[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Rules and Regulations]
[Pages 37630-37659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18274]



[[Page 37629]]

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Part II





Federal Reserve System





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12 CFR Part 208, et al.



Membership of State Banking Institutions in the Federal Reserve System; 
Miscellaneous Interpretations; Issue and Cancellation of Federal 
Reserve Bank Capital Stock; Security Procedures; Final Rules

Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules 
and Regulations

[[Page 37630]]



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: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System is 
amending 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, simplify and update requirements, and eliminate several 
obsolete interpretations. As part of the final rule the Board is 
reissuing prior Subparts B and C. Prior Subparts B and C have not been 
significantly amended but have been relettered (as Subparts D and E, 
respectively) to reflect the fact that prior Subpart A was broken into 
four new Subparts (Subparts A, B, C and F). Prior Subpart D, regarding 
safety and soundness standards, has been incorporated into new Subpart 
A. The final rule does not amend in any way Appendices A through E to 
Part 208. This final rule 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.

EFFECTIVE DATE: October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Rick Heyke, Staff Attorney, Legal 
Division (202/452-3688), or Jean Anderson, Staff Attorney, Legal 
Division (202/452-3707). For the hearing impaired only, 
Telecommunications Device for the Deaf (TDD), Diane Jenkins (202/452-
3544).

SUPPLEMENTARY INFORMATION:

Background

    The Board is adopting amendments to its Regulation H (12 CFR part 
208), regarding the general provisions for state bank membership in the 
Federal Reserve System, 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. 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 
amendments are designed to reduce regulatory burden and simplify and 
update the regulation.
    The principal 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 modify the 
procedures for membership and branch applications, incorporate a new 
section designed to provide guidance to banks regarding permissible 
investments in securities, expand the circumstances under which the 
Board will consider waivers of conditions of membership, eliminate 
existing requirements regarding disclosure of financial condition, 
eliminate the requirement that banks obtain deposit insurance in order 
to become State member banks, and generally provide a definition of 
branch that is consistent with OCC regulations and decisions. The 
amendments also serve to eliminate a number of interpretations 
elsewhere; specifically, interpretations: 12 CFR 250.120, 250.121, 
250.122, 250.123, 250.140, 250.161, 250.162, 250.300, 250.301 and 
250.302. The amended Regulation H replaces the existing Regulation H in 
its entirety, except for the Appendices to Regulation H, which remain 
unchanged.
    A red-lined version of the amendments to the regulation and 
commentary is available from the Board's Freedom of Information Office 
or by calling 202-452-3684.
    The Board published Regulation H for comment in the Federal 
Register on March 31, 1997 (62 FR 15272). The Board received 14 
comments to the proposed amendments from the following types of 
institutions:

Banks/thrifts--1
Community groups--1
Trade associations--4
Federal Reserve Banks--7
Clearinghouses--1

    Twelve of the 14 comments generally supported the proposed 
amendments as serving to reduce regulatory burden on banks and as 
clarifying membership requirements. In addition, the comments addressed 
specific issues raised by the proposed amendments. These comments and 
issues are discussed below in the section-by-section analysis. Any 
sections of the regulation which are not discussed in the section-by-
section analysis were adopted as originally proposed by the Board.

Section-by-Section Analysis

Subpart A--General Membership and Branching Requirements

Section 208.2  Definitions
    Definition of Branch. The Board proposed to define a branch as any 
branch bank, branch office, branch agency, additional office, or any 
branch place of business that receives deposits, pays checks, or lends 
money. The proposed rule also stated that a branch may include a 
temporary, seasonal, or mobile facility. In addition to defining what 
constitutes a branch, the proposed rule specified certain arrangements 
that do not constitute a branch. The Board proposed that a branch not 
include a loan origination facility where the proceeds of loans are not 
disbursed, automated teller machines, remote service units, offices of 
an affiliated depository institution that provide services to customers 
of a State member bank on behalf of the State member bank, or a 
facility that would otherwise qualify as a branch because it engages in 
one or more 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.
    In this regard the proposed rule requested comment on whether a 
branch should include offices of an unaffiliated depository institution 
that provide services to customers of a State member bank on behalf of 
the State member bank. Six commenters, the Federal Reserve Banks of 
Minneapolis, Atlanta, Philadelphia and San Francisco, the America's 
Community Bankers, and the American Bankers Association, supported 
excluding unaffiliated depository institutions that provide services to 
a State member bank from the definition of a branch. In light of these 
comments, and in light of current case law and consistent with Office 
of the Comptroller of the Currency (OCC) decisions,<SUP>1</SUP> the 
Board is excluding from the definition of branch arrangements where 
either affiliated or unaffiliated institutions provide services to 
customers of a State member bank. The final rule provides that a branch 
does not include an office of an affiliated or unaffiliated institution 
that provides services to customers of the member bank on behalf of the 
member

