15272 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

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.

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 § 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 crossreference to real estate appraisal

standards in Regulation Y (Part 225—

Bank Holding Companies and Change in

Bank Control) would be moved from

existing § 208.18 to proposed § 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 § 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 § 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 § 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
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules 15273

1The proposed definition of capital stock and

surplus would not apply to part 209 of this title

(Regulation I).

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.1 The Board proposes to

rescind its current capital-related

interpretations (12 CFR 250.161 and

250.162).

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

§ 208.2, entitled ‘‘Eligibility

Requirements,’’ since its provisions

have been incorporated into the factors

considered in approving applications

for membership. The proposal

eliminates existing § 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 § 208.3, ‘‘Insurance of

Deposits.’’ Existing § 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 § 208.4,

entitled ‘‘Application for membership,’’

by summarizing in a more succinct

fashion the Board’s application

procedures. It also provides a crossreference to the Board’s Rules of

Procedure (12 CFR 262.3), which govern

the submission of such applications.

Existing § 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
15274 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

2The 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)).

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).

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 § 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 § 225.14(c)

of Regulation Y (12 CFR 225.14(c)). In

addition, the Board’s proposal would

grant expedited treatment to state nonmember banks applying for membership

and national banks seeking to convert to

State member banks if the applying

bank is an eligible bank.2

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 § 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.3

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 § 208.3(d) would combine and

condense former §§ 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

§ 208.4. Proposed § 208.3(d) would also

incorporate the provisions of existing

Subpart D, ‘‘Standards for Safety and

Soundness.’’

Existing § 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

§ 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 § 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 § 208.8(b) provides for

waivers of conditions contained within

existing § 208.8 and existing § 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 § 208.11, as

they relate to the effective date of

withdrawal from membership, would be

moved to proposed § 208.3(f). The

provisions in existing § 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

§ 208.3(f) would cross-reference

Regulation I.

Section 208.4 Capital Adequacy

Existing § 208.13, entitled ‘‘Capital

adequacy,’’ and other provisions

concerning capital requirements, would

be moved to proposed § 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
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules 15275

4The Board could shorten the comment period

either by amending Regulation H or by amending

the Board’s Rules of Procedure.

5The Board’s Rules of Procedure (12 CFR part

262) set forth general procedures for applications at

12 CFR 262.3.

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 § 208.5 revises the existing

provisions concerning payment of

dividends and withdrawal of capital,

currently found at § 208.19, in order to

clarify the application of these

requirements to State member banks.

The interpretations currently found at

§ 208.125 through § 208.127 would be

incorporated into proposed § 208.5.

Section 208.6 Establishment and

Maintenance of Branches

The proposal would restructure

existing § 208.9 and replace it with

proposed new § 208.6 which is designed

to improve clarity and provide more

streamlined procedures.

Branching

Existing § 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

§ 208.6(a)(1) provides cross-references to

the statutes governing branching.

Branch Applications Generally

Proposed § 208.6(a)(2) contains a

condensed version of existing § 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 § 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.4

Proposed § 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 § 208.6(b)

eliminates consideration of factors

found at § 265.11(e)(3)(iv), regarding the

competitive situation and

§ 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 § 208.9(b) would be replaced

by proposed § 208.6(c), which sets forth

the Board’s expedited procedures for

eligible banks establishing branches.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.

Consolidated Branch Applications

Proposed § 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 § 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 § 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 § 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 § 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 § 208.28. The Board

requested public comment on existing

§ 208.28 on March 17, 1997 (62 FR

12730). Existing § 208.28 will be

incorporated at proposed § 208.7 once it

is finalized.

Subpart B Investments and Loans

Section 208.21 Investments in

Premises and Securities

A new proposed § 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

§ 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 § 208.102 and

entitled ‘‘Investments in Shares of an

Investment Company.’’
15276 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

6The 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).

7 61 FR 45683 (August 29, 1996). The final rule,

which became effective October 1, 1996, replaced

the provisions of § 208.8(e) with a new § 208.23

(now proposed § 208.25).

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 § 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 § 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 § 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 1998.6 Because the

terms of proposed § 208.23 expire on

January 1, 1999, banks are no longer

able to establish new capital restoration

plans. Since the terms of § 208.23 apply

only to existing capital restoration

plans, proposed § 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.

Section 208.24 Letters of Credit and

Acceptances

The proposal does not substantively

amend existing § 208.8(d), entitled

‘‘Letters of credit and acceptances.’’

Section 208.25 Loans in Areas having

Special Flood Hazards

Existing § 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, 1996.7 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 § 208.25.

Subpart C Bank Securities and

Securities-Related Activities

Section 208.31 State Member Banks as

Transfer Agents

Current § 208.8(f) would be revised

and replaced by proposed § 208.31.

Proposed § 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

§ 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 § 208.8(g) is renumbered as

proposed § 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 § 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, § 208.8(h) and

§ 208.8(i) would be revised and replaced

by proposed § 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
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules 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 § 208.8(h) and on

review in § 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 § 208.24 at proposed new

§ 208.34. Existing § 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 § 208.24 will

be incorporated in its entirety at

§ 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 § 208.35. The Board is

seeking public comment on proposed

§ 208.35 separately from this proposal.

Section 208.36 Reporting Requirements

for State Member Banks Subject to the

Securities Exchange Act of 1934

Existing § 208.16 has not been

substantively modified but has been

moved to proposed § 208.36.

Section 208.37 Government Securities

Sales Practices

The proposal includes a place holder

for § 208.25 at proposed § 208.37.

