[Federal Register Volume 62, Number 61 (Monday, March 31, 1997)]
[Proposed Rules]
[Pages 15272-15296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7585]



[[Page 15271]]

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Part III





Federal Reserve System





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12 CFR Parts 208, 209, 216, and 250



State Banking Institutions Federal Reserve System Membership, 
Miscellaneous Interpretations; Federal Reserve Bank Capital Stock Issue 
and Cancellation; and Security Procedures; Proposed Rules

Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / 
Proposed Rules

[[Page 15272]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 250

[Regulation H; Docket No. R-0964]


Membership of State Banking Institutions in the Federal Reserve 
System; Miscellaneous Interpretations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System is 
proposing to amend Subpart A of Regulation H, regarding the general 
provisions for membership in the Federal Reserve System, and Subpart E 
of Regulation H, regarding Interpretations, in order to reduce 
regulatory burden and simplify and update requirements. The proposal 
would also eliminate several obsolete interpretations. The Board is 
also reissuing existing Subparts B and C. Existing Subparts B and C 
would not be significantly amended but would be relettered (as Subparts 
D and E, respectively) to reflect the fact that existing Subpart A 
would be broken into four new Subparts (Subparts A, B, C and F). 
Existing Subpart D, regarding safety and soundness standards, would be 
incorporated into proposed Subpart A. The proposal would not amend in 
any way Appendices A through E to Part 208. This proposal to modernize 
Subpart A of Regulation H is in accordance with the Board's policy of 
reviewing its regulations as well as the Board's review of regulations 
under section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994.

DATES: Comments must be received by May 30, 1997.

ADDRESSES: Comments, which should refer to Docket No. R-0964, may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments addressed to Mr. Wiles also may be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and 
to the security control room outside of those hours. Both the mail room 
and the security control room are accessible from the courtyard 
entrance on 20th Street between Constitution Avenue and C Street, N.W. 
Comments may be inspected in Room MP-500 between 9:00 a.m. and 5:00 
p.m. weekdays, except as provided in Sec. 261.8 of the Board of 
Governors' Rules Regarding Availability of Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Jean Anderson, Staff Attorney, Legal 
Division (202/452-3707). For the hearing impaired only, 
Telecommunications Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544).

SUPPLEMENTARY INFORMATION:

Background

    As part of its policy of reviewing its regulations, and consistent 
with section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Riegle Act), Pub. L. 103-328, the Board of 
Governors of the Federal Reserve System (Board) is proposing to amend 
Subpart A of Regulation H, regarding the general provisions for state 
bank membership in the Federal Reserve System (12 CFR part 208). 
Section 303 of the Riegle Act requires each Federal banking agency to 
review and streamline its regulations and written policies to improve 
efficiency, reduce unnecessary costs, and remove inconsistencies and 
outmoded and duplicative requirements. The proposed amendments are 
designed to reduce regulatory burden and simplify and update the 
Regulation.
    The principal proposed amendments are described below. In general, 
the amendments serve to reorganize, clarify, and reduce the burden of 
compliance with Subpart A of Regulation H. The amendments delete 
application procedures no longer in effect, reflect the requirements of 
the Community Reinvestment Act (CRA) (12 U.S.C. 2901 et seq.) in branch 
applications, provide for expedited procedures in certain membership 
and branch applications, and eliminate provisions that no longer have a 
significant effect. The Board also proposes to eliminate a number of 
interpretations in Regulation H and elsewhere; specifically, 
interpretations: 12 CFR 208.125, 208.126, 208.127, 208.128, 250.120, 
250.121, 250.122, 250.123, 250.140, 250.161, 250.162, 250.220, 250.300, 
250.301 and 250.302. The amended Regulation H, when fully effective, 
will replace the existing Regulation H in its entirety, except for the 
Appendices to Regulation H, which will remain unchanged by the 
proposal.
    The Board is not proposing to modify substantively existing 
Subparts B and C of Regulation H. However, existing Subparts B and C 
would be reissued and relettered (Subparts D and E, respectively) to 
reflect the fact that Subpart A, as proposed, would be broken into four 
new Subparts (Subpart A, B, C, and F). In addition, a cross-reference 
to real estate appraisal standards in Regulation Y (Part 225--Bank 
Holding Companies and Change in Bank Control) would be moved from 
existing Sec. 208.18 to proposed Sec. 208.50 (Purpose and Scope), 
within proposed Subpart E, which would be renamed ``Real Estate Lending 
and Appraisal Standards.'' Existing Subpart D would be incorporated 
into Subpart A at proposed Sec. 208.3(e), entitled ``Conditions of 
membership.'' The Board is proposing to amend existing Subpart E, which 
lists interpretations of Regulation H, in order to eliminate 
unnecessary or outdated interpretations and to incorporate certain 
interpretations, where noted, into the regulatory language of Subpart A 
of Regulation H. Existing Subpart E would be relettered as Subpart G. 
As noted above, a number of miscellaneous interpretations would also be 
deleted.

Subpart A--General Membership and Branching Requirements

Section 208.2  Definitions

    The definitions would be rearranged and placed in alphabetical 
order. The definition of branch would be taken out of footnote seven of 
existing Sec. 208.9 and added to the definition section. The definition 
section would also include a proposed definition of capital stock and 
surplus. The Board is proposing to formalize in Sec. 208.6 its 
expedited branch application procedures. Consequently, a definition of 
eligible bank is proposed for purposes of determining which banks may 
utilize the expedited branch application procedures. The definition of 
eligible bank would also be used for purposes of determining which 
banks may utilize the Board's newly proposed expedited membership 
procedures.
Definition of Branch
    Section 9(3) of the Federal Reserve Act (12 U.S.C. 321) in essence 
provides that State member banks may establish domestic branches on the 
same terms and conditions and subject to the same limitations and 
restrictions as are applicable to the establishment of branches by 
national banks. The definition of branch incorporates this concept by 
providing that a branch includes any branch bank, branch office, branch 
agency, additional office, or any branch place of business that 
receives deposits, pays checks, or lends money. A branch may include a 
temporary, seasonal, or mobile facility.
    For purposes of this definition, the Board is proposing that a 
branch not include a loan origination facility where the proceeds of 
loans are not disbursed. In addition, pursuant to section 2204 of the 
Economic Growth and Regulatory

[[Page 15273]]

Paperwork Reduction Act of 1996, Pub. L. 104-208, 110 Stat. 3009, 
(Economic Growth Act), the definition excludes automated teller 
machines and remote service units as well as offices of an affiliated 
depository institution that provide services to customers of a State 
member bank on behalf of the State member bank. The Board seeks comment 
on whether it also would be appropriate to exclude from the definition 
of branch an office of an unaffiliated depository institution that 
provides services to customers of the State member bank on behalf of 
the State member bank.
    The proposal also excludes from the definition of branch a facility 
that would otherwise qualify as a branch because it engages in one or 
more of these branching functions (receipt of deposits, payment of 
withdrawals, or making loans) but which prohibits access to members of 
the public for purposes of conducting one or more branching functions. 
For example, an office that receives deposits only through the mail 
(which does not offer a means to attract customers to the bank or 
provide in-person contact with the public) would be excluded. This 
exclusion is consistent with existing Board interpretations.
    The Office of the Comptroller of the Currency (OCC) has also stated 
that it will decide on a case by case basis whether to treat as a 
branch a facility that generally provides services, on a 
nondiscriminatory basis, to accounts that its customers hold as well as 
accounts held by noncustomers in other banks and depository 
institutions. (Before the passage of the Economic Growth Act that 
excludes ATMs from the definition of a branch, an example of such a 
facility would have been ATMs that are linked to networks and thus 
provide services to bank customers and non-customers alike.) The Board 
would also consider on a case-by-case basis, based on the particular 
circumstances involved, whether such facilities constitute branches.
Definition of Capital Stock and Surplus
    The Federal Reserve Act and the current version of Regulation H 
contain various references to a State member bank's ``capital.'' For 
example, the guidelines for determining the capital adequacy of State 
member banks for risk-based capital purposes and for leverage purposes 
are set out in appendices A and B to Regulation H, respectively (these 
measures would not change under the proposal). The Federal Reserve Act 
contains other references to a State member bank's capital stock and 
surplus (or similar terms) in numerous provisions, such as those 
related to purchases of investment securities (12 U.S.C. 335), loans on 
stock or bond collateral (12 U.S.C. 248(m)), deposits with nonmember 
banks (12 U.S.C. 463), bank acceptances (12 U.S.C. 372 and 373), and 
limits on the amount of paper of one borrower that may be discounted by 
a Federal Reserve Bank for any member bank (12 U.S.C. 330 and 345). The 
Board has issued interpretations on how to define ``capital stock and 
surplus'' for some of these purposes (12 CFR 250.161 and 250.162).
    The Board is proposing to define capital stock and surplus in 
Regulation H to mean Tier 1 and Tier 2 capital, as calculated under the 
risk-based capital guidelines, plus any allowance for loan and lease 
losses not already included in Tier 2 capital. This definition would 
apply to all references to capital stock and surplus in the Federal 
Reserve Act and Regulation H, unless otherwise noted. The new 
definition would mirror the definition of capital stock and surplus 
that the Board adopted in April 1996 for purposes of section 23A of the 
Federal Reserve Act (which governs transactions between insured 
depository institutions and their affiliates). This definition is also 
used for purposes of Regulation O (12 CFR 215) (which governs insider 
lending) and the OCC's limits on loans by a national bank to a single 
borrower.<SUP>1 The Board proposes to rescind its current capital-
related interpretations (12 CFR 250.161 and 250.162).
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    \1\ The proposed definition of capital stock and surplus would 
not apply to part 209 of this title (Regulation I).
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Definition of Eligible Bank
    The proposal incorporates a new definition, eligible bank, to serve 
as the qualification for expedited treatment of membership and branch 
applications. Under the proposal, an eligible bank is a bank that: 1. 
is well capitalized; 2. has a Uniform Financial Institutions Rating 
System (CAMELS) rating of 1 or 2; 3. has a Community Reinvestment Act 
rating of ``Outstanding'' or ``Satisfactory;'' 4. has a compliance 
rating of 1 or 2; and 5. has no major unresolved supervisory issues 
outstanding as determined by the Board or the appropriate Federal 
Reserve Bank. The Board has long used similar criteria for expedited 
processing of branch applications. The proposal would incorporate these 
criteria into Regulation H and would expand the use to qualification 
for expedited processing of membership applications. The proposed 
definition of eligible bank is consistent with the definition of 
eligible bank adopted by the OCC.
Definition of Mutual Savings Bank and State Bank
    The Board proposes deleting the definition of a mutual savings bank 
as unnecessary. The Board is proposing to amend the definition of state 
bank in order to track more closely the definition of state bank 
provided in Section 9 of the Federal Reserve Act.

Section 208.3  Application and Conditions for Membership in Federal 
Reserve System

Eligibility Requirements
    The proposal eliminates existing Sec. 208.2, entitled ``Eligibility 
Requirements,'' since its provisions have been incorporated into the 
factors considered in approving applications for membership. The 
proposal eliminates existing Sec. 208.2(b), regarding minimum capital 
required for membership by national banks, and replaces it with a 
cross-reference to the statutory requirements applicable to national 
banks.
    In addition, the proposal eliminates existing Sec. 208.3, 
``Insurance of Deposits.'' Existing Sec. 208.3 reflects prior law that 
accorded insured bank status under the Federal Deposit Insurance Act 
(FDI Act) (12 U.S.C. 264, 1728, 1811 to 1831) to an uninsured bank upon 
becoming a State member bank. Under the Federal Deposit Insurance Act, 
banks must apply separately to the Federal Deposit Insurance 
Corporation for insured bank status.
Applications for Membership and Stock
    The proposal amends existing Sec. 208.4, entitled ``Application for 
membership,'' by summarizing in a more succinct fashion the Board's 
application procedures. It also provides a cross-reference to the 
Board's Rules of Procedure (12 CFR 262.3), which govern the submission 
of such applications. Existing Sec. 208.5(b), which covers procedures 
for the payment for and issuance of Federal Reserve Bank stock to State 
member banks on approval of membership applications, duplicates 
Regulation I and, therefore is deleted. A proposed revision of 
Regulation I (12 CFR part 209) is published elsewhere in today's 
Federal Register.
    Public comment on membership applications (including conversions) 
is not expressly required by statute and, since membership does not 
confer deposit insurance, the CRA does not, by its terms, apply to 
membership applications (state or national charters confer deposit-
taking ability not Federal Reserve membership). Although the 
publication requirement imposes a

[[Page 15274]]

burden on prospective member banks, it may also lead to the Board 
obtaining additional information or views relevant to a membership 
application. Therefore, the Board solicits comment on whether 
publication should be required for membership applications.
    If the Board determines publication is not necessary for membership 
applications, the final rule would provide that membership applications 
would be acted on promptly after receipt of the application.
Factors Considered in Approving Applications for Membership
    The matters given special consideration in membership applications 
would be modified to reflect that insurance coverage under the Federal 
Deposit Insurance Act is no longer a requirement for membership. In 
addition, the membership considerations would be modified to clarify 
that the capital necessary for membership is that required under 
proposed Sec. 208.4. If the proposed changes are adopted, the Board 
would change its Rules Regarding Delegation of Authority (Delegation 
Rules), at 12 CFR 265.11(e)(1), to reflect the changes to Regulation H 
since the Delegation Rules also list the factors the Board takes into 
consideration in approving membership applications.
Expedited Membership Approval for Eligible Banks and Bank Holding 
Companies
    The Board's proposal would provide expedited treatment for 
membership applications from de novo state banks that are sponsored by 
bank holding companies that meet the criteria for expedited processing 
under Sec. 225.14(c) of Regulation Y (12 CFR 225.14(c)). In addition, 
the Board's proposal would grant expedited treatment to state non-
member banks applying for membership and national banks seeking to 
convert to State member banks if the applying bank is an eligible 
bank.<SUP>2
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    \2\ The OCC provides expedited treatment for de novo national 
bank charters for affiliates of lead banks that are eligible 
national banks (12 CFR 5.20(j)) as well as for eligible State member 
banks seeking to convert to national banks 12 CFR 5.24(d)(4)).
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    An application for membership by an eligible bank would be deemed 
approved by the Board or the appropriate Reserve Bank five business 
days after the close of the public comment period, unless the Board or 
the appropriate Reserve Bank notifies the bank that the application is 
approved prior to that date (but in no case will an application be 
approved before the third day after the close of the public comment 
period) or that the bank is not eligible for expedited processing 
because: 1. The bank will offer banking services that are materially 
different from those presently offered by the bank, or those offered by 
affiliates in the case of membership applications by de novo banks; or 
2. The existing bank is not an eligible bank or the bank holding 
company is not eligible for expedited treatment under Sec. 225.14(c) of 
Regulation Y; or 3. The application contains a material error or is 
otherwise deficient; or 4. The application or notice required under the 
Board's Rules of Procedure (12 CFR 262.3), raises significant 
supervisory, Community Reinvestment Act, compliance, policy, or legal 
issues that have not been resolved, or a timely substantive adverse 
comment is submitted. If the proposed changes are adopted, the Board 
will amend it's Rules of Procedure accordingly.
    If the Board determines publication is not necessary for membership 
applications, the final rule would provide that expedited membership 
applications are deemed approved 30 days after receipt of the 
application, unless the applicant is notified it is not eligible for 
expedited review.<SUP>3
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    \3\ In addition, if publication for membership applications is 
retained, the Board will be proposing amendments to its Rules of 
Procedure in the future to allow banks to submit membership 
applications within 15 days of publication, rather than the current 
7 day requirement. This would provide greater consistency in the 
processing procedures under Regulation H and Regulation Y (12 CFR 
part 225).
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    In addition, the Board will be eliminating the pre-acceptance 
period from its internal processing of all membership applications, 
which will generally reduce processing times. The Board believes that 
the expedited application procedures, by establishing criteria which, 
if met, presume approval, will provide greater assurance of the timing 
and outcome of membership applications. The Board solicits comments on 
the benefits of the proposed expedited membership application 
procedure.
Conditions of Membership
    A new Sec. 208.3(d) would combine and condense former Secs. 208.6 
and 208.7 concerning the general conditions and requirements of 
membership. The former requirement that the capital and surplus of a 
State member bank be adequate in relation to its existing and 
prospective deposit liabilities has been modified and placed in 
proposed Sec. 208.4. Proposed Sec. 208.3(d) would also incorporate the 
provisions of existing Subpart D, ``Standards for Safety and 
Soundness.''
    Existing Sec. 208.6(a), which points out that State member banks 
retain all charter and statutory rights under state law not preempted 
by Federal law, and Sec. 208.6(b), which states that State member banks 
are entitled to all the privileges of membership afforded them under 
the Federal Reserve Act and other acts of Congress, and must observe 
all requirements of Federal law, would be deleted, as the Board 
believes these propositions to be self-evident and, therefore, do not 
need to be explicitly stated.
    Existing Sec. 208.7(b) requires specific notification to the 
appropriate Reserve Bank in the event a State member bank acquires the 
assets of another institution through merger, consolidation, or 
purchase, because the acquisition may result in a change in the general 
character of the bank's business or in the scope of its corporate 
powers. The Board proposes to delete this provision because the Bank 
Merger Act (12 U.S.C. 1828(c)) already requires an application under 
these circumstances. Filing an application under the Bank Merger Act 
(12 U.S.C. 1828(c)) fulfills the requirement to notify the appropriate 
Reserve Bank of any change requiring such a filing.
Waivers of Conditions of Membership
    Existing Sec. 208.8(b) provides for waivers of conditions contained 
within existing Sec. 208.8 and existing Sec. 208.10, provides for 
waivers of reports of affiliates. The proposal would provide for a 
waiver of any condition of membership upon a showing of good cause and 
for an automatic waiver of the requirement to file reports of 
affiliates, unless such reports are specifically requested by the 
Board.
Voluntary Withdrawal From Membership
    The provisions of existing Sec. 208.11, as they relate to the 
effective date of withdrawal from membership, would be moved to 
proposed Sec. 208.3(f). The provisions in existing Sec. 208.11, which 
relate to surrendering Reserve Bank stock, are duplicative of 
Regulation I (12 CFR part 209) and therefore would be eliminated, and 
instead, proposed Sec. 208.3(f) would cross-reference Regulation I.

Section 208.4  Capital Adequacy

    Existing Sec. 208.13, entitled ``Capital adequacy,'' and other 
provisions concerning capital requirements, would be moved to proposed 
Sec. 208.4. The substance of existing requirements would not change but 
the language would be amended to provide greater clarity to State 
member banks regarding

[[Page 15275]]

their ongoing obligation to ensure that the bank's capital is adequate. 
The Board will be considering streamlining amendments to Appendices A 
and B separately from this proposal.