[[Page 37631]]

bank so long as the bank does not ``establish or operate'' the office 
providing the services. For example, a bank could contract with an 
unaffiliated or affiliated institution to receive deposits, cash and 
issue checks, drafts, and money orders, change money and receive 
payments of existing indebtedness without becoming a branch of that 
bank so long as that bank: (a) has no ownership or leasehold interest 
in the institution's offices; (b) has no employees who work for the 
institution; and (c) exercises no authority or control over the 
institution's employees or methods of operation.<SUP>2</SUP>
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    \1\ See Cades versus H & R Block, Inc., 43 F.3d 869, 874 (4th 
Cir. 1994) and OCC letter of October 5, 1993 from William P. Bowden, 
Jr., Chief Counsel at page 4, which state that institutions that are 
not affiliated with a bank, but provide services to customers of the 
bank, do not constitute branches so long as the bank does not 
``establish or operate'' the institution providing the services.
    \2\ See, e.g., Cades, 43 F.3d at 874. Although the bank would be 
permitted, in contracting with the institution, to control the terms 
of the services provided by the institution. For example, the bank's 
contractual relationship with the institution could include such 
issues as which institution would bear the risk of loss for items in 
transit or when accounts would be credited with deposits or charged 
with withdrawals.
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    With respect to the statement in the proposed rule that a branch 
does not include a ``remote service unit,'' one commenter requested 
that the Board define the term ``remote service unit.'' The Board is 
adopting the term ``remote service unit'' as proposed and without 
further definition. The Board believes that ``remote service units'' 
may take a variety of forms, and that defining the term at this time 
would be premature. The Board notes that the OCC has determined that a 
``remote service unit'' includes an automated loan machine and believes 
that ``remote service units'' may include automated loan machines as 
well as other arrangements.
    Definition of Capital Stock and Surplus. The Board proposed 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. The Board proposed applying this definition to all 
references to capital stock and surplus in the Federal Reserve Act and 
Regulation H, unless otherwise noted. The Board received one comment 
that Regulation H should incorporate the term ``capital'' rather than 
capital stock and surplus because it would help to reduce the 
historical reference to the more narrow meaning of capital stock and 
surplus, which related only to part of shareholders' equity accounts. 
Use of the term capital stock and surplus is appropriate and consistent 
with the terms of the Federal Reserve Act. Use of the term capital 
stock and surplus should make it easier for banks to comply with the 
Board's regulations since the term capital stock and surplus, as 
defined in the proposal, has been adopted for purposes of section 23A 
of the Federal Reserve Act (12 U.S.C. 371c) which governs transactions 
between insured depository institutions) and Regulation O (12 CFR 215) 
(which governs insider lending). All other commenters supported the 
proposed definition of capital stock and surplus, as well as the use of 
the term itself, and the Board is adopting the definition and term as 
proposed.
    Definition of Eligible Bank. The Board proposed a new definition, 
eligible bank, to serve as the qualification for expedited treatment of 
membership and branch applications. The Board proposed that eligible 
bank be defined as a bank that: (a) is well capitalized; (b) has a 
Uniform Financial Institutions Rating System (CAMELS) rating of 1 or 2 
(copies are available at the address specified in Sec. 216.6 of this 
chapter); (c) has a Community Reinvestment Act (CRA) rating of 
``Outstanding'' or ``Satisfactory;'' (d) has a compliance rating of 1 
or 2; and (e) has no major unresolved supervisory issues outstanding as 
determined by the Board or the appropriate Federal Reserve Bank.
    The Board received one comment that the definition should require a 
CRA rating of ``Outstanding'' rather than a rating of ``Outstanding'' 
or ``Satisfactory.'' The commenter opposed allowing banks with 
``Satisfactory'' ratings to receive eligible bank status because the 
commenter stated most banks receive ``Satisfactory'' ratings and 
because CRA ratings are not a reliable indicator of the bank's CRA 
performance. The remainder of the commenters supported the definition 
of eligible bank with one commenter requesting clarification as to 
whether the Board intended to preclude banks with a compliance rating 
of three from qualifying as an eligible bank.
    The Board is adopting the definition of eligible bank as proposed. 
Allowing membership or branch applications from banks with 
``Satisfactory'' CRA ratings to qualify for expedited treatment 
continues prior Board policies and provides for consistency with the 
OCC's standards for determining whether membership or branch 
applications should receive expedited treatment. The Board has modified 
its previous standard for receiving expedited treatment by requiring a 
compliance rating of 1 or 2 rather than 1, 2, or 3. This change 
provides consistency with the OCC's definition of eligible bank and is 
being adopted as proposed.
    If a bank has not yet received compliance or CRA ratings from a 
bank regulatory authority, which would be necessary for determining 
whether it is an eligible bank, the Board will look to the bank's 
holding company for purposes of determining whether the bank's 
application should receive expedited processing. If the bank's holding 
company meets the criteria for expedited processing under 
Sec. 225.14(c) of Regulation Y (12 CFR 225.14(c)), the bank's 
membership or branch application will be eligible for expedited 
processing.
    Banks that have not yet received compliance or CRA ratings and that 
either are not owned by a bank holding company or are owned by a bank 
holding company that does not meet the criteria for expedited 
processing under Sec. 225.14(c) of Regulation Y, are not eligible for 
expedited treatment.
    Definition of Mutual Savings Bank. The Board proposed deleting the 
definition of mutual savings bank as unnecessary. One commenter opposed 
deletion of the definition on the basis that deletion ``indirectly 
suggest[s] that companies should abandon the traditional mutual 
charter.'' The Board does not believe that removal of the definition 
carries this implication and is adopting the proposal. The status of 
mutual savings banks continues to be addressed in Sec. 208.3(a) of 
Regulation H, concerning applications for membership and stock, as well 
as in the Board's Regulation I (12 CFR 209), published elsewhere in 
today's Federal Register, for purposes of determining the amount of 
Reserve Bank stock mutual savings banks are required to purchase (or in 
certain special cases the amount of money they must deposit with a 
Reserve Bank). See 12 CFR 209.4(c).
Section 208.3  Application and Conditions for Membership
    Publication of Membership Applications. The proposal stated that 
public comment on membership applications (including conversions) is 
not expressly required by statute but that publication might allow the 
Board to obtain additional information or views relevant to a 
membership application. The Board requested comment as to whether it 
should require publication for membership applications.
    The Board received comments both supporting and opposing 
eliminating the publication requirement for membership applications. 
The majority of commenters favored eliminating the requirement. These 
commenters stated that no significant information is gained through 
publication that would