Section 208.25 was issued as a final rule

on March 19, 1997 (62 FR 13276). The

text of existing § 208.25 will be

incorporated in its entirety at § 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 § 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 § 208.18

of existing Subpart A would not be

substantively amended but would be

added to proposed Subpart E as new

§ 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 § 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 § 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

§ 208.62.

Section 208.63 Procedures for

Monitoring Bank Secrecy Act

Compliance

Existing § 208.14 is not being

substantively amended under the

proposal, but is being redesignated as

§ 208.63.

Section 208.64 Frequency of

examination

The proposal includes a place holder

for existing § 208.26. The Board issued

existing § 208.26 as an interim rule with

request for public comment on February

12, 1997 (62 FR 6449). Existing § 208.26

will be incorporated in its entirety at

proposed § 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

§ 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 § 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 § 208.129 will be

incorporated in its entirety at § 208.103

when this proposal is issued as a final

rule.

Sections Proposed To Be Eliminated

Banking Practices

Existing § 208.8 is proposed to be

eliminated in its current form. The parts

of existing § 208.8 that address the

requirements of State member banks as

transfer agents (existing § 208.8(f)) and

registered clearing agencies (existing

§ 208.8(g)–(i)), along with the

corresponding recordkeeping rules

(existing § 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 § 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 § 208.8(d), would not be

significantly amended but would be

moved to proposed new § 208.24,

entitled ‘‘Letters of Credit and

Acceptances,’’ located within proposed

Subpart B, entitled ‘‘Investments and

Loans.’’

The general requirements of existing

§ 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
15278 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

8Additionally, the Board anticipates that more

comprehensive public Call Report data will become

available through the Internet in the future.

proposed new § 208.3(e), entitled

‘‘Conditions of Membership.’’ Existing

§ 208.8(b), which addresses the

conditions under which the Board will

waive conditions of membership, is

proposed to be relocated to new

§ 208.3(f). Existing § 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 § 208.3(e). Existing § 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 § 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 § 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 8), the Board is requesting

comment as to whether existing § 208.17

should be eliminated.

If the Board chooses not to eliminate

§ 208.17, the Board would amend the

language of § 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

§ 208.17 that relate to foreign banks or

state licensed branches of foreign banks.

Municipal Securities Dealers

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

Report

OMB No.

(7100–

lll)

Report name

Annual

burden

hours

Burden type Effect of proposed Reg H

changes on burden

H1 ................ 0091 Securities Activities of SMBs .............. 2,835 Reporting .......................... None.

H2 ................ 0280 Loans Secured by Real Estate in

Flood Hazard Areas.

17,172

8,586

1,042

Reporting ..........................

Disclosure .........................

Recordkeeping ..................

None.

None.

None.

H3 ................ 0196 Securities Transactions made Pursuant to Section 208.8(k)(2,3,&5).165,520 Recordkeeping and disclosure.None.

H4 ................ 0250 Real Estate Appraisal Standards for

Federally Related Transactions.

1 29,710 Recordkeeping .................. None.

H5 ................ 0261 Real Estate Lending Standards .......... 39,000 Recordkeeping .................. None.

H6 ................ 0278 Public Welfare Investments of SMBs 118 Recordkeeping and disclosure.No effect on burden/respondent. Total burden 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 recordkeeping.None.

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 SMBs .... 484 Recordkeeping .................. No effect on the burden for

this information 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

307

280

Reporting ..........................

Disclosure .........................

Recordkeeping ..................

None.

None.

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;
15280 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

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 SecuritiesRelated 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: RiskBased 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:
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules 15281

1Under 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.

2A 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.

Subpart A—General Membership and

Branching Requirements

§ 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.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.

(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.

§ 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.

§ 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

Bank2 in accordance with the Rules of

Procedure governing such applications,

located at 12 CFR 262.3.

(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

§ 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 § 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
15282 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

3State 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.

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 § 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).

§ 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.

§ 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.3

(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.

§ 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
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules 15283

4A 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.

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

§ 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 § 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 § 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.

§ 208.7 Prohibition against use of

interstate branches primarily for deposit

production. [Reserved]

Subpart B—Investments and Loans

§ 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.

§ 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, ¶ 7th.4

§ 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
15284 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

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 lowand 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 lowand 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 moderateincome persons; and

(F) Providing technical assistance,

credit counseling, research, and

program development assistance to lowand 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 §§ 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, promptcorrective-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.

§ 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
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules 15285

5A 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).

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 agriculturallyrelated 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.

§ 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.5

(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.

§ 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
15286 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

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

lllllll. 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.

lll 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.

• 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.

• 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.

• 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.

lll 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

§ 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.
15288 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

§ 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.

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

§ 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 § 208.33

to the extent not inconsistent with this

§ 208.33.

§ 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.

(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
15290 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

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.

§ 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.

(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.
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules 15291

§ 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).

§ 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 § 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.

§ 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:
15292 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

(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 wellcapitalized 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 lessthan-satisfactory rating for any of the

categories of asset quality, management,

earnings, or liquidity.

§ 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

§ 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

§ 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

§ 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 § 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

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

§ 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 § 208.42

or § 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 § 208.42 or

§ 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 § 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

§ 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).

§ 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

§ 208.60 Authority, purpose, and scope.

(a) Authority. Subpart F of Regulation

H (12 CFR part 208, subpart F) is issued
15294 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

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.

§ 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.

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

§ 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.

§ 208.64 Frequency of examination.

[Reserved]

Subpart G—Interpretations

§ 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,
15296 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Proposed Rules

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.

§ 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.

§ 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.

§ 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).

§§ 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.

§§ 250.300 through 250.302. [Removed]

3. The undesignated centerheading

preceding § 250.300 and §§ 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