Section 208.5  Dividends and Other Distributions

    Proposed Sec. 208.5 revises the existing provisions concerning 
payment of dividends and withdrawal of capital, currently found at 
Sec. 208.19, in order to clarify the application of these requirements 
to State member banks. The interpretations currently found at 
Sec. 208.125 through Sec. 208.127 would be incorporated into proposed 
Sec. 208.5.

Section 208.6  Establishment and Maintenance of Branches

    The proposal would restructure existing Sec. 208.9 and replace it 
with proposed new Sec. 208.6 which is designed to improve clarity and 
provide more streamlined procedures.
Branching
    Existing Sec. 208.9(a) states that State member banks may establish 
domestic branches subject to the same limitations and restrictions as 
applied to national banks, unless restrained by State law, and contains 
a detailed summary of geographic restrictions on branching within a 
State, which generally restrict national banks to the same rules as 
those that apply to State banks under state law. Statewide branching is 
now permitted in many States under State law; interstate branching 
through acquisition is now permitted for national banks except in a few 
States which have opted out; and interstate branching de novo is now 
permitted in States in which out-of-state banks generally are permitted 
to establish branches. Rather than summarizing the underlying statutes, 
proposed Sec. 208.6(a)(1) provides cross-references to the statutes 
governing branching.
Branch Applications Generally
    Proposed Sec. 208.6(a)(2) contains a condensed version of existing 
Sec. 208.9(e), which refers State member banks to the Board's 
Regulation K (12 CFR part 211) for matters related to branches in 
foreign countries, their dependencies and possessions, dependencies and 
possessions of the United States, and the Commonwealth of Puerto Rico. 
For matters related to domestic branch applications, proposed 
Sec. 208.6(a)(2) contains a cross-reference to the Board's Rules of 
Procedure (12 CFR 262.3) which govern the submission of domestic branch 
applications. The Board is requesting comment on whether it should 
shorten the public comment period applicable to branch applications 
from the 30 days that is currently required to 15 days.<SUP>4
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    \4\ The Board could shorten the comment period either by 
amending Regulation H or by amending the Board's Rules of Procedure.
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    Proposed Sec. 208.6(b) modifies the Board's requirements for 
approving branch applications currently contained within the Board's 
Delegation Rules (12 CFR 265.11(e)(3)). Proposed Sec. 208.6(b) 
eliminates consideration of factors found at Sec. 265.11(e)(3)(iv), 
regarding the competitive situation and Sec. 265.11(e)(3)(v), regarding 
the branch's prospects for profitable operation, and adds to the 
factors for consideration the bank's performance under the CRA in cases 
where the bank is establishing a branch with deposit-taking ability. If 
the proposed changes are adopted the Board will amend its Delegation 
Rules accordingly.
Expedited Branch Applications
    Existing Sec. 208.9(b) would be replaced by proposed Sec. 208.6(c), 
which sets forth the Board's expedited procedures for eligible banks 
establishing branches.<SUP>5 Under the proposed procedures, which 
modify slightly the Board's existing procedures, located in 
Administrative Letter 92-82 (November 5, 1992), a branch application by 
an eligible bank would be deemed approved by the Board or the 
appropriate Reserve Bank five business days after the close of the 
public comment period, unless the Board or the appropriate Reserve Bank 
notifies the bank that the application is approved prior to that date 
(but in no case will an application be approved before the third day 
after the close of the public comment period) or that the bank is not 
eligible for expedited processing because: (1) It is not an eligible 
bank; (2) The application contains a material error or is otherwise 
deficient; or (3) The application or notice required under the Board's 
Rules of Procedure (12 CFR 262.3), raises significant supervisory, 
Community Reinvestment Act, compliance, policy or legal issues that 
have not been resolved, or a timely substantive adverse comment is 
submitted. If the proposed changes are adopted the Board will amend its 
Rules of Procedure accordingly.
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    \5\ The Board's Rules of Procedure (12 CFR part 262) set forth 
general procedures for applications at 12 CFR 262.3.
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Consolidated Branch Applications
    Proposed Sec. 208.6(d) would authorize explicitly a single 
consolidated application for branches that a State member bank plans to 
establish in a one-year period. At present, such an application is 
permissible because the Board's branch approvals are valid for one 
year, provided the bank notifies the appropriate Reserve Bank before 
opening any branch covered by the approval. Moreover, there is no 
requirement that a particular branch be opened once it is approved. 
Under the proposal to codify such procedures, approvals would remain 
valid for one year unless the Board notifies the bank of the approval's 
suspension as a result of a change in the bank's condition.
Branch Closings
    Proposed Sec. 208.6(e) is a new section requiring branch closings 
to comply with section 42 of the FDI Act (12 U.S.C. 1831r-1), which 
requires notice to both customers and, in the case of insured State 
member banks, the Board, of proposed branch closings. A branch 
relocation is not a closing for purposes of Sec. 42(e) of the FDI Act. 
Under section 42(e) of the FDI Act, a branch relocation is a movement 
that occurs within the immediate neighborhood and that does not 
substantially affect the nature of the business or customers served.
Branch Relocations
    Currently Sec. 208.9(b)(7) of Regulation H states that no branch 
application is required for a relocation of an existing branch. A 
branch relocation, for purposes of filing a branch application, is a 
movement that does not substantially affect the nature of the branch's 
business or customers served. Proposed Sec. 208.6(f) would continue 
this standard.

Section 208.7  Prohibition Against Using Interstate Branches Primarily 
for Deposit Production

    The proposal includes a place holder for existing Sec. 208.28. The 
Board requested public comment on existing Sec. 208.28 on March 17, 
1997 (62 FR 12730). Existing Sec. 208.28 will be incorporated at 
proposed Sec. 208.7 once it is finalized.

Subpart B Investments and Loans

Section 208.21  Investments in Premises and Securities

    A new proposed Sec. 208.21, entitled ``Investments in Premises and 
Securities,'' would be created to provide guidance to State member 
banks with regard to investments in bank premises and securities. 
Existing interpretation Sec. 208.124, entitled, ``Purchase of 
investment company stock by a State member bank,'' would remain as an 
interpretation of Regulation H but would be renumbered as Sec. 208.102 
and entitled ``Investments in Shares of an Investment Company.''

[[Page 15276]]

    Existing interpretation 12 CFR 208.128, entitled ``Commodity- or 
equity-linked transactions,'' would be eliminated under the proposal. 
Since the adoption of the interpretation found at Sec. 208.128, in 
which the Board determined that certain commodity- and equity-linked 
transactions constituted a change in the nature of a bank's business 
for which Board approval was required under Regulation H, more 
comprehensive examination guidance and procedures have been developed 
to address trading activities and market risk. For this reason, the 
Board no longer believes it is necessary to treat commodity- and 
equity-linked transactions differently from transactions involving 
interest rate or foreign exchange risk.

Section 208.22  Community Development and Public Welfare Investments

    Section 208.21 of Regulation H (proposed to be renumbered as 
Sec. 208.22, within proposed Subpart B) contains limitations and 
procedures regarding public welfare investments by State member banks. 
Among other things, the regulation sets out the conditions under which 
a State member bank may make public welfare investments without prior 
Board approval. One of those conditions is that any investment in a 
particular project may not exceed 2 percent of the bank's capital stock 
and surplus. The Board is proposing to eliminate the 2 percent limit. 
(The OCC eliminated a similar 2 percent limit for national banks, 61 FR 
49654, September 23, 1996.) The aggregate public welfare investments of 
a State member bank would continue to be limited to 5 percent of the 
bank's capital stock and surplus.
    In addition, to make a public welfare investment without prior 
approval, a State member bank must have an overall rating of ``at least 
satisfactory'' as of its most recent consumer compliance examination. 
The term ``at least satisfactory'' equates to a rating of ``1'' or 
``2'' in the consumer compliance examination rating system. The Board 
is proposing to substitute the numerical ratings for the term ``at 
least satisfactory.''
    The final paragraph of the public welfare investment section sets 
out procedures regarding preexisting public welfare investments as of 
the effective date of the rule (January 9, 1995). The latest date for 
complying with any action required by this paragraph was January 9, 
1996. As this paragraph is now obsolete, the Board is proposing to 
delete it.
    Finally, as discussed above, the Board is proposing to define 
``capital stock and surplus'' for purposes of Regulation H. The 
proposed definition would also apply to the capital limitations 
associated with public welfare investments.

Section 208.23  Agricultural Loan Loss Amortization

    Proposed Sec. 208.23 would have a sunset date of January 1, 1999, 
because the enabling statute provides that banks may only use this 
amortization provision through 1998.<SUP>6 Because the terms of 
proposed Sec. 208.23 expire on January 1, 1999, banks are no longer 
able to establish new capital restoration plans. Since the terms of 
Sec. 208.23 apply only to existing capital restoration plans, proposed 
Sec. 208.23 eliminates all references relating to establishing new 
capital restoration plans, such as the requirements for submitting 
proposals to establish capital restoration plans and the eligibility 
requirements for establishing plans.
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    \6\ The Office of the Comptroller of the Currency (OCC) and the 
Federal Deposit Insurance Corporation (FDIC) have adopted this same 
sunset date for their agricultural loan loss rules (60 FR 27401, May 
24, 1995)(OCC); (61 FR 33842, July 1, 1996)(FDIC).
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Section 208.24  Letters of Credit and Acceptances

    The proposal does not substantively amend existing Sec. 208.8(d), 
entitled ``Letters of credit and acceptances.''

Section 208.25  Loans in Areas having Special Flood Hazards

    Existing Sec. 208.23, relating to loans by State member banks in 
identified flood hazard areas, was recently amended by the Board and 
issued as a joint final rule on August 16, 1996.<SUP>7 The current 
proposal does not propose to modify the language of the flood insurance 
provisions. The sample form of notice included in the final rule will 
be located at the end of Subpart B as Appendix A to proposed 
Sec. 208.25.
---------------------------------------------------------------------------

    \7\ 61 FR 45683 (August 29, 1996). The final rule, which became 
effective October 1, 1996, replaced the provisions of Sec. 208.8(e) 
with a new Sec. 208.23 (now proposed Sec. 208.25).
---------------------------------------------------------------------------

Subpart C Bank Securities and Securities-Related Activities

Section 208.31  State Member Banks as Transfer Agents

    Current Sec. 208.8(f) would be revised and replaced by proposed 
Sec. 208.31. Proposed Sec. 208.31 incorporates by reference the rules 
of the Securities and Exchange Commission (SEC) prescribing procedures 
for registration of transfer agents for which the SEC is the 
appropriate regulatory agency (12 CFR 240.17Ac2-1). Although section 
17(a)(d)(1) of the Securities Exchange Act of 1934 (the 1934 Act) (15 
U.S.C. 78q-l(d)(1)) generally subjects all transfer agents to SEC 
rules, section 17A(c) (15 U.S.C. 78q-1(c)) provides that transfer 
agents shall register with their appropriate regulatory agencies. 
Current Sec. 208.8(f) sets forth procedural requirements for State 
member banks that register as transfer agents, which are virtually 
identical to the SEC's registration rules. Because the Board does not 
need to maintain separate procedures, the proposal incorporates, by 
reference, the SEC's rule, substituting the ``Board'' for the ``SEC'' 
or ``Commission.'' The proposal also clarifies that State member bank 
transfer agents must comply with the SEC's rules prescribing 
operational and reporting requirements applicable to all transfer 
agents (17 CFR 240.17Ac2-2 and 240.17Ad-1 et seq.), adopted by the SEC 
pursuant to section 17A of the 1934 Act (15 U.S.C. 78q-1).

Section 208.32  Notice of Disciplinary Sanctions Imposed by Registered 
Clearing Agency

    Existing Sec. 208.8(g) is renumbered as proposed Sec. 208.32, with 
minor clarifications and subheadings added. The 1934 Act requires the 
registration of clearing agencies and authorizes a registered clearing 
agency to deny participation in the clearing agency or to impose 
certain disciplinary sanctions upon participants, including limiting 
access to the clearing agency's services. 15 U.S.C. 78q-1(b)(3)(G) and 
(b)(5)(C). Proposed Sec. 208.32 covers notices by registered clearing 
agencies of such adverse actions. The Board considered incorporating 
the SEC's regulations by reference but decided instead to retain its 
existing regulation because it is limited to State member banks and 
their subsidiaries, which makes it simpler and clearer than the 
corresponding SEC rule.

Section 208.33  Application for Stay or Review of Disciplinary 
Sanctions Imposed by Registered Clearing Agency

    Under the proposal, Sec. 208.8(h) and Sec. 208.8(i) would be 
revised and replaced by proposed Sec. 208.33. The resulting new section 
would incorporate, by reference, the SEC's rules regarding applications 
by persons for whom the SEC is the appropriate regulatory agency for 
stays and reviews of disciplinary sanctions, thereby making these rules 
applicable to such applications by State member banks and their 
subsidiaries. Persons aggrieved by clearing agency action that denies 
them participation in the

[[Page 15277]]

clearing agency or imposes certain disciplinary sanctions upon 
participants, including limiting access to the clearing agency's 
services, may request a stay of such action or appeal such action to 
the appropriate regulatory agency. The Board is the appropriate 
regulatory agency with respect to State member banks that are clearing 
agencies. The Board's current rules on stays in Sec. 208.8(h) and on 
review in Sec. 208.8(i) are virtually identical to the SEC's rules. 
Therefore, the Board does not need to maintain separate rules. The 
proposal simply incorporates the SEC's rules, with the Board 
substituted for the SEC.

Section 208.34 Recordkeeping and Confirmation of Certain Securities 
Transactions Effected by State Member Banks

    The proposal includes a place holder for existing Sec. 208.24 at 
proposed new Sec. 208.34. Existing Sec. 208.24 was issued as a final 
rule on March 5, 1997 (62 FR 9909), with an effective date of April 1, 
1997. The text of existing Sec. 208.24 will be incorporated in its 
entirety at Sec. 208.34 when this proposal is issued as a final rule.

Section 208.35 Qualification Requirements for the Recommendation or 
Sale of Certain Securities

    The proposal includes a place holder for proposed new Sec. 208.35. 
The Board is seeking public comment on proposed Sec. 208.35 separately 
from this proposal.

Section 208.36 Reporting Requirements for State Member Banks Subject to 
the Securities Exchange Act of 1934

    Existing Sec. 208.16 has not been substantively modified but has 
been moved to proposed Sec. 208.36.

Section 208.37 Government Securities Sales Practices

    The proposal includes a place holder for Sec. 208.25 at proposed 
Sec. 208.37. Section 208.25 was issued as a final rule on March 19, 
1997 (62 FR 13276). The text of existing Sec. 208.25 will be 
incorporated in its entirety at Sec. 208.37 when this proposal is 
issued as a final rule.

Subpart D Prompt Corrective Action

    The proposal does not significantly amend the terms of existing 
Subpart B other than to redesignate it as Subpart D and to amend 
Sec. 208.41 to provide the Federal Reserve with the option of using 
period-end total assets rather than average total assets for purposes 
of defining total assets. This option will allow the use, in certain 
circumstances, of a definition of total assets that more accurately 
reflects the true asset base of an institution for determining whether 
it is critically undercapitalized. This should be helpful in working 
with banks with rapidly shrinking asset bases.

Subpart E Real Estate Lending and Appraisal Standards

    The proposal does not substantively amend the terms of existing 
Subpart C but merely redesignates Subpart C as Subpart E. In addition, 
existing Sec. 208.18 of existing Subpart A would not be substantively 
amended but would be added to proposed Subpart E as new Sec. 208.50, 
entitled ``Real Estate Lending and Appraisal Standards.''

Subpart F Miscellaneous Requirements

Section 208.61  Bank Security Procedures

    Regulation P (12 CFR part 216), as amended by the Board on May 1, 
1991, is proposed to be incorporated into Regulation H at Sec. 208.61. 
A proposed rule to remove 12 CFR part 216 is found elsewhere in today's 
Federal Register.

Section 208.62  Suspicious Activity Reports

    Existing Sec. 208.20 was amended by the Board and was issued as a 
final rule on February 5, 1996; therefore, it would not be amended 
substantively by this proposal but would be moved to new Sec. 208.62.

Section 208.63  Procedures for Monitoring Bank Secrecy Act Compliance

    Existing Sec. 208.14 is not being substantively amended under the 
proposal, but is being redesignated as Sec. 208.63.

Section 208.64  Frequency of examination

    The proposal includes a place holder for existing Sec. 208.26. The 
Board issued existing Sec. 208.26 as an interim rule with request for 
public comment on February 12, 1997 (62 FR 6449). Existing Sec. 208.26 
will be incorporated in its entirety at proposed Sec. 208.64 once it is 
finalized.

Subpart G Interpretations

    The proposal eliminates interpretations 208.125-208.128, reletters 
existing Subpart E as Subpart G, and renumbers the remaining 
interpretations. In addition, the Board is seeking comment as to 
whether it should amend proposed interpretation Sec. 208.102, entitled 
``Investments in Shares of an Investment Company,'' to provide for an 
alternative limit for diversified investment companies. The Board is 
seeking comment on whether, like the OCC, it should allow a bank to 
elect not to combine its pro rata interest in a particular security in 
an investment company with the bank's direct holdings of that security 
if: (1) The investment company's holdings of the securities of any one 
issuer do not exceed 5 percent of its total portfolio; and (2) if the 
bank's total holdings of the investment company's shares do not exceed 
the most stringent investment limitation that would apply to any of the 
securities in the company's portfolio if those securities were 
purchased directly by the bank.
    The proposal also deletes three miscellaneous interpretations (12 
CFR 250.300-250.302) under the Bank Service Company Act (12 U.S.C. 1861 
et seq.). The Board believes that these interpretations are no longer 
necessary because the substance of the interpretations is now covered 
by the express requirements of the Bank Service Company Act.
    In addition, the proposal includes a place holder for Sec. 208.129, 
an interpretation, entitled ``Obligations concerning institutional 
customers.'' Section 208.129 was issued as a final rule on March 19, 
1997 (62 FR 13276). The text of existing Sec. 208.129 will be 
incorporated in its entirety at Sec. 208.103 when this proposal is 
issued as a final rule.