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outweigh the burden it places on banks. Those opposing eliminating the 
requirement stated that comments may provide useful information in the 
context of de novo membership applications or that the burden it places 
on banks is minimal in light of the fact that many banks seek FDIC 
insurance, which requires a public comment period. The Board is 
eliminating the requirement that banks seeking to become members of the 
Federal Reserve System publish notice of membership applications.
    Because membership applications no longer confer deposit insurance, 
the requirement currently contained in the Board's Rules of Procedure 
(12 CFR 262.3), which states that banks must publish notice of their 
membership applications, no longer applies. The Board's Rules of 
Procedure (12 CFR 262.3) will be amended in the future to reflect the 
fact that membership no longer automatically confers deposit insurance 
and to reflect the change that banks no longer need to publish notice 
of membership applications.
    Processing Time Frames for Expedited Membership Applications. The 
proposed rule provided that if public comment on membership 
applications were eliminated, expedited membership applications would 
be acted on 30 days after receipt of the application. One commenter 
requested that the Board act on expedited membership applications 
within 15 days because, under existing guidelines, non-expedited 
membership applications are acted on within 30 days and expedited 
membership applications should be acted on sooner than non-expedited 
membership applications. The Board is adopting a rule under which 
expedited membership applications will be acted on within 15 days of 
receipt of the application. Non-expedited membership applications will 
be acted on promptly, however, in limited situations processing times 
may be longer if the application involves unusual facts or raises novel 
policy issues.
    Membership Exams. The proposed rule did not include information 
concerning the time frame or conditions under which the Federal Reserve 
will examine banks seeking membership in the Federal Reserve System. 
One commenter requested that guidance be provided in Regulation H 
regarding the time frames for, and necessity of, pre-membership 
examinations of banks. Another commenter requested that the exam 
guidelines in SR 95-30 be updated. The Board has decided not to 
incorporate pre-membership examination guidelines into Regulation H 
because the necessity for, and duration of, examinations depends on the 
individual circumstances of each bank.
    Conditions of Membership. The proposed rule incorporated a new 
Sec. 208.3(d) which combined and condensed former Secs. 208.6 and 208.7 
concerning the general conditions and requirements of membership. The 
former requirement that the capital and surplus of a State member bank 
be adequate in relation to its existing and prospective deposit 
liabilities was modified and placed in proposed Sec. 208.4. Proposed 
Sec. 208.3(d) also incorporated the provisions of existing Subpart D, 
``Standards for Safety and Soundness.''
    In addition, the Board proposed to eliminate existing 
Sec. 208.6(a), which points out that State member banks retain all 
charter and statutory rights under state law not preempted by Federal 
law, and Sec. 208.6(b), which states that State member banks are 
entitled to all the privileges of membership afforded them under the 
Federal Reserve Act and other acts of Congress, and must observe all 
requirements of Federal law. One commenter stated that eliminating 
existing Sec. 208.6(a) and (b) would create confusion because the 
sections state important concepts. The Board continues to believe, 
however, that these propositions are self-evident and do not need to be 
explicitly stated. Therefore, existing Sec. 208.6(a) and (b) are not 
included in the final Regulation H.
    Another commenter requested that the term ``general character of a 
bank's business'' (Sec. 208.3(d)(2)) be defined. The Board believes 
that providing a definition of the term could result in an unduly 
restrictive or inflexible definition and, therefore, has not 
incorporated such a definition in Regulation H.
Section 208.5  Dividends and Other Distributions
    Proposed Sec. 208.5 revised the existing provisions concerning 
payment of dividends and withdrawal of capital, previously located at 
Sec. 208.19. Proposed Sec. 208.5 also incorporated interpretations 
previously located at Sec. 208.125 through Sec. 208.127. The final rule 
retains Sec. 208.5 as proposed, however, in the case of dividends in 
excess of net income for the year, the final rule clarifies that banks 
generally are not required to carry forward negative amounts resulting 
from such excess.<SUP>3</SUP> The final rule also contains a cross 
reference to Sec. 208.45 of Subpart D for purposes of determining 
restrictions on the payment of capital distributions.
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    \3\ This clarification addresses only earnings deficits that 
result from dividends declared in excess of net income for the year 
and does not apply to other types of current earnings deficits. It 
is consistent with the OCC's letter dated December 22, 1997, and 
published as Interpretive Letter #816.
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Section 208.6  Establishment and Maintenance of Branches
    Duration of Comment Period. The Board's proposal requested 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. Those commenters favoring shortening the comment period stated 
that comments on branch applications rarely raise substantive issues 
and that shortening the period would serve to reduce regulatory burden 
on banks. Commenters opposing shortening the comment period stated that 
shortening the comment period to 15 days would make it difficult for 
commenters to provide substantive comments to the Board on branch 
applications. The Board is reducing the public comment period on branch 
applications from 30 to 15 days but will allow, in its discretion, an 
extension of the comment period for an additional 15 days.\4\ Sections 
208.6(a)(3) and (a)(4) describe the new procedural rules for public 
comment on branch applications, including the new 15 day comment period 
and the potential 15 day extension. The Board's Rules of Procedure (12 
CFR 262.3) will continue to describe the form and location for public 
notices and will be amended in the future to reflect the 15 day comment 
period applicable to branch applications.
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    \4\ The OCC, in revising its branch application procedures, 
retained a 30 day comment period for all branch applications other 
than those involving ``short-distance'' relocations (which 
relocations, if within the same neighborhood, would not require a 
branch application under the Board's final rule).
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    Processing Time Frames for Expedited Branch Applications. The 
proposed rule provided procedures for processing expedited branch 
applications that were modified slightly from the Board's existing 
procedures, located in Administrative Letter 92-82 (November 5, 1992). 
The proposed rule provided that 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 or that the bank is not 
eligible for expedited processing because: (a) it is not an eligible 
bank; (b) the application contains a material error or is otherwise 
deficient; or (c) the application or notice

