Sherman Act violation but not

necessarily true in the case of a

violation of the per se prohibition on

tying in section 106. Second,

determining where a transaction has its

effect can be a difficult process yielding

no clear answer, and the test would

therefore leave substantial uncertainty

in terms of compliance.

Some commenters also urged the

Board to exempt transactions to finance

projects located outside the United

States and transactions with foreign

branches of U.S. companies.

A small number of commenters

objected generally to this proposed

change to the tying rules without

providing any specific reason why a safe

harbor for foreign transactions should

not be adopted. One commenter

maintained that a safe harbor was not

necessary because relevant case law had

provided sufficient clarity and certainty

with respect to this question.

For the reasons advanced by

commenters, the Board is adopting a

‘‘safe harbor’’ from the anti-tying rules

for transactions with corporate

customers that are incorporated or

otherwise organized, and have their

principal place of business, outside the

United States, or with individuals who

are citizens of a foreign country and are

not resident in the United States.

However, the safe harbor would not

protect tying arrangements where the
9316 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

31One commenter urged that the safe harbor for

combined-balance discounts be clarified by

specifying that products offered by an affiliate of

the bank may be included as eligible products. The

Board notes that the proposed and final rule refer

to ‘‘products specified by the bank’’, and do not

contain any limitation with respect to the entity

offering the product.

32 See Citizen First Bancorp, Inc. v. Harreld, 559

F.Supp. 867 (1982).

customer is a U.S.-incorporated division

of a foreign company. Furthermore, the

safe harbor would not shelter a

transaction from other antitrust laws if

they were otherwise applicable.

The Board agrees with commenters

that some transactions with U.S.

persons may be so foreign in nature,

because of the location of either the

project that is the subject of the

transaction or the customer’s office that

is entering into the transaction, that they

do not raise the competitive concerns

that section 106 or the antitrust laws

were designed to address. The Board

also believes, however, that many such

foreign-based transactions do have

competitive implications in the United

States—for example, where a U.S.

corporation seeks financing for a project

abroad, and the bank seeks to tie this

financing to an affiliate’s U.S. securities

underwriting services—and the Board

does not believe that commenters have

provided an adequate and clear basis for

excluding such transactions from any

‘‘safe harbor’’ for foreign transactions

with U.S. persons.

6. Technical Changes

The Board also is adopting a

definition of ‘‘bank’’ for purposes of the

anti-tying rules to clarify that any

exemptions afforded to banks generally

also would be applicable to credit card

and other limited purpose institutions

and to United States branches and

agencies of foreign banks.31

E. Other Changes

1. Filings Under the Change in Bank

Control Act

The final rule, as the proposal,

reorganizes, clarifies, and simplifies the

portion of Regulation Y that implements

the Change in Bank Control Act (‘‘CIBC

Act’’). The final rule attempts to

harmonize the scope and procedural

requirements of the Board’s regulation

implementing the CIBC Act with those

of the other federal banking agencies

and to reduce any unnecessary

regulatory burden.

In particular, the final rule reduces

regulatory burden by reducing from two

to one the number of times a person

must receive permission under the CIBC

Act to acquire shares of the same state

member bank or bank holding company.

Specifically, the final rule eliminates

the current requirement that all persons

who have received authorization to

control in excess of 10 percent, but less

than 25 percent, of the voting shares of

a member bank or bank holding

company file a second notice before

acquiring control of 25 percent or more

of the voting shares of the institution.

The Board has determined that this

new rule will apply to any person who

currently controls 10 percent (but less

than 25 percent) of the shares of a state

member bank or bank holding company

with Board approval under the CIBC

Act, unless the approval granted to the

person specifically limited the amount

of shares that the person may control or

the person is otherwise notified in

writing by the System that additional

approval is required. In future cases in

which a person appears to have

sufficient financial resources to acquire

more than 10 percent, but less than 100

percent of the shares of a bank, the

System may limit the approval granted

on a case-by-case basis by requiring

further review of the financial resources

of the person as appropriate.

Commenters that discussed the CIBC

Act proposal supported the proposed

revisions. In particular, these

commenters endorsed the elimination of

the requirement to file a second notice

to the Board upon exceeding 25 percent

ownership of a member bank or bank

holding company when a prior notice to

acquire in excess of 10 percent had been

filed and approved by the Board.

Commenters also supported the

proposal to clarify certain terms used in

the CIBC Act portion of the rule. The

final rule adds definitions of key terms

to clarify the scope of the regulation. In

particular, the final rule defines the

terms acting in concert and immediate

family, and includes specific

presumptions of concerted action, to

clarify the rule and to provide guidance

to acquirors. In addition, the final rule

incorporates current Board practice that

the acquisition of a loan in default that

is secured by voting securities of a state

member bank or bank holding company

is presumed to be an acquisition of the

underlying securities.

The final rule also reduces regulatory

burden on persons whose ownership

percentages increase as the result of an

action outside the control of the person,

such as a redemption of voting

securities by the issuing bank or a sale

of shares by a third party. In these

situations, the proposal would permit

the person affected by the bank or third

party action to file a notice within 90

calendar days after the transaction

occurs, provided that the acquiring

person does not reasonably have

advance knowledge of the triggering

transaction.

In addition, the final rule provides for

more flexible timing for newspaper

announcements of filings under the

CIBC Act by permitting notificants to

publish the announcement up to 15

calendar days before submitting the

filing. The newspaper notice

requirement also is modified to

eliminate the requirement that the

notice include a statement of the

percentage of shares proposed to be

acquired.

Finally, the final rule adds a new

section reflecting the stock loan

reporting requirements in section 205 of

the Federal Deposit Insurance

Corporation Improvement Act as

amended by section 2226 of the

Regulatory Relief Act. Before the

passage of the Regulatory Relief Act, all

financial institutions were required to

file reports documenting credit

outstanding by the institution and its

affiliates when the credit was secured

by 25 percent or more of any class of

voting securities of an insured

depository institution. The Regulatory

Relief Act limits this requirement to

credit outstanding by foreign banks and

their affiliates.

One commenter suggested that the

Board require any person participating

in a proxy solicitation to obtain prior

approval under the CIBC Act and urged

broadening the definition of persons

who would be deemed to be acting in

concert (and thus required to join in a

CIBC Act filing) to include persons

soliciting proxies. This commenter also

suggested that the institution that is the

target of a proxy solicitation be granted

standing as a party to a CIBC Act filing,

be furnished copies of all filings, and be

permitted to submit comments.

The Board has not adopted these

suggestions. The Board has long held,

and a federal court has agreed, that the

CIBC Act is not automatically triggered

by the formation of a group for the

purpose of acquiring proxies for voting

shares and that private parties do not

have legal standing to challenge agency

action under the CIBC Act.32 The final

rule provides for public notice of all

CIBC Act filings (unless immediate or

expeditious action is required) and

permits any private party to submit

comments for Board consideration. This

approach is in keeping with the purpose

of the CIBC Act, which is to permit the

federal banking agencies to review

changes in the ownership of banks and

bank holding companies and is not

intended to be a mechanism for private
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9317

33Financial top-tier domestic bank holding

companies. Excludes middle-tier bank holding

companies, and foreign bank holding companies

that are not required to file a Y–9 report with the

Federal Reserve System.

34Bank holding companies with consolidated

assets of less than $150 million are not required to

file financial regulatory reports on a consolidated

basis. Assets for this group are estimated based on

reports filed by the parent companies and

subsidiaries.

parties to frustrate contested

acquisitions.

2. Notices of Changes in Directors and

Senior Executive Officers

In addition to the BHC Act and the

CIBC Act, Regulation Y implements

section 914 of the Financial Institutions

Reform, Recovery, and Enforcement Act

of 1989, which requires a state member

bank or bank holding company

(together, ‘‘regulated institutions’’) to

give prior notice to the System before

changing directors or senior executive

officers under certain circumstances.

The final rule has been modified in light

of amendments to section 914 enacted

by the Regulatory Relief Act and in

cooperation with the staffs of the other

federal financial institutions

supervisory agencies, in an attempt to

develop uniform procedures for

requiring and reviewing section 914

notices.

As amended, section 914 no longer

requires prior notice from regulated

institutions chartered for less than two

years or regulated institutions that

underwent a change in control within

two years. Accordingly, provisions in

the proposed rule relating to these

circumstances as triggering a section

914 notice have been deleted from the

final rule.

Section 914 also was amended by the

Regulatory Relief Act to permit the

System to extend the 30-day prior notice

period for an additional period not to

exceed 60 days. The Board expects to

continue to process most section 914

notices within 30 days and the final rule

retains the 30-day prior notice period. In

special circumstances, such as an

incomplete administrative record, the

final rule permits the System to extend

the prior notice period for an additional

60 days as provided in section 914 after

notifying the regulated institution or

individual filing the notice of the

extension and the reason for not

processing the notice within 30 days.

In all waiver requests, the final rule

continues to require that all information

required to be filed under the rule be

provided within the time period

specified by the System. The final rule

also adopts the System’s current

practice of granting individuals who are

not proposed by management and who

are elected as new directors of regulated

institutions an automatic waiver of the

30-day prior notice requirement in order

to serve immediately as board members.

To qualify for an automatic waiver, the

individual must also provide the System

with all information required to be filed

under the rule within two business days

after the individual’s election. The

System may issue a notice of

disapproval within 30 days after a

waiver request is granted or the election

of an individual serving pursuant to an

automatic waiver.

One commenter argued that the

automatic waiver procedures should

require an individual to resign as a

director after a notice of disapproval has

been issued by the System. While

disapproval would require the

individual to resign as a director, the

final rule does not incorporate the

suggestion because the System has

sufficient enforcement authority under

applicable law to remove a disapproved

director from the board.

The final rule also makes other

changes, such as modifications to the

appeal procedure for a disapproved

notice, that are intended to clarify the

proposed rule.

3. Other Changes

The Board received three comments

requesting that the Board expand its

proposed presumption exempting

testamentary trusts from the definition

of ‘‘company’’ so as to exempt inter

vivos (or living) trusts. Inter vivos trusts

are trusts that are established by

individuals during their lifetime to

facilitate estate planning. The Board, on

a case-by-case basis, has applied criteria

similar to the criteria proposed in

Regulation Y in determining whether an

inter vivos trust is a ‘‘company’’ for

purposes of the BHC Act. Accordingly,

the final rule has been expanded to

presume that an inter vivos trust is

exempt from the definition of

‘‘company’’ if the trust meets the criteria

in the final rule and is not otherwise

found to be a business trust or company.

The final rule also amends the time

limit in which a trust must terminate to

reflect that the BHC Act permits certain

trusts to extend for 25 years.

The final rule also reduces from 30 to

15 the number of days notice required

before a large stock redemption by a

bank holding company, permits small

bank holding companies to make stock

redemptions without prior notice if the

holding company meets certain leverage

and capital requirements, and permits

bank holding companies to take account

of intervening new issues of stock in

computing when a stock redemption

notice must be filed.

In addition, the final rule adopts the

changes enacted in the Regulatory Relief

Act to the period for divesting certain

shares acquired in satisfaction of a debt

previously contracted. These changes

permit the Board to extend the

divestiture period, under certain

circumstances, to a period of up to 10

years.

Moreover, the final rule deletes the

provisions implementing section 2(g)(3)

of the BHC Act, which have been

repealed by the Regulatory Relief Act.

The Board has also deleted references in

Regulation Y to limitations on asset

growth imposed on certain institution

by the Competitive Equality Banking

Act of 1987 (Pub. L. 100–86, 101 Stat

552) because these limitations were

removed by section 2304 of the

Regulatory Relief Act.

Finally, the final rule adopts the

proposed definitions of ‘‘class of voting

securities’’ and ‘‘immediate family’’ and

includes several other technical

changes.

Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility

Act, the Board is required to conduct an

analysis of the effect on small

institutions of the revisions to

Regulation Y. As of September 30, 1996,

the number of bank holding companies

totalled 5,250.33 The following chart

provides a distribution, based on asset

size, for those companies.

Asset size category

(M=million)

Number of

bank holding companies

Percent of

bank holding company assets

Less than $150M .. 3,874 34 5.2

$150M–$300M ...... 677 3.2

Greater than

$300M ................ 699 91.6

The comprehensive revision to

Regulation Y is intended to eliminate

unnecessary burden for all bank holding

companies, including smaller banking

organizations. Included in the revision

are expedited application/notice

procedures with minimal information

requirements for well-rated and wellrun bank holding companies. The vast

majority of bank holding companies

would qualify to use the streamlined

procedures, and it is estimated that

more than 50 percent of the

applications/notices reviewed by the

Federal Reserve System during 1995

would have qualified for the new

streamlined procedures. The revisions

also include a reorganization and

streamlining of the regulatory laundry

list of permissible nonbanking activities,
9318 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

the removal of unnecessary and

outmoded regulatory restrictions, and a

waiver of filing requirements for bank

acquisitions that are in-substance bankto-bank mergers. These changes apply to

all bank holding companies and will be

particularly helpful to small bank

holding companies.

The revisions include a number of

other changes applicable to smaller

organizations in particular. These

changes include a special exception for

small bank holding companies with

assets of less than $300 million from the

aggregate size limit applying to the use

of the expedited application procedures,

an update of the small bank holding

company policy statement that applies

to bank holding companies with assets

of less than $150 million and reduces

burden for qualifying small bank

holding companies, reduction of the

thresholds for qualification for

streamlined formation of new bank

holding companies, reduction in the

filing requirements under the Change in

Bank Control Act, and addition of a new

exception for small bank holding

companies from the prior approval

requirements regarding stock

redemption proposals. These and the

other changes described above are

explained in more detail in the

Supplementary Information portion of

this document.

The Board expects that the final rule

will result in a significant reduction in

regulatory filings, in the paperwork

burden and processing time associated

with regulatory filings, and in the costs

associated with complying with the

regulation, thereby improving the ability

of all bank holding companies,

including small organizations, to

conduct business on a more costefficient basis.

Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. Ch.

3506; 5 CFR part 1320 Appendix A.1),

the Board reviewed the rule under the

authority delegated to the Board by the

Office of Management and Budget. The

Federal Reserve may not conduct or

sponsor, and an organization is not

required to respond to, the following

information collections unless it

displays a currently valid OMB control

number. The OMB control numbers are

indicated below.

The collection of information

requirements in this regulation are

found in 12 CFR 225.11, 12 CFR 225.12,

12 CFR 225.14, 12 CFR 225.17, 12 CFR

225.23, 12 CFR 225.24, 12 USC 1817(j)

and 1831(i), 12 CFR 225.73, 12 CFR

225.4, and 12 CFR 225.3(a). This

information is required to evidence

compliance with the requirements of the

Bank Holding Company Act, the Change

in Bank Control Act and provisions of

the Federal Deposit Insurance Act. The

respondents are for-profit financial

institutions and other corporations,

including small businesses, and

individuals.

The Board received no comments that

specifically addressed burden estimates.

The streamlining of applications to

acquire banks and nonbanking

companies by institutions that meet the

qualifying criteria should result in a

significant reduction in burden for

respondents that file the Application for

Prior Approval To Become a Bank

Holding Company, or for a Bank

Holding Company To Acquire an

Additional Bank or Bank Holding

Company (FR Y–3; OMB No. 7100–

0171). Approximately 196 respondents

file the FR Y–3 annually pursuant to

section 3(a)(1) of the Bank Holding

Company Act (Act) and 303 respondents

file annually the FR Y–3 pursuant to

section 3(a)(3) and 3(a)(5) of the Act.

The current burden per response is 48.5

hours and 59.0 hours, respectively, for

a total estimated annual burden of

27,383 hours. Under the rule, it is

estimated that at least 50 percent of

these respondents, or a total of 249

respondents for both types of

applications, would meet the criteria to

qualify for the filing of a streamlined

application. The average number of

hours per response for proposed

applications of each type is estimated to

decrease to 2.5 hours. Therefore the

total amount of annual burden is

estimated to be 14,343.5 hours. Based

on an hourly cost of $50, the annual cost

to the public under the revision is

estimated to be $717,175, which

represents an estimated cost reduction

of $651,975 from the estimated annual

cost to the public of $1,369,150 under

the current rule.

The final rule should result in a

significant reduction in regulatory

burden by eliminating the prior review

and approval requirements for well-run

bank holding companies to engage de

novo in nonbanking activities that are

permissible by Board regulation;

streamlining the application process to

engage de novo in nonbanking activities

that are permissible only by Board order

and to acquire nonbanking companies;

and permitting bank holding companies

to obtain approval at one time to engage

in a preauthorized list of nonbanking

activities. Thus, respondents that file

the Application for Prior Approval To

Engage Directly or Indirectly in Certain

Nonbanking Activities (FR Y–4; OMB

No. 7100–0121) will experience a

significant reduction in costs.

Approximately 362 respondents file the

FR Y–4 annually to meet application

requirements, and 114 respondents file

to meet notification requirements. The

current burden per response is 59.0

hours and 1.5 hours, respectively, for a

total estimated annual burden of 21,529

hours. Under the rule it is estimated that

at least 50 percent of these respondents

would meet the criteria to qualify either

for elimination or for the filing of a

streamlined application, representing

181 applications and 57 notifications.

The average number of hours per

response for the required postconsummation notice is 0.5 hours and

for the required streamlined notice is

1.5 hours. Therefore the total amount of

annual burden is estimated to be

11,121.5 hours. Based on an hourly cost

of $50, the annual cost to the public

under the revision is estimated to be

$556,075, which represents an

estimated cost reduction of $520,375

from the current estimated annual cost

to the public of $1,076,450 under the

current rule.

The elimination of the requirement

that a person who has already received

Board approval under the Change in

Bank Control Act obtain additional

approvals to acquire additional shares of

the same bank or bank holding company

should result in a significant reduction

in burden for respondents that file the

Notice of Change in Bank Control (FR

2081; OMB No. 7100–0134).

Approximately 300 respondents file the

FR 2081 annually to meet the

notification requirements of change in

control, 280 respondents file to meet the

requirements for notice of a change in

director or senior executive officer, and

1000 respondents file to meet

requirements to report certain

biographical and financial information.

The current burden per response for

each requirement is 30.0 hours, 2.0

hours, and 4.0 hours, respectively, for a

total estimated annual burden of 13,560

hours. Under the rule it is estimated that

50 percent fewer notifications of change

in control will be filed for an annual

total of 150 responses. The estimated

number of filings to meet the other two

requirements and the estimated average

hours per response for each requirement

remains unchanged. Therefore the total

amount of annual burden is estimated to

be 9,060 hours. Based on an hourly cost

of $20, the total annual cost to the

public under the revision is estimated to

be $181,200, which represents an

estimated cost reduction of $90,000

from the current estimated annual cost

to the public of $271,200 under the

current rule.

The allowance for bank holding

companies to take account of
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9319

1Code of Federal Regulations, title 12, chapter II,

part 225.

intervening new issues of stock in

computing when a stock redemption

notice must be filed and the exemption

provided to small bank holding

companies that meet certain leverage

and capital requirements should result

in a significant reduction in burden for

respondents that file the Notice of

Proposed Stock Redemption (FR 4008;

OMB No. 7100–0131). Approximately

50 respondents file the FR 4008

annually. The current burden per

response is 15.5 hours, for a total

estimated annual burden of 775 hours.

Under the rule it is estimated that 50

percent fewer notifications will be filed

for an annual total of 25 responses and

the estimated average hours per

response remains unchanged. Therefore

the total amount of annual burden is

estimated to be 387.5 hours. Based on

an hourly cost of $30, the total annual

cost to the public under the revision is

estimated to be $11,625, which

represents a cost reduction of $11,625

from the current estimated cost to the

public of $23,250 under the current

rule.

The streamlining of application

requirements are not expected to change

the ongoing annual burden associated

with the Application for a Foreign

Organization to Become a Bank Holding

Company (FR Y–1f; OMB No. 7100–

0119). Approximately 2 respondents file

the FR Y–1f annually. The current

burden per response is 77 hours for a

total estimated annual burden of 144

hours. Based on an hourly cost of $20,

the annual cost to the public is

estimated to be $3,080.

All information contained in these

collections of information are available

to the public unless the respondent can

substantiate that disclosure of certain

information would result in substantial

competitive harm or an unwarranted

invasion of personal privacy or would

otherwise qualify for an exemption

under the Freedom of Information Act.

The Federal Reserve has a continuing

interest in the public’s opinions of our

collections of information. At any time,

comments regarding the burden

estimate, or any other aspect of this

collection of information, including

suggestions for reducing the burden may

be sent to: Secretary, Board of Governors

of the Federal Reserve System, 20th and

C Streets, NW., Washington, DC 20551;

and to the Office of Management and

Budget, Paperwork Reduction Project

(7100–0196), Washington, DC 20503.

List of Subjects in 12 CFR Part 225

Administrative practice and

procedure, Banks, banking, Federal

Reserve System, Holding Companies,

Reporting and recordkeeping

requirements, Securities.

For the reasons set out in the

preamble, the Board amends 12 CFR

part 225 as follows:

PART 225—BANK HOLDING

COMPANIES AND CHANGE IN BANK

CONTROL (REGULATION Y)

1. The authority citation for part 225

continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818,

1831i, 1831p–1, 1843(c)(8), 1844(b), 1972(l),

3106, 3108, 3310, 3331–3351, 3907, and

3909.

2. Subpart A is revised to read as

follows:

Subpart A—General Provisions

Sec.

225.1 Authority, purpose, and scope.

225.2 Definitions.

225.3 Administration.

225.4 Corporate practices.

225.5 Registration, reports, and inspections.

225.6 Penalties for violations.

225.7 Exceptions to tying restrictions

Subpart A—General Provisions

§ 225.1 Authority, purpose, and scope.