Sections Proposed To Be Eliminated

Banking Practices
    Existing Sec. 208.8 is proposed to be eliminated in its current 
form. The parts of existing Sec. 208.8 that address the requirements of 
State member banks as transfer agents (existing Sec. 208.8(f)) and 
registered clearing agencies (existing Sec. 208.8(g)-(i)), along with 
the corresponding recordkeeping rules (existing Sec. 208.8(k)), would 
be amended (except for 208.8(g)) and relocated to proposed Subpart C, 
entitled ``Bank Securities and Securities Related Activities.'' 
Existing Sec. 208.8(j), relating to municipal securities dealers, would 
be deleted in its entirety. This amendment is described in greater 
detail below. The requirements for letters of credit and acceptances, 
existing Sec. 208.8(d), would not be significantly amended but would be 
moved to proposed new Sec. 208.24, entitled ``Letters of Credit and 
Acceptances,'' located within proposed Subpart B, entitled 
``Investments and Loans.''
    The general requirements of existing Sec. 208.8(a), which requires 
State member banks to conduct their business in a safe and sound 
manner, would be amended to provide greater clarity and moved to

[[Page 15278]]

proposed new Sec. 208.3(e), entitled ``Conditions of Membership.'' 
Existing Sec. 208.8(b), which addresses the conditions under which the 
Board will waive conditions of membership, is proposed to be relocated 
to new Sec. 208.3(f). Existing Sec. 208.8(c) is proposed to be 
eliminated. It states the general requirement that banks shall not 
engage in unsafe or unsound practices, which is proposed to be 
incorporated in new Sec. 208.3(e). Existing Sec. 208.8(c) also states 
the Board's authority to designate practices as unsafe or unsound in 
the future. The Board considers it unnecessary to state that Regulation 
H does not limit in any way the Board's enforcement authority.
Board Forms
    Existing Sec. 208.12, making all forms referred to in existing 
Regulation H a part of the regulation, would be deleted. The proposal 
would eliminate most references to specific forms.
Disclosure of Financial Condition
    Existing Sec. 208.17 requires a State member bank to: 1. Make year-
end Call Reports or other alternative information available to 
shareholders, customers, and the general public upon request; 2. 
furnish a written announcement to shareholders advising them of the 
availability of this information; and 3. use reasonable means at their 
disposal to inform the public of the availability of this information. 
The Board previously indicated in the Joint Report to Congress on 
Streamlining Regulatory Requirements (September 23, 1996) that it would 
reconsider the need for this provision when Call Reports, or other 
financial information on State member banks, become more readily 
available electronically. Since summary financial information derived 
from Call Reports is now available through the Internet (from the FDIC 
for all insured depository institutions, including State member banks 
<SUP>8), the Board is requesting comment as to whether existing 
Sec. 208.17 should be eliminated.
---------------------------------------------------------------------------

    \8\ Additionally, the Board anticipates that more comprehensive 
public Call Report data will become available through the Internet 
in the future.
---------------------------------------------------------------------------

    If the Board chooses not to eliminate Sec. 208.17, the Board would 
amend the language of Sec. 208.17 to provide greater clarity as to the 
information that must be disclosed to the public by State member banks 
and to incorporate in Regulation K the portions of existing Sec. 208.17 
that relate to foreign banks or state licensed branches of foreign 
banks.
Municipal Securities Dealers
    Existing Sec. 208.8(j) would be deleted under the proposal. Section 
15B(b) of the 1934 Act (15 U.S.C. 78o-4(b)) creates the Municipal 
Securities Rulemaking Board (MSRB) and requires MSRB regulations to 
mandate standards of training, experience, competence, and other 
qualifications for municipal securities brokers and dealers and any 
natural persons associated with them. The MSRB has issued Rule G-7 
(Information Concerning Associated Persons) requiring principals and 
representatives associated with bank municipal securities dealers to 
file Form MSD-4 (Uniform Application for Municipal Securities Principal 
or Municipal Securities Representative Associated with a Bank Municipal 
Securities Dealer) with the dealer. In turn, the dealer shall verify 
the accuracy and completeness of such form and file it with the 
appropriate regulatory authority. If a principal or representative is 
terminated, the broker or dealer must file Form MSD-5 (Uniform 
Termination Notice for Municipal Securities Principal or Municipal 
Securities Representative Associated with a Bank Municipal Securities 
Dealer) with the appropriate regulatory authority.
    Section 208.8(j) contains a Board rule virtually identical to the 
MSRB rule in these matters. As such, it is duplicative and unnecessary, 
and the Board proposes to remove it. The Board notes that section 
15B(a) of the 1934 Act (15 U.S.C. 78o-4(a)) and the rules of the SEC 
thereunder (17 CFR 240.15Ba2-1) similarly require municipal securities 
dealers that are banks, or separately identifiable departments or 
divisions of banks (as defined by the MSRB), to register with the SEC 
on Form MSD. The Board has never found a need to duplicate these SEC 
regulations, and proposes to follow the same approach for principals 
and representatives as for dealers.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an 
agency to publish an initial regulatory flexibility analysis with any 
notice of proposed rulemaking. The initial regulatory flexibility 
analysis (5 U.S.C. 603(b)) requires an agency to describe the reasons 
why the proposed rule is being considered and a statement of the 
objectives of, and legal basis for, the proposed rule. The 
``Supplementary Information,'' above, contains this information. The 
proposed rules require no additional reporting or recordkeeping 
requirements and do not overlap with other federal rules.
    The initial regulatory flexibility analysis also requires a 
description of and, where feasible, an estimate of the number of small 
entities to which the proposed rule will apply. The proposal will apply 
to all depository institutions regardless of size. The proposal will 
apply to all State member banks, which numbered 1,021 as of September 
30, 1996.
    The Board expects that the proposed changes will reduce regulatory 
filings, reduce the paperwork burden and processing time associated 
with regulatory filings, reduce the costs associated with complying 
with regulation, and improve the ability of banks to conduct business 
on a more cost-efficient basis. For example, the proposal is generally 
designed to reduce burden by removing out-dated material and by re-
organizing the remaining material so it is easier to locate and to 
read.
    The proposal also seeks to reduce burden by incorporating expedited 
procedures for membership and branch applications for certain banks and 
by reducing the processing period for expedited applications from 5 to 
3 days after the close of the public comment period. In addition, the 
proposal expands the circumstances under which the Board will consider 
waivers of conditions of membership, eliminates existing requirements 
regarding disclosure of financial condition, and eliminates the 
requirement that banks obtain deposit insurance in order to become 
State member banks. The proposal also provides for an alternate 
definition of total assets for institutions with rapidly declining 
asset bases. The Board invites public comment on whether the proposal 
serves to reduce regulatory burden.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed rule 
under the authority delegated to the Board by the Office of Management 
and Budget. Comments on the collections of information should be sent 
to the Office of Management and Budget, Paperwork Reduction Project 
(7100-0046, 7100-0091, 7100-0097, 7100-0112, 7100-0139, 7100-0196, 
7100-0212, 7100-0250, 7100-0261, 7100-0264, 7100-0278, or 7100-0280), 
Washington, DC 20503, with copies of such comments to be sent to Mary 
M. McLaughlin, Chief, Financial Reports Section, Division of Research 
and Statistics, Mail Stop 97, Board of Governors of the Federal Reserve 
System, Washington, DC 20551.
    The collection of information requirements in this proposed 
regulation are found in 12 CFR part 208.

[[Page 15279]]

The respondents and recordkeepers are state member banks.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, these information collections unless 
they display currently valid OMB control numbers.
    The following table shows the current Regulation H burden by 
Federal Reserve report, along with a notation on whether and how the 
burden might be affected by the proposed changes. Based on an hourly 
cost of $20 for the H reports, the FR 2230, and the FR 4004, and $30 
for the remaining FR reports, the annual cost to the public is 
estimated to be $5,378,650. The Federal Reserve believes that the 
proposed changes would result in a net decrease in annual burden for 
this regulation of less than 100 hours.

                                                   Burden for Regulation H: State Member Banks (SMBs)                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                              OMB No.                                     Annual                                                                        
          Report              (7100-              Report name             burden         Burden type         Effect of proposed Reg H changes on burden 
                              ______)                                     hours                                                                         
--------------------------------------------------------------------------------------------------------------------------------------------------------
H1.......................       0091     Securities Activities of SMBs      2,835  Reporting..............  None.                                       
H2.......................       0280     Loans Secured by Real Estate      17,172  Reporting..............  None.                                       
                                          in Flood Hazard Areas.            8,586   Disclosure............  None.                                       
                                                                            1,042   Recordkeeping.........  None.                                       
H3.......................       0196     Securities Transactions made     165,520  Recordkeeping and        None.                                       
                                          Pursuant to Section                       disclosure.                                                         
                                          208.8(k)(2,3,&5).                                                                                             
H4.......................       0250     Real Estate Appraisal          \1\ 29,71  Recordkeeping..........  None.                                       
                                          Standards for Federally               0                                                                       
                                          Related Transactions.                                                                                         
H5.......................       0261     Real Estate Lending Standards     39,000  Recordkeeping..........  None.                                       
H6.......................       0278     Public Welfare Investments of        118  Recordkeeping and        No effect on burden/respondent. Total burden
                                          SMBs.                                     disclosure.              would increase by an estimated 10%         
                                                                                                             resulting from the proposal to liberalize  
                                                                                                             the limitation on a project's value as a   
                                                                                                             percent of capital & surplus.              
FR 2083..................       0046     Membership Application.......      1,988  Reporting..............  Minimal burden reduction from broadened     
                                                                                                             authority of Board to grant waivers.       
FR 2230..................       0212     Suspicious Activity Report...  \2\ 7,200  Reporting and            None.                                       
                                                                                    recordkeeping.                                                      
FR 4001..................       0097     Domestic Branch Notification.        415  Reporting..............  Burden reduction estimated at 20% if branch 
                                                                                                             applications are no longer required for    
                                                                                                             ATMs, remote service units, offices of     
                                                                                                             affiliated depository institutions, or for 
                                                                                                             loan origination facilities where the      
                                                                                                             proceeds of the loan are not disbursed.    
                                                                                                             Also, fewer notifications may be submitted,
                                                                                                             for 2 reasons: the clarification of the    
                                                                                                             interpretation of ``relocation,'' and the  
                                                                                                             single notification for all branches SMBs  
                                                                                                             plan to establish in a 1-year period.      
FR 4004..................       0112     Written Security Program for         484  Recordkeeping..........  No effect on the burden for this information
                                          SMBs.                                                              collection; however, burden would be       
                                                                                                             transferred from Regulation P.             
FR 4014..................       0139     Investment in Bank Premises..         75  Reporting..............  None.                                       
FR 4031..................       0264     Branch Closing Notification..        612  Reporting..............  None.                                       
                                                                              307   Disclosure............  None.                                       
                                                                              280   Recordkeeping.........  None.                                       
                          --------------                               -----------                                                                      
  Total..................  ............  .............................    275,344  .......................  ............................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ 8250 hours (27.8%) of this burden is attributable to Regulation Y.                                                                                  
\2\ In addition to the burden for SMBs and their nonbank affiliates, the burden for this report includes burden for Edge corporations (Regulation K),   
  bank holding companies and their nonbank subsidiaries (Regulation Y), and branches, agencies, and nonbank subsidiaries of foreign banks (Regulation   
  K).                                                                                                                                                   

    No issues of confidentiality under the provisions of the Freedom of 
Information Act normally arise for any of these information collections 
other than for FR 2230; however, that report is not affected by these 
proposed changes.
    Comments are invited on: a. whether the collections of information 
are necessary for the proper performance of the Federal Reserve's 
functions;

[[Page 15280]]

including whether the information has practical utility; b. the 
accuracy of the Federal Reserve's estimate of the burden of the 
information collections, including the cost of compliance; c. ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and d. ways to minimize the burden of information collection 
on respondents, including through the use of automated collection 
techniques or other forms of information technology.

                            Derivation Table                            
 [This table directs readers to the provision(s) of existing Regulation 
         H, if any, upon which the proposed provision is based.]        
------------------------------------------------------------------------
          Revised provision                   Original provision        
------------------------------------------------------------------------
208.1...............................  None.                             
208.2...............................  208.1.                            
208.3(a)............................  208.2.                            
208.3(b)............................  208.4, 208.5.                     
208.3(c)............................  208.5.                            
208.3(d)............................  Added.                            
208.3(e)............................  208.7.                            
208.3(f)............................  208.10.                           
208.3(g)............................  208.11.                           
208.4...............................  208.13.                           
208.5...............................  208.19.                           
208.6(a)............................  208.9.                            
208.6(b)............................  None.                             
208.6(c)............................  None.                             
208.6(d)............................  None.                             
208.6(e)............................  208.9(b)(7).                      
208.6(f)............................  None.                             
208.7...............................  208.28.                           
208.20..............................  None.                             
208.21..............................  None.                             
208.22..............................  208.21.                           
208.23..............................  208.15.                           
208.24..............................  208.8(d).                         
208.25..............................  208.23.                           
208.30..............................  None.                             
208.31..............................  208.8(f).                         
208.32..............................  208.8(h), 208.8(i).               
208.33..............................  208.8(g).                         
208.34..............................  208.24.                           
208.35..............................  None.                             
208.36..............................  208.16.                           
208.37..............................  208.25.                           
208.40..............................  208.30.                           
208.41..............................  208.31.                           
208.42..............................  208.32.                           
208.43..............................  208.33.                           
208.44..............................  208.34.                           
208.45..............................  208.35.                           
208.50..............................  208.51.                           
208.51..............................  208.52.                           
208.60..............................  None.                             
208.61..............................  None.                             
208.62..............................  208.20.                           
208.63..............................  208.14.                           
208.64..............................  208.26.                           
208.100.............................  208.116.                          
208.101.............................  None.                             
208.102.............................  208.124.                          
208.103.............................  208.129.                          
------------------------------------------------------------------------

List of Subjects

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 250

    Federal Reserve System.

    For the reasons set forth in the preamble, the Board proposes to 
amend chapter II of title 12 of the Code of Federal Regulations as 
follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for Part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 
1828(o), 1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 U.S.C. 
4012a, 4104a, 4104b, 4106 and 4128.

    2. The table of contents to part 208 is revised to read as follows:

Subpart A--General Membership and Branching Requirements

Sec.
208.1  Authority, purpose, and scope.
208.2  Definitions.
208.3  Application and conditions for membership in the Federal 
Reserve System.
208.4  Capital adequacy.
208.5  Dividends and other distributions.
208.6  Establishment and maintenance of branches.
208.7  Prohibition against use of interstate branches primarily for 
deposit production. [Reserved]

Subpart B--Investments and Loans

208.20  Authority, purpose, and scope.
208.21  Investments in premises and securities.
208.22  Community development and public welfare investments.
208.23  Agricultural loan loss amortization.
208.24  Letters of credit and acceptances.
208.25  Loans in areas having special flood hazards.

Subpart C--Bank Securities and Securities-Related Activities

208.30  Authority, purpose, and scope.
208.31  State member banks as transfer agents.
208.32  Notice of disciplinary sanctions imposed by registered 
clearing agency.
208.33  Application for stay or review of disciplinary sanctions 
imposed by registered clearing agency.
208.34  Recordkeeping and confirmation of certain securities 
transactions effected by State member banks. [Reserved]
208.35  Qualification requirements for transactions in certain 
securities. [Reserved]
208.36  Reporting requirements for State member banks subject to the 
Securities Exchange Act of 1934.
208.37  Government securities sales practices. [Reserved]

Subpart D--Prompt Corrective Action

208.40  Authority, purpose, scope, other supervisory authority, and 
disclosure of capital categories.
208.41  Definitions for purposes of this subpart.
208.42  Notice of capital category.
208.43  Capital measures and capital category definitions.
208.44  Capital restoration plans.
208.45  Mandatory and discretionary supervisory actions under 
section 38.

Subpart E--Real Estate Lending and Appraisal Standards

208.50  Authority, purpose, and scope.
208.51  Real estate lending standards.

Subpart F--Miscellaneous Requirements

208.60  Authority, purpose, and scope.
208.61  Bank security procedures.
208.62  Suspicious activity reports.
208.63  Procedures for monitoring Bank Secrecy Act compliance.
208.64  Frequency of examination. [Reserved]

Subpart G--Interpretations

208.100  Sale of bank's money orders off premises as establishment 
of branch office.
208.101  Investments in Federal Agricultural Mortgage Corporation 
(Farmer Mac) stock.
208.102  Investments in shares of an investment company.
208.103  Obligations concerning institutional customers. [Reserved]
Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure
Appendix B to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Tier 1 Leverage Measure
Appendix C to Part 208--Interagency Guidelines for Real Estate Lending 
Policies
Appendix D to Part 208--Interagency Guidelines Establishing Standards 
for Safety and Soundness
Appendix E to Part 208--Capital Adequacy Guidelines for State Member 
Banks; Market Risk Measure
    3. Subparts A through E are revised and subparts F and G are added 
to read as follows:

[[Page 15281]]

Subpart A--General Membership and Branching Requirements


Sec. 208.1  Authority, purpose, and scope.

    (a) Authority. Subpart A of Regulation H (12 CFR part 208, Subpart 
A) is issued by the Board of Governors of the Federal Reserve System 
(Board) under 12 U.S.C. 24, 36; sections 9, 11, 21, 25 and 25A of the 
Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 
and 611); sections 1814, 1816, 1818, 1820(d)(8), 1831o, 1831p-1, 1831r-
1 and 1835a of the Federal Deposit Insurance Act (12 U.S.C. 1814, 1816, 
1818, 1831o, 1831p-1, 1831r-1, and 1835); and 12 U.S.C. 3906-3909.
    (b) Purpose and Scope. (1) The requirements of this part 208 govern 
State member banks and state banks eligible for admission to membership 
in the Federal Reserve System (System) under section 9 of the Federal 
Reserve Act (Act). This part 208 does not govern banks eligible for 
membership under section 2 or 19 of the Act.<SUP>1 Any bank desiring to 
be admitted to the System under the provisions of section 2 or 19 
should communicate with the Federal Reserve Bank with which it desires 
to do business.
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    \1\ Under section 2 of the Federal Reserve Act, every national 
bank in any state shall, upon commencing business, or within 90 days 
after admission into the Union of the State in which it is located, 
become a member of the System. Under section 19 of the Federal 
Reserve Act, national banks and banks organized under local laws, 
located in a dependency or insular possession or any part of the 
United States outside of the States of the United States and the 
District of Columbia, are not required to become members of the 
System but may, with the consent of the board, become members of the 
System.
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    (2) This subpart A describes the eligibility requirements for 
membership of state-chartered banking institutions in the System, the 
general conditions imposed upon members, including capital and dividend 
requirements, as well as the requirements for establishing and 
maintaining branches.


Sec. 208.2  Definitions.