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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. In addition, the preamble to the proposed 
rule stated that in no case would an expedited branch application be 
approved prior to the third day after the close of the public comment 
period.
    In the final rule, the Board is including in the text of the 
regulation an express statement that expedited branch applications will 
not be approved prior to the third day after the close of the public 
comment period. Waiting until the third day enables the Board, or 
appropriate Reserve Bank, to determine whether it has received any 
public comments on the application. In all other respects the 
processing time frames for expedited branch applications remain the 
same as proposed. The Board will be amending its Rules of Procedure to 
incorporate the changes adopted in the final rule.
    Non-expedited branch applications will be processed in accordance 
with the Board's Applications Procedures Manual.
    Processing Procedures. The proposed rule required branch 
applications to be filed in accordance with the Board's Rules of 
Procedure (12 CFR 262.3). One commenter raised a question as to whether 
eligible banks must file a ``full'' branch application. Both eligible 
and non-eligible banks must comply with the Board's Rules of Procedure. 
More in-depth review is expected in non-eligible bank branch 
applications. Accordingly, the Board may require more extensive 
information regarding non-eligible bank branch applications than 
eligible bank branch applications. In particular, the Board pays close 
attention to areas that have caused the bank to become non-eligible.
    Notification of Branch Opening. Section 208.6(d) of the proposed 
rule explicitly authorized a single consolidated application for 
branches that a State member bank plans to establish in a one-year 
period, provided the bank meets the existing requirement that it notify 
the appropriate Reserve Bank one week prior to opening any branch 
covered by the approval. One commenter raised a question as to whether 
it was necessary for banks to provide prior notification of opening a 
branch. The Board has reviewed this policy further and concurs with the 
commenter that prior approval is unnecessary, therefore, Sec. 208.6(d) 
of the final rule provides for a more flexible time for notification, 
merely requiring notice within 30 days after opening the branch.
    Branch Closings. The proposed rule established a new Sec. 208.6(e) 
regarding branch closings, which requires branch closings to comply 
with section 42 of the FDI Act (12 U.S.C. 1831r-1). Section 42(e) 
requires notice to both customers and, in the case of insured State 
member banks, the Board, of proposed branch closings. The proposed rule 
also clarified that a branch relocation is not a closing for purposes 
of section 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.
    One commenter requested that Sec. 208.6(e) refer to the Interagency 
Policy Statement on Branch Closings. The Board believes that referring 
to the policy statement in Sec. 208.6(e) would reduce the flexibility 
inherent in policy statements and, therefore, is not referring to it in 
Regulation H.
Section 208.7  Prohibition Against Use of Interstate Branches Primarily 
for Deposit Production
    The final rule includes the text of existing Sec. 208.28, as issued 
in final by the Board on September 10, 1997 (62 FR 47727) with an 
effective date of October 10, 1997. Existing Sec. 208.28 remains 
unchanged except that it is being renumbered from Sec. 208.28 to 
Sec. 208.7.