(a) Authority. This part 1 (Regulation

Y) is issued by the Board of Governors

of the Federal Reserve System (Board)

under section 5(b) of the Bank Holding

Company Act of 1956, as amended (12

U.S.C. 1844(b)) (BHC Act); sections 8

and 13(a) of the International Banking

Act of 1978 (12 U.S.C. 3106 and 3108);

section 7(j)(13) of the Federal Deposit

Insurance Act, as amended by the

Change in Bank Control Act of 1978 (12

U.S.C. 1817(j)(13)) (Bank Control Act);

section 8(b) of the Federal Deposit

Insurance Act (12 U.S.C. 1818(b));

section 914 of the Financial Institutions

Reform, Recovery and Enforcement Act

of 1989 (12 U.S.C. 1831i); section 106 of

the Bank Holding Company Act

Amendments of 1970 (12 U.S.C. 1972);

and the International Lending

Supervision Act of 1983 (Pub. L. 98–

181, title IX). The BHC Act is codified

at 12 U.S.C. 1841, et seq.

(b) Purpose. The principal purposes of

this part are to:

(1) Regulate the acquisition of control

of banks by companies and individuals;

(2) Define and regulate the

nonbanking activities in which bank

holding companies and foreign banking

organizations with United States

operations may engage; and

(3) Set forth the procedures for

securing approval for these transactions

and activities.

(c) Scope—(1) Subpart A contains

general provisions and definitions of

terms used in this regulation.

(2) Subpart B governs acquisitions of

bank or bank holding company

securities and assets by bank holding

companies or by any company that will

become a bank holding company as a

result of the acquisition.

(3) Subpart C defines and regulates

the nonbanking activities in which bank

holding companies and foreign banking

organizations may engage directly or

through a subsidiary. The Board’s

Regulation K governs certain

nonbanking activities conducted by

foreign banking organizations and

certain foreign activities conducted by

bank holding companies (12 CFR part

211, International Banking Operations).

(4) Subpart D specifies situations in

which a company is presumed to

control voting securities or to have the

power to exercise a controlling

influence over the management or

policies of a bank or other company;

sets forth the procedures for making a

control determination; and provides

rules governing the effectiveness of

divestitures by bank holding companies.

(5) Subpart E governs changes in bank

control resulting from the acquisition by

individuals or companies (other than

bank holding companies) of voting

securities of a bank holding company or

state member bank of the Federal

Reserve System.

(6) Subpart F specifies the limitations

that govern companies that control socalled nonbank banks and the activities

of nonbank banks.

(7) Subpart G prescribes minimum

standards that apply to the performance

of real estate appraisals and identifies

transactions that require state certified

appraisers.

(8) Subpart H identifies the

circumstances when written notice must

be provided to the Board prior to the

appointment of a director or senior

officer of a bank holding company and

establishes procedures for obtaining the

required Board approval.

(9) Appendix A to the regulation

contains the Board’s Risk-Based Capital

Adequacy Guidelines for bank holding

companies.

(10) Appendix B contains the Board’s

Capital Adequacy Guidelines for

measuring leverage for bank holding

companies and state member banks.

(11) Appendix C contains the Board’s

policy statement governing small bank

holding companies.

(12) Appendix D contains the Board’s

Capital Adequacy Guidelines for

measuring tier 1 leverage for bank

holding companies.
9320 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

(13) Appendix E contains the Board’s

Capital Adequacy Guidelines for

measuring market risk of bank holding

companies.

§ 225.2 Definitions.

Except as modified in this regulation

or unless the context otherwise requires,

the terms used in this regulation have

the same meaning as set forth in the

relevant statutes.

(a) Affiliate means any company that

controls, is controlled by, or is under

common control with, another

company.

(b)(1) Bank means:

(i) An insured bank as defined in

section 3(h) of the Federal Deposit

Insurance Act (12 U.S.C. 1813(h)); or

(ii) An institution organized under the

laws of the United States which both:

(A) Accepts demand deposits or

deposits that the depositor may

withdraw by check or similar means for

payment to third parties or others; and

(B) Is engaged in the business of

making commercial loans.

(2) Bank does not include those

institutions qualifying under the

exceptions listed in section 2(c)(2) of the

BHC Act (12 U.S.C. 1841(c)(2)).

(c)(1) Bank holding company means

any company (including a bank) that

has direct or indirect control of a bank,

other than control that results from the

ownership or control of:

(i) Voting securities held in good faith

in a fiduciary capacity (other than as

provided in paragraphs (e)(2)(ii) and (iii)

of this section) without sole

discretionary voting authority, or as

otherwise exempted under section

2(a)(5)(A) of the BHC Act;

(ii) Voting securities acquired and

held only for a reasonable period of time

in connection with the underwriting of

securities, as provided in section

2(a)(5)(B) of the BHC Act;

(iii) Voting rights to voting securities

acquired for the sole purpose and in the

course of participating in a proxy

solicitation, as provided in section

2(a)(5)(C) of the BHC Act;

(iv) Voting securities acquired in

satisfaction of debts previously

contracted in good faith, as provided in

section 2(a)(5)(D) of the BHC Act, if the

securities are divested within two years

of acquisition (or such later period as

the Board may permit by order); or

(v) Voting securities of certain

institutions owned by a thrift institution

or a trust company, as provided in

sections 2(a)(5)(E) and (F) of the BHC

Act.

(2) Except for the purposes of

§ 225.4(b) of this subpart and subpart E

of this part, or as otherwise provided in

this regulation, bank holding company

includes a foreign banking organization.

For the purposes of subpart B of this

part, bank holding company includes a

foreign banking organization only if it

owns or controls a bank in the United

States.

(d)(1) Company includes any bank,

corporation, general or limited

partnership, association or similar

organization, business trust, or any

other trust unless by its terms it must

terminate either within 25 years, or

within 21 years and 10 months after the

death of individuals living on the

effective date of the trust.

(2) Company does not include any

organization, the majority of the voting

securities of which are owned by the

United States or any state.

(3) Testamentary trusts exempt.

Unless the Board finds that the trust is

being operated as a business trust or

company, a trust is presumed not to be

a company if the trust:

(i) Terminates within 21 years and 10

months after the death of grantors or

beneficiaries of the trust living on the

effective date of the trust or within 25

years;

(ii) Is a testamentary or inter vivos

trust established by an individual or

individuals for the benefit of natural

persons (or trusts for the benefit of

natural persons) who are related by

blood, marriage or adoption;

(iii) Contains only assets previously

owned by the individual or individuals

who established the trust;

(iv) Is not a Massachusetts business

trust; and

(v) Does not issue shares, certificates,

or any other evidence of ownership.

(4) Qualified limited partnerships

exempt. Company does not include a

qualified limited partnership, as defined

in section 2(o)(10) of the BHC Act.

(e)(1) Control of a bank or other

company means (except for the

purposes of subpart E of this part):

(i) Ownership, control, or power to

vote 25 percent or more of the

outstanding shares of any class of voting

securities of the bank or other company,

directly or indirectly or acting through

one or more other persons;

(ii) Control in any manner over the

election of a majority of the directors,

trustees, or general partners (or

individuals exercising similar functions)

of the bank or other company;

(iii) The power to exercise, directly or

indirectly, a controlling influence over

the management or policies of the bank

or other company, as determined by the

Board after notice and opportunity for

hearing in accordance with § 225.31 of

subpart D of this part; or

(iv) Conditioning in any manner the

transfer of 25 percent or more of the

outstanding shares of any class of voting

securities of a bank or other company

upon the transfer of 25 percent or more

of the outstanding shares of any class of

voting securities of another bank or

other company.

(2) A bank or other company is

deemed to control voting securities or

assets owned, controlled, or held,

directly or indirectly:

(i) By any subsidiary of the bank or

other company;

(ii) In a fiduciary capacity (including

by pension and profit-sharing trusts) for

the benefit of the shareholders,

members, or employees (or individuals

serving in similar capacities) of the bank

or other company or any of its

subsidiaries; or

(iii) In a fiduciary capacity for the

benefit of the bank or other company or

any of its subsidiaries.

(f) Foreign banking organization and

qualifying foreign banking organization

have the same meanings as provided in

§ 211.21(n) and § 211.23 of the Board’s

Regulation K (12 CFR 211.21(n) and

211.23).

(g) Insured depository institution

includes an insured bank as defined in

section 3(h) of the Federal Deposit

Insurance Act (12 U.S.C. 1813(h)) and a

savings association.

(h) Lead insured depository

institution means the largest insured

depository institution controlled by the

bank holding company as of the quarter

ending immediately prior to the

proposed filing, based on a comparison

of the average total risk-weighted assets

controlled during the previous 12-

month period by each insured

depository institution subsidiary of the

holding company.

(i) Management official means any

officer, director (including honorary or

advisory directors), partner, or trustee of

a bank or other company, or any

employee of the bank or other company

with policy-making functions.

(j) Nonbank bank means any

institution that:

(1) Became a bank as a result of

enactment of the Competitive Equality

Amendments of 1987 (Pub. L. 100–86),

on the date of enactment (August 10,

1987); and

(2) Was not controlled by a bank

holding company on the day before the

enactment of the Competitive Equality

Amendments of 1987 (August 9, 1987).

(k) Outstanding shares means any

voting securities, but does not include

securities owned by the United States or

by a company wholly owned by the

United States.

(l) Person includes an individual,

bank, corporation, partnership, trust,

association, joint venture, pool,
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9321

2For purposes of this subpart and subparts B and

C of this part, a bank holding company with

consolidated assets under $150 million that is

subject to the Small Bank Holding Company Policy

Statement in Appendix C of this part will be

deemed to be ‘‘well-capitalized’’ if the bank holding

company meets the requirements for expedited/

waived processing in Appendix C.

syndicate, sole proprietorship,

unincorporated organization, or any

other form of entity.

(m) Savings association means:

(1) Any federal savings association or

federal savings bank;

(2) Any building and loan association,

savings and loan association, homestead

association, or cooperative bank if such

association or cooperative bank is a

member of the Savings Association

Insurance Fund; and

(3) Any savings bank or cooperative

that is deemed by the director of the

Office of Thrift Supervision to be a

savings association under section 10(l)

of the Home Owners Loan Act.

(n) Shareholder—(1) Controlling

shareholder means a person that owns

or controls, directly or indirectly, 25

percent or more of any class of voting

securities of a bank or other company.

(2) Principal shareholder means a

person that owns or controls, directly or

indirectly, 10 percent or more of any

class of voting securities of a bank or

other company, or any person that the

Board determines has the power,

directly or indirectly, to exercise a

controlling influence over the

management or policies of a bank or

other company.

(o) Subsidiary means a bank or other

company that is controlled by another

company, and refers to a direct or

indirect subsidiary of a bank holding

company. An indirect subsidiary is a

bank or other company that is

controlled by a subsidiary of the bank

holding company.

(p) United States means the United

States and includes any state of the

United States, the District of Columbia,

any territory of the United States, Puerto

Rico, Guam, American Samoa, and the

Virgin Islands.

(q)(1) Voting securities means shares

of common or preferred stock, general or

limited partnership shares or interests,

or similar interests if the shares or

interest, by statute, charter, or in any

manner, entitle the holder:

(i) To vote for or to select directors,

trustees, or partners (or persons

exercising similar functions of the

issuing company); or

(ii) To vote on or to direct the conduct

of the operations or other significant

policies of the issuing company.

(2) Nonvoting shares. Preferred

shares, limited partnership shares or

interests, or similar interests are not

voting securities if:

(i) Any voting rights associated with

the shares or interest are limited solely

to the type customarily provided by

statute with regard to matters that

would significantly and adversely affect

the rights or preference of the security

or other interest, such as the issuance of

additional amounts or classes of senior

securities, the modification of the terms

of the security or interest, the

dissolution of the issuing company, or

the payment of dividends by the issuing

company when preferred dividends are

in arrears;

(ii) The shares or interest represent an

essentially passive investment or

financing device and do not otherwise

provide the holder with control over the

issuing company; and

(iii) The shares or interest do not

entitle the holder, by statute, charter, or

in any manner, to select or to vote for

the selection of directors, trustees, or

partners (or persons exercising similar

functions) of the issuing company.

(3) Class of voting shares. Shares of

stock issued by a single issuer are

deemed to be the same class of voting

shares, regardless of differences in

dividend rights or liquidation

preference, if the shares are voted

together as a single class on all matters

for which the shares have voting rights

other than matters described in

paragraph (o)(2)(i) of this section that

affect solely the rights or preferences of

the shares.

(r) Well–capitalized–(1) Bank holding

company. In the case of a bank holding

company,2 well-capitalized means that:

(i) On a consolidated basis, the bank

holding company maintains a total riskbased capital ratio of 10.0 percent or

greater, as defined in Appendix A of

this part;

(ii) On a consolidated basis, the bank

holding company maintains a Tier 1

risk-based capital ratio of 6.0 percent or

greater, as defined in Appendix A of

this part; and

(iii) The bank holding company is not

subject to any written agreement, order,

capital directive, or prompt corrective

action directive issued by the Board to

meet and maintain a specific capital

level for any capital measure.

(2) Insured depository institution. In

the case of an insured depository

institution, well-capitalized means that

the institution maintains at least the

capital levels required to be ‘‘wellcapitalized’’ under the capital adequacy

regulations or guidelines applicable to

the institution that have been adopted

by the appropriate federal banking

agency for the institution under section

38 of the Federal Deposit Insurance Act

(12 U.S.C. 1831o).

(3) Foreign banks—(i) Standards

applied. For purposes of determining

whether a foreign banking organization

qualifies under paragraph (r)(1) of this

section:

(A) A foreign banking organization

whose home country supervisor, as

defined in § 211.21 of the Board’s

Regulation K (12 CFR 211.21), has

adopted capital standards consistent in

all respects with the Capital Accord of

the Basle Committee on Banking

Supervision (Basle Accord) may

calculate its capital ratios under the

home country standard; and

(B) A foreign banking organization

whose home country supervisor has not

adopted capital standards consistent in

all respects with the Basle Accord shall

obtain a determination from the Board

that its capital is equivalent to the

capital that would be required of a U.S.

banking organization under paragraph

(r)(1) of this section.

(ii) Branches and agencies. For

purposes of determining, under

paragraph (r)(1) of this section, whether

a branch or agency of a foreign banking

organization is well-capitalized, the

branch or agency shall be deemed to

have the same capital ratios as the

foreign banking organization.

(s) Well-managed—(1) In general. A

company, insured depository

institution, or branch or agency of a

foreign banking organization is wellmanaged if:

(i) At its most recent inspection or

examination or subsequent review by

the appropriate federal banking agency

for the company or institution, the

company or institution received:

(A) At least a satisfactory composite

rating; and

(B) At least a satisfactory rating for

management and for compliance, if such

a rating is given; or

(ii) In the case of a company or

insured depository institution that has

not received an examination rating, the

Board has determined, after a review of

the managerial and other resources of

the company or depository institution,

that the company or institution qualifies

for the streamlined procedures in this

subpart, and subparts B and C of this

part.

(2) Foreign banking organizations. A

foreign banking organization shall

qualify under this paragraph if the

combined operations of the foreign

banking organization in the United

States have received at least a

satisfactory composite rating at the most

recent annual assessment.

§ 225.3 Administration.

(a) Delegation of authority. Designated

Board members and officers and the
9322 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

Federal Reserve Banks are authorized by

the Board to exercise various functions

prescribed in this regulation and in the

Board’s Rules Regarding Delegation of

Authority (12 CFR part 265) and the

Board’s Rules of Procedure (12 CFR part

262).

(b) Appropriate Federal Reserve Bank.

In administering this regulation, unless

a different Federal Reserve Bank is

designated by the Board, the appropriate

Federal Reserve Bank is as follows:

(1) For a bank holding company (or a

company applying to become a bank

holding company): the Reserve Bank of

the Federal Reserve district in which the

company’s banking operations are

principally conducted, as measured by

total domestic deposits in its subsidiary

banks on the date it became (or will

become) a bank holding company;

(2) For a foreign banking organization

that has no subsidiary bank and is not

subject to paragraph (b)(1) of this

section: the Reserve Bank of the Federal

Reserve district in which the total assets

of the organization’s United States

branches, agencies, and commercial

lending companies are the largest as of

the later of January 1, 1980, or the date

it becomes a foreign banking

organization;

(3) For an individual or company

submitting a notice under subpart E of

this part: The Reserve Bank of the

Federal Reserve district in which the

banking operations of the bank holding

company or state member bank to be

acquired are principally conducted, as

measured by total domestic deposits on

the date the notice is filed.

§ 225.4 Corporate practices.

(a) Bank holding company policy and

operations. (1) A bank holding company

shall serve as a source of financial and

managerial strength to its subsidiary

banks and shall not conduct its

operations in an unsafe or unsound

manner.

(2) Whenever the Board believes an

activity of a bank holding company or

control of a nonbank subsidiary (other

than a nonbank subsidiary of a bank)

constitutes a serious risk to the financial

safety, soundness, or stability of a

subsidiary bank of the bank holding

company and is inconsistent with sound

banking principles or the purposes of

the BHC Act or the Financial

Institutions Supervisory Act of 1966, as

amended (12 U.S.C. 1818(b) et seq.), the

Board may require the bank holding

company to terminate the activity or to

terminate control of the subsidiary, as

provided in section 5(e) of the BHC Act.

(b) Purchase or redemption by bank

holding company of its own securities—

(1) Filing notice. Except as provided in

paragraph (b)(6) of this section, a bank

holding company shall give the Board

prior written notice before purchasing

or redeeming its equity securities if the

gross consideration for the purchase or

redemption, when aggregated with the

net consideration paid by the company

for all such purchases or redemptions

during the preceding 12 months, is

equal to 10 percent or more of the

company’s consolidated net worth. For

the purposes of this section, ‘‘net

consideration’’ is the gross

consideration paid by the company for

all of its equity securities purchased or

redeemed during the period minus the

gross consideration received for all of its

equity securities sold during the period.

(2) Contents of notice. Any notice

under this section shall be filed with the

appropriate Reserve Bank and shall

contain the following information:

(i) The purpose of the transaction, a

description of the securities to be

purchased or redeemed, the total

number of each class outstanding, the

gross consideration to be paid, and the

terms and sources of funding for the

transaction;

(ii) A description of all equity

securities redeemed within the

preceding 12 months, the net

consideration paid, and the terms of any

debt incurred in connection with those

transactions; and

(iii) (A) If the bank holding company

has consolidated assets of $150 million

or more, consolidated pro forma riskbased capital and leverage ratio

calculations for the bank holding

company as of the most recent quarter,

and, if the redemption is to be debt

funded, a parent-only pro forma balance

sheet as of the most recent quarter; or

(B) If the bank holding company has

consolidated assets of less than $150

million, a pro forma parent-only balance

sheet as of the most recent quarter, and,

if the redemption is to be debt funded,

one-year income statement and cash

flow projections.

(3) Acting on notice. Within 15

calendar days of receipt of a notice

under this section, the appropriate

Reserve Bank shall either approve the

transaction proposed in the notice or

refer the notice to the Board for

decision. If the notice is referred to the

Board for decision, the Board shall act

on the notice within 30 calendar days

after the Reserve Bank receives the

notice.

(4) Factors considered in acting on

notice. (i) The Board may disapprove a

proposed purchase or redemption if it

finds that the proposal would constitute

an unsafe or unsound practice, or would

violate any law, regulation, Board order,

directive, or any condition imposed by,

or written agreement with, the Board.

(ii) In determining whether a proposal

constitutes an unsafe or unsound

practice, the Board shall consider

whether the bank holding company’s

financial condition, after giving effect to

the proposed purchase or redemption,

meets the financial standards applied by

the Board under section 3 of the BHC

Act, including the Board’s Capital

Adequacy Guidelines (Appendix A of

this part) and the Board’s Policy

Statement for Small Bank Holding

Companies (Appendix C of this part).

(5) Disapproval and hearing. (i) The

Board shall notify the bank holding

company in writing of the reasons for a

decision to disapprove any proposed

purchase or redemption. Within 10

calendar days of receipt of a notice of

disapproval by the Board, the bank

holding company may submit a written

request for a hearing.

(ii) The Board shall order a hearing

within 10 calendar days of receipt of the

request if it finds that material facts are

in dispute, or if it otherwise appears

appropriate. Any hearing conducted

under this paragraph shall be held in

accordance with the Board’s Rules of

Practice for Formal Hearings (12 CFR

part 263).

(iii) At the conclusion of the hearing,

the Board shall by order approve or

disapprove the proposed purchase or

redemption on the basis of the record of

the hearing.

(6) Exception for well-capitalized

bank holding companies. A bank

holding company is not required to

obtain prior Board approval for the

redemption or purchase of its equity

securities under this section provided:

(i) Both before and immediately after

the redemption, the bank holding

company is well-capitalized;

(ii) The bank holding company is

well-managed; and

(iii) The bank holding company is not

the subject of any unresolved

supervisory issues.

(c) Deposit insurance. Every bank that

is a bank holding company or a

subsidiary of a bank holding company

shall obtain Federal Deposit Insurance

and shall remain an insured bank as

defined in section 3(h) of the Federal

Deposit Insurance Act (12 U.S.C.

1813(h)).