    For the purposes of this part:
    (a) Board of Directors means the governing board of any institution 
performing the usual functions of a board of directors.
    (b) Board means the Board of Governors of the Federal Reserve 
System.
    (c) Branch (1) Branch includes any branch bank, branch office, 
branch agency, additional office, or any branch place of business that 
receives deposits, pays checks, or lends money. A branch may include a 
temporary, seasonal, or mobile facility that meets these criteria.
    (2) Branch does not include:
    (i) A loan origination facility where the proceeds of loans are not 
disbursed;
    (ii) An office of an affiliated depository institution that 
provides services to customers of the member bank on behalf of the 
member bank;
    (iii) An automated teller machine;
    (iv) A remote service unit;
    (v) A facility to which the bank does not permit members of the 
public to have physical access for purposes of making deposits, paying 
checks, or borrowing money (such as an office established by the bank 
that receives deposits only through the mail); or
    (vi) A facility that is located at the site of, or is an extension 
of, an approved main office or branch. The Board determines whether a 
facility is an extension of an existing main or branch office on a 
case-by-case basis.
    (d) Capital stock and surplus means, unless otherwise provided in 
this part, or by statute, Tier 1 and Tier 2 capital included in a 
member bank's risk-based capital (under the guidelines in appendix A of 
this part) and the balance of a member bank's allowance for loan and 
lease losses not included in its Tier 2 capital for calculation of 
risk-based capital, based on the bank's most recent consolidated Report 
of Condition and Income filed under 12 U.S.C. 324.
    (e) Eligible bank means a member bank that:
    (1) Is well-capitalized as defined in Subpart D of this part;
    (2) Has a composite Uniform Financial Institutions Rating System 
(CAMELS) rating of 1 or 2;
    (3) Has a Community Reinvestment Act (CRA) (12 U.S.C. 2906) rating 
of ``Outstanding'' or ``Satisfactory;''
    (4) Has a compliance rating of 1 or 2; and
    (5) Has no major unresolved supervisory issues outstanding (as 
determined by the Board and appropriate Federal Reserve Bank in its 
discretion).
    (f) State bank means any bank incorporated by special law of any 
State, or organized under the general laws of any State, or of the 
United States, including a Morris Plan bank, or other incorporated 
banking institution engaged in a similar business.
    (g) State member bank or member bank means a state bank that is a 
member of the Federal Reserve System.


Sec. 208.3  Application and conditions for membership in the Federal 
Reserve System.

    (a) Applications for membership and stock--(1) State banks applying 
for membership in the Federal Reserve System shall file with the 
appropriate Federal Reserve Bank an application for membership in the 
Federal Reserve System and for stock in the Reserve Bank<SUP>2 in 
accordance with the Rules of Procedure governing such applications, 
located at 12 CFR 262.3.
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    \2\ A mutual savings bank not authorized to purchase Federal 
Reserve Bank stock may apply for membership evidenced initially by a 
deposit, but if the laws under which the bank is organized are not 
amended at the first session of the legislature after its admission 
to authorize the purchase, or if the bank fails to purchase the 
stock within six months of the amendment, its membership shall be 
terminated.
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    (2) Board approval. If an applying bank conforms to all the 
requirements of the Federal Reserve Act and this section, and is 
otherwise qualified for membership, the Board may approve its 
application subject to such conditions as the Board may prescribe.
    (3) Effective date of membership. A State bank becomes a member of 
the Federal Reserve System on the date its Federal Reserve Bank stock 
is credited to its account (or its deposit is accepted, if it is a 
mutual savings bank not authorized to purchase Reserve Bank stock) in 
accordance with the Board's Regulation I (12 CFR part 209).
    (b) Factors considered in approving applications for membership. 
Factors given special consideration by the Board in passing upon an 
application are:
    (1) Financial condition and management. The financial history and 
condition of the applying bank and the general character of its 
management.
    (2) Capital. The adequacy of the bank's capital in accordance with 
Sec. 208.4, and its future earnings prospects.
    (3) Convenience and needs. The convenience and needs of the 
community.
    (4) Corporate powers. Whether the bank's corporate powers are 
consistent with the purposes of the Federal Reserve Act.
    (c) Expedited approval for eligible banks and bank holding 
companies--(1) Availability of expedited treatment. The expedited 
membership procedures described in paragraph (c)(2) of this section are 
available to:
    (i) An existing state bank seeking membership, or national bank 
converting to a state bank and seeking membership, if the existing bank 
is an eligible bank; and to
    (ii) A de novo state bank seeking membership if the bank holding 
company meets the criteria for expedited processing under 
Sec. 225.14(c) of Regulation Y (12 CFR 225.14(c)).
    (2) Expedited procedures. The membership application of a bank will 
be deemed approved on the fifth day after the close of the comment 
period, required by the Board's Rules of Procedure (12 CFR 262.3), 
unless the Board or the appropriate Federal Reserve Bank notifies the 
bank that the

[[Page 15282]]

application is approved prior to that date or that it is not eligible 
for expedited review for any reason, including, without limitation, 
that:
    (i) The bank will offer banking services that are materially 
different from those currently offered by the bank, or by the 
affiliates of the proposed bank;
    (ii) The bank is not an eligible bank under Sec. 208.2(e) or the 
Bank Holding Company does not meet the criteria for expedited 
processing under 12 CFR 225.14(c);
    (iii) The application contains a material error or is otherwise 
deficient; or
    (iv) The application or notice required under the Board's Rules of 
Procedure (12 CFR 262.3), raises significant supervisory, Community 
Reinvestment Act, compliance, policy or legal issues that have not been 
resolved, or a timely substantive adverse comment is submitted.
    (d) Conditions of membership--(1) Safety and soundness. (i) Each 
member bank shall at all times conduct its business and exercise its 
powers with due regard to safety and soundness. (The Interagency 
Guidelines Establishing Standards for Safety and Soundness prescribed 
pursuant to section 39 of the Federal Deposit Insurance Act (12 U.S.C. 
1831p-1), as set forth as appendix D to this part apply to all member 
banks.)
    (2) General character of bank's business. A member bank may not, 
without the permission of the Board, cause or permit any change in the 
general character of its business or in the scope of the corporate 
powers it exercises at the time of admission to membership.
    (3) Compliance with conditions of membership. Each member bank 
shall comply at all times with this Regulation H (12 CFR part 208) and 
any other conditions of membership prescribed by the Board.
    (e) Waivers--(1) Conditions of membership. A member bank may 
petition the Board to waive a condition of membership. The Board may 
grant a waiver of a condition of membership upon a showing of good 
cause and, in its discretion, may limit, among other items, the scope, 
duration, and timing of the waiver.
    (2) Reports of affiliates. Pursuant to section 21 of the Federal 
Reserve Act (12 U.S.C. 486), the Board waives the requirement for the 
submission of reports of affiliates of member banks, unless such 
reports are specifically requested by the Board.
    (f) Voluntary withdrawal from membership. Voluntary withdrawal from 
membership becomes effective upon cancellation of the Federal Reserve 
Bank stock held by the member bank, and after the bank has made due 
provision to pay any indebtedness due or to become due to the Federal 
Reserve Bank in accordance with the Board's Regulation I (12 CFR part 
209).


Sec. 208.4  Capital adequacy.

    (a) Adequacy. A member bank's capital, as defined in Section II of 
Appendix A to this part, shall be at all times adequate in relation to 
the character and condition of its assets and to its existing and 
prospective liabilities and other corporate responsibilities. If at any 
time, in light of all the circumstances, the bank's capital appears 
inadequate in relation to its assets, liabilities, and 
responsibilities, the bank shall increase the amount of its capital, 
within such period as the Board deems reasonable, to an amount which, 
in the judgement of the Board, shall be adequate.
    (b) Standards for evaluating capital adequacy. Standards and 
guidelines by which the Board evaluates the capital adequacy of member 
banks include those in appendices A and E to this part for risk-based 
capital purposes and appendix B to this part for leverage measurement 
purposes.


Sec. 208.5  Dividends and other distributions.

    (a) Definitions. For the purposes of this section:
    (1) Capital surplus means the total of surplus as reportable in the 
bank's Reports of Condition and Income and surplus on perpetual 
preferred stock.
    (2) Permanent capital means the total of the bank's perpetual 
preferred stock and related surplus, common stock and surplus, and 
minority interest in consolidated subsidiaries, as reportable in the 
Reports of Condition and Income.
    (b) Limitations. The limitations in this section on the payment of 
dividends and withdrawal of capital apply to all cash and property 
dividends or distributions on common or preferred stock. The 
limitations do not apply to dividends paid in the form of common stock.
    (c) Earnings limitations on payment of dividends. (1) A member bank 
may not declare or pay a dividend if the total of all dividends 
declared during the calendar year, including the proposed dividend, 
exceeds the sum of the bank's net income (as reportable in its Reports 
of Condition and Income) during the current calendar year and the 
retained net income of the prior two calendar years, unless the 
dividend has been approved by the Board.
    (2) ``Retained net income'' is equal to the bank's reported net 
income, less any dividends declared during the period. The bank's net 
income during the current year and its retained net income from the 
prior two calendar years is reduced by any net losses incurred in the 
current or prior two years and any required transfers to surplus or to 
a fund for the retirement of preferred stock.<SUP>3
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    \3\ State member banks are required to comply with state law 
provisions concerning the maintenance of surplus funds in addition 
to common capital. Where the surplus of a State member bank is less 
than what applicable state law requires the bank to maintain 
relative to its capital stock account, the bank may be required to 
transfer amounts from its undivided profits account to surplus.
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    (d) Limitation on withdrawal of capital by dividend or otherwise. 
(1) A member bank may not declare or pay a dividend if the dividend 
would exceed the bank's undivided profits as reportable on its Reports 
of Condition and Income, unless the bank has received the prior 
approval of the Board and of at least two-thirds of the shareholders of 
each class of stock outstanding.
    (2) A member bank may not permit any portion of its permanent 
capital to be withdrawn unless the withdrawal has been approved by the 
Board and by at least two-thirds of the shareholders of each class of 
stock outstanding.
    (3) If a member bank has capital surplus in excess of that required 
by law, the excess amount may be transferred to the bank's undivided 
profits account and be available for the payment of dividends if:
    (i) The amount transferred came from the earnings of prior periods, 
excluding earnings transferred as a result of stock dividends;
    (ii) The bank's board of directors approves the transfer of funds; 
and
    (iii) The transfer has been approved by the Board.
    (e) Payment of capital distributions. All member banks also are 
subject to the restrictions on payment of capital distributions 
contained in subpart D of this part.
    (f) Compliance. A member bank shall use the date a dividend is 
declared to determine compliance with this section.


Sec. 208.6  Establishment and maintenance of branches.

    (a) Branching. (1) To the extent authorized by state law, a member 
bank may establish and maintain branches (including inter-state 
branches) subject to the same limitations and restrictions that apply 
to the establishment and maintenance of national bank branches (12 
U.S.C. 36 and 1831u), except that approval of such branches shall be

[[Page 15283]]

obtained from the Board rather than from the Comptroller of the 
Currency.
    (2) Branch applications. A State member bank wishing to establish a 
branch in the United States or its territories must file an application 
in accordance with the Board's Rules of Procedure (12 CFR 262.3). 
Branches of member banks located in foreign nations, in the overseas 
territories, dependencies, and insular possessions of those nations and 
of the United States, and in the Commonwealth of Puerto Rico, are 
subject to 12 CFR part 211 (Regulation K).
    (b) Factors considered in approving domestic branch applications. 
Factors given special consideration by the Board in passing upon a 
branch application are:
    (1) Financial condition and management. The financial history and 
condition of the applying bank and the general character of its 
management;
    (2) Capital. The adequacy of the bank's capital in accordance with 
Sec. 208.4, and its future earnings prospects;
    (3) Convenience and needs. The convenience and needs of the 
community to be served by the branch;
    (4) CRA performance. In the case of branches with deposit-taking 
capability, the bank's performance under the Community Reinvestment Act 
(12 U.S.C. 2901 et seq.); and
    (5) Investment in bank premises. Whether the bank's investment in 
bank premises in establishing the branch will comply with Sec. 208.21.
    (c) Expedited approval for eligible banks. An application by an 
eligible bank to establish a domestic branch is deemed approved on the 
fifth day after the close of the comment period, required by the 
Board's Rules of Procedure (12 CFR 262.3), unless the Board or the 
appropriate Federal Reserve Bank notifies the bank that the application 
is approved prior to that date or that it is not eligible for expedited 
review for any reason, including, without limitation, that:
    (1) The bank is not an eligible bank as defined by Sec. 208.2(e);
    (2) The application contains a material error or is otherwise 
deficient; or
    (3) The application or notice required under the Board's Rules of 
Procedure (12 CFR 262.3), raises significant supervisory, Community 
Reinvestment Act, compliance, policy or legal issues that have not been 
resolved, or a timely substantive adverse comment is submitted.
    (d) Consolidated applications--(1) Proposed branches; prior notice 
of branch opening. A member bank may seek approval in a single 
application or notice for any branches that it proposes to establish 
within one year after the approval date. The bank shall, unless 
notification is waived, notify the appropriate Reserve Bank one week 
before opening any branch approved under a consolidated application. A 
bank is not required to open a branch approved under either a 
consolidated or single branch application.
    (2) Duration of branch approval. Branch approvals remain valid for 
one year unless the Board or the appropriate Reserve Bank notifies the 
bank that in its judgement, based on reports of condition, 
examinations, or other information, there has been a change in the 
bank's condition, financial or otherwise, that warrants reconsideration 
of the approval.
    (e) Branch closings. A member bank shall comply with section 42 of 
the Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1831r-1, with 
regard to branch closings.
    (f) Branch relocations. A relocation of an existing branch does not 
require filing a branch application. A relocation of an existing 
branch, for purposes of determining whether to file a branch 
application, is a movement that does not substantially affect the 
nature of the branch's business or customers served.


Sec. 208.7  Prohibition against use of interstate branches primarily 
for deposit production. [Reserved]

Subpart B--Investments and Loans


Sec. 208.20  Authority, purpose, and scope.

    (a) Authority. Subpart B of Regulation H (12 CFR part 208, subpart 
B) is issued by the Board of Governors of the Federal Reserve System 
under 12 U.S.C. 24; sections 9, 11 and 21 of the Federal Reserve Act 
(12 U.S.C. 321-338a, 248(a), 248(c), and 481-486); sections 1814, 1816, 
1818, 1823(j), 1831o, 1831p-1 and 1831r-1 of the Federal Deposit 
Insurance Act (12 U.S.C. 1814, 1816, 1818, 1823(j), 1831o, 1831p-1 and 
1831r-1); and the National Flood Insurance Act of 1968 and the Flood 
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
    (b) Purpose and scope. This subpart B describes certain investment 
limitations on member banks, statutory requirements for amortizing 
losses on agricultural loans and extending credit in areas having 
special flood hazards, as well as the requirements for issuing letters 
of credit and acceptances.


Sec. 208.21  Investments in premises and securities.

    (a) Investment in bank premises. No state member bank shall invest 
in bank premises, or in the stock, bonds, debentures, or other such 
obligations of any corporation holding the premises of such bank, or 
make loans to or upon the security of any such corporation unless:
    (1) The bank receives the prior approval of the Board;
    (2) The aggregate of all such investments and loans, together with 
the amount of any indebtedness incurred by any such corporation that is 
an affiliate of the bank (as defined in section 2 of the Banking Act of 
1933, as amended, 12 U.S.C. 221a), is less than or equal to the amount 
of the capital stock and surplus of such bank; or
    (3)(i) The aggregate of all such investments and loans, together 
with the amount of any indebtedness incurred by any such corporation 
that is an affiliate of the bank, is less than or equal to 150 percent 
of the capital stock and surplus of the bank; and
    (ii) The bank:
    (A) Has a CAMELS composite rating of 1 or 2 under the Uniform 
Financial Institutions Rating System (or an equivalent rating under a 
comparable rating system) as of the most recent examination of the 
bank;
    (B) Is well-capitalized and will continue to be well-capitalized, 
in accordance with subpart D of this part, after the investment or 
loan; and
    (C) Provides notification to the Board not later than 30 days after 
making the investment or loan.
    (b) Investments in securities. Member banks are subject to the same 
limitations and conditions with respect to purchasing, selling, 
underwriting, and holding investment securities and stocks as are 
national banks under 12 U.S.C. 24, para. 7th.<SUP>4
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    \4\ A member bank, acting as executor or trustee, may hold the 
stock of any corporation so long as the bank will not vote any of 
the shares or control in any manner the election of any directors, 
trustees, or other persons exercising similar functions.
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Sec. 208.22  Community development and public welfare investments.