Subpart B--Investments and Loans

Section 208.21  Investments in Premises and Securities
    Investments in Premises. Section 208.21(a) of the proposed rule 
provided new investment limitations on banks' investments in premises. 
These new limitations were incorporated into Regulation H as a result 
of amendments to section 24A of the Federal Reserve Act made by the 
Economic Growth and Regulatory Paperwork Reduction Act of 1996, Pub. L. 
104-208, 110 Stat. 3009, (Economic Growth Act). The Economic Growth Act 
provides that banks may make investments in bank premises if they 
either: (a) obtain prior approval from the Board; (b) invest less than 
or equal to the bank's capital stock; or (c) invest less than or equal 
to 150 percent of the bank's capital and surplus so long as the bank is 
well-rated and well capitalized and provides the Board with notice no 
later than 30 days after making the investment. The Economic Growth Act 
creates investment in premises limits based on banks' ``capital stock'' 
or ``capital and surplus.'' The proposed rule based the investment 
limits on the basis of banks' capital stock and surplus, as defined by 
Sec. 208.2(d) of Regulation H. One commenter stated that limitations on 
investments in premises for non-well rated and non-well capitalized 
banks should be based on banks' ``capital stock'' rather than the 
banks' capital stock and surplus as defined by Regulation H. The 
commenter stated that liberalizing the investment limit for non-well 
rated and non-well capitalized banks could result in supervisory 
concerns, particularly with respect to problem banks.
    The Board believes that basing investment in premises limits on 
capital stock and surplus could present supervisory problems, 
therefore, the Board is basing the investment in premises limits on a 
bank's perpetual preferred stock and related surplus plus common stock 
plus surplus, as those terms are defined in the FFIEC Consolidated 
Reports of Condition and Income. If a well rated and well capitalized 
bank chooses to invest an amount above 150% of its perpetual preferred 
stock and related surplus plus common stock plus surplus (or, for a 
non-well-rated and well-capitalized bank, 100% of its perpetual 
preferred stock and related surplus plus common stock plus surplus) the 
bank may do so as long as it provides the appropriate Reserve Bank at 
least 15 days notice prior to making such investments and has not 
received notice that the investment is subject to further review by the 
end of the fifteen day notice period.
    Another commenter raised a question as to whether it was necessary 
for the Board to receive after-the-fact notice of investments in 
premises that are less than or equal to 150% of banks' perpetual 
preferred stock and related surplus plus common stock plus surplus as 
required by Sec. 208.21(a)(3)(ii)(C). The commenter questioned the 
usefulness of after-the-fact notice of such investments. The Board has 
concluded that such after-the-fact notice is unnecessary. The Economic 
Growth Act provides that banks with a CAMELS rating of 1 or 2, as of 
the most recent examination of the bank, and that are, and continue to 
be, well capitalized, may make investments in bank premises of less 
than or equal to 150 percent of the bank's capital and surplus so long 
as they provide the Board with after-the-fact notice of such 
investments. Under section 24A the Board also has the authority to 
grant banks prior approval to make investments in premises. Pursuant to 
this authority the Board is granting prior approval for state member 
banks with a CAMELS rating of 1 or 2, as of the most

[[Page 37634]]

recent examination of the bank, and that are, and continue to be, well 
capitalized, to make investments in bank premises of less than or equal 
to 150 percent of the bank's perpetual preferred stock and related 
surplus plus common stock plus surplus without providing the Board with 
after-the-fact notice of such investments.
    Investments in Securities. The proposal incorporated a new 
Sec. 208.21(b) which provided guidance to banks regarding permissible 
investments in securities. For the reasons outlined below under the 
discussion of the Board's interpretation on Investments in Shares of an 
Investment Company, the Board is amending Sec. 208.21(b) to clarify 
generally that, with respect to certain investment company shares and 
investment securities, a State member bank may look to the OCC's Part 1 
rules and interpretations to determine whether a security qualifies as 
an investment security for the purpose of section 24, paragraph 7th, 
and for the calculations of the limitations applicable to such 
investments. Section 208.21(b) is also being amended to clarify that a 
State member bank should consult the Board for determinations with 
respect to issues concerning investment securities that have not been 
addressed by the OCC rules and interpretations.
    Voting Stock in a Fiduciary Capacity. The proposed rule contained a 
footnote, footnote four, which several commenters stated would prevent 
banks from voting shares of stock in a fiduciary capacity. Footnote 
four was derived from, and was intended to update, a Board 
interpretation located at 12 CFR 250.220, which was to be removed. The 
Board is not including footnote four in the final rule and is retaining 
the Board interpretation found at 12 CFR 250.220 which states that 
banks may vote shares of stock if they are acting in a fiduciary 
capacity.