(d) Acting as transfer agent,

municipal securities dealer, or clearing

agent. A bank holding company or any

nonbanking subsidiary that is a ‘‘bank,’’

as defined in section 3(a)(6) of the

Securities Exchange Act of 1934 (15

U.S.C. 78c(a)(6)), and that is a transfer

agent of securities, a municipal

securities dealer, a clearing agency, or a
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9323

participant in a clearing agency (as

those terms are defined in section 3(a)

of the Securities Exchange Act (15

U.S.C. 78c(a)), shall be subject to

§§ 208.8 (f)–(j) of the Board’s Regulation

H (12 CFR 208.8 (f)–(j)) as if it were a

state member bank.

(e) Reporting requirement for credit

secured by certain bank holding

company stock. Each executive officer

or director of a bank holding company

the shares of which are not publicly

traded shall report annually to the board

of directors of the bank holding

company the outstanding amount of any

credit that was extended to the

executive officer or director and that is

secured by shares of the bank holding

company. For purposes of this

paragraph, the terms ‘‘executive officer’’

and ‘‘director’’ shall have the meaning

given in § 215.2 of Regulation O (12 CFR

215.2).

(f) Suspicious activity report. A bank

holding company or any nonbank

subsidiary thereof, or a foreign bank that

is subject to the BHC Act or any

nonbank subsidiary of such foreign bank

operating in the United States, shall file

a suspicious activity report in

accordance with the provisions of

§ 208.20 of the Board’s Regulation H (12

CFR 208.20).

§ 225.5 Registration, reports, and

inspections.

(a) Registration of bank holding

companies. Each company shall register

within 180 days after becoming a bank

holding company by furnishing

information in the manner and form

prescribed by the Board. A company

that receives the Board’s prior approval

under subpart B of this part to become

a bank holding company may complete

this registration requirement through

submission of its first annual report to

the Board as required by paragraph (b)

of this section.

(b) Reports of bank holding

companies. Each bank holding company

shall furnish, in the manner and form

prescribed by the Board, an annual

report of the company’s operations for

the fiscal year in which it becomes a

bank holding company, and for each

fiscal year during which it remains a

bank holding company. Additional

information and reports shall be

furnished as the Board may require.

(c) Examinations and inspections.

The Board may examine or inspect any

bank holding company and each of its

subsidiaries and prepare a report of

their operations and activities. With

respect to a foreign banking

organization, the Board may also

examine any branch or agency of a

foreign bank in any state of the United

States and may examine or inspect each

of the organization’s subsidiaries in the

United States and prepare reports of

their operations and activities. The

Board shall rely, as far as possible, on

the reports of examination made by the

primary federal or state supervisor of

the subsidiary bank of the bank holding

company or of the branch or agency of

the foreign bank.

§ 225.6 Penalties for violations.

(a) Criminal and civil penalties. (1)

Section 8 of the BHC Act provides

criminal penalties for willful violation,

and civil penalties for violation, by any

company or individual, of the BHC Act

or any regulation or order issued under

it, or for making a false entry in any

book, report, or statement of a bank

holding company.

(2) Civil money penalty assessments

for violations of the BHC Act shall be

made in accordance with subpart C of

the Board’s Rules of Practice for

Hearings (12 CFR part 263, subpart C).

For any willful violation of the Bank

Control Act or any regulation or order

issued under it, the Board may assess a

civil penalty as provided in 12 U.S.C.

1817(j)(15).

(b) Cease-and-desist proceedings. For

any violation of the BHC Act, the Bank

Control Act, this regulation, or any

order or notice issued thereunder, the

Board may institute a cease-and-desist

proceeding in accordance with the

Financial Institutions Supervisory Act

of 1966, as amended (12 U.S.C. 1818(b)

et seq.).

§ 225.7 Exceptions to tying restrictions.

(a) Purpose. This section establishes

exceptions to the anti-tying restrictions

of section 106 of the Bank Holding

Company Act Amendments of 1970 (12

U.S.C. 1971, 1972(1)). These exceptions

are in addition to those in section 106.

The section also restricts tying of

electronic benefit transfer services by

bank holding companies and their

nonbank subsidiaries.

(b) Exceptions to statute. Subject to

the limitations of paragraph (c) of this

section, a bank may:

(1) Extension to affiliates of statutory

exceptions preserving traditional

banking relationships. Extend credit,

lease or sell property of any kind, or

furnish any service, or fix or vary the

consideration for any of the foregoing,

on the condition or requirement that a

customer:

(i) Obtain a loan, discount, deposit, or

trust service from an affiliate of the

bank; or

(ii) Provide to an affiliate of the bank

some additional credit, property, or

service that the bank could require to be

provided to itself pursuant to section

106(b)(1)(C) of the Bank Holding

Company Act Amendments of 1970 (12

U.S.C. 1972(1)(C)).

(2) Safe harbor for combined-balance

discounts. Vary the consideration for

any product or package of products

based on a customer’s maintaining a

combined minimum balance in certain

products specified by the bank (eligible

products), if:

(i) The bank offers deposits, and all

such deposits are eligible products; and

(ii) Balances in deposits count at least

as much as nondeposit products toward

the minimum balance.

(3) Safe harbor for foreign

transactions. Engage in any transaction

with a customer if that customer is:

(i) A corporation, business, or other

person (other than an individual) that:

(A) Is incorporated, chartered, or

otherwise organized outside the United

States; and

(B) Has its principal place of business

outside the United States; or

(ii) An individual who is a citizen of

a foreign country and is not resident in

the United States.

(c) Limitations on exceptions. Any

exception granted pursuant to this

section shall terminate upon a finding

by the Board that the arrangement is

resulting in anti-competitive practices.

The eligibility of a bank to operate

under any exception granted pursuant

to this section shall terminate upon a

finding by the Board that its exercise of

this authority is resulting in anticompetitive practices.

(d) Extension of statute to electronic

benefit transfer services. A bank holding

company or nonbank subsidiary of a

bank holding company that provides

electronic benefit transfer services shall

be subject to the anti-tying restrictions

applicable to such services set forth in

section 7(i)(11) of the Food Stamp Act

of 1977 (7 U.S.C. 2016(i)(11)).

(e) For purposes of this section, bank

has the meaning given that term in

section 106(a) of the Bank Holding

Company Act Amendments of 1970 (12

U.S.C. 1971), but shall also include a

United States branch, agency, or

commercial lending company

subsidiary of a foreign bank that is

subject to section 106 pursuant to

section 8(d) of the International Banking

Act of 1978 (12 U.S.C. 3106(d)), and any

company made subject to section 106 by

section 4(f)(9) or 4(h) of the BHC Act.

3. Subpart B is revised to read as

follows:
9324 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

Subpart B—Acquisition of Bank Securities

or Assets

Sec.

225.11 Transactions requiring Board

approval.

225.12 Transactions not requiring Board

approval.

225.13 Factors considered in acting on bank

acquisition proposals.

225.14 Expedited action for certain bank

acquisitions by well-run bank holding

companies.

225.15 Procedures for other bank

acquisition proposals.

225.16 Public notice, comments, hearings,

and other provisions governing

applications and notices.

225.17 Notice procedure for one-bank

holding company formations.

Subpart B—Acquisition of Bank

Securities or Assets

§ 225.11 Transactions requiring Board

approval

The following transactions require the

Board’s prior approval under section 3

of the Bank Holding Company Act

except as exempted under § 225.12 or as

otherwise covered by § 225.17 of this

subpart:

(a) Formation of bank holding

company. Any action that causes a bank

or other company to become a bank

holding company.

(b) Acquisition of subsidiary bank.

Any action that causes a bank to become

a subsidiary of a bank holding company.

(c) Acquisition of control of bank or

bank holding company securities.

(1) The acquisition by a bank holding

company of direct or indirect ownership

or control of any voting securities of a

bank or bank holding company, if the

acquisition results in the company’s

control of more than 5 percent of the

outstanding shares of any class of voting

securities of the bank or bank holding

company.

(2) An acquisition includes the

purchase of additional securities

through the exercise of preemptive

rights, but does not include securities

received in a stock dividend or stock

split that does not alter the bank holding

company’s proportional share of any

class of voting securities.

(d) Acquisition of bank assets. The

acquisition by a bank holding company

or by a subsidiary thereof (other than a

bank) of all or substantially all of the

assets of a bank.

(e) Merger of bank holding companies.

The merger or consolidation of bank

holding companies, including a merger

through the purchase of assets and

assumption of liabilities.

(f) Transactions by foreign banking

organization. Any transaction described

in paragraphs (a) through (e) of this

section by a foreign banking

organization that involves the

acquisition of an interest in a U.S. bank

or in a bank holding company for which

application would be required if the

foreign banking organization were a

bank holding company.

§ 225.12 Transactions not requiring Board

approval.

The following transactions do not

require the Board’s approval under

§ 225.11 of this subpart:

(a) Acquisition of securities in

fiduciary capacity. The acquisition by a

bank or other company (other than a

trust that is a company) of control of

voting securities of a bank or bank

holding company in good faith in a

fiduciary capacity, unless:

(1) The acquiring bank or other

company has sole discretionary

authority to vote the securities and

retains this authority for more than two

years; or

(2) The acquisition is for the benefit

of the acquiring bank or other company,

or its shareholders, employees, or

subsidiaries.

(b) Acquisition of securities in

satisfaction of debts previously

contracted. The acquisition by a bank or

other company of control of voting

securities of a bank or bank holding

company in the regular course of

securing or collecting a debt previously

contracted in good faith, if the acquiring

bank or other company divests the

securities within two years of

acquisition. The Board or Reserve Bank

may grant requests for up to three oneyear extensions.

(c) Acquisition of securities by bank

holding company with majority control.

The acquisition by a bank holding

company of additional voting securities

of a bank or bank holding company if

more than 50 percent of the outstanding

voting securities of the bank or bank

holding company is lawfully controlled

by the acquiring bank holding company

prior to the acquisition.

(d) Acquisitions involving bank

mergers and internal corporate

reorganizations—(1) Transactions

subject to Bank Merger Act. The merger

or consolidation of a subsidiary bank of

a bank holding company with another

bank, or the purchase of assets by the

subsidiary bank, or a similar transaction

involving subsidiary banks of a bank

holding company, if the transaction

requires the prior approval of a federal

supervisory agency under the Bank

Merger Act (12 U.S.C. 1828(c)) and does

not involve the acquisition of shares of

a bank. This exception does not include:

(i) The merger of a nonsubsidiary

bank and a nonoperating subsidiary

bank formed by a company for the

purpose of acquiring the nonsubsidiary

bank; or

(ii) Any transaction requiring the

Board’s prior approval under § 225.11(e)

of this subpart.

The Board may require an application

under this subpart if it determines that

the merger or consolidation would have

a significant adverse impact on the

financial condition of the bank holding

company, or otherwise requires

approval under section 3 of the BHC

Act.

(2) Certain acquisitions subject to

Bank Merger Act. The acquisition by a

bank holding company of shares of a

bank or company controlling a bank or

the merger of a company controlling a

bank with the bank holding company, if

the transaction is part of the merger or

consolidation of the bank with a

subsidiary bank (other than a

nonoperating subsidiary bank) of the

acquiring bank holding company, or is

part of the purchase of substantially all

of the assets of the bank by a subsidiary

bank (other than a nonoperating

subsidiary bank) of the acquiring bank

holding company, and if:

(i) The bank merger, consolidation, or

asset purchase occurs simultaneously

with the acquisition of the shares of the

bank or bank holding company or the

merger of holding companies, and the

bank is not operated by the acquiring

bank holding company as a separate

entity other than as the survivor of the

merger, consolidation, or asset

purchase;

(ii) The transaction requires the prior

approval of a federal supervisory agency

under the Bank Merger Act (12 U.S.C.

1828(c));

(iii) The transaction does not involve

the acquisition of any nonbank

company that would require prior

approval under section 4 of the BHC Act

(12 U.S.C. 1843);

(iv) Both before and after the

transaction, the acquiring bank holding

company meets the Board’s Capital

Adequacy Guidelines (Appendixes A, B,

C, D, and E of this part);

(v) At least 10 days prior to the

transaction, the acquiring bank holding

company has provided to the Reserve

Bank written notice of the transaction

that contains:

(A) A copy of the filing made to the

appropriate federal banking agency

under the Bank Merger Act; and

(B) A description of the holding

company’s involvement in the

transaction, the purchase price, and the

source of funding for the purchase price;

and

(vi) Prior to expiration of the period

provided in paragraph (d)(2)(v) of this

section, the Reserve Bank has not
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9325

1 In the case of a transaction that results in the

formation or designation of a new bank holding

company, the new bank holding company must

complete the registration requirements described in

§ 225.5.

2 If, in connection with a transaction under this

subpart, any person or group of persons proposes

to acquire control of the acquiring bank holding

company for purposes of the Bank Control Act or

§ 225.41, the person or group of persons may fulfill

the notice requirements of the Bank Control Act and

§ 225.43 by providing, as part of the submission by

the acquiring bank holding company under this

subpart, identifying and biographical information

required in paragraph (6)(A) of the Bank Control

Act (12 U.S.C. 1817(j)(6)(A)), as well as any

financial or other information requested by the

Reserve Bank under § 225.43.

informed the bank holding company

that an application under § 225.11 is

required.

(3) Internal corporate reorganizations.

(i) Subject to paragraph (d)(3)(ii) of this

section, any of the following

transactions performed in the United

States by a bank holding company:

(A) The merger of holding companies

that are subsidiaries of the bank holding

company;

(B) The formation of a subsidiary

holding company; 1

(C) The transfer of control or

ownership of a subsidiary bank or a

subsidiary holding company between

one subsidiary holding company and

another subsidiary holding company or

the bank holding company.

(ii) A transaction described in

paragraph (d)(3)(i) of this section

qualifies for this exception if:

(A) The transaction represents solely

a corporate reorganization involving

companies and insured depository

institutions that, both preceding and

following the transaction, are lawfully

controlled and operated by the bank

holding company;

(B) The transaction does not involve

the acquisition of additional voting

shares of an insured depository

institution that, prior to the transaction,

was less than majority owned by the

bank holding company;

(C) The bank holding company is not

organized in mutual form; and

(D) Both before and after the

transaction, the bank holding company

meets the Board’s Capital Adequacy

Guidelines (Appendixes A, B, C, D, and

E of this part).

(e) Holding securities in escrow. The

holding of any voting securities of a

bank or bank holding company in an

escrow arrangement for the benefit of an

applicant pending the Board’s action on

an application for approval of the

proposed acquisition, if title to the

securities and the voting rights remain

with the seller and payment for the

securities has not been made to the

seller.

(f) Acquisition of foreign banking

organization. The acquisition of a

foreign banking organization where the

foreign banking organization does not

directly or indirectly own or control a

bank in the United States, unless the

acquisition is also by a foreign banking

organization and otherwise subject to

§ 225.11(f) of this subpart.

§ 225.13 Factors considered in acting on

bank acquisition proposals.

(a) Factors requiring denial. As

specified in section 3(c) of the BHC Act,

the Board may not approve any

application under this subpart if:

(1) The transaction would result in a

monopoly or would further any

combination or conspiracy to

monopolize, or to attempt to

monopolize, the business of banking in

any part of the United States;

(2) The effect of the transaction may

be substantially to lessen competition in

any section of the country, tend to

create a monopoly, or in any other

manner be in restraint of trade, unless

the Board finds that the transaction’s

anti-competitive effects are clearly

outweighed by its probable effect in

meeting the convenience and needs of

the community;

(3) The applicant has failed to provide

the Board with adequate assurances that

it will make available such information

on its operations or activities, and the

operations or activities of any affiliate of

the applicant, that the Board deems

appropriate to determine and enforce

compliance with the BHC Act and other

applicable federal banking statutes, and

any regulations thereunder; or

(4) In the case of an application

involving a foreign banking

organization, the foreign banking

organization is not subject to

comprehensive supervision or

regulation on a consolidated basis by

the appropriate authorities in its home

country, as provided in § 211.24(c)(1)(ii)

of the Board’s Regulation K (12 CFR

211.24(c)(1)(ii)).

(b) Other factors. In deciding

applications under this subpart, the

Board also considers the following

factors with respect to the applicant, its

subsidiaries, any banks related to the

applicant through common ownership

or management, and the bank or banks

to be acquired:

(1) Financial condition. Their

financial condition and future

prospects, including whether current

and projected capital positions and

levels of indebtedness conform to

standards and policies established by

the Board.

(2) Managerial resources. The

competence, experience, and integrity of

the officers, directors, and principal

shareholders of the applicant, its

subsidiaries, and the banks and bank

holding companies concerned; their

record of compliance with laws and

regulations; and the record of the

applicant and its affiliates of fulfilling

any commitments to, and any

conditions imposed by, the Board in

connection with prior applications.

(3) Convenience and needs of

community. The convenience and needs

of the communities to be served,

including the record of performance

under the Community Reinvestment Act

of 1977 (12 U.S.C. 2901 et seq.) and

regulations issued thereunder, including

the Board’s Regulation BB (12 CFR part

228).

(c) Interstate transactions. The Board

may approve any application or notice

under this subpart by a bank holding

company to acquire control of all or

substantially all of the assets of a bank

located in a state other than the home

state of the bank holding company,

without regard to whether the

transaction is prohibited under the law

of any state, if the transaction complies

with the requirements of section 3(d) of

the BHC Act (12 U.S.C. 1842(d)).

(d) Conditional approvals. The Board

may impose conditions on any

approval, including conditions to

address competitive, financial,

managerial, safety and soundness,

convenience and needs, compliance or

other concerns, to ensure that approval

is consistent with the relevant statutory

factors and other provisions of the BHC

Act.

§ 225.14 Expedited action for certain bank

acquisitions by well-run bank holding

companies.

(a) Filing of notice—(1) Information

required and public notice. As an

alternative to the procedure provided in

§ 225.15, a bank holding company that

meets the requirements of paragraph (c)

of this section may satisfy the prior

approval requirements of § 225.11 in

connection with the acquisition of

shares, assets or control of a bank, or a

merger or consolidation between bank

holding companies, by providing the

appropriate Reserve Bank with a written

notice containing the following:

(i) A certification that all of the

criteria in paragraph (c) of this section

are met;

(ii) A description of the transaction

that includes identification of the

companies and insured depository

institutions involved in the transaction 2

and identification of each banking

market affected by the transaction;
9326 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

(iii) A description of the effect of the

transaction on the convenience and

needs of the communities to be served

and of the actions being taken by the

bank holding company to improve the

CRA performance of any insured

depository institution subsidiary that

does not have at least a satisfactory CRA

performance rating at the time of the

transaction;

(iv) Evidence that notice of the

proposal has been published in

accordance with § 225.16(b)(1);

(v)(A) If the bank holding company

has consolidated assets of $150 million

or more, an abbreviated consolidated

pro forma balance sheet as of the most

recent quarter showing credit and debit

adjustments that reflect the proposed

transaction, consolidated pro forma

risk-based capital ratios for the

acquiring bank holding company as of

the most recent quarter, and a

description of the purchase price and

the terms and sources of funding for the

transaction;

(B) If the bank holding company has

consolidated assets of less than $150

million, a pro forma parent-only balance

sheet as of the most recent quarter

showing credit and debit adjustments

that reflect the proposed transaction,

and a description of the purchase price,

the terms and sources of funding for the

transaction, and the sources and

schedule for retiring any debt incurred

in the transaction;

(vi) If the bank holding company has

consolidated assets of less than $300

million, a list of and biographical

information regarding any directors or

senior executive officers of the resulting

bank holding company that are not

directors or senior executive officers of

the acquiring bank holding company or

of a company or institution to be

acquired;

(vii) For each insured depository

institution whose Tier 1 capital, total

capital, total assets or risk-weighted

assets change as a result of the

transaction, the total risk-weighted

assets, total assets, Tier 1 capital and

total capital of the institution on a pro

forma basis; and

(viii) The market indexes for each

relevant banking market reflecting the

pro forma effect of the transaction.

(2) Waiver of unnecessary

information. The Reserve Bank may

reduce the information requirements in

paragraph (a)(1)(v) through (viii) of this

section as appropriate.

(b)(1) Action on proposals under this

section. The Board or the appropriate

Reserve Bank shall act on a proposal

submitted under this section or notify

the bank holding company that the

transaction is subject to the procedure

in § 225.15 within 5 business days after

the close of the public comment period.

The Board and the Reserve Bank shall

not approve any proposal under this

section prior to the third business day

following the close of the public

comment period, unless an emergency

exists that requires expedited or

immediate action. The Board may

extend the period for action under this

section for up to 5 business days.

(2) Acceptance of notice in event

expedited procedure not available. In

the event that the Board or the Reserve

Bank determines after the filing of a

notice under this section that a bank

holding company may not use the

procedure in this section and must file

an application under § 225.15, the

application shall be deemed accepted

for purposes of § 225.15 as of the date

that the notice was filed under this

section.

(c) Criteria for use of expedited

procedure. The procedure in this

section is available only if:

(1) Well-capitalized organization—(i)

Bank holding company. Both at the time

of and immediately after the proposed

transaction, the acquiring bank holding

company is well-capitalized;

(ii) Insured depository institutions.

Both at the time of and immediately

after the proposed transaction:

(A) The lead insured depository

institution of the acquiring bank holding

company is well-capitalized;

(B) Well-capitalized insured

depository institutions control at least

80 percent of the total risk-weighted

assets of insured depository institutions

controlled by the acquiring bank

holding company; and

(C) No insured depository institution

controlled by the acquiring bank

holding company is undercapitalized;

(2) Well-managed organization. (i)

Satisfactory examination ratings. At the

time of the transaction, the acquiring

bank holding company, its lead insured

depository institution, and insured

depository institutions that control at

least 80 percent of the total riskweighted assets of insured depository

institutions controlled by the holding

company are well-managed;

(ii) No poorly managed institutions.