    (a) Definitions. For purposes of this section:
    (1) Low- or moderate-income area means:
    (i) One or more census tracts in a Metropolitan Statistical Area 
where the median family income adjusted for family size in each census 
tract is less than 80 percent of the median family income adjusted for 
family size of the Metropolitan Statistical Area; or
    (ii) If not in a Metropolitan Statistical Area, one or more census 
tracts or block-numbered areas where the median family income adjusted 
for family size in each census tract or block-numbered

[[Page 15284]]

area is less than 80 percent of the median family income adjusted for 
family size of the State.
    (2) Low- and moderate-income persons has the same meaning as low- 
and moderate-income persons as defined in 42 U.S.C. 5302(a)(20)(A).
    (3) Small business means a business that meets the size-eligibility 
standards of 13 CFR 121.802(a)(2).
    (b) Investments not requiring prior Board approval. Notwithstanding 
the provisions of section 5136 of the Revised Statutes (12 U.S.C. 24 
(Seventh)) made applicable to member banks by paragraph 20 of section 9 
of the Federal Reserve Act (12 U.S.C. 335), a member bank may make an 
investment, without prior Board approval, if the following conditions 
are met:
    (1) The investment is in a corporation, limited partnership, or 
other entity, and:
    (i) The Board has determined that an investment in that entity or 
class of entities is a public welfare investment under paragraph 23 of 
section 9 of the Federal Reserve Act (12 U.S.C. 338a), or a community 
development investment under Regulation Y (12 CFR 225.25(b)(6)); or
    (ii) The Comptroller of the Currency has determined, by order or 
regulation, that an investment in that entity by a national bank is a 
public welfare investment under section 5136 of the Revised Statutes 
(12 U.S.C. 24 (Eleventh)); or
    (iii) The entity is a community development financial institution 
as defined in section 103(5) of the Community Development Banking and 
Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); or
    (iv) The entity, directly or indirectly, engages solely in or makes 
loans solely for the purposes of one or more of the following community 
development activities:
    (A) Investing in, developing, rehabilitating, managing, selling, or 
renting residential property if a majority of the units will be 
occupied by low- and moderate-income persons, or if the property is a 
``qualified low-income building'' as defined in section 42(c)(2) of the 
Internal Revenue Code (26 U.S.C. 42(c)(2));
    (B) Investing in, developing, rehabilitating, managing, selling, or 
renting nonresidential real property or other assets located in a low- 
or moderate-income area and targeted towards low- and moderate-income 
persons;
    (C) Investing in one or more small businesses located in a low- or 
moderate-income area to stimulate economic development;
    (D) Investing in, developing, or otherwise assisting job training 
or placement facilities or programs that will be targeted towards low- 
and moderate-income persons;
    (E) Investing in an entity located in a low- or moderate-income 
area if the entity creates long-term employment opportunities, a 
majority of which (based on full-time equivalent positions) will be 
held by low- and moderate-income persons; and
    (F) Providing technical assistance, credit counseling, research, 
and program development assistance to low-and moderate-income persons, 
small businesses, or nonprofit corporations to help achieve community 
development;
    (2) The investment is permitted by state law;
    (3) The investment will not expose the member bank to liability 
beyond the amount of the investment;
    (4) The aggregate of all such investments of the member bank does 
not exceed the sum of five percent of its capital stock and surplus;
    (5) The member bank is well capitalized or adequately capitalized 
under Secs. 208.43(b) (1) and (2);
    (6) The member bank received a composite CAMELS rating of ``1'' or 
``2'' under the Uniform Financial Institutions Rating System as of its 
most recent examination and an overall rating of ``1'' or ``2'' as of 
its most recent consumer compliance examination; and
    (7) The member bank is not subject to any written agreement, cease-
and-desist order, capital directive, prompt-corrective-action 
directive, or memorandum of understanding issued by the Board or a 
Federal Reserve Bank.
    (c) Notice to Federal Reserve Bank. Not more than 30 days after 
making an investment under paragraph (b) of this section, the member 
bank shall advise its Federal Reserve Bank of the investment, including 
the amount of the investment and the identity of the entity in which 
the investment is made.
    (d) Investments requiring Board approval. (1) With prior Board 
approval, a member bank may make public welfare investments under 
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a), 
other than those specified in paragraph (b) of this section.
    (2) Requests for Board approval under this paragraph (d) shall 
include, at a minimum:
    (i) The amount of the proposed investment;
    (ii) A description of the entity in which the investment is to be 
made;
    (iii) An explanation of why the investment is a public welfare 
investment under paragraph 23 of section 9 of the Federal Reserve Act 
(12 U.S.C. 338a);
    (iv) A description of the member bank's potential liability under 
the proposed investment;
    (v) The amount of the member bank's aggregate outstanding public 
welfare investments under paragraph 23 of section 9 of the Federal 
Reserve Act;
    (vi) The amount of the member bank's capital stock and surplus; and
    (vii) If the bank investment is not eligible under paragraph (b) of 
this section, explain the reason or reasons why it is ineligible.
    (3) The Board shall act on a request under this paragraph (d) 
within 60 calendar days of receipt of a request that meets the 
requirements of paragraph (d)(2) of this section, unless the Board 
notifies the requesting member bank that a longer time period will be 
required.
    (e) Divestiture of investments. A member bank shall divest itself 
of an investment made under paragraph (b) or (d) of this section to the 
extent that the investment exceeds the scope of, or ceases to meet, the 
requirements of paragraphs (b)(1) through (b)(4) or paragraph (d) of 
this section. The divestiture shall be made in the manner specified in 
12 CFR 225.140, Regulation Y, for interests acquired by a lending 
subsidiary of a bank holding company or the bank holding company itself 
in satisfaction of a debt previously contracted.


Sec. 208.23  Agricultural loan loss amortization.

    (a) Definitions. For purposes of this section:
    (1) Accepting official means:
    (i) The Reserve Bank in whose district the bank is located; or
    (ii) The Director of the Division of Banking Supervision and 
Regulation in cases in which the Reserve Bank cannot determine that the 
bank qualifies.
    (2) Agriculturally related other property means any property, real 
or personal, that the bank owned on January 1, 1983, and any additional 
property that it acquired prior to January 1, 1992, in connection with 
a qualified agricultural loan. For the purposes of paragraph (d) of 
this section, the value of such property shall include the amount 
previously charged off as a loss.
    (3) Participating bank means an agricultural bank (as defined in 12 
U.S.C. 1823(j)(4)(A)) that, as of January 1, 1992, had a proposal for a 
capital restoration plan accepted by an accepting official and received 
permission from the accepting official, subject to paragraphs (d) and 
(e) of this

[[Page 15285]]

section, to amortize losses in accordance with paragraphs (b) and (c) 
of this section.
    (4) Qualified agricultural loan means:
    (i) Loans that finance agricultural production or are secured by 
farm land for purposes of Schedule RC-C of the FFIEC Consolidated 
Report of Condition or such other comparable schedule;
    (ii) Loans secured by farm machinery;
    (iii) Other loans that a bank proves to be sufficiently related to 
agriculture for classification as an agricultural loan by the Board; 
and
    (iv) The remaining unpaid balance of any loans described in 
paragraphs (a)(4) (i), (ii) and (iii) of this section that have been 
charged off since January 1, 1984, and that qualify for deferral under 
this section.
    (b)(1) Provided there is no evidence that the loss resulted from 
fraud or criminal abuse on the part of the bank, the officers, 
directors, or principal shareholders, a participating bank may amortize 
in its Reports of Condition and Income:
    (i) Any loss on a qualified agricultural loan that the bank would 
be required to reflect in its financial statements for any period 
between and including 1984 and 1991; or
    (ii) Any loss that the bank would be required to reflect in its 
financial statements for any period between and including 1983 and 1991 
resulting from a reappraisal or sale of agriculturally-related other 
property.
    (2) Amortization under this section shall be computed over a period 
not to exceed seven years on a quarterly straight-line basis commencing 
in the first quarter after the loan was or is charged off so as to be 
fully amortized not later than December 31, 1998.
    (c) Accounting for amortization. Any bank that is permitted to 
amortize losses in accordance with paragraph (b) of this section may 
restate its capital and other relevant accounts and account for future 
authorized deferrals and authorizations in accordance with the 
instructions to the FFIEC Consolidated Reports of Condition and Income. 
Any resulting increase in the capital account shall be included in 
qualifying capital pursuant to Appendix A of this part.
    (d) Conditions of participation. In order for a bank to maintain 
its status as a participating bank, it shall:
    (1) Adhere to the approved capital plan and obtain the prior 
approval of the accepting official before making any modifications to 
the plan;
    (2) Maintain accounting records for each asset subject to loss 
deferral under the program that document the amount and timing of the 
deferrals, repayments, and authorizations;
    (3) Maintain the financial condition of the bank so that it does 
not deteriorate to the point where it is no longer a viable, 
fundamentally sound institution;
    (4) Make a reasonable effort, consistent with safe and sound 
banking practices, to maintain in its loan portfolio a percentage of 
agricultural loans, including agriculturally-related other property, 
not less than the percentage of such loans in its loan portfolio on 
January 1, 1986; and
    (5) Provide the accepting official, upon request, with any 
information the accepting official deems necessary to monitor the 
bank's amortization, its compliance with the conditions of 
participation, and its continued eligibility.
    (e) Revocation of eligibility for loss amortization. The failure to 
comply with any condition in an acceptance, with the capital 
restoration plan, or with the conditions stated in paragraph (d) of 
this section, is grounds for revocation of acceptance for loss 
amortization and for an administrative action against the bank under 12 
U.S.C. 1818(b). In addition, acceptance of a bank for loss amortization 
shall not foreclose any administrative action against the bank that the 
Board may deem appropriate.
    (f) Expiration date. The terms of this section will no longer be in 
effect as of January 1, 1999.


Sec. 208.24  Letters of credit and acceptances.

    (a) Standby letters of credit. For the purpose of this section, 
standby letters of credit include every letter of credit (or similar 
arrangement however named or designated) that represents an obligation 
to the beneficiary on the part of the issuer:
    (1) To repay money borrowed by or advanced to or for the account of 
the account party; or
    (2) To make payment on account of any evidence of indebtedness 
undertaken by the account party; or
    (3) To make payment on account of any default by the party 
procuring the issuance of the letter of credit in the performance of an 
obligation.<SUP>5
---------------------------------------------------------------------------

    \5\ A standby letter of credit does not include: (1) Commercial 
letters of credit and similar instruments, where the issuing bank 
expects the beneficiary to draw upon the issuer, and which do not 
guaranty payment of a money obligation; or (2) a guaranty or similar 
obligation issued by a foreign branch in accordance with and subject 
to the limitations of 12 CFR part 211 (Regulation K).
---------------------------------------------------------------------------

    (b) Ineligible acceptance. An ineligible acceptance is a time draft 
accepted by a bank, which does not meet the requirements for discount 
with a Federal Reserve Bank.
    (c) Bank's lending limits. Standby letters of credit and ineligible 
acceptances count toward member banks' lending limits imposed by state 
law.
    (d) Exceptions. A standby letter of credit or ineligible acceptance 
is not subject to the restrictions set forth in paragraph (c) of this 
section if prior to or at the time of issuance of the credit:
    (1) The issuing bank is paid an amount equal to the bank's maximum 
liability under the standby letter of credit; or
    (2) The party procuring the issuance of a letter of credit or 
ineligible acceptance has set aside sufficient funds in a segregated, 
clearly earmarked deposit account to cover the bank's maximum liability 
under the standby letter of credit or ineligible acceptance.


Sec. 208.25  Loans in areas having special flood hazards.

    (a) Purpose and scope--(1) Purpose. The purpose of this section is 
to implement the requirements of the National Flood Insurance Act of 
1968 and the Flood Disaster Protection Act of 1973, as amended (42 
U.S.C. 4001-4129).
    (2) Scope. This section, except for paragraphs (f) and (h) of this 
section, applies to loans secured by buildings or mobile homes located 
or to be located in areas determined by the Director of the Federal 
Emergency Management Agency to have special flood hazards. Paragraphs 
(f) and (h) of this section apply to loans secured by buildings or 
mobile homes, regardless of location.
    (b) Definitions. For purposes of this section:
    (1) Act means the National Flood Insurance Act of 1968, as amended 
(42 U.S.C. 4001-4129).
    (2) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (3) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (4) Designated loan means a loan secured by a building or mobile 
home that is located or to be located in a special flood hazard area in 
which flood insurance is available under the Act.
    (5) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (6) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use 
with or without a permanent foundation when attached to

[[Page 15286]]

the required utilities. The term mobile home does not include a 
recreational vehicle. For purposes of this section, the term mobile 
home means a mobile home on a permanent foundation. The term mobile 
home includes a manufactured home as that term is used in the National 
Flood Insurance Program.
    (7) NFIP means the National Flood Insurance Program authorized 
under the Act.
    (8) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.
    (9) Servicer means the person responsible for:
    (i) Receiving any scheduled, periodic payments from a borrower 
under the terms of a loan, including amounts for taxes, insurance 
premiums, and other charges with respect to the property securing the 
loan; and
    (ii) Making payments of principal and interest and any other 
payments from the amounts received from the borrower as may be required 
under the terms of the loan.
    (10) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (11) Table funding means a settlement at which a loan is funded by 
a contemporaneous advance of loan funds and an assignment of the loan 
to the person advancing the funds.
    (c) Requirement to purchase flood insurance where available.--(1) 
In general. A member bank shall not make, increase, extend, or renew 
any designated loan unless the building or mobile home and any personal 
property securing the loan is covered by flood insurance for the term 
of the loan. The amount of insurance must be at least equal to the 
lesser of the outstanding principal balance of the designated loan or 
the maximum limit of coverage available for the particular type of 
property under the Act. Flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.
    (2) Table funded loans. A member bank that acquires a loan from a 
mortgage broker or other entity through table funding shall be 
considered to be making a loan for the purposes of this section.
    (d) Exemptions. The flood insurance requirement prescribed by 
paragraph (c) of this section does not apply with respect to:
    (1) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (2) Property securing any loan with an original principal balance 
of $5,000 or less and a repayment term of one year or less.
    (e) Escrow requirement. If a member bank requires the escrow of 
taxes, insurance premiums, fees, or any other charges for a loan 
secured by residential improved real estate or a mobile home that is 
made, increased, extended, or renewed after October 1, 1996, the member 
bank shall also require the escrow of all premiums and fees for any 
flood insurance required under paragraph (c) of this section. The 
member bank, or a servicer acting on its behalf, shall deposit the 
flood insurance premiums on behalf of the borrower in an escrow 
account. This escrow account will be subject to escrow requirements 
adopted pursuant to section 10 of the Real Estate Settlement Procedures 
Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount 
that may be maintained in escrow accounts for certain types of loans 
and requires escrow account statements for those accounts, only if the 
loan is otherwise subject to RESPA. Following receipt of a notice from 
the Director of FEMA or other provider of flood insurance that premiums 
are due, the member bank, or a servicer acting on its behalf, shall pay 
the amount owed to the insurance provider from the escrow account by 
the date when such premiums are due.
    (f) Required use of standard flood hazard determination form.--(1) 
Use of form. A member bank shall use the standard flood hazard 
determination form developed by the Director of FEMA (as set forth in 
Appendix A of 44 CFR part 65) when determining whether the building or 
mobile home offered as collateral security for a loan is or will be 
located in a special flood hazard area in which flood insurance is 
available under the Act. The standard flood hazard determination form 
may be used in a printed, computerized, or electronic manner.
    (2) Retention of form. A member bank shall retain a copy of the 
completed standard flood hazard determination form, in either hard copy 
or electronic form, for the period of time the bank owns the loan.
    (g) Forced placement of flood insurance. If a member bank, or a 
servicer acting on behalf of the bank, determines at any time during 
the term of a designated loan that the building or mobile home and any 
personal property securing the designated loan is not covered by flood 
insurance or is covered by flood insurance in an amount less than the 
amount required under paragraph (c) of this section, then the bank or 
its servicer shall notify the borrower that the borrower should obtain 
flood insurance, at the borrower's expense, in an amount at least equal 
to the amount required under paragraph (c) of this section, for the 
remaining term of the loan. If the borrower fails to obtain flood 
insurance within 45 days after notification, then the member bank or 
its servicer shall purchase insurance on the borrower's behalf. The 
member bank or its servicer may charge the borrower for the cost of 
premiums and fees incurred in purchasing the insurance.
    (h) Determination fees.--(1) General. Notwithstanding any Federal 
or State law other than the Flood Disaster Protection Act of 1973, as 
amended (42 U.S.C. 4001-4129), any member bank, or a servicer acting on 
behalf of the bank, may charge a reasonable fee for determining whether 
the building or mobile home securing the loan is located or will be 
located in a special flood hazard area. A determination fee may also 
include, but is not limited to, a fee for life-of-loan monitoring.
    (2) Borrower fee. The determination fee authorized by paragraph 
(h)(1) of this section may be charged to the borrower if the 
determination:
    (i) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (ii) Reflects the Director of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (iii) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (A) Affects the area in which the building or mobile home securing 
the loan is located; or
    (B) By determination of the Director of FEMA, may reasonably 
require a determination whether the building or mobile home securing 
the loan is located in a special flood hazard area;
    (iv) Results in the purchase of flood insurance coverage by the 
lender or its servicer on behalf of the borrower under paragraph (g) of 
this section.
    (3) Purchaser or transferee fee. The determination fee authorized 
by paragraph (h)(1) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.
    (i) Notice of special flood hazards and availability of Federal 
disaster relief assistance. When a member bank makes, increases, 
extends, or renews a loan secured by a building or a mobile home 
located or to be located in a

[[Page 15287]]

special flood hazard area, the bank shall mail or deliver a written 
notice to the borrower and to the servicer in all cases whether or not 
flood insurance is available under the Act for the collateral securing 
the loan.
    (1) Contents of notice. The written notice must include the 
following information:
    (i) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (ii) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, 
as amended (42 U.S.C. 4012a(b));
    (iii) A statement, where applicable, that flood insurance coverage 
is available under the NFIP and may also be available from private 
insurers; and
    (iv) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally declared disaster.
    (2) Timing of notice. The member bank shall provide the notice 
required by paragraph (i)(1) of this section to the borrower within a 
reasonable time before the completion of the transaction, and to the 
servicer as promptly as practicable after the bank provides notice to 
the borrower and in any event no later than the time the bank provides 
other similar notices to the servicer concerning hazard insurance and 
taxes. Notice to the servicer may be made electronically or may take 
the form of a copy of the notice to the borrower.
    (3) Record of receipt. The member bank shall retain a record of the 
receipt of the notices by the borrower and the servicer for the period 
of time the bank owns the loan.
    (4) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (i)(1) of this section, a member 
bank may obtain satisfactory written assurance from a seller or lessor 
that, within a reasonable time before the completion of the sale or 
lease transaction, the seller or lessor has provided such notice to the 
purchaser or lessee. The member bank shall retain a record of the 
written assurance from the seller or lessor for the period of time the 
bank owns the loan.
    (5) Use of prescribed form of notice. A member bank will be 
considered to be in compliance with the requirement for notice to the 
borrower of this paragraph (i) by providing written notice to the 
borrower containing the language presented in appendix A of this 
section within a reasonable time before the completion of the 
transaction. The notice presented in appendix A of this section 
satisfies the borrower notice requirements of the Act.
    (j) Notice of servicer's identity--(1) Notice requirement. When a 
member bank makes, increases, extends, renews, sells, or transfers a 
loan secured by a building or mobile home located or to be located in a 
special flood hazard area, the bank shall notify the Director of FEMA 
(or the Director's designee) in writing of the identity of the servicer 
of the loan. The Director of FEMA has designated the insurance provider 
to receive the member bank's notice of the servicer's identity. This 
notice may be provided electronically if electronic transmission is 
satisfactory to the Director of FEMA's designee.
    (2) Transfer of servicing rights. The member bank shall notify the 
Director of FEMA (or the Director's designee) of any change in the 
servicer of a loan described in paragraph (j)(1) of this section within 
60 days after the effective date of the change. This notice may be 
provided electronically if electronic transmission is satisfactory to 
the Director of FEMA's designee. Upon any change in the servicing of a 
loan described in paragraph (j)(1) of this section, the duty to provide 
notice under this paragraph (j)(2) shall transfer to the transferee 
servicer.

Appendix A to Sec. 208.25 Sample Form of Notice

Notice of Special Flood Hazards and Availability of Federal 
Disaster Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ______________. This area has a one 
percent (1%) chance of a flood equal to or exceeding the base flood 
elevation (a 100-year flood) in any given year. During the life of a 
30-year mortgage loan, the risk of a 100-year flood in a special 
flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______ The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have 
applied for if you do not purchase flood insurance. The flood 
insurance must be maintained for the life of the loan. If you fail 
to purchase or renew flood insurance on the property, Federal law 
authorizes and requires us to purchase the flood insurance for you 
at your expense.
    <bullet> Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
    <bullet> At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) The outstanding principal balance of the loan; or
    (2) The maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
    <bullet> Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______ Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally declared 
flood disaster.