Subpart C--Bank Securities and Securities-Related Activities

Section 208.34  Recordkeeping and Confirmation of Certain Securities 
Transactions
    Effected by State Member Banks. The final rule includes the text of 
existing Sec. 208.24, as issued in final by the Board on March 5, 1997 
(62 FR 9909), with an effective date of April 1, 1997. Existing 
Sec. 208.24 remains unchanged except that it is being renumbered from 
Sec. 208.24 to Sec. 208.34.
Section 208.35  Qualification Requirements for the Recommendation or 
Sale of Certain Securities
    The final rule includes a place holder for proposed new 
Sec. 208.35. The Board is seeking public comment on proposed 
Sec. 208.35 separately.
Section 208.37  Government Securities Sales Practices
    The final rule includes the text of existing Sec. 208.25, as issued 
in final by the Board on March 19, 1997 (62 FR 13275) with an effective 
date of July 1, 1997. Existing Sec. 208.25 remains unchanged except 
that it is being renumbered from Sec. 208.25 to Sec. 208.37.

Subpart D--Prompt Corrective Action

    The proposed rule did not significantly amend the terms of prior 
Subpart B other than to redesignate it as Subpart D and to amend 
Sec. 208.41 to provide the Federal Reserve with the option of using 
period-end total assets rather than average total assets for purposes 
of defining total assets. The Board received two comments regarding 
Subpart D. The first commenter inquired as to whether other 
governmental agencies allow the option of using period-end total assets 
rather than average total assets for purposes of defining total assets. 
In this regard the Board notes that the OCC's definition of total 
assets, for purposes of its prompt corrective action rule, is the same 
as the Board's.<SUP>5</SUP>
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    \5\ 12 CFR 6.2(j).
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    The second commenter stated that Sec. 208.43(c)(2) should be 
updated to reflect all applicable CAMELS components. The Board has 
added ``sensitivity to market risk'' as the final CAMELS component.

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 being incorporated into Regulation H at Sec. 208.61. A final 
rule removing 12 CFR part 216 is found elsewhere in today's Federal 
Register.
Section 208.64  Frequency of Examination
    The final rule includes the text of existing Sec. 208.26, as issued 
in final by the Board on April 2, 1998 (63 FR 16378), also effective on 
April 2, 1998). Existing Sec. 208.26 remains unchanged except that it 
is being renumbered from Sec. 208.26 to Sec. 208.64.

Subpart G--Interpretations

Proposed Sec. 208.101  Investments in Federal Agricultural Mortgage 
Corporation (Farmer Mac) Stock
    This proposed interpretation restated an existing staff opinion 
<SUP>6</SUP> regarding the permissibility of banks investing in the 
stock of the Federal Agricultural Mortgage Corporation (Farmer Mac), 
which is a government agency. One commenter stated that the Board 
should either provide a complete list of permissible investments in 
stocks of governmental agencies or provide no list.
---------------------------------------------------------------------------

    \6\ F.R.R.S. 3-447.13 (July 26, 1988).
---------------------------------------------------------------------------

    In general, banks are prohibited from owning stock pursuant to 
paragraph seventh of section 5136 of the Revised Statutes (12 U.S.C. 24 
para. 7th), which was made applicable to State member banks under 
paragraph 20 of Sec. 9 of the Federal Reserve Act (12 U.S.C. 335). 
Although State member banks are generally prohibited from owning stock, 
the Board has, in the past, allowed banks to own the stock of certain 
governmental agencies where Congress has evidenced a clear intention 
that banks be allowed to hold such stock in order to achieve a 
legislative purpose. Since decisions regarding permissible stock 
investments in governmental agencies must be made on a case-by-case 
basis, the Board has decided not to include proposed Sec. 208.101 in 
the final rule. However, the Board will retain the existing staff 
opinion regarding investments in Farmer Mac stock in the Federal 
Reserve Regulatory Service.
Proposed Section 208.102  Investments in Shares of an Investment 
Company
    The Board proposed to retain its existing interpretation, entitled 
``Purchase of investment company stock by a State member bank,'' and 
rename it ``Investments in Shares of an Investment Company,'' and 
renumber it from Sec. 208.124 to Sec. 208.102. In addition, the Board 
requested comment as to whether the existing interpretation should be 
amended to provide an alternative limit for certain diversified 
investment companies. Under the alternative limit, a bank could elect 
not to combine its pro rata interest in a particular security held by 
an investment company with the bank's direct holdings of the security 
where: (a) the investment company's holdings of the securities of any 
one issuer do not exceed 5 percent of its total portfolio; and (b) the 
bank's total holdings of the investment company's shares do not exceed 
the most stringent limit applicable to any of the securities in the