No insured depository institution

controlled by the acquiring bank

holding company has received 1 of the

2 lowest composite ratings at the later

of the institution’s most recent

examination or subsequent review by

the appropriate federal banking agency

for the institution;

(iii) Recently acquired institutions

excluded. Any insured depository

institution that has been acquired by the

bank holding company during the 12-

month period preceding the date on

which written notice is filed under

paragraph (a) of this section may be

excluded for purposes of paragraph

(c)(2)(ii) of this section if :

(A) The bank holding company has

developed a plan acceptable to the

appropriate federal banking agency for

the institution to restore the capital and

management of the institution; and

(B) All insured depository institutions

excluded under this paragraph

represent, in the aggregate, less than 10

percent of the aggregate total riskweighted assets of all insured

depository institutions controlled by the

bank holding company;

(3) Convenience and needs criteria—

(i) Effect on the community. The record

indicates that the proposed transaction

would meet the convenience and needs

of the community standard in the BHC

Act; and

(ii) Established CRA performance

record. At the time of the transaction,

the lead insured depository institution

of the acquiring bank holding company

and insured depository institutions that

control at least 80 percent of the total

risk-weighted assets of insured

institutions controlled by the holding

company have received a satisfactory or

better composite rating at the most

recent examination under the

Community Reinvestment Act;

(4) Public comment. No comment that

is timely and substantive as provided in

§ 225.16 is received by the Board or the

appropriate Reserve Bank other than a

comment that supports approval of the

proposal;

(5) Competitive criteria—(i)

Competitive screen. Without regard to

any divestitures proposed by the

acquiring bank holding company, the

acquisition does not cause:

(A) Insured depository institutions

controlled by the acquiring bank

holding company to control in excess of

35 percent of market deposits in any

relevant banking market; or

(B) The Herfindahl-Hirschman index

to increase by more than 200 points in

any relevant banking market with a

post-acquisition index of at least 1800;

and

(ii) Department of Justice. The

Department of Justice has not indicated

to the Board that consummation of the

transaction is likely to have a

significantly adverse effect on

competition in any relevant banking

market;

(6) Size of acquisition—(i) In

general—(A) Limited Growth. Except as

provided in paragraph (c)(6)(ii) of this

section, the sum of the aggregate riskweighted assets to be acquired in the

proposal and the aggregate risk-
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9327

weighted assets acquired by the

acquiring bank holding company in all

other qualifying transactions does not

exceed 35 percent of the consolidated

risk-weighted assets of the acquiring

bank holding company. For purposes of

this paragraph other qualifying

transactions means any transaction

approved under this section or § 225.23

during the 12 months prior to filing the

notice under this section; and

(B) Individual size limitation. The

total risk-weighted assets to be acquired

do not exceed $7.5 billion;

(ii) Small bank holding companies.

Paragraph (c)(6)(i)(A) of this section

shall not apply if, immediately

following consummation of the

proposed transaction, the consolidated

risk-weighted assets of the acquiring

bank holding company are less than

$300 million;

(7) Supervisory actions. During the

12-month period ending on the date on

which the bank holding company

proposes to consummate the proposed

transaction, no formal administrative

order, including a written agreement,

cease and desist order, capital directive,

prompt corrective action directive, asset

maintenance agreement, or other formal

enforcement action, is or was

outstanding against the bank holding

company or any insured depository

institution subsidiary of the holding

company, and no formal administrative

enforcement proceeding involving any

such enforcement action, order, or

directive is or was pending;

(8) Interstate acquisitions. Boardapproval of the transaction is not

prohibited under section 3(d) of the

BHC Act;

(9) Other supervisory considerations.

Board approval of the transaction is not

prohibited under the informational

sufficiency or comprehensive home

country supervision standards set forth

in section 3(c)(3) of the BHC Act; and

(10) Notification. The acquiring bank

holding company has not been notified

by the Board, in its discretion, prior to

the expiration of the period in

paragraph (b)(1) of this section that an

application under § 225.15 is required

in order to permit closer review of any

financial, managerial, competitive,

convenience and needs or other matter

related to the factors that must be

considered under this part.

(d) Comment by primary banking

supervisor—(1) Notice. Upon receipt of

a notice under this section, the

appropriate Reserve Bank shall

promptly furnish notice of the proposal

and a copy of the information filed

pursuant to paragraph (a) of this section

to the primary banking supervisor of the

insured depository institutions to be

acquired.

(2) Comment period. The primary

banking supervisor shall have 30

calendar days (or such shorter time as

agreed to by the primary banking

supervisor) from the date of the letter

giving notice in which to submit its

views and recommendations to the

Board.

(3) Action subject to supervisor’s

comment. Action by the Board or the

Reserve Bank on a proposal under this

section is subject to the condition that

the primary banking supervisor not

recommend in writing to the Board

disapproval of the proposal prior to the

expiration of the comment period

described in paragraph (d)(2) of this

section. In such event, any approval

given under this section shall be

revoked and, if required by section 3(b)

of the BHC Act, the Board shall order a

hearing on the proposal.

(4) Emergencies. Notwithstanding

paragraphs (d)(2) and (d)(3) of this

section, the Board may provide the

primary banking supervisor with 10

calendar days’ notice of a proposal

under this section if the Board finds that

an emergency exists requiring

expeditious action, and may act during

the notice period or without providing

notice to the primary banking

supervisor if the Board finds that it must

act immediately to prevent probable

failure.

(5) Primary banking supervisor. For

purposes of this section and § 225.15(b),

the primary banking supervisor for an

institution is:

(i) The Office of the Comptroller of

the Currency, in the case of a national

banking association or District bank;

(ii) The appropriate supervisory

authority for the State in which the bank

is chartered, in the case of a State bank;

(iii) The Director of the Office of

Thrift Supervision, in the case of a

savings association.

(e) Branches and agencies of foreign

banking organizations. For purposes of

this section, a U.S. branch or agency of

a foreign banking organization shall be

considered to be an insured depository

institution. A U.S. branch or agency of

a foreign banking organization shall be

subject to paragraph (c)(3)(ii) of this

section only to the extent it is insured

by the Federal Deposit Insurance

Corporation in accordance with section

6 of the International Banking Act of

1978 (12 U.S.C. 3104).

§ 225.15 Procedures for other bank

acquisition proposals.

(a) Filing application. Except as

provided in § 225.14, an application for

the Board’s prior approval under this

subpart shall be governed by the

provisions of this section and shall be

filed with the appropriate Reserve Bank

on the designated form.

(b) Notice to primary banking

supervisor. Upon receipt of an

application under this subpart, the

Reserve Bank shall promptly furnish

notice and a copy of the application to

the primary banking supervisor of each

bank to be acquired. The primary

supervisor shall have 30 calendar days

from the date of the letter giving notice

in which to submit its views and

recommendations to the Board.

(c) Accepting application for

processing. Within 7 calendar days after

the Reserve Bank receives an

application under this section, the

Reserve Bank shall accept it for

processing as of the date the application

was filed or return the application if it

is substantially incomplete. Upon

accepting an application, the Reserve

Bank shall immediately send copies to

the Board. The Reserve Bank or the

Board may request additional

information necessary to complete the

record of an application at any time

after accepting the application for

processing.

(d) Action on applications—(1) Action

under delegated authority. The Reserve

Bank shall approve an application

under this section within 30 calendar

days after the acceptance date for the

application, unless the Reserve Bank,

upon notice to the applicant, refers the

application to the Board for decision

because action under delegated

authority is not appropriate.

(2) Board action. The Board shall act

on an application under this subpart

that is referred to it for decision within

60 calendar days after the acceptance

date for the application, unless the

Board notifies the applicant that the 60-

day period is being extended for a

specified period and states the reasons

for the extension. In no event may the

extension exceed the 91-day period

provided in § 225.16(f). The Board may,

at any time, request additional

information that it believes is necessary

for its decision.

§ 225.16 Public notice, comments,

hearings, and other provisions governing

applications and notices.

(a) In general. The provisions of this

section apply to all notices and

applications filed under § 225.14 and

§ 225.15.

(b) Public notice—(1) Newspaper

publication—(i) Location of publication.

In the case of each notice or application

submitted under § 225.14 or § 225.15,

the applicant shall publish a notice in

a newspaper of general circulation, in
9328 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

the form and at the locations specified

in § 262.3 of the Rules of Procedure (12

CFR 262.3);

(ii) Contents of notice. A newspaper

notice under this paragraph shall

provide an opportunity for interested

persons to comment on the proposal for

a period of at least 30 calendar days;

(iii) Timing of publication. Each

newspaper notice published in

connection with a proposal under this

paragraph shall be published no more

than 15 calendar days before and no

later than 7 calendar days following the

date that a notice or application is filed

with the appropriate Reserve Bank.

(2) Federal Register notice. (i)

Publication by Board. Upon receipt of a

notice or application under § 225.14 or

§ 225.15, the Board shall promptly

publish notice of the proposal in the

Federal Register and shall provide an

opportunity for interested persons to

comment on the proposal for a period of

no more than 30 days;

(ii) Request for advance publication.

A bank holding company may request

that, during the 15-day period prior to

filing a notice or application under

§ 225.14 or § 225.15, the Board publish

notice of a proposal in the Federal

Register. A request for advance Federal

Register publication shall be made in

writing to the appropriate Reserve Bank

and shall contain the identifying

information prescribed by the Board for

Federal Register publication;

(3) Waiver or shortening of notice. The

Board may waive or shorten the

required notice periods under this

section if the Board determines that an

emergency exists requiring expeditious

action on the proposal, or if the Board

finds that immediate action is necessary

to prevent the probable failure of an

insured depository institution.

(c) Public comment—(1) Timely

comments. Interested persons may

submit information and comments

regarding a proposal filed under this

subpart. A comment shall be considered

timely for purposes of this subpart if the

comment, together with all

supplemental information, is submitted

in writing in accordance with the

Board’s Rules of Procedure and received

by the Board or the appropriate Reserve

Bank prior to the expiration of the latest

public comment period provided in

paragraph (b) of this section.

(2) Extension of comment period—(i)

In general. The Board may, in its

discretion, extend the public comment

period regarding any proposal

submitted under this subpart.

(ii) Requests in connection with

obtaining application or notice. In the

event that an interested person has

requested a copy of a notice or

application submitted under this

subpart, the Board may, in its discretion

and based on the facts and

circumstances, grant such person an

extension of the comment period for up

to 15 calendar days.

(iii) Joint requests by interested

person and acquiring company. The

Board will grant a joint request by an

interested person and the acquiring

bank holding company for an extension

of the comment period for a reasonable

period for a purpose related to the

statutory factors the Board must

consider under this subpart.

(3) Substantive comment. A comment

will be considered substantive for

purposes of this subpart unless it

involves individual complaints, or

raises frivolous, previously-considered

or wholly unsubstantiated claims or

irrelevant issues.

(d) Notice to Attorney General. The

Board or Reserve Bank shall

immediately notify the United States

Attorney General of approval of any

notice or application under § 225.14 or

§ 225.15.

(e) Hearings. As provided in section

3(b) of the BHC Act, the Board shall

order a hearing on any application or

notice under § 225.15 if the Board

receives from the primary supervisor of

the bank to be acquired, within the 30-

day period specified in § 225.15(b), a

written recommendation of disapproval

of an application. The Board may order

a formal or informal hearing or other

proceeding on the application or notice,

as provided in § 262.3(i)(2) of the

Board’s Rules of Procedure. Any request

for a hearing (other than from the

primary supervisor) shall comply with

§ 262.3(e) of the Rules of Procedure (12

CFR 262.3(e)).

(f) Approval through failure to act—

(1) Ninety-one day rule. An application

or notice under § 225.14 or § 225.15

shall be deemed approved if the Board

fails to act on the application or notice

within 91 calendar days after the date of

submission to the Board of the complete

record on the application. For this

purpose, the Board acts when it issues

an order stating that the Board has

approved or denied the application or

notice, reflecting the votes of the

members of the Board, and indicating

that a statement of the reasons for the

decision will follow promptly.

(2) Complete record. For the purpose

of computing the commencement of the

91-day period, the record is complete on

the latest of:

(i) The date of receipt by the Board of

an application or notice that has been

accepted by the Reserve Bank;

(ii) The last day provided in any

notice for receipt of comments and

hearing requests on the application or

notice;

(iii) The date of receipt by the Board

of the last relevant material regarding

the application or notice that is needed

for the Board’s decision, if the material

is received from a source outside of the

Federal Reserve System; or

(iv) The date of completion of any

hearing or other proceeding.

(g) Exceptions to notice and hearing

requirements.

(1) Probable bank failure. If the Board

finds it must act immediately on an

application or notice in order to prevent

the probable failure of a bank or bank

holding company, the Board may

modify or dispense with the notice and

hearing requirements of this section.

(2) Emergency. If the Board finds that,

although immediate action on an

application or notice is not necessary,

an emergency exists requiring

expeditious action, the Board shall

provide the primary supervisor 10 days

to submit its recommendation. The

Board may act on such an application or

notice without a hearing and may

modify or dispense with the other

notice and hearing requirements of this

section.

(h) Waiting period. A transaction

approved under § 225.14 or § 225.15

shall not be consummated until 30 days

after the date of approval of the

application, except that a transaction

may be consummated:

(1) Immediately upon approval, if the

Board has determined under paragraph

(g) of this section that the application or

notice involves a probable bank failure;

(2) On or after the 5th calendar day

following the date of approval, if the

Board has determined under paragraph

(g) of this section that an emergency

exists requiring expeditious action; or

(3) On or after the 15th calendar day

following the date of approval, if the

Board has not received any adverse

comments from the United States

Attorney General relating to the

competitive factors and the Attorney

General has consented to the shorter

waiting period.

§ 225.17 Notice procedure for one-bank

holding company formations.

(a) Transactions that qualify under

this section. An acquisition by a

company of control of a bank may be

consummated 30 days after providing

notice to the appropriate Reserve Bank

in accordance with paragraph (b) of this

section, provided that all of the

following conditions are met:

(1) The shareholder or shareholders

who control at least 67 percent of the

shares of the bank will control,

immediately after the reorganization, at
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9329

3A shareholder of a bank in reorganization will

be considered to have the same proportional

interest in the holding company if the shareholder

interest increases, on a pro rata basis, as a result

of either the redemption of shares from dissenting

shareholders by the bank or bank holding company,

or the acquisition of shares of dissenting

shareholders by the remaining shareholders.

4This procedure is not available in cases in

which the exercise of dissenting shareholders’

rights would cause a company that is not a bank

holding company (other than the company in

formation) to be required to register as a bank

holding company. This procedure also is not

available for the formation of a bank holding

company organized in mutual form.

5For a banking organization with consolidated

assets, on a pro forma basis, of less than $150

million (other than a banking organization that will

control a de novo bank), this requirement is

satisfied if the proposal complies with the Board’s

policy statement on small bank holding companies

(Appendix C of this part).

least 67 percent of the shares of the

holding company in substantially the

same proportion, except for changes in

shareholders’ interests resulting from

the exercise of dissenting shareholders’

rights under state or federal law; 3

(2) No shareholder, or group of

shareholders acting in concert, will,

following the reorganization, own or

control 10 percent or more of any class

of voting shares of the bank holding

company, unless that shareholder or

group of shareholders was authorized,

after review under the Change in Bank

Control Act of 1978 (12 U.S.C. 1817(j))

by the appropriate federal banking

agency for the bank, to own or control

10 percent or more of any class of voting

shares of the bank; 4

(3) The bank is adequately capitalized

(as defined in section 38 of the Federal

Deposit Insurance Act (12 U.S.C.

1831o));

(4) The bank received at least a

composite ‘‘satisfactory’’ rating at its

most recent examination, in the event

that the bank was examined;

(5) At the time of the reorganization,

neither the bank nor any of its officers,

directors, or principal shareholders is

involved in any unresolved supervisory

or enforcement matters with any

appropriate federal banking agency;

(6) The company demonstrates that

any debt that it incurs at the time of the

reorganization, and the proposed means

of retiring this debt, will not place

undue burden on the holding company

or its subsidiary on a pro forma basis; 5

(7) The holding company will not, as

a result of the reorganization, acquire

control of any additional bank or engage

in any activities other than those of

managing and controlling banks; and

(8) During this period, neither the

appropriate Reserve Bank nor the Board

objected to the proposal or required the

filing of an application under § 225.15

of this subpart.

(b) Contents of notice. A notice filed

under this paragraph shall include:

(1) Certification by the notificant’s

board of directors that the requirements

of 12 U.S.C. 1842(a)(C) and this section

are met by the proposal;

(2) A list identifying all principal

shareholders of the bank prior to the

reorganization and of the holding

company following the reorganization,

and specifying the percentage of shares

held by each principal shareholder in

the bank and proposed to be held in the

new holding company;

(3) A description of the resulting

management of the proposed bank

holding company and its subsidiary

bank, including:

(i) Biographical information regarding

any senior officers and directors of the

resulting bank holding company who

were not senior officers or directors of

the bank prior to the reorganization; and

(ii) A detailed history of the

involvement of any officer, director, or

principal shareholder of the resulting

bank holding company in any

administrative or criminal proceeding;

and

(4) Pro forma financial statements for

the holding company, and a description

of the amount, source, and terms of

debt, if any, that the bank holding

company proposes to incur, and

information regarding the sources and

timing for debt service and retirement.

(c) Acknowledgment of notice. Within

7 calendar days following receipt of a

notice under this section, the Reserve

Bank shall provide the notificant with a

written acknowledgment of receipt of

the notice. This written

acknowledgment shall indicate that the

transaction described in the notice may

be consummated on the 30th calendar

day after the date of receipt of the notice

if the Reserve Bank or the Board has not

objected to the proposal during that

time.

(d) Application required upon

objection. The Reserve Bank or the

Board may object to a proposal during

the notice period by providing the bank

holding company with a written

explanation of the reasons for the

objection. In such case, the bank

holding company may file an

application for prior approval of the

proposal pursuant to § 225.15 of this

subpart.

4. Subpart C is revised to read as

follows:

Subpart C—Nonbanking Activities and

Acquisitions by Bank Holding Companies

Sec.

225.21 Prohibited nonbanking activities

and acquisitions; exempt bank holding

companies.

225.22 Exempt nonbanking activities and

acquisitions.

225.23 Expedited action for nonbanking

proposals by well-run bank holding

companies.

225.24 Procedures for other nonbanking

proposals.

225.25 Hearings, alteration of activities, and

other matters.

225.26 Factors considered in acting on

nonbanking proposals.

225.27 Procedures for determining scope of

nonbanking activities.

225.28 List of permissible nonbanking

activities.

Subpart C—Nonbanking Activities and

Acquisitions by Bank Holding

Companies

§ 225.21 Prohibited nonbanking activities

and acquisitions; exempt bank holding

companies.

(a) Prohibited nonbanking activities

and acquisitions. Except as provided in

§ 225.22 of this subpart, a bank holding

company or a subsidiary may not engage

in, or acquire or control, directly or

indirectly, voting securities or assets of

a company engaged in, any activity

other than:

(1) Banking or managing or

controlling banks and other subsidiaries

authorized under the BHC Act; and

(2) An activity that the Board

determines to be so closely related to

banking, or managing or controlling

banks as to be a proper incident thereto,

including any incidental activities that

are necessary to carry on such an

activity, if the bank holding company

has obtained the prior approval of the

Board for that activity in accordance

with the requirements of this regulation.

(b) Exempt bank holding companies.

The following bank holding companies

are exempt from the provisions of this

subpart:

(1) Family-owned companies. Any

company that is a ‘‘company covered in

1970’’ (as defined in section 2(b) of the

BHC Act), more than 85 percent of the

voting securities of which was

collectively owned on June 30, 1968,

and continuously thereafter, by

members of the same family (or their

spouses) who are lineal descendants of

common ancestors.

(2) Labor, agricultural, and

horticultural organizations. Any

company that was on January 4, 1977,

both a bank holding company and a

labor, agricultural, or horticultural

organization exempt from taxation
9330 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

under section 501 of the Internal

Revenue Code (26 U.S.C. 501(c)).

(3) Companies granted hardship

exemption. Any bank holding company

that has controlled only one bank since

before July 1, 1968, and that has been

granted an exemption by the Board

under section 4(d) of the BHC Act,

subject to any conditions imposed by

the Board.

(4) Companies granted exemption on

other grounds. Any company that

acquired control of a bank before

December 10, 1982, without the Board’s

prior approval under section 3 of the

BHC Act, on the basis of a narrow

interpretation of the term demand

deposit or commercial loan, if the Board

has determined that:

(i) Coverage of the company as a bank

holding company under this subpart

would be unfair or represent an

unreasonable hardship; and

(ii) Exclusion of the company from

coverage under this part is consistent

with the purposes of the BHC Act and

section 106 of the Bank Holding

Company Act Amendments of 1970 (12

U.S.C. 1971, 1972(1)). The provisions of

§ 225.4 of subpart A of this part do not

apply to a company exempt under this

paragraph.

§ 225.22 Exempt nonbanking activities and

acquisitions.

(a) Certain de novo activities. A bank

holding company may, either directly or

indirectly, engage de novo in any

nonbanking activity listed in § 225.28(b)

(other than operation of an insured

depository institution) without

obtaining the Board’s prior approval if

the bank holding company:

(1) Meets the requirements of

paragraphs (c) (1), (2), and (6) of

§ 225.23;

(2) Conducts the activity in

compliance with all Board orders and

regulations governing the activity; and

(3) Within 10 business days after

commencing the activity, provides

written notice to the appropriate

Reserve Bank describing the activity,

identifying the company or companies

engaged in the activity, and certifying

that the activity will be conducted in

accordance with the Board’s orders and

regulations and that the bank holding

company meets the requirements of

paragraphs (c) (1), (2), and (6) of

§ 225.23.