Subpart C--Bank Securities and Securities-Related Activities


Sec. 208.30  Authority, purpose, and scope.

    (a) Authority. Subpart C of Regulation H (12 CFR part 208, subpart 
C) is issued by the Board of Governors of the Federal Reserve System 
under 12 U.S.C. 24, 92a, 93a; sections 1818 and 1831p-1(a)(2) of the 
Federal Deposit Insurance Act (12 U.S.C. 1818, 1831p-1(a)(2)); and 
sections 78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78o-5, 78q, 78q-1, 
and 78w of the Securities Exchange Act of 1934 (15 U.S.C. 78b, 78l(b), 
78l(g), 78l(i), 78o-4(c)(5), 78o-5, 78q, 78q-1, 78w).
    (b) Purpose and scope. This subpart C describes the requirements 
imposed upon member banks acting as transfer agents, registered 
clearing agencies, or sellers of securities under the Securities 
Exchange Act of 1934. This subpart C also describes the reporting 
requirements imposed on member banks whose securities are subject to 
registration under the Securities Exchange Act of 1934.

[[Page 15288]]

Sec. 208.31  State member banks as transfer agents.

    (a) The rules adopted by the Securities and Exchange Commission 
(SEC) pursuant to section 17A of the Securities Exchange Act of 1934 
(15 U.S.C. 78q-1) prescribing procedures for registration of transfer 
agents for which the SEC is the appropriate regulatory agency (17 CFR 
240.17Ac2-1) apply to member bank transfer agents. References to the 
``Commission'' are deemed to refer to the Board.
    (b) The rules adopted by the SEC pursuant to section 17A 
prescribing operational and reporting requirements for transfer agents 
(17 CFR 240.17Ac2-2 and 240.17Ad-1 through 240.17Ad-16) apply to member 
bank transfer agents.


Sec. 208.32  Notice of disciplinary sanctions imposed by registered 
clearing agency.

    (a) Notice requirement. Any member bank or any of its subsidiaries 
that is a registered clearing agency pursuant to section 17A(b) of the 
Securities Exchange Act of 1934 (the Act), and that:
    (1) Imposes any final disciplinary sanction on any participant 
therein;
    (2) Denies participation to any applicant; or
    (3) Prohibits or limits any person in respect to access to services 
offered by the clearing agency, shall file with the Board (and the 
appropriate regulatory agency, if other than the Board, for a 
participant or applicant) notice thereof in the manner prescribed in 
this section.
    (b) Notice of final disciplinary actions. (1) Any registered 
clearing agency for which the Board is the appropriate regulatory 
agency that takes any final disciplinary action with respect to any 
participant shall promptly file a notice thereof with the Board in 
accordance with paragraph (c) of this section. For the purposes of this 
paragraph (b), final disciplinary action means the imposition of any 
disciplinary sanction pursuant to section 17A(b)(3)(G) of the Act, or 
other action of a registered clearing agency which, after notice and 
opportunity for hearing, results in final disposition of charges of:
    (i) One or more violations of the rules of the registered clearing 
agency; or
    (ii) Acts or practices constituting a statutory disqualification of 
a type defined in paragraph (iv) or (v) (except prior convictions) of 
section 3(a)(39) of the Act.
    (2) However, if a registered clearing agency fee schedule specifies 
certain charges for errors made by its participants in giving 
instructions to the registered clearing agency which are de minimis on 
a per error basis, and whose purpose is, in part, to provide revenues 
to the clearing agency to compensate it for effort expended in 
beginning to process an erroneous instruction, such error charges shall 
not be considered a final disciplinary action for purposes of this 
paragraph (b).
    (c) Contents of final disciplinary action notice. Any notice filed 
pursuant to paragraph (b) of this section shall consist of the 
following, as appropriate:
    (1) The name of the respondent and the respondent's last known 
address, as reflected on the records of the clearing agency, and the 
name of the person, committee, or other organizational unit that 
brought the charges. However, identifying information as to any 
respondent found not to have violated a provision covered by a charge 
may be deleted insofar as the notice reports the disposition of that 
charge and, prior to the filing of the notice, the respondent does not 
request that identifying information be included in the notice;
    (2) A statement describing the investigative or other origin of the 
action;
    (3) As charged in the proceeding, the specific provision or 
provisions of the rules of the clearing agency violated by the 
respondent, or the statutory disqualification referred to in paragraph 
(b)(2) of this section, and a statement describing the answer of the 
respondent to the charges;
    (4) A statement setting forth findings of fact with respect to any 
act or practice in which the respondent was charged with having engaged 
in or omitted; the conclusion of the clearing agency as to whether the 
respondent violated any rule or was subject to a statutory 
disqualification as charged; and a statement of the clearing agency in 
support of its resolution of the principal issues raised in the 
proceedings;
    (5) A statement describing any sanction imposed, the reasons 
therefor, and the date upon which the sanction became or will become 
effective; and
    (6) Such other matters as the clearing agency may deem relevant.
    (d) Notice of final denial, prohibition, termination or limitation 
based on qualification or administrative rules. (1) Any registered 
clearing agency, for which the Board is the appropriate regulatory 
agency, that takes any final action that denies or conditions the 
participation of any person, or prohibits or limits access, to services 
offered by the clearing agency, shall promptly file notice thereof with 
the Board (and the appropriate regulatory agency, if other than the 
Board, for the affected person) in accordance with paragraph (e) of 
this section; but such action shall not be considered a final 
disciplinary action for purposes of paragraph (b) of this section where 
the action is based on an alleged failure of such person to:
    (i) Comply with the qualification standards prescribed by the rules 
of the registered clearing agency pursuant to section 17A(b)(4)(B) of 
the Act; or
    (ii) Comply with any administrative requirements of the registered 
clearing agency (including failure to pay entry or other dues or fees, 
or to file prescribed forms or reports) not involving charges of 
violations that may lead to a disciplinary sanction.
    (2) However, no such action shall be considered final pursuant to 
this paragraph (d) that results merely from a notice of such failure to 
comply to the person affected, if such person has not sought an 
adjudication of the matter, including a hearing, or otherwise exhausted 
the administrative remedies within the registered clearing agency with 
respect to such a matter.
    (e) Contents of notice required by paragraph (d) of this section. 
Any notice filed pursuant to paragraph (d) of this section shall 
consist of the following, as appropriate:
    (1) The name of each person concerned and each person's last known 
address, as reflected in the records of the clearing agency;
    (2) The specific grounds upon which the action of the clearing 
agency was based, and a statement describing the answer of the person 
concerned;
    (3) A statement setting forth findings of fact and conclusions as 
to each alleged failure of the person to comply with qualification 
standards or administrative obligations, and a statement of the 
clearing agency in support of its resolution of the principal issues 
raised in the proceeding;
    (4) The date upon which such action became or will become 
effective; and
    (5) Such other matters as the clearing agency deems relevant.
    (f) Notice of final action based on prior adjudicated statutory 
disqualifications. Any registered clearing agency for which the Board 
is the appropriate regulatory agency that takes any final action shall 
promptly file notice thereof with the Board (and the appropriate 
regulatory agency, if other than the Board, for the affected person) in 
accordance with paragraph (g) of this section, where the final action:
    (1) Denies or conditions participation to any person, or prohibits 
or limits access to services offered by the clearing agency; and
    (2) Is based upon a statutory disqualification of a type defined in 
paragraph (A), (B) or (C) of section 3(a)(39) of the Act, consisting of 
a prior

[[Page 15289]]

conviction, as described in subparagraph (E) of section 3(a)(39) of the 
Act. However, no such action shall be considered final pursuant to this 
paragraph (f) that results merely from a notice of such 
disqualification to the person affected, if such person has not sought 
an adjudication of the matter, including a hearing, or otherwise 
exhausted the administrative remedies within the clearing agency with 
respect to such a matter.
    (g) Contents of notice required by paragraph (f) of this section. 
Any notice filed pursuant to paragraph (f) of this section shall 
consist of the following, as appropriate:
    (1) The name of each person concerned and each person's last known 
address, as reflected in the records of the clearing agency;
    (2) A statement setting forth the principal issues raised, the 
answer of any person concerned, and a statement of the clearing agency 
in support of its resolution of the principal issues raised in the 
proceeding;
    (3) Any description furnished by or on behalf of the person 
concerned of the activities engaged in by the person since the 
adjudication upon which the disqualification is based;
    (4) A copy of the order or decision of the court, appropriate 
regulatory agency, or self-regulatory organization that adjudicated the 
matter giving rise to the statutory disqualification;
    (5) The nature of the action taken and the date upon which such 
action is to be made effective; and
    (6) Such other matters as the clearing agency deems relevant.
    (h) Notice of summary suspension of participation. Any registered 
clearing agency for which the Board is the appropriate regulatory 
agency that summarily suspends or closes the accounts of a participant 
pursuant to the provisions of section 17A(b)(5)(C) of the Act shall, 
within one business day after such action becomes effective, file 
notice thereof with the Board and the appropriate regulatory agency for 
the participant, if other than the Board, of such action in accordance 
with paragraph (i) of this section.
    (i) Contents of notice of summary suspension. Any notice pursuant 
to paragraph (h) of this section shall contain at least the following 
information, as appropriate:
    (1) The name of the participant concerned and the participant's 
last known address, as reflected in the records of the clearing agency;
    (2) The date upon which the summary action became or will become 
effective;
    (3) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(i) of the Act, a copy of the relevant order or decision of 
the self-regulatory organization, if available to the clearing agency;
    (4) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(ii) of the Act, a statement describing the default of any 
delivery of funds or securities to the clearing agency;
    (5) If the summary action is based upon the provisions of section 
17A(b)(5)(C)(iii) of the Act, a statement describing the financial or 
operating difficulty of the participant based upon which the clearing 
agency determined that the suspension and closing of accounts was 
necessary for the protection of the clearing agency, its participants, 
creditors, or investors;
    (6) The nature and effective date of the suspension; and
    (7) Such other matters as the clearing agency deems relevant.


Sec. 208.33  Application for stay or review of disciplinary sanctions 
imposed by registered clearing agency.

    (a) Stays. The rules adopted by the Securities and Exchange 
Commission (SEC) pursuant to section 19 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the 
SEC is the appropriate regulatory agency for stays of disciplinary 
sanctions or summary suspensions imposed by registered clearing 
agencies (17 CFR 240.19d-2) apply to applications by member banks. 
References to the ``Commission'' are deemed to refer to the Board.
    (b) Reviews. The regulations adopted by the Securities and Exchange 
Commission pursuant to section 19 of the Securities and Exchange Act of 
1934 (15 U.S.C. 78s) regarding applications by persons for whom the SEC 
is the appropriate regulatory agency for reviews of final disciplinary 
sanctions, denials of participation, or prohibitions or limitations of 
access to services imposed by registered clearing agencies (17 CFR 
240.19d-3 (a)-(f)) apply to applications by member banks. References to 
the ``Commission'' are deemed to refer to the Board. The Board's 
Uniform Rules of Practice and Procedure (12 CFR part 263) apply to 
review proceedings under this Sec. 208.33 to the extent not 
inconsistent with this Sec. 208.33.


Sec. 208.34  Recordkeeping and confirmation of certain securities 
transactions effected by State member banks. [Reserved]


Sec. 208.35  Qualification requirements for transactions in certain 
securities. [Reserved]


Sec. 208.36  Reporting requirements for State member banks subject to 
the Securities Exchange Act of 1934.

    (a) Filing requirements. Except as otherwise provided in this 
section, a member bank whose securities are subject to registration 
pursuant to section 12(b) or section 12(g) of the Securities Exchange 
Act of 1934 (the 1934 Act) (15 U.S.C. 78l (b) and (g)) shall comply 
with the rules, regulations, and forms adopted by the Securities and 
Exchange Commission (Commission) pursuant to sections 12, 13, 14(a), 
14(c), 14(d), 14(f) and 16 of the 1934 Act (15 U.S.C. 78l, 78m, 78n 
(a), (c), (d), (f) and 78p). The term ``Commission'' as used in those 
rules and regulations shall with respect to securities issued by member 
banks be deemed to refer to the Board unless the context otherwise 
requires.
    (b) Elections permitted for member banks with total assets of $150 
million or less. (1) Notwithstanding paragraph (a) of this section or 
the rules and regulations promulgated by the Commission pursuant to the 
1934 Act a member bank that has total assets of $150 million or less as 
of the end of its most recent fiscal year, and no foreign offices, may 
elect to substitute for the financial statements required by the 
Commission's Form 10-Q, the balance sheet and income statement from the 
quarterly report of condition required to be filed by the bank with the 
Board under section 9 of the Federal Reserve Act (12 U.S.C. 324) 
(Federal Financial Institutions Examination Council Form 033 or 034).
    (2) A member bank qualifying for and electing to file financial 
statements from its quarterly report of condition pursuant to paragraph 
(b)(1) of this section in its form 10-Q shall include earnings per 
share or net loss per share data prepared in accordance with GAAP and 
disclose any material contingencies, as required by Article 10 of the 
Commission's Regulation S-X (17 CFR 210.10-01), in the Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations section of Form 10-Q.
    (c) Required filings--(1) Place and timing of filing. All papers 
required to be filed with the Board, pursuant to the 1934 Act or 
regulations thereunder, shall be submitted to the Division of Banking 
Supervision and Regulation, Board of Governors of the Federal Reserve 
System, 20th Street and

[[Page 15290]]

Constitution Avenue, NW., Washington, DC 20551. Material may be filed 
by delivery to the Board, through the mails, or otherwise. The date on 
which papers are actually received by the Board shall be the date of 
filing thereof if all of the requirements with respect to the filing 
have been complied with.
    (2) Filing fees. No filing fees specified by the Commission's rules 
shall be paid to the Board.
    (3) Public inspection. Copies of the registration statement, 
definitive proxy solicitation materials, reports, and annual reports to 
shareholders required by this section (exclusive of exhibits) shall be 
available for public inspection at the Board's offices in Washington, 
DC, as well as at the Federal Reserve Banks of New York, Chicago, and 
San Francisco and at the Reserve Bank in the district in which the 
reporting bank is located.
    (d) Confidentiality of filing. Any person filing any statement, 
report, or document under the 1934 Act may make written objection to 
the public disclosure of any information contained therein in 
accordance with the following procedure:
    (1) The person shall omit from the statement, report, or document, 
when it is filed, the portion thereof that the person desires to keep 
undisclosed (hereinafter called the confidential portion). The person 
shall indicate at the appropriate place in the statement, report, or 
document that the confidential portion has been omitted and filed 
separately with the Board.
    (2) The person shall file the following with the copies of the 
statement, report, or document filed with the Board:
    (i) As many copies of the confidential portion, each clearly marked 
``CONFIDENTIAL TREATMENT,'' as there are copies of the statement, 
report, or document filed with the Board. Each copy of the confidential 
portion shall contain the complete text of the item and, 
notwithstanding that the confidential portion does not constitute the 
whole of the answer, the entire answer thereto; except that in case the 
confidential portion is part of a financial statement or schedule, only 
the particular financial statement or schedule need be included. All 
copies of the confidential portion shall be in the same form as the 
remainder of the statement, report, or document; and
    (ii) An application making objection to the disclosure of the 
confidential portion. The application shall be on a sheet or sheets 
separate from the confidential portion, and shall:
    (A) Identify the portion of the statement, report, or document that 
has been omitted;
    (B) Include a statement of the grounds of objection; and
    (C) Include the name of each exchange, if any, with which the 
statement, report, or document is filed.
    (3) The copies of the confidential portion and the application 
filed in accordance with this paragraph shall be enclosed in a separate 
envelope marked ``CONFIDENTIAL TREATMENT,'' and addressed to Secretary, 
Board of Governors of the Federal Reserve System, Washington, DC 20551.
    (4) Pending determination by the Board on the objection filed in 
accordance with this paragraph, the confidential portion shall not be 
disclosed by the Board.
    (5) If the Board determines to sustain the objection, a notation to 
that effect shall be made at the appropriate place in the statement, 
report, or document.
    (6) If the Board determines not to sustain the objection because 
disclosure of the confidential portion is in the public interest, a 
finding and determination to that effect shall be entered and notice of 
the finding and determination sent by registered or certified mail to 
the person.
    (7) If the Board determines not to sustain the objection, pursuant 
to paragraph (d)(6) of this section, the confidential portion shall be 
made available to the public:
    (i) 15 days after notice of the Board's determination not to 
sustain the objection has been given, as required by paragraph (d)(6) 
of this section, provided that the person filing the objection has not 
previously filed with the Board a written statement that he intends, in 
good faith, to seek judicial review of the finding and determination; 
or
    (ii) 60 days after notice of the Board's determination not to 
sustain the objection has been given as required by paragraph (d)(6) of 
this section and the person filing the objection has filed with the 
Board a written statement of intent to seek judicial review of the 
finding and determination, but has failed to file a petition for 
judicial review of the Board's determination; or
    (iii) Upon final judicial determination, if adverse to the party 
filing the objection.
    (8) If the confidential portion is made available to the public, a 
copy thereof shall be attached to each copy of the statement, report, 
or document filed with the Board.


Sec. 208.37  Government securities sales practices.  [Reserved]

Subpart D--Prompt Corrective Action


Sec. 208.40  Authority, purpose, scope, other supervisory authority, 
and disclosure of capital categories.

    (a) Authority. Subpart D of Regulation H (12 CFR part 208, subpart 
D) is issued by the Board of Governors of the Federal Reserve System 
(Board) under section 38 (section 38) of the Federal Deposit Insurance 
Act (FDI Act) as added by section 131 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (Pub. L. 102-242, 105 Stat. 2236 
(1991)) (12 U.S.C. 1831o).
    (b) Purpose and scope. This subpart D defines the capital measures 
and capital levels that are used for determining the supervisory 
actions authorized under section 38 of the FDI Act. (Section 38 of the 
FDI Act establishes a framework of supervisory actions for insured 
depository institutions that are not adequately capitalized.) This 
subpart also establishes procedures for submission and review of 
capital restoration plans and for issuance and review of directives and 
orders pursuant to section 38. Certain of the provisions of this 
subpart apply to officers, directors, and employees of state member 
banks. Other provisions apply to any company that controls a member 
bank and to the affiliates of the member bank.
    (c) Other supervisory authority. Neither section 38 nor this 
subpart in any way limits the authority of the Board under any other 
provision of law to take supervisory actions to address unsafe or 
unsound practices or conditions, deficient capital levels, violations 
of law, or other practices. Action under section 38 of the FDI Act and 
this subpart may be taken independently of, in conjunction with, or in 
addition to any other enforcement action available to the Board, 
including issuance of cease and desist orders, capital directives, 
approval or denial of applications or notices, assessment of civil 
money penalties, or any other actions authorized by law.
    (d) Disclosure of capital categories. The assignment of a bank 
under this subpart within a particular capital category is for purposes 
of implementing and applying the provisions of section 38. Unless 
permitted by the Board or otherwise required by law, no bank may state 
in any advertisement or promotional material its capital category under 
this subpart or that the Board or any other Federal banking agency has 
assigned the bank to a particular capital category.