[[Page 37635]]

company's portfolio if those securities were purchased directly by the 
bank. This alternative limit is currently available to national banks 
under OCC rules.
    Several commenters pointed to conflicts between the Board's 
interpretation and the provisions of the OCC's Part 1 concerning 
investment company shares and recommended that the Board withdraw its 
interpretation in order to avoid a conflict with the OCC rules. 
Alternatively, these commenters supported efforts to conform the 
Board's interpretation to the OCC's current provisions concerning 
investment companies, including adoption of the alternative limit and 
other conforming amendments.
    In addition to differences concerning calculation of limits, the 
commenters pointed out that the Board's interpretation generally 
permits investment only in investment companies that are registered 
with the Securities and Exchange Commission under the Investment 
Company Act of 1940 and the Securities Act of 1933, while the OCC rule 
provides for case-by-case consideration of investment companies that 
are exempt from registration where the portfolio of the investment 
companies consist entirely of assets that a national bank may purchase 
and sell for its own account. Commenters also pointed out that the 
OCC's rule requires only that the portfolio of the investment company 
consist exclusively of assets that a national bank could purchase 
directly. The Board's interpretation, on the other hand, requires that 
limits on the investment company's authority be included in the 
investment company's prospectus, which one commenter argued prevented 
State member banks from being able to ``seed'' start-up investment 
companies where funds were initially invested only in bank eligible 
securities. The Board's interpretation also differs from the OCC rule 
in other technical respects and includes requirements that relate to 
safety and soundness, rather than investment authority.
    The Board believes that State member banks should be permitted to 
use the alternative method of calculating investment limits available 
under the OCC's rules for diversified investment companies. 
Additionally, although the circumstances under which a State member 
bank may provide funds to ``seed'' an investment company are limited, 
the Board believes that State member banks should be permitted to do so 
where the activity is consistent with the Glass-Steagall Act. The Board 
also notes that its interpretation was not intended to preclude the 
consideration on a case-by-case basis of investments not covered by its 
interpretation, including unregistered investment companies.
    With respect to the provisions of the interpretation concerning 
internal procedures for approval and management of investments in 
investment companies, guidance issued by Board staff concerning risk 
management practices related to investment and end-user activities 
provides more thorough guidance concerning appropriate risk management 
practices than was available at the time the interpretation was 
adopted.<SUP>7</SUP> Further, internal procedures and practices 
discussed in current guidance cover the bank's investment activities 
generally and are not limited to a particular area. The Board therefore 
believes that the specific internal procedures required under the 
Board's interpretation are no longer necessary.
---------------------------------------------------------------------------

    \7\ See SR 95-17 (SUP), March 28, 1995.
---------------------------------------------------------------------------

    Based on the above considerations, the Board has concluded that its 
existing interpretation, Sec. 208.124 (proposed Sec. 208.102), no 
longer serves a useful purpose and is rescinding it. The Board is 
adding language to the Sec. 208.21(b) on investments in securities to 
clarify generally that, with respect to certain investment company 
shares and investment securities, a State member bank may look to the 
OCC's Part 1 rules and interpretations to determine whether a security 
qualifies as an investment security for the purpose of section 24, 
paragraph 7th, and for the calculations of the limitations applicable 
to such investments. Regulation H also is being amended to clarify that 
a State member bank should consult the Board for determinations with 
respect to issues concerning investment securities that have not been 
addressed by the OCC rules and interpretations.
Section 208.101  Obligations Concerning Institutional Customers
    The final rule includes the text of existing Sec. 208.129, as 
issued in final by the Board on March 19, 1997 (62 FR 13275). Existing 
Sec. 208.129 remains unchanged except that it is being renumbered from 
Sec. 208.129 to Sec. 208.101.
    Investments in operating subsidiaries. Several commenters 
recommended that the Board rescind its 1968 interpretation concerning 
``operations subsidiaries,'' published at 12 CFR 250.141, noting that 
this interpretation was obsolete. The interpretation states that a 
State member bank may invest in the shares of a wholly owned 
``operations subsidiary'' without violating the provisions of the 
Glass-Steagall Act concerning the purchase of stock by member banks. At 
the present time the Board is retaining the existing interpretation 
regarding ``operations subsidiaries.''
    Miscellaneous. Financial Condition. The Board proposed eliminating 
existing Sec. 208.17, entitled Disclosure of Financial Information by 
State member banks, from the proposed Regulation H on the basis that 
call report information for banks is now available through the 
internet. In response to this proposal the Board received three 
comments from Federal Reserve Banks which stated that it was premature 
to eliminate Sec. 208.17 because a large segment of the public does not 
have access to the internet. The Board has decided to rescind 
Sec. 208.17 despite these objections. The Board believes that 
Sec. 208.17 places a burden on banks by requiring them to make 
available a potentially unlimited number of copies of statements 
regarding their financial condition to the public. This burden has been 
justified in the past because it was the only effective means for the 
public to obtain information concerning a bank's financial condition. 
However, now that many private institutions, as well as many public 
institutions, such as public libraries, offer access to the internet, 
where such financial information concerning banks can be obtained, the 
Board does not believe the burden on banks of providing such 
information continues to be justified, and therefore, is removing 
existing Sec. 208.17 from the final rule.