(b) Servicing activities. A bank

holding company may, without the

Board’s prior approval under this

subpart, furnish services to or perform

services for, or establish or acquire a

company that engages solely in

servicing activities for:

(1) The bank holding company or its

subsidiaries in connection with their

activities as authorized by law,

including services that are necessary to

fulfill commitments entered into by the

subsidiaries with third parties, if the

bank holding company or servicing

company complies with the Board’s

published interpretations and does not

act as principal in dealing with third

parties; and

(2) The internal operations of the bank

holding company or its subsidiaries.

Services for the internal operations of

the bank holding company or its

subsidiaries include, but are not limited

to:

(i) Accounting, auditing, and

appraising;

(ii) Advertising and public relations;

(iii) Data processing and data

transmission services, data bases, or

facilities;

(iv) Personnel services;

(v) Courier services;

(vi) Holding or operating property

used wholly or substantially by a

subsidiary in its operations or for its

future use;

(vii) Liquidating property acquired

from a subsidiary;

(viii) Liquidating property acquired

from any sources either prior to May 9,

1956, or the date on which the company

became a bank holding company,

whichever is later; and

(ix) Selling, purchasing, or

underwriting insurance, such as blanket

bond insurance, group insurance for

employees, and property and casualty

insurance.

(c) Safe deposit business. A bank

holding company or nonbank subsidiary

may, without the Board’s prior

approval, conduct a safe deposit

business, or acquire voting securities of

a company that conducts such a

business.

(d) Nonbanking acquisitions not

requiring prior Board approval. The

Board’s prior approval is not required

under this subpart for the following

acquisitions:

(1) DPC acquisitions. (i) Voting

securities or assets, acquired by

foreclosure or otherwise, in the ordinary

course of collecting a debt previously

contracted (DPC property) in good faith,

if the DPC property is divested within

two years of acquisition.

(ii) The Board may, upon request,

extend this two-year period for up to

three additional years. The Board may

permit additional extensions for up to 5

years (for a total of 10 years), for shares,

real estate or other assets where the

holding company demonstrates that

each extension would not be

detrimental to the public interest and

either the bank holding company has

made good faith attempts to dispose of

such shares, real estate or other assets or

disposal of the shares, real estate or

other assets during the initial period

would have been detrimental to the

company.

(iii) Transfers of DPC property within

the bank holding company system do

not extend any period for divestiture of

the property.

(2) Securities or assets required to be

divested by subsidiary. Voting securities

or assets required to be divested by a

subsidiary at the request of an

examining federal or state authority

(except by the Board under the BHC Act

or this regulation), if the bank holding

company divests the securities or assets

within two years from the date acquired

from the subsidiary.

(3) Fiduciary investments. Voting

securities or assets acquired by a bank

or other company (other than a trust that

is a company) in good faith in a

fiduciary capacity, if the voting

securities or assets are:

(i) Held in the ordinary course of

business; and

(ii) Not acquired for the benefit of the

company or its shareholders,

employees, or subsidiaries.

(4) Securities eligible for investment

by national bank. Voting securities of

the kinds and amounts explicitly

eligible by federal statute (other than

section 4 of the Bank Service

Corporation Act, 12 U.S.C. 1864) for

investment by a national bank, and

voting securities acquired prior to June

30, 1971, in reliance on section 4(c)(5)

of the BHC Act and interpretations of

the Comptroller of the Currency under

section 5136 of the Revised Statutes (12

U.S.C. 24(7)).

(5) Securities or property representing

5 percent or less of a company. Voting

securities of a company or property that,

in the aggregate, represent 5 percent or

less of the outstanding shares of any

class of voting securities of a company,

or that represent a 5 percent interest or

less in the property, subject to the

provisions of 12 CFR 225.137.

(6) Securities of investment company.

Voting securities of an investment

company that is solely engaged in

investing in securities and that does not

own or control more than 5 percent of

the outstanding shares of any class of

voting securities of any company.

(7) Assets acquired in ordinary course

of business. Assets of a company

acquired in the ordinary course of

business, subject to the provisions of 12

CFR 225.132, if the assets relate to

activities in which the acquiring

company has previously received Board
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9331

1A bank holding company may acquire voting

securities or assets of a savings association or other

insured depository institution that is not a bank by

using the procedures in § 225.14 of subpart B if the

bank holding company and the proposal qualify

under that section as if the savings association or

other institution were a bank for purposes of that

section.

approval under this regulation to

engage.

(8) Asset acquisitions by lending

company or industrial bank. Assets of

an office(s) of a company, all or

substantially all of which relate to

making, acquiring, or servicing loans if:

(i) The acquiring company has

previously received Board approval

under this regulation or is not required

to obtain prior Board approval under

this regulation to engage in lending

activities or industrial banking

activities;

(ii) The assets acquired during any 12-

month period do not represent more

than 50 percent of the risk-weighted

assets (on a consolidated basis) of the

acquiring lending company or industrial

bank, or more than $100 million,

whichever amount is less;

(iii) The assets acquired do not

represent more than 50 percent of the

selling company’s consolidated assets

that are devoted to lending activities or

industrial banking business;

(iv) The acquiring company notifies

the Reserve Bank of the acquisition

within 30 days after the acquisition; and

(v) The acquiring company, after

giving effect to the transaction, meets

the Board’s Capital Adequacy

Guidelines (Appendix A of this part),

and the Board has not previously

notified the acquiring company that it

may not acquire assets under the

exemption in this paragraph.

(e) Acquisition of securities by

subsidiary banks—(1) National bank. A

national bank or its subsidiary may,

without the Board’s approval under this

subpart, acquire or retain securities on

the basis of section 4(c)(5) of the BHC

Act in accordance with the regulations

of the Comptroller of the Currency.

(2) State bank. A state-chartered bank

or its subsidiary may, insofar as federal

law is concerned, and without the

Board’s prior approval under this

subpart:

(i) Acquire or retain securities, on the

basis of section 4(c)(5) of the BHC Act,

of the kinds and amounts explicitly

eligible by federal statute for investment

by a national bank; or

(ii) Acquire or retain all (but, except

for directors’ qualifying shares, not less

than all) of the securities of a company

that engages solely in activities in which

the parent bank may engage, at locations

at which the bank may engage in the

activity, and subject to the same

limitations as if the bank were engaging

in the activity directly.

(f) Activities and securities of new

bank holding companies. A company

that becomes a bank holding company

may, for a period of two years, engage

in nonbanking activities and control

voting securities or assets of a nonbank

subsidiary, if the bank holding company

engaged in such activities or controlled

such voting securities or assets on the

date it became a bank holding company.

The Board may grant requests for up to

three one-year extensions of the twoyear period.

(g) Grandfathered activities and

securities. Unless the Board orders

divestiture or termination under section

4(a)(2) of the BHC Act, a ‘‘company

covered in 1970,’’ as defined in section

2(b) of the BHC Act, may:

(1) Retain voting securities or assets

and engage in activities that it has

lawfully held or engaged in

continuously since June 30, 1968; and

(2) Acquire voting securities of any

newly formed company to engage in

such activities.

(h) Securities or activities exempt

under Regulation K. A bank holding

company may acquire voting securities

or assets and engage in activities as

authorized in Regulation K (12 CFR part

211).

§ 225.23 Expedited action for certain

nonbanking proposals by well-run bank

holding companies.

(a) Filing of notice—(1) Information

required. A bank holding company that

meets the requirements of paragraph (c)

of this section may satisfy the notice

requirement of this subpart in

connection with the acquisition of

voting securities or assets of a company

engaged in nonbanking activities that

the Board has permitted by order or

regulation (other than an insured

depository institution) 1, or a proposal to

engage de novo, either directly or

indirectly, in a nonbanking activity that

the Board has permitted by order or by

regulation, by providing the appropriate

Reserve Bank with a written notice

containing the following:

(i) A certification that all of the

criteria in paragraph (c) of this section

are met;

(ii) A description of the transaction

that includes identification of the

companies involved in the transaction,

the activities to be conducted, and a

commitment to conduct the proposed

activities in conformity with the Board’s

regulations and orders governing the

conduct of the proposed activity;

(iii) If the proposal involves an

acquisition of a going concern:

(A) If the bank holding company has

consolidated assets of $150 million or

more, an abbreviated consolidated pro

forma balance sheet for the acquiring

bank holding company as of the most

recent quarter showing credit and debit

adjustments that reflect the proposed

transaction, consolidated pro forma

risk-based capital ratios for the

acquiring bank holding company as of

the most recent quarter, a description of

the purchase price and the terms and

sources of funding for the transaction,

and the total revenue and net income of

the company to be acquired;

(B) If the bank holding company has

consolidated assets of less than $150

million, a pro forma parent-only balance

sheet as of the most recent quarter

showing credit and debit adjustments

that reflect the proposed transaction, a

description of the purchase price and

the terms and sources of funding for the

transaction and the sources and

schedule for retiring any debt incurred

in the transaction, and the total assets,

off-balance sheet items, revenue and net

income of the company to be acquired;

(C) For each insured depository

institution whose Tier 1 capital, total

capital, total assets or risk-weighted

assets change as a result of the

transaction, the total risk-weighted

assets, total assets, Tier 1 capital and

total capital of the institution on a pro

forma basis;

(iv) Identification of the geographic

markets in which competition would be

affected by the proposal, a description

of the effect of the proposal on

competition in the relevant markets, a

list of the major competitors in that

market in the proposed activity if the

affected market is local in nature, and,

if requested, the market indexes for the

relevant market; and

(v) A description of the public

benefits that can reasonably be expected

to result from the transaction.

(2) Waiver of unnecessary

information. The Reserve Bank may

reduce the information requirements in

paragraphs (a)(1) (iii) and (iv) of this

section as appropriate.

(b)(1) Action on proposals under this

section. The Board or the appropriate

Reserve Bank shall act on a proposal

submitted under this section, or notify

the bank holding company that the

transaction is subject to the procedure

in § 225.24, within 12 business days

following the filing of all of the

information required in paragraph (a) of

this section.

(2) Acceptance of notice if expedited

procedure not available. If the Board or

the Reserve Bank determines, after the

filing of a notice under this section, that

a bank holding company may not use
9332 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

the procedure in this section and must

file a notice under § 225.24, the notice

shall be deemed accepted for purposes

of § 225.24 as of the date that the notice

was filed under this section.

(c) Criteria for use of expedited

procedure. The procedure in this

section is available only if:

(1) Well-capitalized organization—(i)

Bank holding company. Both at the time

of and immediately after the proposed

transaction, the acquiring bank holding

company is well-capitalized;

(ii) Insured depository institutions.

Both at the time of and immediately

after the transaction:

(A) The lead insured depository

institution of the acquiring bank holding

company is well-capitalized;

(B) Well-capitalized insured

depository institutions control at least

80 percent of the total risk-weighted

assets of insured depository institutions

controlled by the acquiring bank

holding company; and

(C) No insured depository institution

controlled by the acquiring bank

holding company is undercapitalized;

(2) Well-managed organization—(i)

Satisfactory examination ratings. At the

time of the transaction, the acquiring

bank holding company, its lead insured

depository institution, and insured

depository institutions that control at

least 80 percent of the total riskweighted assets of insured depository

institutions controlled by such holding

company are well-managed;

(ii) No poorly managed institutions.

No insured depository institution

controlled by the acquiring bank

holding company has received 1 of the

2 lowest composite ratings at the later

of the institution’s most recent

examination or subsequent review by

the appropriate federal banking agency

for the institution.

(iii) Recently acquired institutions

excluded. Any insured depository

institution that has been acquired by the

bank holding company during the 12-

month period preceding the date on

which written notice is filed under

paragraph (a) of this section may be

excluded for purposes of paragraph

(c)(2)(ii) of this section if:

(A) The bank holding company has

developed a plan acceptable to the

appropriate federal banking agency for

the institution to restore the capital and

management of the institution; and

(B) All insured depository institutions

excluded under this paragraph

represent, in the aggregate, less than 10

percent of the aggregate total riskweighted assets of all insured

depository institutions controlled by the

bank holding company;

(3) Permissible activity. (i) The Board

has determined by regulation or order

that each activity proposed to be

conducted is so closely related to

banking, or managing or controlling

banks, as to be a proper incident thereto;

and

(ii) The Board has not indicated that

proposals to engage in the activity are

subject to the notice procedure provided

in § 225.24;

(4) Competitive criteria—(i)

Competitive screen. In the case of the

acquisition of a going concern, the

acquisition, without regard to any

divestitures proposed by the acquiring

bank holding company, does not cause:

(A) The acquiring bank holding

company to control in excess of 35

percent of the market share in any

relevant market; or

(B) The Herfindahl-Hirschman index

to increase by more than 200 points in

any relevant market with a postacquisition index of at least 1800; and

(ii) Other competitive factors. The

Board has not indicated that the

transaction is subject to close scrutiny

on competitive grounds;

(5) Size of acquisition—(i) In

general—(A) Limited growth. Except as

provided in paragraph (c)(5)(ii) of this

section, the sum of aggregate riskweighted assets to be acquired in the

proposal and the aggregate riskweighted assets acquired by the

acquiring bank holding company in all

other qualifying transactions does not

exceed 35 percent of the consolidated

risk-weighted assets of the acquiring

bank holding company. For purposes of

this paragraph, ‘‘other qualifying

transactions’’ means any transaction

approved under this section or § 225.14

during the 12 months prior to filing the

notice under this section;

(B) Consideration paid. The gross

consideration to be paid by the

acquiring bank holding company in the

proposal does not exceed 15 percent of

the consolidated Tier 1 capital of the

acquiring bank holding company; and

(C) Individual size limitation. The

total risk-weighted assets to be acquired

do not exceed $7.5 billion;

(ii) Small bank holding companies.

Paragraph (c)(5)(i)(A) of this section

shall not apply if, immediately

following consummation of the

proposed transaction, the consolidated

risk-weighted assets of the acquiring

bank holding company are less than

$300 million;

(6) Supervisory actions. During the

12-month period ending on the date on

which the bank holding company

proposes to consummate the proposed

transaction, no formal administrative

order, including a written agreement,

cease and desist order, capital directive,

prompt corrective action directive, asset

maintenance agreement, or other formal

enforcement order is or was outstanding

against the bank holding company or

any insured depository institution

subsidiary of the holding company, and

no formal administrative enforcement

proceeding involving any such

enforcement action, order, or directive

is or was pending; and

(7) Notification. The bank holding

company has not been notified by the

Board, in its discretion, prior to the

expiration of the period in paragraph (b)

of this section that a notice under

§ 225.24 is required in order to permit

closer review of any potential adverse

effect or other matter related to the

factors that must be considered under

this part.

(d) Branches and agencies of foreign

banking organizations. For purposes of

this section, a U.S. branch or agency of

a foreign banking organization shall be

considered to be an insured depository

institution.

§ 225.24 Procedures for other nonbanking

proposals.

(a) Notice required for nonbanking

activities. Except as provided in

§ 225.22 and § 225.23, a notice for the

Board’s prior approval under § 225.21(a)

to engage in or acquire a company

engaged in a nonbanking activity shall

be filed by a bank holding company

(including a company seeking to

become a bank holding company) with

the appropriate Reserve Bank in

accordance with this section and the

Board’s Rules of Procedure (12 CFR

262.3).

(1) Engaging de novo in listed

activities. A bank holding company

seeking to commence or to engage de

novo, either directly or through a

subsidiary, in a nonbanking activity

listed in § 225.28 shall file a notice

containing a description of the activities

to be conducted and the identity of the

company that will conduct the activity.

(2) Acquiring company engaged in

listed activities. A bank holding

company seeking to acquire or control

voting securities or assets of a company

engaged in a nonbanking activity listed

in § 225.28 shall file a notice containing

the following:

(i) A description of the proposal,

including a description of each

proposed activity, and the effect of the

proposal on competition among entities

engaging in each proposed activity in

each relevant market with relevant

market indexes;

(ii) The identity of any entity involved

in the proposal, and, if the notificant

proposes to conduct the activity through
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9333

an existing subsidiary, a description of

the existing activities of the subsidiary;

(iii) A statement of the public benefits

that can reasonably be expected to result

from the proposal;

(iv) If the bank holding company has

consolidated assets of $150 million or

more:

(A) Parent company and consolidated

pro forma balance sheets for the

acquiring bank holding company as of

the most recent quarter showing credit

and debit adjustments that reflect the

proposed transaction;

(B) Consolidated pro forma risk-based

capital and leverage ratio calculations

for the acquiring bank holding company

as of the most recent quarter; and

(C) A description of the purchase

price and the terms and sources of

funding for the transaction;

(v) If the bank holding company has

consolidated assets of less than $150

million:

(A) A pro forma parent-only balance

sheet as of the most recent quarter

showing credit and debit adjustments

that reflect the proposed transaction;

and

(B) A description of the purchase

price and the terms and sources of

funding for the transaction and, if the

transaction is debt funded, one-year

income statement and cash flow

projections for the parent company, and

the sources and schedule for retiring

any debt incurred in the transaction;

(vi) For each insured depository

institution whose Tier 1 capital, total

capital, total assets or risk-weighted

assets change as a result of the

transaction, the total risk-weighted

assets, total assets, Tier 1 capital and

total capital of the institution on a pro

forma basis; and

(vii) A description of the management

expertise, internal controls and risk

management systems that will be

utilized in the conduct of the proposed

activities; and

(viii) A copy of the purchase

agreements, and balance sheet and

income statements for the most recent

quarter and year-end for any company

to be acquired.

(3) Engaging in or acquiring company

to engage in unlisted activities. A bank

holding company seeking to engage de

novo in, or to acquire or control voting

securities or assets of a company

engaged in, any activity not listed in

§ 225.28 shall file a notice containing

the following:

(i) Evidence that the proposed activity

is so closely related to banking or

managing or controlling banks as to be

a proper incident thereto, or, if the

Board previously determined by order

that the activity is permissible for a

bank holding company to conduct, a

commitment to comply with all the

conditions and limitations established

by the Board governing the activity; and

(ii) The information required in

paragraphs (a)(1) or (a)(2) of this section,

as appropriate.

(b) Notice provided to Board. The

Reserve Bank shall immediately send to

the Board a copy of any notice received

under paragraphs (a)(2) or (a)(3) of this

section.

(c) Notice to public—(1) Listed

activities and activities approved by

order—(i) In a case involving an activity

listed in § 225.28 or previously

approved by the Board by order, the

Reserve Bank shall notify the Board for

publication in the Federal Register

immediately upon receipt by the

Reserve Bank of:

(A) A notice under this section; or

(B) A written request that notice of a

proposal under this section or § 225.23

be published in the Federal Register.

Such a request may request that Federal

Register publication occur up to 15

calendar days prior to submission of a

notice under this subpart.

(ii) The Federal Register notice

published under this paragraph shall

invite public comment on the proposal,

generally for a period of 15 days.

(2) New activities—(i) In general. In

the case of a notice under this subpart

involving an activity that is not listed in

§ 225.28 and that has not been

previously approved by the Board by

order, the Board shall send notice of the

proposal to the Federal Register for

publication, unless the Board

determines that the notificant has not

demonstrated that the activity is so

closely related to banking or to

managing or controlling banks as to be

a proper incident thereto. The Federal

Register notice shall invite public

comment on the proposal for a

reasonable period of time, generally for

30 days.

(ii) Time for publication. The Board

shall send the notice required under this

paragraph to the Federal Register

within 10 business days of acceptance

by the Reserve Bank. The Board may

extend the 10-day period for an

additional 30 calendar days upon notice

to the notificant. In the event notice of

a proposal is not published for

comment, the Board shall inform the

notificant of the reasons for the

decision.

(d) Action on notices—(1) Reserve

Bank action—(i) In general. Within 30

calendar days after receipt by the

Reserve Bank of a notice filed pursuant

to paragraphs (a)(1) or (a)(2) of this

section, the Reserve Banks shall:

(A) Approve the notice; or

(B) Refer the notice to the Board for

decision because action under delegated

authority is not appropriate.

(ii) Return of incomplete notice.

Within 7 calendar days of receipt, the

Reserve Bank may return any notice as

informationally incomplete that does

not contain all of the information

required by this subpart. The return of

such a notice shall be deemed action on

the notice.

(iii) Notice of action. The Reserve

Bank shall promptly notify the bank

holding company of any action or

referral under this paragraph.

(iv) Close of public comment period.

The Reserve Bank shall not approve any

notice under this paragraph (d)(1) of this

section prior to the third business day

after the close of the public comment

period, unless an emergency exists that

requires expedited or immediate action.

(2) Board action—(i) Internal

schedule. The Board seeks to act on

every notice referred to it for decision

within 60 days of the date that the

notice is filed with the Reserve Bank. If

the Board is unable to act within this

period, the Board shall notify the

notificant and explain the reasons and

the date by which the Board expects to

act.

(ii) Extension of required period for

action—(A) In general. The Board may

extend the 60-day period required for

Board action under paragraph (d)(2)(i) of

this section for an additional 30 days

upon notice to the notificant.

(B) Unlisted activities. If a notice

involves a proposal to engage in an

activity that is not listed in § 225.28, the

Board may extend the period required

for Board action under paragraph

(d)(2)(i) of this section for an additional

90 days. This 90-day extension is in

addition to the 30-day extension period

provided in paragraph (d)(2)(ii)(A) of

this section. The Board shall notify the

notificant that the notice period has

been extended and explain the reasons

for the extension.

(3) Requests for additional

information. The Board or the Reserve

Bank may modify the information

requirements under this section or at

any time request any additional

information that either believes is

needed for a decision on any notice

under this section.