[[Page 15291]]

Sec. 208.41  Definitions for purposes of this subpart.

    For purposes of this subpart, except as modified in this section or 
unless the context otherwise requires, the terms used have the same 
meanings as set forth in section 38 and section 3 of the FDI Act.
    (a) Control--(1) Control has the same meaning assigned to it in 
section 2 of the Bank Holding Company Act (12 U.S.C. 1841), and the 
term controlled shall be construed consistently with the term control.
    (2) Exclusion for fiduciary ownership. No insured depository 
institution or company controls another insured depository institution 
or company by virtue of its ownership or control of shares in a 
fiduciary capacity. Shares shall not be deemed to have been acquired in 
a fiduciary capacity if the acquiring insured depository institution or 
company has sole discretionary authority to exercise voting rights with 
respect to the shares.
    (3) Exclusion for debts previously contracted. No insured 
depository institution or company controls another insured depository 
institution or company by virtue of its ownership or control of shares 
acquired in securing or collecting a debt previously contracted in good 
faith, until two years after the date of acquisition. The two-year 
period may be extended at the discretion of the appropriate Federal 
banking agency for up to three one-year periods.
    (b) Controlling person means any person having control of an 
insured depository institution and any company controlled by that 
person.
    (c) Leverage ratio means the ratio of Tier 1 capital to average 
total consolidated assets, as calculated in accordance with the Board's 
Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage 
Measure (Appendix B to this part).
    (d) Management fee means any payment of money or provision of any 
other thing of value to a company or individual for the provision of 
management services or advice to the bank, or related overhead 
expenses, including payments related to supervisory, executive, 
managerial, or policy making functions, other than compensation to an 
individual in the individual's capacity as an officer or employee of 
the bank.
    (e) Risk-weighted assets means total weighted risk assets, as 
calculated in accordance with the Board's Capital Adequacy Guidelines 
for State Member Banks: Risk-Based Measure (Appendix A to this part).
    (f) Tangible equity means the amount of core capital elements in 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part), plus the amount of outstanding 
cumulative perpetual preferred stock (including related surplus), minus 
all intangible assets except mortgage servicing rights to the extent 
that the Board determines that mortgage servicing rights may be 
included in calculating the bank's Tier 1 capital.
    (g) Tier 1 capital means the amount of Tier 1 capital as defined in 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
    (h) Tier 1 risk-based capital ratio means the ratio of Tier 1 
capital to weighted risk assets, as calculated in accordance with the 
Board's Capital Adequacy Guidelines for State Member Banks: Risk-Based 
Measure (Appendix A to this part).
    (i) Total assets means quarterly average total assets as reported 
in a bank's Report of Condition and Income (Call Report), minus 
intangible assets as provided in the definition of tangible equity. At 
its discretion the Federal Reserve may calculate total assets using a 
bank's period-end assets rather than quarterly average assets.
    (j) Total risk-based capital ratio means the ratio of qualifying 
total capital to weighted risk assets, as calculated in accordance with 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).


Sec. 208.42  Notice of capital category.

    (a) Effective date of determination of capital category. A member 
bank shall be deemed to be within a given capital category for purposes 
of section 38 of the FDI Act and this subpart as of the date the bank 
is notified of, or is deemed to have notice of, its capital category, 
pursuant to paragraph (b) of this section.
    (b) Notice of capital category. A member bank shall be deemed to 
have been notified of its capital levels and its capital category as of 
the most recent date:
    (1) A Report of Condition and Income (Call Report) is required to 
be filed with the Board;
    (2) A final report of examination is delivered to the bank; or
    (3) Written notice is provided by the Board to the bank of its 
capital category for purposes of section 38 of the FDI Act and this 
subpart or that the bank's capital category has changed as provided in 
paragraph (c) of this section or Sec. 208.43(c).
    (c) Adjustments to reported capital levels and capital category--
(1) Notice of adjustment by bank. A member bank shall provide the Board 
with written notice that an adjustment to the bank's capital category 
may have occurred no later than 15 calendar days following the date 
that any material event occurred that would cause the bank to be placed 
in a lower capital category from the category assigned to the bank for 
purposes of section 38 and this subpart on the basis of the bank's most 
recent Call Report or report of examination.
    (2) Determination by Board to change capital category. After 
receiving notice pursuant to paragraph (c)(1) of this section, the 
Board shall determine whether to change the capital category of the 
bank and shall notify the bank of the Board's determination.


Sec. 208.43  Capital measures and capital category definitions.

    (a) Capital measures. For purposes of section 38 and this subpart, 
the relevant capital measures are:
    (1) The total risk-based capital ratio;
    (2) The Tier 1 risk-based capital ratio; and
    (3) The leverage ratio.
    (b) Capital categories. For purposes of section 38 and this 
subpart, a member bank is deemed to be:
    (1) ``Well capitalized'' if the bank:
    (i) Has a total risk-based capital ratio of 10.0 percent or 
greater; and
    (ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or 
greater; and
    (iii) Has a leverage ratio of 5.0 percent or greater; and
    (iv) Is not subject to any written agreement, order, capital 
directive, or prompt corrective action directive issued by the Board 
pursuant to section 8 of the FDI Act, the International Lending 
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act, 
or any regulation thereunder, to meet and maintain a specific capital 
level for any capital measure.
    (2) ``Adequately capitalized'' if the bank:
    (i) Has a total risk-based capital ratio of 8.0 percent or greater; 
and
    (ii) Has a Tier 1 risk-based capital ratio of 4.0 percent or 
greater; and
    (iii) Has:
    (A) A leverage ratio of 4.0 percent or greater; or
    (B) A leverage ratio of 3.0 percent or greater if the bank is rated 
composite 1 under the CAMELS rating system in the most recent 
examination of the bank and is not experiencing or anticipating 
significant growth; and
    (iv) Does not meet the definition of a ``well capitalized'' bank.
    (3) ``Undercapitalized'' if the bank has:

[[Page 15292]]

    (i) A total risk-based capital ratio that is less than 8.0 percent; 
or
    (ii) A Tier 1 risk-based capital ratio that is less than 4.0 
percent; or
    (iii) Except as provided in paragraph (b)(iii)(B) of this section, 
has a leverage ratio that is less than 4.0 percent; or
    (iv) A leverage ratio that is less than 3.0 percent, if the bank is 
rated composite 1 under the CAMELS rating system in the most recent 
examination of the bank and is not experiencing or anticipating 
significant growth.
    (4) ``Significantly undercapitalized'' if the bank has:
    (i) A total risk-based capital ratio that is less than 6.0 percent; 
or
    (ii) A Tier 1 risk-based capital ratio that is less than 3.0 
percent; or
    (iii) A leverage ratio that is less than 3.0 percent.
    (5) ``Critically undercapitalized'' if the bank has a ratio of 
tangible equity to total assets that is equal to or less than 2.0 
percent.
    (c) Reclassification based on supervisory criteria other than 
capital. The Board may reclassify a well-capitalized member bank as 
adequately capitalized and may require an adequately-capitalized or an 
undercapitalized member bank to comply with certain mandatory or 
discretionary supervisory actions as if the bank were in the next lower 
capital category (except that the Board may not reclassify a 
significantly undercapitalized bank as critically undercapitalized) 
(each of these actions are hereinafter referred to generally as 
``reclassifications'') in the following circumstances:
    (1) Unsafe or unsound condition. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that the 
bank is in unsafe or unsound condition; or
    (2) Unsafe or unsound practice. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that, in 
the most recent examination of the bank, the bank received and has not 
corrected, a less-than-satisfactory rating for any of the categories of 
asset quality, management, earnings, or liquidity.


Sec. 208.44  Capital restoration plans.

    (a) Schedule for filing plan--(1) In general. A member bank shall 
file a written capital restoration plan with the appropriate Reserve 
Bank within 45 days of the date that the bank receives notice or is 
deemed to have notice that the bank is undercapitalized, significantly 
undercapitalized, or critically undercapitalized, unless the Board 
notifies the bank in writing that the plan is to be filed within a 
different period. An adequately capitalized bank that has been 
required, pursuant to Sec. 208.43(c), to comply with supervisory 
actions as if the bank were undercapitalized is not required to submit 
a capital restoration plan solely by virtue of the reclassification.
    (2) Additional capital restoration plans. Notwithstanding paragraph 
(a)(1) of this section, a bank that has already submitted and is 
operating under a capital restoration plan approved under section 38 
and this subpart is not required to submit an additional capital 
restoration plan based on a revised calculation of its capital measures 
or a reclassification of the institution under Sec. 208.43(c), unless 
the Board notifies the bank that it must submit a new or revised 
capital plan. A bank that is notified that it must submit a new or 
revised capital restoration plan shall file the plan in writing with 
the appropriate Reserve Bank within 45 days of receiving such notice, 
unless the Board notifies the bank in writing that the plan is to be 
filed within a different period.
    (b) Contents of plan. All financial data submitted in connection 
with a capital restoration plan shall be prepared in accordance with 
the instructions provided on the Call Report, unless the Board 
instructs otherwise. The capital restoration plan shall include all of 
the information required to be filed under section 38(e)(2) of the FDI 
Act. A bank that is required to submit a capital restoration plan as 
the result of a reclassification of the bank pursuant to Sec. 208.43(c) 
shall include a description of the steps the bank will take to correct 
the unsafe or unsound condition or practice. No plan shall be accepted 
unless it includes any performance guarantee described in section 
38(e)(2)(C) of that Act by each company that controls the bank.
    (c) Review of capital restoration plans. Within 60 days after 
receiving a capital restoration plan under this subpart, the Board 
shall provide written notice to the bank of whether the plan has been 
approved. The Board may extend the time within which notice regarding 
approval of a plan shall be provided.
    (d) Disapproval of capital plan. If the Board does not approve a 
capital restoration plan, the bank shall submit a revised capital 
restoration plan within the time specified by the Board. Upon receiving 
notice that its capital restoration plan has not been approved, any 
undercapitalized member bank (as defined in Sec. 208.43(b)(3)) shall be 
subject to all of the provisions of section 38 and this subpart 
applicable to significantly undercapitalized institutions. These 
provisions shall be applicable until such time as the Board approves a 
new or revised capital restoration plan submitted by the bank.
    (e) Failure to submit capital restoration plan. A member bank that 
is undercapitalized (as defined in Sec. 208.43(b)(3)) and that fails to 
submit a written capital restoration plan within the period provided in 
this section shall, upon the expiration of that period, be subject to 
all of the provisions of section 38 and this subpart applicable to 
significantly undercapitalized institutions.
    (f) Failure to implement capital restoration plan. Any 
undercapitalized member bank that fails in any material respect to 
implement a capital restoration plan shall be subject to all of the 
provisions of section 38 and this subpart applicable to significantly 
undercapitalized institutions.
    (g) Amendment of capital plan. A bank that has filed an approved 
capital restoration plan may, after prior written notice to and 
approval by the Board, amend the plan to reflect a change in 
circumstance. Until such time as a proposed amendment has been 
approved, the bank shall implement the capital restoration plan as 
approved prior to the proposed amendment.
    (h) Notice to FDIC. Within 45 days of the effective date of Board 
approval of a capital restoration plan, or any amendment to a capital 
restoration plan, the Board shall provide a copy of the plan or 
amendment to the Federal Deposit Insurance Corporation.
    (i) Performance guarantee by companies that control a bank--(1) 
Limitation on Liability--(i) Amount limitation. The aggregate liability 
under the guarantee provided under section 38 and this subpart for all 
companies that control a specific member bank that is required to 
submit a capital restoration plan under this subpart shall be limited 
to the lesser of:
    (A) An amount equal to 5.0 percent of the bank's total assets at 
the time the bank was notified or deemed to have notice that the bank 
was undercapitalized; or
    (B) The amount necessary to restore the relevant capital measures 
of the bank to the levels required for the bank to be classified as 
adequately capitalized, as those capital measures and levels are 
defined at the time that the bank initially fails to comply with a 
capital restoration plan under this subpart.
    (ii) Limit on duration. The guarantee and limit of liability under 
section 38 and this subpart shall expire after the Board notifies the 
bank that it has remained adequately capitalized for each of four 
consecutive calendar quarters. The expiration or fulfillment

[[Page 15293]]

by a company of a guarantee of a capital restoration plan shall not 
limit the liability of the company under any guarantee required or 
provided in connection with any capital restoration plan filed by the 
same bank after expiration of the first guarantee.
    (iii) Collection on guarantee. Each company that controls a bank 
shall be jointly and severally liable for the guarantee for such bank 
as required under section 38 and this subpart, and the Board may 
require and collect payment of the full amount of that guarantee from 
any or all of the companies issuing the guarantee.
    (2) Failure to provide guarantee. In the event that a bank that is 
controlled by a company submits a capital restoration plan that does 
not contain the guarantee required under section 38(e)(2) of the FDI 
Act, the bank shall, upon submission of the plan, be subject to the 
provisions of section 38 and this subpart that are applicable to banks 
that have not submitted an acceptable capital restoration plan.
    (3) Failure to perform guarantee. Failure by any company that 
controls a bank to perform fully its guarantee of any capital plan 
shall constitute a material failure to implement the plan for purposes 
of section 38(f) of the FDI Act. Upon such failure, the bank shall be 
subject to the provisions of section 38 and this subpart that are 
applicable to banks that have failed in a material respect to implement 
a capital restoration plan.


Sec. 208.45   Mandatory and discretionary supervisory actions under 
section 38.

    (a) Mandatory supervisory actions--(1) Provisions applicable to all 
banks. All member banks are subject to the restrictions contained in 
section 38(d) of the FDI Act on payment of capital distributions and 
management fees.
    (2) Provisions applicable to undercapitalized, significantly 
undercapitalized, and critically undercapitalized banks. Immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 208.42 or Sec. 208.44, that the bank is undercapitalized, 
significantly undercapitalized, or critically undercapitalized, the 
bank shall become subject to the provisions of section 38 of the FDI 
Act:
    (i) Restricting payment of capital distributions and management 
fees (section 38(d));
    (ii) Requiring that the Board monitor the condition of the bank 
(section 38(e)(1));
    (iii) Requiring submission of a capital restoration plan within the 
schedule established in this subpart (section 38(e)(2));
    (iv) Restricting the growth of the bank's assets (section 
38(e)(3)); and
    (v) Requiring prior approval of certain expansion proposals 
(section 3(e)(4)).
    (3) Additional provisions applicable to significantly 
undercapitalized, and critically undercapitalized banks. In addition to 
the provisions of section 38 of the FDI Act described in paragraph 
(a)(2) of this section, immediately upon receiving notice or being 
deemed to have notice, as provided in Sec. 208.42 or Sec. 208.44, that 
the bank is significantly undercapitalized, or critically 
undercapitalized, or that the bank is subject to the provisions 
applicable to institutions that are significantly undercapitalized 
because the bank failed to submit or implement in any material respect 
an acceptable capital restoration plan, the bank shall become subject 
to the provisions of section 38 of the FDI Act that restrict 
compensation paid to senior executive officers of the institution 
(section 38(f)(4)).
    (4) Additional provisions applicable to critically undercapitalized 
banks. In addition to the provisions of section 38 of the FDI Act 
described in paragraphs (a)(2) and (a)(3) of this section, immediately 
upon receiving notice or being deemed to have notice, as provided in 
Sec. 208.32, that the bank is critically undercapitalized, the bank 
shall become subject to the provisions of section 38 of the FDI Act:
    (i) Restricting the activities of the bank (section 38(h)(1)); and
    (ii) Restricting payments on subordinated debt of the bank (section 
38(h)(2)).
    (b) Discretionary supervisory actions. In taking any action under 
section 38 that is within the Board's discretion to take in connection 
with: A member bank that is deemed to be undercapitalized, 
significantly undercapitalized, or critically undercapitalized, or has 
been reclassified as undercapitalized, or significantly 
undercapitalized; an officer or director of such bank; or a company 
that controls such bank, the Board shall follow the procedures for 
issuing directives under 12 CFR 263.202 and 263.204, unless otherwise 
provided in section 38 or this subpart.

Subpart E--Real Estate Lending and Appraisal Standards


Sec. 208.50   Authority, purpose, and scope.

    (a) Authority. Subpart E of Regulation H (12 CFR part 208, subpart 
E) is issued by the Board of Governors of the Federal Reserve System 
under section 304 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991, 12 U.S.C. 1828(o) and Title 11 of the 
Financial Institutions Reform, Recovery, and Enforcement Act (12 U.S.C. 
3331-3351).
    (b) Purpose and scope. This subpart E prescribes standards for real 
estate lending to be used by member banks in adopting internal real 
estate lending policies. The standards applicable to appraisals 
rendered in connection with federally related transactions entered into 
by member banks are set forth in 12 CFR part 225, subpart G (Regulation 
Y).


Sec. 208.51   Real estate lending standards.

    (a) Adoption of written policies. Each state bank that is a member 
of the Federal Reserve System shall adopt and maintain written policies 
that establish appropriate limits and standards for extensions of 
credit that are secured by liens on or interests in real estate, or 
that are made for the purpose of financing permanent improvements to 
real estate.
    (b) Requirements of lending policies. (1) Real estate lending 
policies adopted pursuant to this section shall be:
    (i) Consistent with safe and sound banking practices;
    (ii) Appropriate to the size of the institution and the nature and 
scope of its operations; and
    (iii) Reviewed and approved by the bank's board of directors at 
least annually.
    (2) The lending policies shall establish:
    (i) Loan portfolio diversification standards;
    (ii) Prudent underwriting standards, including loan-to-value 
limits, that are clear and measurable;
    (iii) Loan administration procedures for the bank's real estate 
portfolio; and
    (iv) Documentation, approval, and reporting requirements to monitor 
compliance with the bank's real estate lending policies.
    (c) Monitoring conditions. Each member bank shall monitor 
conditions in the real estate market in its lending area to ensure that 
its real estate lending policies continue to be appropriate for current 
market conditions.
    (d) Interagency guidelines. The real estate lending policies 
adopted pursuant to this section should reflect consideration of the 
Interagency Guidelines for Real Estate Lending Policies (contained in 
Appendix C of this part) established by the Federal bank and thrift 
supervisory agencies.