(4) Tolling of period. The Board or the

Reserve Bank may at any time extend or

toll the time period for action on a

notice for any period with the consent

of the notificant.

§ 225.25 Hearings, alteration of activities,

and other matters.

(a) Hearings—(1) Procedure to request

hearing. Any request for a hearing on a
9334 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

notice under this subpart shall comply

with the provisions of 12 CFR 262.3(e).

(2) Determination to hold hearing.

The Board may order a formal or

informal hearing or other proceeding on

a notice as provided in 12 CFR

262.3(i)(2). The Board shall order a

hearing only if there are disputed issues

of material fact that cannot be resolved

in some other manner.

(3) Extension of period for hearing.

The Board may extend the time for

action on any notice for such time as is

reasonably necessary to conduct a

hearing and evaluate the hearing record.

Such extension shall not exceed 91

calendar days after the date of

submission to the Board of the complete

record on the notice. The procedures for

computation of the 91-day rule as set

forth in § 225.16(f) apply to notices

under this subpart that involve hearings.

(b) Approval through failure to act. (1)

Except as provided in paragraph (a) of

this section or § 225.24(d)(4), a notice

under this subpart shall be deemed to be

approved at the conclusion of the period

that begins on the date the complete

notice is received by the Reserve Bank

or the Board and that ends 60 calendar

days plus any applicable extension and

tolling period thereafter.

(2) Complete notice. For purposes of

paragraph (b)(1) of this section, a notice

shall be deemed complete at such time

as it contains all information required

by this subpart and all other information

requested by the Board or the Reserve

Bank.

(c) Notice to expand or alter

nonbanking activities—(1) De novo

expansion. A notice under this subpart

is required to open a new office or to

form a subsidiary to engage in, or to

relocate an existing office engaged in, a

nonbanking activity that the Board has

previously approved for the bank

holding company under this regulation,

only if:

(i) The Board’s prior approval was

limited geographically;

(ii) The activity is to be conducted in

a country outside of the United States

and the bank holding company has not

previously received prior Board

approval under this regulation to engage

in the activity in that country; or

(iii) The Board or appropriate Reserve

Bank has notified the company that a

notice under this subpart is required.

(2) Activities outside United States.

With respect to activities to be engaged

in outside the United States that require

approval under this subpart, the

procedures of this section apply only to

activities to be engaged in directly by a

bank holding company that is not a

qualifying foreign banking organization,

or by a nonbank subsidiary of a bank

holding company approved under this

subpart. Regulation K (12 CFR part 211)

governs other international operations

of bank holding companies.

(3) Alteration of nonbanking activity.

Unless otherwise permitted by the

Board, a notice under this subpart is

required to alter a nonbanking activity

in any material respect from that

considered by the Board in acting on the

application or notice to engage in the

activity.

(d) Emergency savings association

acquisitions. In the case of a notice to

acquire a savings association, the Board

may modify or dispense with the public

notice and hearing requirements of this

subpart if the Board finds that an

emergency exists that requires the Board

to act immediately and the primary

federal regulator of the institution

concurs.

§ 225.26 Factors considered in acting on

nonbanking proposals.

(a) In general. In evaluating a notice

under § 225.23 or § 225.24, the Board

shall consider whether the notificant’s

performance of the activities can

reasonably be expected to produce

benefits to the public (such as greater

convenience, increased competition,

and gains in efficiency) that outweigh

possible adverse effects (such as undue

concentration of resources, decreased or

unfair competition, conflicts of interest,

and unsound banking practices).

(b) Financial and managerial

resources. Consideration of the factors

in paragraph (a) of this section includes

an evaluation of the financial and

managerial resources of the notificant,

including its subsidiaries and any

company to be acquired, the effect of the

proposed transaction on those

resources, and the management

expertise, internal control and riskmanagement systems, and capital of the

entity conducting the activity.

(c) Competitive effect of de novo

proposals. Unless the record

demonstrates otherwise, the

commencement or expansion of a

nonbanking activity de novo is

presumed to result in benefits to the

public through increased competition.

(d) Denial for lack of information. The

Board may deny any notice submitted

under this subpart if the notificant

neglects, fails, or refuses to furnish all

information required by the Board.

(e) Conditional approvals. The Board

may impose conditions on any

approval, including conditions to

address permissibility, financial,

managerial, safety and soundness,

competitive, compliance, conflicts of

interest, or other concerns to ensure that

approval is consistent with the relevant

statutory factors and other provisions of

the BHC Act.

§ 225.27 Procedures for determining

scope of nonbanking activities.

(a) Advisory opinions regarding scope

of previously approved nonbanking

activities—(1) Request for advisory

opinion. Any person may submit a

request to the Board for an advisory

opinion regarding the scope of any

permissible nonbanking activity. The

request shall be submitted in writing to

the Board and shall identify the

proposed parameters of the activity, or

describe the service or product that will

be provided, and contain an explanation

supporting an interpretation regarding

the scope of the permissible nonbanking

activity.

(2) Response to request. The Board

shall provide an advisory opinion

within 45 days of receiving a written

request under this paragraph.

(b) Procedure for consideration of new

activities—(1) Initiation of proceeding.

The Board may, at any time, on its own

initiative or in response to a written

request from any person, initiate a

proceeding to determine whether any

activity is so closely related to banking

or managing or controlling banks as to

be a proper incident thereto.

(2) Requests for determination. Any

request for a Board determination that

an activity is so closely related to

banking or managing or controlling

banks as to be a proper incident thereto,

shall be submitted to the Board in

writing, and shall contain evidence that

the proposed activity is so closely

related to banking or managing or

controlling banks as to be a proper

incident thereto.

(3) Publication. The Board shall

publish in the Federal Register notice

that it is considering the permissibility

of a new activity and invite public

comment for a period of at least 30

calendar days. In the case of a request

submitted under paragraph (b) of this

section, the Board may determine not to

publish notice of the request if the

Board determines that the requester has

provided no reasonable basis for a

determination that the activity is so

closely related to banking, or managing

or controlling banks as to be a proper

incident thereto, and notifies the

requester of the determination.

(4) Comments and hearing requests.

Any comment and any request for a

hearing regarding a proposal under this

section shall comply with the

provisions of § 262.3(e) of the Board’s

Rules of Procedure (12 CFR 262.3(e)).
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9335

2Asset management services include acting as

agent in the liquidation or sale of loans and

collateral for loans, including real estate and other

assets acquired through foreclosure or in

satisfaction of debts previously contracted.

3For this purpose, the divestiture period for

property begins on the date that the debt is

acquired, regardless of when legal title to the

property is acquired.

4For purposes of this section, real estate

settlement services do not include providing title

insurance as principal, agent, or broker.

5The requirement that the lease be on a

nonoperating basis means that the bank holding

company may not, directly or indirectly, engage in

operating, servicing, maintaining, or repairing

leased property during the lease term. For purposes

of the leasing of automobiles, the requirement that

the lease be on a nonoperating basis means that the

bank holding company may not, directly or

indirectly: (1) Provide servicing, repair, or

maintenance of the leased vehicle during the lease

term; (2) purchase parts and accessories in bulk or

for an individual vehicle after the lessee has taken

delivery of the vehicle; (3) provide the loan of an

automobile during servicing of the leased vehicle;

(4) purchase insurance for the lessee; or (5) provide

for the renewal of the vehicle’s license merely as

a service to the lessee where the lessee could renew

the license without authorization from the lessor.

The bank holding company may arrange for a third

party to provide these services or products.

6Feasibility studies do not include assisting

management with the planning or marketing for a

given project or providing general operational or

management advice.

§ 225.28 List of permissible nonbanking

activities.

(a) Closely related nonbanking

activities. The activities listed in

paragraph (b) of this section are so

closely related to banking or managing

or controlling banks as to be a proper

incident thereto, and may be engaged in

by a bank holding company or its

subsidiary in accordance with the

requirements of this regulation.

(b) Activities determined by regulation

to be permissible—(1) Extending credit

and servicing loans. Making, acquiring,

brokering, or servicing loans or other

extensions of credit (including factoring,

issuing letters of credit and accepting

drafts) for the company’s account or for

the account of others.

(2) Activities related to extending

credit. Any activity usual in connection

with making, acquiring, brokering or

servicing loans or other extensions of

credit, as determined by the Board. The

Board has determined that the following

activities are usual in connection with

making, acquiring, brokering or

servicing loans or other extensions of

credit:

(i) Real estate and personal property

appraising. Performing appraisals of real

estate and tangible and intangible

personal property, including securities.

(ii) Arranging commercial real estate

equity financing. Acting as intermediary

for the financing of commercial or

industrial income-producing real estate

by arranging for the transfer of the title,

control, and risk of such a real estate

project to one or more investors, if the

bank holding company and its affiliates

do not have an interest in, or participate

in managing or developing, a real estate

project for which it arranges equity

financing, and do not promote or

sponsor the development of the

property.

(iii) Check-guaranty services.

Authorizing a subscribing merchant to

accept personal checks tendered by the

merchant’s customers in payment for

goods and services, and purchasing

from the merchant validly authorized

checks that are subsequently

dishonored.

(iv) Collection agency services.

Collecting overdue accounts receivable,

either retail or commercial.

(v) Credit bureau services.

Maintaining information related to the

credit history of consumers and

providing the information to a credit

grantor who is considering a borrower’s

application for credit or who has

extended credit to the borrower.

(vi) Asset management, servicing, and

collection activities. Engaging under

contract with a third party in asset

management, servicing, and collection 2

of assets of a type that an insured

depository institution may originate and

own, if the company does not engage in

real property management or real estate

brokerage services as part of these

services.

(vii) Acquiring debt in default.

Acquiring debt that is in default at the

time of acquisition, if the company:

(A) Divests shares or assets securing

debt in default that are not permissible

investments for bank holding

companies, within the time period

required for divestiture of property

acquired in satisfaction of a debt

previously contracted under

§ 225.12(b); 3

(B) Stands only in the position of a

creditor and does not purchase equity of

obligors of debt in default (other than

equity that may be collateral for such

debt); and

(C) Does not acquire debt in default

secured by shares of a bank or bank

holding company.

(viii) Real estate settlement servicing.

Providing real estate settlement

services.4

(3) Leasing personal or real property.

Leasing personal or real property or

acting as agent, broker, or adviser in

leasing such property if:

(i) The lease is on a nonoperating

basis; 5

(ii) The initial term of the lease is at

least 90 days;

(iii) In the case of leases involving real

property:

(A) At the inception of the initial

lease, the effect of the transaction will

yield a return that will compensate the

lessor for not less than the lessor’s full

investment in the property plus the

estimated total cost of financing the

property over the term of the lease from

rental payments, estimated tax benefits,

and the estimated residual value of the

property at the expiration of the initial

lease; and

(B) The estimated residual value of

property for purposes of paragraph

(b)(3)(iii)(A) of this section shall not

exceed 25 percent of the acquisition cost

of the property to the lessor.

(4) Operating nonbank depository

institutions—(i) Industrial banking.

Owning, controlling, or operating an

industrial bank, Morris Plan bank, or

industrial loan company, so long as the

institution is not a bank.

(ii) Operating savings association.

Owning, controlling, or operating a

savings association, if the savings

association engages only in deposittaking activities, lending, and other

activities that are permissible for bank

holding companies under this subpart

C.

(5) Trust company functions.

Performing functions or activities that

may be performed by a trust company

(including activities of a fiduciary,

agency, or custodial nature), in the

manner authorized by federal or state

law, so long as the company is not a

bank for purposes of section 2(c) of the

Bank Holding Company Act.

(6) Financial and investment advisory

activities. Acting as investment or

financial advisor to any person,

including (without, in any way, limiting

the foregoing):

(i) Serving as investment adviser (as

defined in section 2(a)(20) of the

Investment Company Act of 1940, 15

U.S.C. 80a–2(a)(20)), to an investment

company registered under that act,

including sponsoring, organizing, and

managing a closed-end investment

company;

(ii) Furnishing general economic

information and advice, general

economic statistical forecasting services,

and industry studies;

(iii) Providing advice in connection

with mergers, acquisitions, divestitures,

investments, joint ventures, leveraged

buyouts, recapitalizations, capital

structurings, financing transactions and

similar transactions, and conducting

financial feasibility studies; 6

(iv) Providing information, statistical

forecasting, and advice with respect to

any transaction in foreign exchange,

swaps, and similar transactions,
9336 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

7A bank-ineligible security is any security that a

State member bank is not permitted to underwrite

or deal in under 12 U.S.C. 24 and 335.

8A company or its affiliates may not enter quotes

for specific bank-ineligible securities in any dealer

quotation system in connection with the company’s

riskless principal transactions; except that the

company or its affiliates may enter ‘‘bid’’ or ‘‘ask’’

quotations, or publish ‘‘offering wanted’’ or ‘‘bid

wanted’’ notices on trading systems other than

NASDAQ or an exchange, if the company or its

affiliate does not enter price quotations on different

sides of the market for a particular security during

any two-day period.

9A bank-ineligible security is any security that a

state member bank is not permitted to underwrite

or deal in under 12 U.S.C. 24 and 335.

10This reference does not include acting as a

dealer in options based on indices of bankineligible securities when the options are traded on

securities exchanges. These options are securities

for purposes of the federal securities laws and bankineligible securities for purposes of section 20 of the

Glass-Steagall Act, 12 U.S.C. 337. Similarly, this

reference does not include acting as a dealer in any

other instrument that is a bank-ineligible security

for purposes of section 20. A bank holding company

may deal in these instruments in accordance with

the Board’s orders on dealing in bank-ineligible

securities.

11 In performing this activity, bank holding

companies are not authorized to perform tasks or

operations or provide services to client institutions

either on a daily or continuing basis, except as

necessary to instruct the client institution on how

to perform such services for itself. See also the

Board’s interpretation of bank management

consulting advice (12 CFR 225.131).

commodities, and any forward contract,

option, future, option on a future, and

similar instruments;

(v) Providing educational courses, and

instructional materials to consumers on

individual financial management

matters; and

(vi) Providing tax-planning and taxpreparation services to any person.

(7) Agency transactional services for

customer investments—(i) Securities

brokerage. Providing securities

brokerage services (including securities

clearing and/or securities execution

services on an exchange), whether alone

or in combination with investment

advisory services, and incidental

activities (including related securities

credit activities and custodial services),

if the securities brokerage services are

restricted to buying and selling

securities solely as agent for the account

of customers and do not include

securities underwriting or dealing.

(ii) Riskless principal transactions.

Buying and selling in the secondary

market all types of securities on the

order of customers as a ‘‘riskless

principal’’ to the extent of engaging in

a transaction in which the company,

after receiving an order to buy (or sell)

a security from a customer, purchases

(or sells) the security for its own

account to offset a contemporaneous

sale to (or purchase from) the customer.

This does not include:

(A) Selling bank-ineligible securities 7

at the order of a customer that is the

issuer of the securities, or selling bankineligible securities in any transaction

where the company has a contractual

agreement to place the securities as

agent of the issuer; or

(B) Acting as a riskless principal in

any transaction involving a bankineligible security for which the

company or any of its affiliates acts as

underwriter (during the period of the

underwriting or for 30 days thereafter)

or dealer.8

(iii) Private placement services.

Acting as agent for the private

placement of securities in accordance

with the requirements of the Securities

Act of 1933 (1933 Act) and the rules of

the Securities and Exchange

Commission, if the company engaged in

the activity does not purchase or

repurchase for its own account the

securities being placed, or hold in

inventory unsold portions of issues of

these securities.

(iv) Futures commission merchant.

Acting as a futures commission

merchant (FCM) for unaffiliated persons

in the execution, clearance, or execution

and clearance of any futures contract

and option on a futures contract traded

on an exchange in the United States or

abroad if:

(A) The activity is conducted through

a separately incorporated subsidiary of

the bank holding company, which may

engage in activities other than FCM

activities (including, but not limited to,

permissible advisory and trading

activities); and

(B) The parent bank holding company

does not provide a guarantee or

otherwise become liable to the exchange

or clearing association other than for

those trades conducted by the

subsidiary for its own account or for the

account of any affiliate.

(v) Other transactional services.

Providing to customers as agent

transactional services with respect to

swaps and similar transactions, any

transaction described in paragraph (b)(8)

of this section, any transaction that is

permissible for a state member bank,

and any other transaction involving a

forward contract, option, futures, option

on a futures or similar contract (whether

traded on an exchange or not) relating

to a commodity that is traded on an

exchange.

(8) Investment transactions as

principal—(i) Underwriting and dealing

in government obligations and money

market instruments. Underwriting and

dealing in obligations of the United

States, general obligations of states and

their political subdivisions, and other

obligations that state member banks of

the Federal Reserve System may be

authorized to underwrite and deal in

under 12 U.S.C. 24 and 335, including

banker’s acceptances and certificates of

deposit, under the same limitations as

would be applicable if the activity were

performed by the bank holding

company’s subsidiary member banks or

its subsidiary nonmember banks as if

they were member banks.

(ii) Investing and trading activities.

Engaging as principal in:

(A) Foreign exchange;

(B) Forward contracts, options,

futures, options on futures, swaps, and

similar contracts, whether traded on

exchanges or not, based on any rate,

price, financial asset (including gold,

silver, platinum, palladium, copper, or

any other metal approved by the Board),

nonfinancial asset, or group of assets,

other than a bank-ineligible security,9 if:

(1) A state member bank is authorized

to invest in the asset underlying the

contract;

(2) The contract requires cash

settlement; or

(3) The contract allows for

assignment, termination, or offset prior

to delivery or expiration, and the

company makes every reasonable effort

to avoid taking or making delivery; and

(C) Forward contracts, options,10

futures, options on futures, swaps, and

similar contracts, whether traded on

exchanges or not, based on an index of

a rate, a price, or the value of any

financial asset, nonfinancial asset, or

group of assets, if the contract requires

cash settlement.

(iii) Buying and selling bullion, and

related activities. Buying, selling and

storing bars, rounds, bullion, and coins

of gold, silver, platinum, palladium,

copper, and any other metal approved

by the Board, for the company’s own

account and the account of others, and

providing incidental services such as

arranging for storage, safe custody,

assaying, and shipment.

(9) Management consulting and

counseling activities—(i) Management

consulting. (A) Providing management

consulting advice: 11

(1) On any matter to unaffiliated

depository institutions, including

commercial banks, savings and loan

associations, savings banks, credit

unions, industrial banks, Morris Plan

banks, cooperative banks, industrial

loan companies, trust companies, and

branches or agencies of foreign banks;

(2) On any financial, economic,

accounting, or audit matter to any other

company.

(B) A company conducting

management consulting activities under

this subparagraph and any affiliate of

such company may not:
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9337

12 Financial organization refers to insured

depository institution holding companies and their

subsidiaries, other than nonbanking affiliates of

diversified savings and loan holding companies that

engage in activities not permissible under section

4(c)(8) of the Bank Holding Company Act (12 U.S.C.

1842(c)(8)).

13See also the Board’s interpretation on courier

activities (12 CFR 225.129), which sets forth

conditions for bank holding company entry into the

activity.

14Extension of credit includes direct loans to

borrowers, loans purchased from other lenders, and

leases of real or personal property so long as the

leases are nonoperating and full-payout leases that

meet the requirements of paragraph (b)(3) of this

section.

15 Finance company includes all non-deposittaking financial institutions that engage in a

significant degree of consumer lending (excluding

lending secured by first mortgages) and all financial

institutions specifically defined by individual states

as finance companies and that engage in a

significant degree of consumer lending.

16These limitations increase at the end of each

calendar year, beginning with 1982, by the

percentage increase in the Consumer Price Index for

Urban Wage Earners and Clerical Workers

published by the Bureau of Labor Statistics.

17Nothing contained in this provision shall

preclude a bank holding company subsidiary that

is authorized to engage in a specific insuranceagency activity under this clause from continuing

to engage in the particular activity after merger with

an affiliate, if the merger is for legitimate business

purposes and prior notice has been provided to the

Board.

18For the purposes of this paragraph, activities

engaged in on May 1, 1982, include activities

carried on subsequently as the result of an

application to engage in such activities pending

before the Board on May 1, 1982, and approved

subsequently by the Board or as the result of the

acquisition by such company pursuant to a binding

written contract entered into on or before May 1,

1982, of another company engaged in such

activities at the time of the acquisition.

(1) Own or control, directly or

indirectly, more than 5 percent of the

voting securities of the client

institution; and

(2) Allow a management official, as

defined in 12 CFR 212.2(h), of the

company or any of its affiliates to serve

as a management official of the client

institution, except where such

interlocking relationship is permitted

pursuant to an exemption granted under

12 CFR 212.4(b) or otherwise permitted

by the Board.

(C) A company conducting

management consulting activities may

provide management consulting

services to customers not described in

paragraph (b)(9)(i)(A)(1) of this section

or regarding matters not described in

paragraph (b)(9)(i)(A)(2) of this section,

if the total annual revenue derived from

those management consulting services

does not exceed 30 percent of the

company’s total annual revenue derived

from management consulting activities.

(ii) Employee benefits consulting

services. Providing consulting services

to employee benefit, compensation and

insurance plans, including designing

plans, assisting in the implementation

of plans, providing administrative

services to plans, and developing

employee communication programs for

plans.

(iii) Career counseling services.

Providing career counseling services to:

(A) A financial organization 12 and

individuals currently employed by, or

recently displaced from, a financial

organization;

(B) Individuals who are seeking

employment at a financial organization;

and

(C) Individuals who are currently

employed in or who seek positions in

the finance, accounting, and audit

departments of any company.

(10) Support services—(i) Courier

services. Providing courier services for:

(A) Checks, commercial papers,

documents, and written instruments

(excluding currency or bearer-type

negotiable instruments) that are

exchanged among banks and financial

institutions; and

(B) Audit and accounting media of a

banking or financial nature and other

business records and documents used in

processing such media.13

(ii) Printing and selling MICR-encoded

items. Printing and selling checks and

related documents, including corporate

image checks, cash tickets, voucher

checks, deposit slips, savings

withdrawal packages, and other forms

that require Magnetic Ink Character

Recognition (MICR) encoding.

(11) Insurance agency and

underwriting—(i) Credit insurance.

Acting as principal, agent, or broker for

insurance (including home mortgage

redemption insurance) that is:

(A) Directly related to an extension of

credit by the bank holding company or

any of its subsidiaries; and

(B) Limited to ensuring the repayment

of the outstanding balance due on the

extension of credit 14 in the event of the

death, disability, or involuntary

unemployment of the debtor.

(ii) Finance company subsidiary.

Acting as agent or broker for insurance

directly related to an extension of credit

by a finance company 15 that is a

subsidiary of a bank holding company,

if:

(A) The insurance is limited to

ensuring repayment of the outstanding

balance on such extension of credit in

the event of loss or damage to any

property used as collateral for the

extension of credit; and

(B) The extension of credit is not more

than $10,000, or $25,000 if it is to

finance the purchase of a residential

manufactured home 16 and the credit is

secured by the home; and

(C) The applicant commits to notify

borrowers in writing that:

(1) They are not required to purchase

such insurance from the applicant;

(2) Such insurance does not insure

any interest of the borrower in the

collateral; and

(3) The applicant will accept more

comprehensive property insurance in

place of such single-interest insurance.

(iii) Insurance in small towns.

Engaging in any insurance agency

activity in a place where the bank

holding company or a subsidiary of the

bank holding company has a lending

office and that:

(A) Has a population not exceeding

5,000 (as shown in the preceding

decennial census); or

(B) Has inadequate insurance agency

facilities, as determined by the Board,

after notice and opportunity for hearing.

(iv) Insurance-agency activities

conducted on May 1, 1982. Engaging in

any specific insurance-agency activity 17

if the bank holding company, or

subsidiary conducting the specific

activity, conducted such activity on

May 1, 1982, or received Board approval

to conduct such activity on or before

May 1, 1982.18 A bank holding company

or subsidiary engaging in a specific

insurance agency activity under this

clause may:

(A) Engage in such specific insurance

agency activity only at locations:

(1) In the state in which the bank

holding company has its principal place

of business (as defined in 12 U.S.C.

1842(d));

(2) In any state or states immediately

adjacent to such state; and

(3) In any state in which the specific

insurance-agency activity was

conducted (or was approved to be

conducted) by such bank holding

company or subsidiary thereof or by any

other subsidiary of such bank holding

company on May 1, 1982; and

(B) Provide other insurance coverages

that may become available after May 1,

1982, so long as those coverages insure

against the types of risks as (or are

otherwise functionally equivalent to)

coverages sold or approved to be sold on

May 1, 1982, by the bank holding

company or subsidiary.

(v) Supervision of retail insurance

agents. Supervising on behalf of

insurance underwriters the activities of

retail insurance agents who sell:

(A) Fidelity insurance and property

and casualty insurance on the real and

personal property used in the operations

of the bank holding company or its

subsidiaries; and

(B) Group insurance that protects the

employees of the bank holding company

or its subsidiaries.
9338 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

1 If two or more persons, not acting in concert,

each propose to acquire simultaneously equal

percentages of 10 percent or more of a class of

voting securities of the state member bank or bank

holding company, each person must file prior

notice to the Board.

(vi) Small bank holding companies.

Engaging in any insurance-agency

activity if the bank holding company

has total consolidated assets of $50

million or less. A bank holding

company performing insurance-agency

activities under this paragraph may not

engage in the sale of life insurance or

annuities except as provided in

paragraphs (b)(11) (i) and (iii) of this

section, and it may not continue to

engage in insurance-agency activities

pursuant to this provision more than 90

days after the end of the quarterly

reporting period in which total assets of

the holding company and its

subsidiaries exceed $50 million.

(vii) Insurance-agency activities

conducted before 1971. Engaging in any

insurance-agency activity performed at

any location in the United States

directly or indirectly by a bank holding

company that was engaged in insuranceagency activities prior to January 1,

1971, as a consequence of approval by

the Board prior to January 1, 1971.

(12) Community development

activities—(i) Financing and investment

activities. Making equity and debt

investments in corporations or projects

designed primarily to promote

community welfare, such as the

economic rehabilitation and

development of low-income areas by

providing housing, services, or jobs for

residents.

(ii) Advisory activities. Providing

advisory and related services for

programs designed primarily to promote

community welfare.

(13) Money orders, savings bonds, and

traveler’s checks. The issuance and sale

at retail of money orders and similar

consumer-type payment instruments;

the sale of U.S. savings bonds; and the

issuance and sale of traveler’s checks.

(14) Data processing. (i) Providing

data processing and data transmission

services, facilities (including data

processing and data transmission

hardware, software, documentation, or

operating personnel), data bases, advice,

and access to such services, facilities, or

data bases by any technological means,

if:

(A) The data to be processed or

furnished are financial, banking, or

economic; and

(B) The hardware provided in

connection therewith is offered only in

conjunction with software designed and

marketed for the processing and

transmission of financial, banking, or

economic data, and where the general

purpose hardware does not constitute

more than 30 percent of the cost of any

packaged offering.

(ii) A company conducting data

processing and data transmission

activities may conduct data processing

and data transmission activities not

described in paragraph (b)(14)(i) of this

section if the total annual revenue

derived from those activities does not

exceed 30 percent of the company’s

total annual revenues derived from data

processing and data transmission

activities.

5. Subpart D is amended as follows:

§ 225.31 [Amended]

(A) Section 225.31, paragraph

(d)(2)(ii), is amended by removing the

words ‘‘as defined in 12 CFR 206.2(k)’’;

and

§ 225.32 [Removed]

(B) Section 225.32 is removed.

6. Subpart E is revised to read as

follows:

Subpart E—Change in Bank Control

Sec.

225.41 Transactions requiring prior notice.

225.42 Transactions not requiring prior

notice.

225.43 Procedures for filing, processing,

publishing, and acting on notices.

225.44 Reporting of stock loans.

Subpart E—Change in Bank Control

§ 225.41 Transactions requiring prior

notice.

(a) Prior notice requirement. Any

person acting directly or indirectly, or

through or in concert with one or more

persons, shall give the Board 60 days’

written notice, as specified in § 225.43

of this subpart, before acquiring control

of a state member bank or bank holding

company, unless the acquisition is

exempt under § 225.42.

(b) Definitions. For purposes of this

subpart:

(1) Acquisition includes a purchase,

assignment, transfer, or pledge of voting

securities, or an increase in percentage

ownership of a state member bank or a

bank holding company resulting from a

redemption of voting securities.

(2) Acting in concert includes

knowing participation in a joint activity

or parallel action towards a common

goal of acquiring control of a state

member bank or bank holding company

whether or not pursuant to an express

agreement.

(3) Immediate family includes a

person’s father, mother, stepfather,

stepmother, brother, sister, stepbrother,

stepsister, son, daughter, stepson,

stepdaughter, grandparent, grandson,

granddaughter, father-in-law, mother-inlaw, brother-in-law, sister-in-law, sonin-law, daughter-in-law, the spouse of

any of the foregoing, and the person’s

spouse.

(c) Acquisitions requiring prior

notice—(1) Acquisition of control. The

acquisition of voting securities of a state

member bank or bank holding company

constitutes the acquisition of control

under the Bank Control Act, requiring

prior notice to the Board, if,

immediately after the transaction, the

acquiring person (or persons acting in

concert) will own, control, or hold with

power to vote 25 percent or more of any

class of voting securities of the

institution.

(2) Rebuttable presumption of control.

The Board presumes that an acquisition

of voting securities of a state member

bank or bank holding company

constitutes the acquisition of control

under the Bank Control Act, requiring

prior notice to the Board, if,

immediately after the transaction, the

acquiring person (or persons acting in

concert) will own, control, or hold with

power to vote 10 percent or more of any

class of voting securities of the

institution, and if:

(i) The institution has registered

securities under section 12 of the

Securities Exchange Act of 1934 (15

U.S.C. 78l); or

(ii) No other person will own, control,

or hold the power to vote a greater

percentage of that class of voting

securities immediately after the

transaction.1

(d) Rebuttable presumption of

concerted action. The following persons

shall be presumed to be acting in

concert for purposes of this subpart:

(1) A company and any controlling

shareholder, partner, trustee, or

management official of the company, if

both the company and the person own

voting securities of the state member

bank or bank holding company;

(2) An individual and the individual’s

immediate family;

(3) Companies under common

control;

(4) Persons that are parties to any

agreement, contract, understanding,

relationship, or other arrangement,

whether written or otherwise, regarding

the acquisition, voting, or transfer of

control of voting securities of a state

member bank or bank holding company,

other than through a revocable proxy as

described in § 225.42(a)(5) of this

subpart;

(5) Persons that have made, or

propose to make, a joint filing under

sections 13 or 14 of the Securities

Exchange Act of 1934 (15 U.S.C. 78m or

78n), and the rules promulgated
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9339

thereunder by the Securities and

Exchange Commission; and

(6) A person and any trust for which

the person serves as trustee.

(e) Acquisitions of loans in default.

The Board presumes an acquisition of a

loan in default that is secured by voting

securities of a state member bank or

bank holding company to be an

acquisition of the underlying securities

for purposes of this section.

(f) Other transactions. Transactions

other than those set forth in paragraph

(c) of this section resulting in a person’s

control of less than 25 percent of a class

of voting securities of a state member

bank or bank holding company are not

deemed by the Board to constitute

control for purposes of the Bank Control

Act.

(g) Rebuttal of presumptions. Prior

notice to the Board is not required for

any acquisition of voting securities

under the presumption of control set

forth in this section, if the Board finds

that the acquisition will not result in

control. The Board shall afford any

person seeking to rebut a presumption

in this section an opportunity to present

views in writing or, if appropriate,

orally before its designated

representatives at an informal

conference.

§ 225.42 Transactions not requiring prior

notice.

(a) Exempt transactions. The

following transactions do not require

notice to the Board under this subpart:

(1) Existing control relationships. The

acquisition of additional voting

securities of a state member bank or

bank holding company by a person who:

(i) Continuously since March 9, 1979

(or since the institution commenced

business, if later), held power to vote 25

percent or more of any class of voting

securities of the institution; or

(ii) Is presumed, under § 225.41(c)(2)

of this subpart, to have controlled the

institution continuously since March 9,

1979, if the aggregate amount of voting

securities held does not exceed 25

percent or more of any class of voting

securities of the institution or, in other

cases, where the Board determines that

the person has controlled the bank

continuously since March 9, 1979;

(2) Increase of previously authorized

acquisitions. Unless the Board or the

Reserve Bank otherwise provides in

writing, the acquisition of additional

shares of a class of voting securities of

a state member bank or bank holding

company by any person (or persons

acting in concert) who has lawfully

acquired and maintained control of the

institution (for purposes of § 225.41(c)

of this subpart), after complying with

the procedures and receiving approval

to acquire voting securities of the

institution under this subpart, or in

connection with an application

approved under section 3 of the BHC

Act (12 U.S.C. 1842; § 225.11 of subpart

B of this part) or section 18(c) of the

Federal Deposit Insurance Act (Bank

Merger Act, 12 U.S.C. 1828(c));

(3) Acquisitions subject to approval

under BHC Act or Bank Merger Act. Any

acquisition of voting securities subject

to approval under section 3 of the BHC

Act (12 U.S.C. 1842; § 225.11 of subpart

B of this part), or section 18(c) of the

Federal Deposit Insurance Act (Bank

Merger Act, 12 U.S.C. 1828(c));

(4) Transactions exempt under BHC

Act. Any transaction described in

sections 2(a)(5), 3(a)(A), or 3(a)(B) of the

BHC Act (12 U.S.C. 1841(a)(5),

1842(a)(A), and 1842(a)(B)), by a person

described in those provisions;

(5) Proxy solicitation. The acquisition

of the power to vote securities of a state

member bank or bank holding company

through receipt of a revocable proxy in

connection with a proxy solicitation for

the purposes of conducting business at

a regular or special meeting of the

institution, if the proxy terminates

within a reasonable period after the

meeting;

(6) Stock dividends. The receipt of

voting securities of a state member bank

or bank holding company through a

stock dividend or stock split if the

proportional interest of the recipient in

the institution remains substantially the

same; and

(7) Acquisition of foreign banking

organization. The acquisition of voting

securities of a qualifying foreign

banking organization. (This exemption

does not extend to the reports and

information required under paragraphs

9, 10, and 12 of the Bank Control Act

(12 U.S.C. 1817(j) (9), (10), and (12)) and

§ 225.44 of this subpart.)

(b) Prior notice exemption. (1) The

following acquisitions of voting

securities of a state member bank or

bank holding company, which would

otherwise require prior notice under

this subpart, are not subject to the prior

notice requirements if the acquiring

person notifies the appropriate Reserve

Bank within 90 calendar days after the

acquisition and provides any relevant

information requested by the Reserve

Bank:

(i) Acquisition of voting securities

through inheritance;

(ii) Acquisition of voting securities as

a bona fide gift; and

(iii) Acquisition of voting securities in

satisfaction of a debt previously

contracted (DPC) in good faith.

(2) The following acquisitions of

voting securities of a state member bank

or bank holding company, which would

otherwise require prior notice under

this subpart, are not subject to the prior

notice requirements if the acquiring

person does not reasonably have

advance knowledge of the transaction,

and provides the written notice required

under section 225.43 to the appropriate

Reserve Bank within 90 calendar days

after the transaction occurs:

(i) Acquisition of voting securities

resulting from a redemption of voting

securities by the issuing bank or bank

holding company; and

(ii) Acquisition of voting securities as

a result of actions (including the sale of

securities) by any third party that is not

within the control of the acquiror.

(3) Nothing in paragraphs (b)(1) or

(b)(2) of this section limits the authority

of the Board to disapprove a notice

pursuant to § 225.43(h) of this subpart.

§ 225.43 Procedures for filing, processing,

publishing, and acting on notices.

(a) Filing notice. (1) A notice required

under this subpart shall be filed with

the appropriate Reserve Bank and shall

contain all the information required by

paragraph 6 of the Bank Control Act (12

U.S.C. 1817(j)(6)), or prescribed in the

designated Board form.

(2) The Board may waive any of the

informational requirements of the notice

if the Board determines that it is in the

public interest.

(3) A notificant shall notify the

appropriate Reserve Bank or the Board

immediately of any material changes in

a notice submitted to the Reserve Bank,

including changes in financial or other

conditions.

(4) When the acquiring person is an

individual, or group of individuals

acting in concert, the requirement to

provide personal financial data may be

satisfied by a current statement of assets

and liabilities and an income summary,

as required in the designated Board

form, together with a statement of any

material changes since the date of the

statement or summary. The Reserve

Bank or the Board, nevertheless, may

request additional information, if

appropriate.

(b) Acceptance of notice. The 60-day

notice period specified in § 225.41 of

this subpart begins on the date of receipt

of a complete notice. The Reserve Bank

shall notify the person or persons

submitting a notice under this subpart

in writing of the date the notice is or

was complete and thereby accepted for

processing. The Reserve Bank or the

Board may request additional relevant

information at any time after the date of

acceptance.
9340 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

(c) Publication—(1) Newspaper

Announcement. Any person(s) filing a

notice under this subpart shall publish,

in a form prescribed by the Board, an

announcement soliciting public

comment on the proposed acquisition.

The announcement shall be published

in a newspaper of general circulation in

the community in which the head office

of the state member bank to be acquired

is located or, in the case of a proposed

acquisition of a bank holding company,

in the community in which its head

office is located and in the community

in which the head office of each of its

subsidiary banks is located. The

announcement shall be published no

earlier than 15 calendar days before the

filing of the notice with the appropriate

Reserve Bank and no later than 10

calendar days after the filing date; and

the publisher’s affidavit of a publication

shall be provided to the appropriate

Reserve Bank.

(2) Contents of newspaper

announcement. The newspaper

announcement shall state:

(i) The name of each person identified

in the notice as a proposed acquiror of

the bank or bank holding company;

(ii) The name of the bank or bank

holding company to be acquired,

including the name of each of the bank

holding company’s subsidiary banks;

and

(iii) A statement that interested

persons may submit comments on the

notice to the Board or the appropriate

Reserve Bank for a period of 20 days, or

such shorter period as may be provided,

pursuant to paragraph (c)(5) of this

section.

(3) Federal Register announcement.

The Board shall, upon filing of a notice

under this subpart, publish

announcement in the Federal Register

of receipt of the notice. The Federal

Register announcement shall contain

the information required under

paragraphs (c)(2)(i) and (c)(2)(ii) of this

section and a statement that interested

persons may submit comments on the

proposed acquisition for a period of 15

calendar days, or such shorter period as

may be provided, pursuant to paragraph

(c)(5) of this section. The Board may

waive publication in the Federal

Register, if the Board determines that

such action is appropriate.

(4) Delay of publication. The Board

may permit delay in the publication

required under paragraphs (c)(1) and

(c)(3) of this section if the Board

determines, for good cause shown, that

it is in the public interest to grant such

delay. Requests for delay of publication

may be submitted to the appropriate

Reserve Bank.

(5) Shortening or waiving notice. The

Board may shorten or waive the public

comment or newspaper publication

requirements of this paragraph, or act on

a notice before the expiration of a public

comment period, if it determines in

writing that an emergency exists, or that

disclosure of the notice, solicitation of

public comment, or delay until

expiration of the public comment period

would seriously threaten the safety or

soundness of the bank or bank holding

company to be acquired.

(6) Consideration of public comments.

In acting upon a notice filed under this

subpart, the Board shall consider all

public comments received in writing

within the period specified in the

newspaper or Federal Register

announcement, whichever is later. At

the Board’s option, comments received

after this period may, but need not, be

considered.

(7) Standing. No person (other than

the acquiring person) who submits

comments or information on a notice

filed under this subpart shall thereby

become a party to the proceeding or

acquire any standing or right to

participate in the Board’s consideration

of the notice or to appeal or otherwise

contest the notice or the Board’s action

regarding the notice.

(d) Time period for Board action—(1)

Consummation of acquisition —(i) The

notificant(s) may consummate the

proposed acquisition 60 days after

submission to the Reserve Bank of a

complete notice under paragraph (a) of

this section, unless within that period

the Board disapproves the proposed

acquisition or extends the 60-day

period, as provided under paragraph

(d)(2) of this section.

(ii) The notificant(s) may consummate

the proposed transaction before the

expiration of the 60-day period if the

Board notifies the notificant(s) in

writing of the Board’s intention not to

disapprove the acquisition.

(2) Extensions of time period. (i) The

Board may extend the 60-day period in

paragraph (d)(1) of this section for an

additional 30 days by notifying the

acquiring person(s).

(ii) The Board may further extend the

period during which it may disapprove

a notice for two additional periods of

not more than 45 days each, if the Board

determines that:

(A) Any acquiring person has not

furnished all the information required

under paragraph (a) of this section;

(B) Any material information

submitted is substantially inaccurate;

(C) The Board is unable to complete

the investigation of an acquiring person

because of inadequate cooperation or

delay by that person; or

(D) Additional time is needed to

investigate and determine that no

acquiring person has a record of failing

to comply with the requirements of the

Bank Secrecy Act, subchapter II of

Chapter 53 of Title 31, United States

Code.

(iii) If the Board extends the time

period under this paragraph, it shall

notify the acquiring person(s) of the

reasons therefor and shall include a

statement of the information, if any,

deemed incomplete or inaccurate.

(e) Advice to bank supervisory

agencies. (1) Upon accepting a notice

relating to acquisition of securities of a

state member bank, the Reserve Bank

shall send a copy of the notice to the

appropriate state bank supervisor,

which shall have 30 calendar days from

the date the notice is sent in which to

submit its views and recommendations

to the Board. The Reserve Bank also

shall send a copy of any notice to the

Comptroller of the Currency, the Federal

Deposit Insurance Corporation, and the

Office of Thrift Supervision.

(2) If the Board finds that it must act

immediately in order to prevent the

probable failure of the bank or bank

holding company involved, the Board

may dispense with or modify the

requirements for notice to the state

supervisor.

(f) Investigation and report. (1) After

receiving a notice under this subpart,

the Board or the appropriate Reserve

Bank shall conduct an investigation of

the competence, experience, integrity,

and financial ability of each person by

and for whom an acquisition is to be

made. The Board shall also make an

independent determination of the

accuracy and completeness of any

information required to be contained in

a notice under paragraph (a) of this

section. In investigating any notice

accepted under this subpart, the Board

or Reserve Bank may solicit information

or views from any person, including any

bank or bank holding company involved

in the notice, and any appropriate state,

federal, or foreign governmental

authority.

(2) The Board or the appropriate

Reserve Bank shall prepare a written

report of its investigation, which shall

contain, at a minimum, a summary of

the results of the investigation.

(g) Factors considered in acting on

notices. In reviewing a notice filed

under this subpart, the Board shall

consider the information in the record,

the views and recommendations of the

appropriate bank supervisor, and any

other relevant information obtained

during any investigation of the notice.

(h) Disapproval and hearing—(1)

Disapproval of notice. The Board may
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9341

disapprove an acquisition if it finds

adverse effects with respect to any of the

factors set forth in paragraph 7 of the

Bank Control Act (12 U.S.C. 1817(j)(7))

(i.e., competitive, financial, managerial,

banking, or incompleteness of

information).