Subpart F--Miscellaneous Requirements


Sec. 208.60  Authority, purpose, and scope.

    (a) Authority. Subpart F of Regulation H (12 CFR part 208, subpart 
F) is issued

[[Page 15294]]

by the Board of Governors of the Federal Reserve System under sections 
9, 11, 21, 25 and 25A of the Federal Reserve Act (12 U.S.C. 321-338a, 
248(a), 248(c), 481-486, 601 and 611), section 7 of the International 
Banking Act (12 U.S.C. 3105), section 3 of the Bank Protection Act of 
1968 (12 U.S.C. 1882), sections 1814, 1816, 1818, 1820(d)(9), 1831o, 
1831p-1 and 1831r-1 of the Federal Deposit Insurance Act (12 U.S.C. 
1814, 1816, 1818, 1831o, 1831p-1 and 1831r-1), and the Bank Secrecy Act 
(31 U.S.C. 5318).
    (b) Purpose and scope. This subpart F describes a member bank's 
obligation to disclose its financial condition to the public, to 
implement security procedures to discourage certain crimes, to file 
suspicious activity reports, and to comply with the Bank Secrecy Act's 
requirements for reporting and recordkeeping of currency and foreign 
transactions. It also describes the examination schedule for certain 
small insured member banks.


Sec. 208.61  Bank security procedures.

    (a) Authority, purpose, and scope. Pursuant to section 3 of the 
Bank Protection Act of 1968 (12 U.S.C. 1882), member banks are required 
to adopt appropriate security procedures to discourage robberies, 
burglaries, and larcenies, and to assist in the identification and 
prosecution of persons who commit such acts. It is the responsibility 
of the member bank's board of directors to comply with the provisions 
of this section and ensure that a written security program for the 
bank's main office and branches is developed and implemented.
    (b) Designation of security officer. Upon becoming a member of the 
Federal Reserve System, a member bank's board of directors shall 
designate a security officer who shall have the authority, subject to 
the approval of the board of directors, to develop, within a reasonable 
time, but no later than 180 days, and to administer a written security 
program for each banking office.
    (c) Security program. (1) The security program shall:
    (i) Establish procedures for opening and closing for business and 
for the safekeeping of all currency, negotiable securities, and similar 
valuables at all times;
    (ii) Establish procedures that will assist in identifying persons 
committing crimes against the institution and that will preserve 
evidence that may aid in their identification and prosecution. Such 
procedures may include, but are not limited to: maintaining a camera 
that records activity in the banking office; using identification 
devices, such as prerecorded serial-numbered bills, or chemical and 
electronic devices; and retaining a record of any robbery, burglary, or 
larceny committed against the bank;
    (iii) Provide for initial and periodic training of officers and 
employees in their responsibilities under the security program and in 
proper employee conduct during and after a burglary, robbery, or 
larceny; and
    (iv) Provide for selecting, testing, operating, and maintaining 
appropriate security devices, as specified in paragraph (c)(2) of this 
section.
    (2) Security devices. Each member bank shall have, at a minimum, 
the following security devices:
    (i) A means of protecting cash and other liquid assets, such as a 
vault, safe, or other secure space;
    (ii) A lighting system for illuminating, during the hours of 
darkness, the area around the vault, if the vault is visible from 
outside the banking office;
    (iii) Tamper-resistant locks on exterior doors and exterior windows 
that may be opened;
    (iv) An alarm system or other appropriate device for promptly 
notifying the nearest responsible law enforcement officers of an 
attempted or perpetrated robbery or burglary; and
    (v) Such other devices as the security officer determines to be 
appropriate, taking into consideration: the incidence of crimes against 
financial institutions in the area; the amount of currency and other 
valuables exposed to robbery, burglary, or larceny; the distance of the 
banking office from the nearest responsible law enforcement officers; 
the cost of the security devices; other security measures in effect at 
the banking office; and the physical characteristics of the structure 
of the banking office and its surroundings.
    (d) Annual reports. The security officer for each member bank shall 
report at least annually to the bank's board of directors on the 
implementation, administration, and effectiveness of the security 
program.
    (e) Reserve Banks. Each Reserve Bank shall develop and maintain a 
written security program for its main office and branches subject to 
review and approval of the Board.


Sec. 208.62  Suspicious Activity Reports.

    (a) Purpose. This section ensures that a member bank files a 
Suspicious Activity Report when it detects a known or suspected 
violation of Federal law, or a suspicious transaction related to a 
money laundering activity or a violation of the Bank Secrecy Act. This 
section applies to all member banks.
    (b) Definitions. For the purposes of this section:
    (1) FinCEN means the Financial Crimes Enforcement Network of the 
Department of the Treasury.
    (2) Institution-affiliated party means any institution-affiliated 
party as that term is defined in 12 U.S.C. 1786(r), or 1813(u) and 
1818(b) (3), (4) or (5).
    (3) SAR means a Suspicious Activity Report on the form prescribed 
by the Board.
    (c) SARs required. A member bank shall file a SAR with the 
appropriate Federal law enforcement agencies and the Department of the 
Treasury in accordance with the form's instructions by sending a 
completed SAR to FinCEN in the following circumstances:
    (1) Insider abuse involving any amount. Whenever the member bank 
detects any known or suspected Federal criminal violation, or pattern 
of criminal violations, committed or attempted against the bank or 
involving a transaction or transactions conducted through the bank, 
where the bank believes that it was either an actual or potential 
victim of a criminal violation, or series of criminal violations, or 
that the bank was used to facilitate a criminal transaction, and the 
bank has a substantial basis for identifying one of its directors, 
officers, employees, agents or other institution-affiliated parties as 
having committed or aided in the commission of a criminal act 
regardless of the amount involved in the violation.
    (2) Violations aggregating $5,000 or more where a suspect can be 
identified. Whenever the member bank detects any known or suspected 
Federal criminal violation, or pattern of criminal violations, 
committed or attempted against the bank or involving a transaction or 
transactions conducted through the bank and involving or aggregating 
$5,000 or more in funds or other assets, where the bank believes that 
it was either an actual or potential victim of a criminal violation, or 
series of criminal violations, or that the bank was used to facilitate 
a criminal transaction, and the bank has a substantial basis for 
identifying a possible suspect or group of suspects. If it is 
determined prior to filing this report that the identified suspect or 
group of suspects has used an ``alias,'' then information regarding the 
true identity of the suspect or group of suspects, as well as alias 
identifiers, such as drivers' licenses or social security numbers, 
addresses and telephone numbers, must be reported.
    (3) Violations aggregating $25,000 or more regardless of a 
potential suspect. Whenever the member bank detects any known or 
suspected Federal criminal

[[Page 15295]]

violation, or pattern of criminal violations, committed or attempted 
against the bank or involving a transaction or transactions conducted 
through the bank and involving or aggregating $25,000 or more in funds 
or other assets, where the bank believes that it was either an actual 
or potential victim of a criminal violation, or series of criminal 
violations, or that the bank was used to facilitate a criminal 
transaction, even though there is no substantial basis for identifying 
a possible suspect or group of suspects.
    (4) Transactions aggregating $5,000 or more that involve potential 
money laundering or violations of the Bank Secrecy Act. Any transaction 
(which for purposes of this paragraph (c)(4) means a deposit, 
withdrawal, transfer between accounts, exchange of currency, loan, 
extension of credit, purchase or sale of any stock, bond, certificate 
of deposit, or other monetary instrument or investment security, or any 
other payment, transfer, or delivery by, through, or to a financial 
institution, by whatever means effected) conducted or attempted by, at 
or through the member bank and involving or aggregating $5,000 or more 
in funds or other assets, if the bank knows, suspects, or has reason to 
suspect that:
    (i) The transaction involves funds derived from illegal activities 
or is intended or conducted in order to hide or disguise funds or 
assets derived from illegal activities (including, without limitation, 
the ownership, nature, source, location, or control of such funds or 
assets) as part of a plan to violate or evade any law or regulation or 
to avoid any transaction reporting requirement under federal law;
    (ii) The transaction is designed to evade any regulations 
promulgated under the Bank Secrecy Act; or
    (iii) The transaction has no business or apparent lawful purpose or 
is not the sort in which the particular customer would normally be 
expected to engage, and the bank knows of no reasonable explanation for 
the transaction after examining the available facts, including the 
background and possible purpose of the transaction.
    (d) Time for reporting. A member bank is required to file a SAR no 
later than 30 calendar days after the date of initial detection of 
facts that may constitute a basis for filing a SAR. If no suspect was 
identified on the date of detection of the incident requiring the 
filing, a member bank may delay filing a SAR for an additional 30 
calendar days to identify a suspect. In no case shall reporting be 
delayed more than 60 calendar days after the date of initial detection 
of a reportable transaction. In situations involving violations 
requiring immediate attention, such as when a reportable violation is 
on-going, the financial institution shall immediately notify, by 
telephone, an appropriate law enforcement authority and the Board in 
addition to filing a timely SAR.
    (e) Reports to state and local authorities. Member banks are 
encouraged to file a copy of the SAR with state and local law 
enforcement agencies where appropriate.
    (f) Exceptions. (1) A member bank need not file a SAR for a robbery 
or burglary committed or attempted that is reported to appropriate law 
enforcement authorities.
    (2) A member bank need not file a SAR for lost, missing, 
counterfeit, or stolen securities if it files a report pursuant to the 
reporting requirements of 17 CFR 240.17f-1.
    (g) Retention of records. A member bank shall maintain a copy of 
any SAR filed and the original or business record equivalent of any 
supporting documentation for a period of five years from the date of 
the filing of the SAR. Supporting documentation shall be identified and 
maintained by the bank as such, and shall be deemed to have been filed 
with the SAR. A member bank must make all supporting documentation 
available to appropriate law enforcement agencies upon request.
    (h) Notification to board of directors. The management of a member 
bank shall promptly notify its board of directors, or a committee 
thereof, of any report filed pursuant to this section.
    (i) Compliance. Failure to file a SAR in accordance with this 
section and the instructions may subject the member bank, its 
directors, officers, employees, agents, or other institution affiliated 
parties to supervisory action.
    (j) Confidentiality of SARs. SARs are confidential. Any member bank 
subpoenaed or otherwise requested to disclose a SAR or the information 
contained in a SAR shall decline to produce the SAR or to provide any 
information that would disclose that a SAR has been prepared or filed 
citing this section, applicable law (e.g., 31 U.S.C. 5318(g)), or both, 
and notify the Board.
    (k) Safe harbor. The safe harbor provisions of 31 U.S.C. 5318(g), 
which exempts any member bank that makes a disclosure of any possible 
violation of law or regulation from liability under any law or 
regulation of the United States, or any constitution, law or regulation 
of any state or political subdivision, covers all reports of suspected 
or known criminal violations and suspicious activities to law 
enforcement and financial institution supervisory authorities, 
including supporting documentation, regardless of whether such reports 
are filed pursuant to this section or are filed on a voluntary basis.


Sec. 208.63  Procedures for monitoring Bank Secrecy Act compliance.

    (a) Purpose. This section is issued to assure that all state member 
banks establish and maintain procedures reasonably designed to assure 
and monitor their compliance with the provisions of the Bank Secrecy 
Act (31 U.S.C. 5311, et seq.) and the implementing regulations 
promulgated thereunder by the Department of Treasury at 31 CFR part 
103, requiring recordkeeping and reporting of currency transactions.
    (b) Establishment of compliance program. On or before April 27, 
1987, each bank shall develop and provide for the continued 
administration of a program reasonably designed to assure and monitor 
compliance with the recordkeeping and reporting requirements set forth 
in the Bank Secrecy Act (31 U.S.C. 5311, et seq.) and the implementing 
regulations promulgated thereunder by the Department of Treasury at 31 
CFR part 103. The compliance program shall be reduced to writing, 
approved by the board of directors, and noted in the minutes.
    (c) Contents of compliance program. The compliance program shall, 
at a minimum:
    (1) Provide for a system of internal controls to assure ongoing 
compliance;
    (2) Provide for independent testing for compliance to be conducted 
by bank personnel or by an outside party;
    (3) Designate an individual or individuals responsible for 
coordinating and monitoring day-to-day compliance; and
    (4) Provide training for appropriate personnel.


Sec. 208.64 Frequency of examination.  [Reserved]

Subpart G--Interpretations


Sec. 208.100  Sale of bank's money orders off premises as establishment 
of branch office.

    (a) The Board of Governors has been asked to consider whether the 
appointment by a member bank of an agent to sell the bank's money 
orders, at a location other than the premises of the bank, constitutes 
the establishment of a branch office.
    (b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is 
also applicable to member banks, defines the term branch as including 
``any branch bank, branch office, branch agency,

[[Page 15296]]

additional office, or any branch place of business * * * at which 
deposits are received, or checks paid, or money lent.'' The basic 
question is whether the sale of a bank's money orders by an agent 
amounts to the receipt of deposits at a branch place of business within 
the meaning of this statute.
    (c) Money orders are classified as deposits for certain purposes. 
However, they bear a strong resemblance to traveler's checks that are 
issued by banks and sold off premises. In both cases, the purchaser 
does not intend to establish a deposit account in the bank, although a 
liability on the bank's part is created. Even though they result in a 
deposit liability, the Board is of the opinion that the issuance of a 
bank's money orders by an authorized agent does not involve the receipt 
of deposits at a ``branch place of business'' and accordingly does not 
require the Board's permission to establish a branch.


Sec. 208.101  Investments in Federal Agricultural Mortgage Corporation 
(Farmer Mac) stock.

    (a) Member banks may purchase and hold for their own account common 
stock in the Federal Agricultural Mortgage Corporation (Farmer Mac) 
incidental to their participation in the secondary market for 
agricultural real estate. Although banks are generally prohibited from 
owning stock (See section 5136 of the Revised Statutes (12 U.S.C. 24)), 
they are not prohibited from holding stock where Congress has evidenced 
a clear intention that they be allowed to hold such stock in order to 
achieve a legislative purpose.
    (b) The legislative history and provisions of the statute creating 
Farmer Mac indicate that Congress envisioned the development of 
secondary markets through the creation of private entities owned 
entirely by institutions involved in lending in the particular market 
under consideration. It is clear from the explicit provisions of the 
enabling statute as well as from the legislative history that Congress 
contemplated that banks, including member banks, would purchase and 
hold stock in Farmer Mac. Member banks are therefore not prohibited 
from purchasing such shares in nominal amounts consistent with safe and 
sound banking practices and state law.


Sec. 208.102  Investments in shares of an investment company.

    (a) A member bank may purchase and hold for its own account stock 
of any investment company (including a money market mutual fund) 
provided that:
    (1) The investment company only has the authority, as stated in the 
investment objectives of its current prospectus, to invest in the 
following securities and no others: United States Treasury and agency 
obligations, general obligations of states and municipalities, 
corporate debt securities, and any other securities designated in 12 
U.S.C. 24(7) as eligible for purchase by national banks that member 
banks are authorized to purchase directly. The investment company may 
have authority, as stated in the investment objectives of its current 
prospectus, to enter into futures, forwards and option contracts 
relating to the above securities when those futures, forwards and 
option contracts are to be used solely to reduce interest rate risk and 
not for speculation. The investment company may also have authority, as 
stated in the investment objectives of its current prospectus, to enter 
into repurchase agreements and securities lending contracts relating to 
the securities designated above if those contracts comply with policy 
statements adopted by the Federal Financial Institutions Examination 
Council (FFIEC). See Federal Reserve Regulatory Service 3-1579.1 (Nov. 
12, 1985).
    (i) If the portfolio of the investment company in which a member 
bank may invest consists solely of obligations that the bank could 
purchase without restriction as to amount, or solely of those 
obligations and futures, forwards, options, repurchase agreements and 
securities lending contracts relating solely to those obligations, no 
express limit is placed on investment.
    (ii) If the portfolio of the investment company in which a member 
bank may invest includes any securities that the bank could purchase 
subject to a restriction as to amount, the pro-rata share of holdings 
of such securities of an issuer indirectly held by a member bank 
through its holdings of investment company stock (including money 
market mutual funds), when aggregated with the direct investment in 
securities of that issuer by the bank, must not exceed the investment 
limit.
    (2) The investment company whose stock is purchased by a member 
bank must register with the Securities and Exchange Commission under 
the Investment Company Act of 1940 and the Securities Act of 1933, 
unless the conditions of paragraph (a)(3) of this section are met.
    (3) The stock purchased may be of a privately offered fund if the 
sponsor of the fund is a subsidiary of a bank holding company, and if 
the stock of the fund is held solely by subsidiaries of the bank 
holding company.
    (4) The stock purchased must represent an equitable, equal, and 
proportionate undivided interest in the underlying assets of the 
investment company.
    (5) The stockholders must be shielded from personal liability for 
acts and obligations of the investment company.
    (6) The member bank's investment policy and procedures, as formally 
approved by its board of directors, must specifically provide for 
investment in investment company stock. The investment policy must 
establish procedures, standards, and controls that relate specifically 
to investments in investment company stock and must provide that prior 
approval of the board of directors of the bank is necessary for 
investment in a specific investment company and that this approval be 
recorded in the official board minutes. Furthermore, the bank must 
review its holdings of investment company stock at least quarterly to 
ensure that investments have been made in accordance with the policy 
and legal requirements, unless the investment objectives of the 
investment companies, as stated in their current prospectuses, restrict 
investments to those obligations that the member bank could purchase 
without restriction as to amount.
    (b) The interpretation in this section does not exempt member banks 
from any provision of state law.


Sec. 208.103 Obligations concerning institutional 
customers.  [Reserved]

PART 250--MISCELLANEOUS INTERPRETATIONS

    1. The authority citation for part 250 continues to read as 
follows:

    Authority: 12 U.S.C. 78, 248(i) and 371c(e).


Secs. 250.120 through 250.123, 250.140, 250.161, 250.162, 
250.220.  [Removed]

    2. Sections 250.120, 250.121, 250.122, 250.123, 250.140, 250.161, 
250.162, 250.220 are removed.


Secs. 250.300 through 250.302.  [Removed]

    3. The undesignated centerheading preceding Sec. 250.300 and 
Secs. 250.300 through 250.302 are removed.

    By order of the Board of Governors of the Federal Reserve 
System, March 20, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-7585 Filed 3-28-97; 8:45 am]
BILLING CODE 6210-01-P