(2) Disapproval notification. Within

three days after its decision to issue a

notice of intent to disapprove any

proposed acquisition, the Board shall

notify the acquiring person in writing of

the reasons for the action.

(3) Hearing. Within 10 calendar days

of receipt of the notice of the Board’s

intent to disapprove, the acquiring

person may submit a written request for

a hearing. Any hearing conducted under

this paragraph shall be in accordance

with the Rules of Practice for Formal

Hearings (12 CFR part 263). At the

conclusion of the hearing, the Board

shall, by order, approve or disapprove

the proposed acquisition on the basis of

the record of the hearing. If the

acquiring person does not request a

hearing, the notice of intent to

disapprove becomes final and

unappealable.

§ 225.44 Reporting of stock loans.

(a) Requirements. (1) Any foreign

bank or affiliate of a foreign bank that

has credit outstanding to any person or

group of persons, in the aggregate,

which is secured, directly or indirectly,

by 25 percent or more of any class of

voting securities of a state member bank,

shall file a consolidated report with the

appropriate Reserve Bank for the state

member bank.

(2) The foreign bank or its affiliate

also shall file a copy of the report with

its appropriate Federal banking agency.

(3) Any shares of the state member

bank held by the foreign bank or any

affiliate of the foreign bank as principal

must be included in the calculation of

the number of shares in which the

foreign bank or its affiliate has a security

interest for purposes of paragraph (a) of

this section.

(b) Definitions. For purposes of

paragraph (a) of this section:

(1) Foreign bank shall have the same

meaning as in section 1(b) of the

International Banking Act of 1978 (12

U.S.C. 3101).

(2) Credit outstanding includes any

loan or extension of credit; the issuance

of a guarantee, acceptance, or letter of

credit, including an endorsement or

standby letter of credit; and any other

type of transaction that extends credit or

financing to the person or group of

persons.

(3) Group of persons includes any

number of persons that the foreign bank

or any affiliate of a foreign bank has

reason to believe:

(i) Are acting together, in concert, or

with one another to acquire or control

shares of the same insured depository

institution, including an acquisition of

shares of the same depository institution

at approximately the same time under

substantially the same terms; or

(ii) Have made, or propose to make, a

joint filing under section 13 or 14 of the

Securities Exchange Act of 1934 (15

U.S.C. 78m or 78n), and the rules

promulgated thereunder by the

Securities and Exchange Commission

regarding ownership of the shares of the

same insured depository institution.

(c) Exceptions. Compliance with

paragraph (a) of this section is not

required if:

(1) The person or group of persons

referred to in that paragraph has

disclosed the amount borrowed and the

security interest therein to the Board or

appropriate Reserve Bank in connection

with a notice filed under § 225.41 of this

subpart, or another application filed

with the Board or Reserve Bank as a

substitute for a notice under § 225.41 of

this subpart, including an application

filed under section 3 of the BHC Act (12

U.S.C. 1842) or section 18(c) of the

Federal Deposit Insurance Act (Bank

Merger Act, 12 U.S.C. 1828(c)), or an

application for membership in the

Federal Reserve System; or

(2) The transaction involves a person

or group of persons that has been the

owner or owners of record of the stock

for a period of one year or more; or, if

the transaction involves stock issued by

a newly chartered bank, before the bank

is opened for business.

(d) Report requirements. (1) The

consolidated report shall indicate the

number and percentage of shares

securing each applicable extension of

credit, the identity of the borrower, and

the number of shares held as principal

by the foreign bank and any affiliate

thereof.

(2) A foreign bank, or any affiliate of

a foreign bank, shall file the

consolidated report in writing within 30

days of the date on which the foreign

bank or affiliate first believes that the

security for any outstanding credit

consists of 25 percent or more of any

class of voting securities of a state

member bank.

(e) Other reporting requirements. A

foreign bank, or any affiliate thereof,

that is supervised by the System and is

required to report credit outstanding

that is secured by the shares of an

insured depository institution to

another Federal banking agency also

shall file a copy of the report with the

appropriate Reserve Bank.

§ 225.51 [Removed]

7. Subpart F is amended by removing

§ 225.51.

8. Subpart G is amended by revising

the heading to read as follows:

Subpart G—Appraisal Standards for

Federally Related Transactions

9. Subpart H, consisting of §§ 225.71

through 225.73, is revised to read as

follows:

Subpart H—Notice of Addition or Change of

Directors and Senior Executive Officers

Sec.

225.71 Definitions.

225.72 Director and officer appointments;

prior notice requirement.

225.73 Procedures for filing, processing,

and acting on notices; standards for

disapproval; waiver of notice.

Subpart H—Notice of Addition or

Change of Directors and Senior

Executive Officers

§ 225.71 Definitions.

(a) Director means a person who

serves on the board of directors of a

regulated institution, except that this

term does not include an advisory

director who:

(1) Is not elected by the shareholders

of the regulated institution;

(2) Is not authorized to vote on any

matters before the board of directors or

any committee thereof;

(3) Solely provides general policy

advice to the board of directors and any

committee thereof; and

(4) Has not been identified by the

Board or Reserve Bank as a person who

performs the functions of a director for

purposes of this subpart.

(b) Regulated institution means a state

member bank or a bank holding

company.

(c) Senior executive officer means a

person who holds the title or, without

regard to title, salary, or compensation,

performs the function of one or more of

the following positions: president, chief

executive officer, chief operating officer,

chief financial officer, chief lending

officer, or chief investment officer.

Senior executive officer also includes

any other person identified by the Board

or Reserve Bank, whether or not hired

as an employee, with significant

influence over, or who participates in,

major policymaking decisions of the

regulated institution.

(d) Troubled condition for a regulated

institution means an institution that:

(1) Has a composite rating, as

determined in its most recent report of

examination or inspection, of 4 or 5

under the Uniform Financial

Institutions Rating System or under the
9342 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

Federal Reserve Bank Holding Company

Rating System;

(2) Is subject to a cease-and-desist

order or formal written agreement that

requires action to improve the financial

condition of the institution, unless

otherwise informed in writing by the

Board or Reserve Bank; or

(3) Is informed in writing by the

Board or Reserve Bank that it is in

troubled condition for purposes of the

requirements of this subpart on the basis

of the institution’s most recent report of

condition or report of examination or

inspection, or other information

available to the Board or Reserve Bank.

§ 225.72 Director and officer

appointments; prior notice requirement.

(a) Prior notice by regulated

institution. A regulated institution shall

give the Board 30 days’ written notice,

as specified in § 225.73, before adding

or replacing any member of its board of

directors, employing any person as a

senior executive officer of the

institution, or changing the

responsibilities of any senior executive

officer so that the person would assume

a different senior executive officer

position, if:

(1) The regulated institution is not in

compliance with all minimum capital

requirements applicable to the

institution as determined on the basis of

the institution’s most recent report of

condition or report of examination or

inspection;

(2) The regulated institution is in

troubled condition; or

(3) The Board determines, in

connection with its review of a capital

restoration plan required under section

38 of the Federal Deposit Insurance Act

or subpart B of the Board’s Regulation

H, or otherwise, that such notice is

appropriate.

(b) Prior notice by individual. The

prior notice required by paragraph (a) of

this section may be provided by an

individual seeking election to the board

of directors of a regulated institution.

§ 225.73 Procedures for filing, processing,

and acting on notices; standards for

disapproval; waiver of notice.

(a) Filing notice—(1) Content. The

notice required in § 225.72 shall be filed

with the appropriate Reserve Bank and

shall contain:

(i) The information required by

paragraph 6(A) of the Change in Bank

Control Act (12 U.S.C. 1817(j)(6)(A)) as

may be prescribed in the designated

Board form;

(ii) Additional information consistent

with the Federal Financial Institutions

Examination Council’s Joint Statement

of Guidelines on Conducting

Background Checks and Change in

Control Investigations, as set forth in the

designated Board form; and

(iii) Such other information as may be

required by the Board or Reserve Bank.

(2) Modification. The Reserve Bank

may modify or accept other information

in place of the requirements of

§ 225.73(a)(1) for a notice filed under

this subpart.

(3) Acceptance and processing of

notice. The 30-day notice period

specified in § 225.72 shall begin on the

date all information required to be

submitted by the notificant pursuant to

§ 225.73(a)(1) is received by the

appropriate Reserve Bank. The Reserve

Bank shall notify the regulated

institution or individual submitting the

notice of the date on which all required

information is received and the notice is

accepted for processing, and of the date

on which the 30-day notice period will

expire. The Board or Reserve Bank may

extend the 30-day notice period for an

additional period of not more than 60

days by notifying the regulated

institution or individual filing the

notice that the period has been extended

and stating the reason for not processing

the notice within the 30-day notice

period.

(b) Commencement of service—(1) At

expiration of period. A proposed

director or senior executive officer may

begin service after the end of the 30-day

period and any extension as provided

under paragraph (a)(3) of this section,

unless the Board or Reserve Bank

disapproves the notice before the end of

the period.

(2) Prior to expiration of period. A

proposed director or senior executive

officer may begin service before the end

of the 30-day period and any extension

as provided under paragraph (a)(3) of

this section, if the Board or the Reserve

Bank notifies in writing the regulated

institution or individual submitting the

notice of the Board’s or Reserve Bank’s

intention not to disapprove the notice.

(c) Notice of disapproval. The Board

or Reserve Bank shall disapprove a

notice under § 225.72 if the Board or

Reserve Bank finds that the competence,

experience, character, or integrity of the

individual with respect to whom the

notice is submitted indicates that it

would not be in the best interests of the

depositors of the regulated institution or

in the best interests of the public to

permit the individual to be employed

by, or associated with, the regulated

institution. The notice of disapproval

shall contain a statement of the basis for

disapproval and shall be sent to the

regulated institution and the

disapproved individual.

(d) Appeal of a notice of disapproval.

(1) A disapproved individual or a

regulated institution that has submitted

a notice that is disapproved under this

section may appeal the disapproval to

the Board within 15 days of the effective

date of the notice of disapproval. An

appeal shall be in writing and explain

the reasons for the appeal and include

all facts, documents, and arguments that

the appealing party wishes to be

considered in the appeal, and state

whether the appealing party is

requesting an informal hearing.

(2) Written notice of the final decision

of the Board shall be sent to the

appealing party within 60 days of the

receipt of an appeal, unless the

appealing party’s request for an informal

hearing is granted.

(3) The disapproved individual may

not serve as a director or senior

executive officer of the state member

bank or bank holding company while

the appeal is pending.

(e) Informal hearing. (1) An

individual or regulated institution

whose notice under this section has

been disapproved may request an

informal hearing on the notice. A

request for an informal hearing shall be

in writing and shall be submitted within

15 days of a notice of disapproval. The

Board may, in its sole discretion, order

an informal hearing if the Board finds

that oral argument is appropriate or

necessary to resolve disputes regarding

material issues of fact.

(2) An informal hearing shall be held

within 30 days of a request, if granted,

unless the requesting party agrees to a

later date.

(3) Written notice of the final decision

of the Board shall be given to the

individual and the regulated institution

within 60 days of the conclusion of any

informal hearing ordered by the Board,

unless the requesting party agrees to a

later date.

(f) Waiver of notice—(1) Waiver

requests. The Board or Reserve Bank

may permit an individual to serve as a

senior executive officer or director

before the notice required under this

subpart is provided, if the Board or

Reserve Bank finds that:

(i) Delay would threaten the safety or

soundness of the regulated institution or

a bank controlled by a bank holding

company;

(ii) Delay would not be in the public

interest; or

(iii) Other extraordinary

circumstances exist that justify waiver

of prior notice.

(2) Automatic waiver. An individual

may serve as a director upon election to

the board of directors of a regulated

institution before the notice required
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations 9343

1A parent company that is engaged in significant

off-balance sheet activities would generally be

deemed to be engaged in activities that involve

significant leverage.

2The appropriate Reserve Bank should be

contacted to determine the manner in which a

specific situation may qualify for treatment under

this policy statement.

3The term debt, as used in the ratio of debt to

equity, means any borrowed funds (exclusive of

short-term borrowings that arise out of current

transactions, the proceeds of which are used for

current transactions), and any securities issued by,

or obligations of, the holding company that are the

functional equivalent of borrowed funds.

The term equity, as used in the ratio of debt to

equity, means the total stockholders’ equity of the

bank holding company as defined in accordance

with generally accepted accounting principles. In

determining the total amount of stockholders’

equity, the bank holding company should account

for its investments in the common stock of

subsidiaries by the equity method of accounting.

Ordinarily the Board does not view redeemable

preferred stock as a substitute for common stock in

a small bank holding company. Nevertheless, to a

limited degree and under certain circumstances, the

Board will consider redeemable preferred stock as

equity in the capital accounts of the holding

company if the following conditions are met: (1)

The preferred stock is redeemable only at the option

of the issuer and (2) the debt to equity ratio of the

holding company would be at or remain below .30:1

following the redemption or retirement of any

preferred stock. Preferred stock that is convertible

into common stock of the holding company may be

treated as equity.

4 Dividends may be paid by small bank holding

companies with debt to equity at or below 1.0:1 and

otherwise meeting the requirements of

§ § 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) if

the dividends are reasonable in amount, do not

Continued

under this subpart is provided if the

individual:

(i) Is not proposed by the management

of the regulated institution;

(ii) Is elected as a new member of the

board of directors at a meeting of the

regulated institution; and

(iii) Provides to the appropriate

Reserve Bank all the information

required in § 225.73(a) within two (2)

business days after the individual’s

election.

(3) Effect on disapproval authority. A

waiver shall not affect the authority of

the Board or Reserve Bank to disapprove

a notice within 30 days after a waiver

is granted under paragraph (f)(1) of this

section or the election of an individual

who has filed a notice and is serving

pursuant to an automatic waiver under

paragraph (f)(2) of this section.

* * * * *

10. Section 225.125 is amended by

revising paragraphs (f) and (g) to read as

follows:

§ 225.125 Investment adviser activities

* * * * *

(f) In the Board’s opinion, the GlassSteagall Act provisions, as interpreted

by the U.S. Supreme Court, forbid a

bank holding company to sponsor,

organize, or control a mutual fund.

However, the Board does not believe

that such restrictions apply to closedend investment companies as long as

such companies are not primarily or

frequently engaged in the issuance, sale,

and distribution of securities. A bank

holding company should not act as

investment adviser to an investment

company that has a name similar to the

name of the holding company or any of

its subsidiary banks, unless the

prospectus of the investment company

contains the disclosures required in

paragraph (h) of this section. In no case

should a bank holding company act as

investment adviser to an investment

company that has either the same name

as the name of the holding company or

any of its subsidiary banks, or a name

that contains the word ‘‘bank.’’

(g) In view of the potential conflicts

of interests that may exist, a bank

holding company and its bank and

nonbank subsidiaries should not

purchase in their sole discretion, in a

fiduciary capacity (including as

managing agent), securities of any

investment company for which the bank

holding company acts as investment

adviser unless, the purchase is

specifically authorized by the terms of

the instrument creating the fiduciary

relationship, by court order, or by the

law of the jurisdiction under which the

trust is administered.

* * * * *

§ 225.145 [Amended]

11. Section 225.145, paragraph (a) the

fifth sentence is amended by removing

the words ‘‘increasing their assets at an

annual rate exceeding 7 percent during

any 12-month period after August 10,

1988,’’ and the last sentence by

removing ‘‘225.51 and’’.

12. Appendix C is revised to read as

follows:

Appendix C to Part 225—Small Bank

Holding Company Policy Statement

Policy Statement on Assessment of Financial

and Managerial Factors

In acting on applications filed under the

Bank Holding Company Act, the Board has

adopted, and continues to follow, the

principle that bank holding companies

should serve as a source of strength for their

subsidiary banks. When bank holding

companies incur debt and rely upon the

earnings of their subsidiary banks as the

means of repaying such debt, a question

arises as to the probable effect upon the

financial condition of the holding company

and its subsidiary bank or banks.

The Board believes that a high level of debt

at the parent holding company impairs the

ability of a bank holding company to provide

financial assistance to its subsidiary bank(s)

and, in some cases, the servicing

requirements on such debt may be a

significant drain on the resources of the

bank(s). For these reasons, the Board has not

favored the use of acquisition debt in the

formation of bank holding companies or in

the acquisition of additional banks.

Nevertheless, the Board has recognized that

the transfer of ownership of small banks

often requires the use of acquisition debt.

The Board, therefore, has permitted the

formation and expansion of small bank

holding companies with debt levels higher

than would be permitted for larger holding

companies. Approval of these applications

has been given on the condition that small

bank holding companies demonstrate the

ability to service acquisition debt without

straining the capital of their subsidiary banks

and, further, that such companies restore

their ability to serve as a source of strength

for their subsidiary banks within a relatively

short period of time.

In the interest of continuing its policy of

facilitating the transfer of ownership in banks

without compromising bank safety and

soundness, the Board has, as described

below, adopted the following procedures and

standards for the formation and expansion of

small bank holding companies subject to this

policy statement.

1. Applicability of Policy Statement

This policy statement applies only to bank

holding companies with pro forma

consolidated assets of less than $150 million

that: (i) are not engaged in any nonbanking

activities involving significant leverage 1 and

(ii) do not have a significant amount of

outstanding debt that is held by the general

public.

While this policy statement primarily

applies to the formation of small bank

holding companies, it also applies to existing

small bank holding companies that wish to

acquire an additional bank or company and

to transactions involving changes in control,

stock redemptions, or other shareholder

transactions. 2

2. Ongoing Requirements

The following guidelines must be followed

on an ongoing basis for all organizations

operating under this policy statement.

A. Reduction in parent company leverage:

Small bank holding companies are to reduce

their parent company debt consistent with

the requirement that all debt be retired

within 25 years of being incurred. The Board

also expects that these bank holding

companies reach a debt to equity ratio of

.30:1 or less within 12 years of the incurrence

of the debt. 3 The bank holding company

must also comply with debt servicing and

other requirements imposed by its creditors.

B. Capital adequacy: Each insured

depository subsidiary of a small bank holding

company is expected to be well-capitalized.

Any institution that is not well-capitalized is

expected to become well-capitalized within a

brief period of time.

C. Dividend restrictions: A small bank

holding company whose debt to equity ratio

is greater than 1.0:1 is not expected to pay

corporate dividends until such time as it

reduces its debt to equity ratio to 1.0:1 or less

and otherwise meets the criteria set forth in

§§ 225.14(c)(1)(ii), 225.14(c)(2), and

225.14(c)(7) of Regulation Y. 4
9344 Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 / Rules and Regulations

adversely affect the ability of the bank holding

company to service its debt in an orderly manner,

and do not adversely affect the ability of the

subsidiary banks to be well-capitalized. It is

expected that dividends will be eliminated if the

holding company is (1) not reducing its debt

consistent with the requirement that the debt to

equity ratio be reduced to .30:1 within 12 years of

consummation of the proposal or (2) not meeting

the requirements of its loan agreement(s).

Small bank holding companies formed

before the effective date of this policy

statement may switch to a plan that adheres

to the intent of this statement provided they

comply with the requirements set forth

above.

3. Core Requirements for All Applicants

In assessing applications or notices by

organizations subject to this policy statement,

the Board will continue to take into account

a full range of financial and other

information about the applicant, and its

current and proposed subsidiaries, including

the recent trend and stability of earnings,

past and prospective growth, asset quality,

the ability to meet debt servicing

requirements without placing an undue

strain on the resources of the bank(s), and the

record and competency of management. In

addition, the Board will require applicants to

meet the following requirements:

A. Minimum down payment: The amount

of acquisition debt should not exceed 75

percent of the purchase price of the bank(s)

or company to be acquired. When the

owner(s) of the holding company incurs debt

to finance the purchase of the bank(s) or

company, such debt will be considered

acquisition debt even though it does not

represent an obligation of the bank holding

company, unless the owner(s) can

demonstrate that such debt can be serviced

without reliance on the resources of the

bank(s) or bank holding company.

B. Ability to reduce parent company

leverage: The bank holding company must

clearly be able to reduce its debt to equity

ratio and comply with its loan agreement(s)

as set forth in paragraph 2A above.

Failure to meet the criteria in this section

would normally result in denial of an

application.

4. Additional Application Requirements for

Expedited/Waived Processing

A. Expedited notices under §§ 225.14 and

225.23 of Regulation Y: A small bank holding

company proposal will be eligible for the

expedited processing procedures set forth in

§§ 225.14 and 225.23 of Regulation Y if the

bank holding company is in compliance with

the ongoing requirements of this policy

statement, the bank holding company meets

the core requirements for all applicants noted

above, and the following requirements are

met:

i. The parent bank holding company has a

pro forma debt to equity ratio of 1.0:1 or less.

ii. The bank holding company meets all of

the criteria for expedited action set forth in

§§ 225.14 or 225.23 of Regulation Y.

B. Waiver of stock redemption filing: A

small bank holding company will be eligible

for the stock redemption filing exception for

well-capitalized bank holding companies

contained in § 225.4(b)(6) if the following

requirements are met:

i. The parent bank holding company has a

pro forma debt to equity ratio of 1.0:1 or less.

ii. The bank holding company is in

compliance with the ongoing requirements of this policy statement and meets the

requirements of §§ 225.14(c)(1)(ii),

225.14(c)(2), and 225.14(c)(7) of Regulation

Y.

William W. Wiles,

Secretary of the Board.

[FR Doc. 97–4906 Filed 2–27–97; 8:45 am]

BILLING CODE 6210–01–P