Final Regulatory Flexibility Analysis

    Two of the three requirements of a final regulatory flexibility 
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and 
the objectives of the rule and (2) a summary of the issues raised by 
the public comments, the agency's assessment of the issues, and a 
statement of the changes made in the final rule in response to the 
comments, are discussed above. The third requirement of a final 
regulatory flexibility analysis is a description of significant 
alternatives to the rule that would minimize the rule's economic impact 
on small entities and reasons why the alternatives were rejected.
    The final amendments will apply to all State member banks, which 
numbered approximately 997 as of February 1998, regardless of size, and 
represent changes to the existing rules that should reduce burden for 
those institutions by reducing regulatory filings, reducing the 
paperwork burden

[[Page 37636]]

and processing time associated with regulatory filings, reducing the 
costs associated with complying with regulation, and improving the 
ability of banks to conduct business on a more cost-efficient basis. 
For example, the rule 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 rule 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 
rule 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 rule also provides for an alternate definition 
of total assets for institutions with rapidly declining asset bases.
    The amendments should not have a negative economic effect on small 
institutions, and, therefore, there were no significant alternatives 
that would have minimized the economic impact on those institutions.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the final rule 
under the authority delegated to the Board by the Office of Management 
and Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, these information 
collections unless they display a currently valid OMB control number. 
The OMB control numbers for the affected information collections are 
7100-0097, 7100-0278, 7100-0046, and 7100-0139.
    The sections of the regulation pertaining to the revised 
information collections are found in 12 CFR 208.2, 208.3, 208.6, 
208.21, and 208.22. This information is needed in order for the Federal 
Reserve System to conduct its supervisory responsibility for state 
member banks. The respondents and recordkeepers are state member banks. 
Individual respondent data generally are not regarded as confidential.
    No comments specifically addressing the burden estimate were 
received. Four existing information collections covered by Regulation H 
are affected by the changes to the regulation. Fewer Domestic Branch 
Notifications (FR 4001; OMB No. 7100-0097), which are mandatory, will 
be submitted resulting from the elimination of the notification 
requirement for ATMs and certain other offices and from the broadening 
of the interpretation of ``location.'' The proposed rule also had 
provided that depository institutions be permitted to file a single 
notification for prior approval of multiple branches to be established 
within a year following the notification. The requirement for prior 
approval was eliminated in the final rule, which only requires 
notification within thirty days after each branch is opened. Further 
study, based on an analysis of the types of notifications received in 
the past, has led the Federal Reserve to increase its initial estimate 
of the effect of these changes on the annual burden from a decrease of 
20 percent to more than 50 percent, from 415 to 201 hours.
    The revisions to Regulation H are expected to affect the relative 
distribution of two of the types of Reports Related to Public Welfare 
Investments of State Member Banks (OMB No. 7100-0278) that are 
submitted to the Federal Reserve. The Board is eliminating the 
requirement that, to avoid applying for Board approval, the investment 
must be smaller than 2 percent of capital and surplus. This should 
result in fewer applications and more notices of investments not 
requiring Board approval. A requirement has been added to the 
applications for Board approval: if the bank is not permitted to make 
the investment without Board approval, the institution must explain the 
reason or reasons why the investment is ineligible. This is expected to 
increase the burden per response from two and one-half hours to two and 
three-quarters hours. The estimated burden per response for a notice of 
investment not requiring Board approval is two hours. There were twenty 
notices and fourteen applications received during 1997. It is estimated 
that following the revision there will be twenty-seven notices and 
seven applications submitted annually. There is estimated to be no 
effect on the divestiture notice requirements, one of which is expected 
to be submitted annually. The burden per response for the divestiture 
notice is estimated to be five hours. Altogether the total amount of 
annual burden is estimated to be reduced 3 percent from eighty hours to 
seventy-eight. There is estimated to be no annual cost burden over the 
annual hour burden and no capital or start-up costs associated with the 
changes.
    The burden for the Membership Application (FR 2083; OMB No. 7100-
0046) will experience a minimal reduction in the current annual burden 
of 3,450 hours, resulting from the elimination of the publication 
requirement, the broadened authority of the Board to waive the 
application, and the reduction in the processing time for expedited 
applications from thirty to fifteen days.
    The final rule contains changes that affect another existing 
information collection. The proposed rule provided that the Investment 
in Bank Premises Notification (FR 4014; OMB No. 7100-0139) must be 
filed by a state member bank whenever it proposes to make an investment 
in bank premises that results in its total bank premises investment 
exceeding its capital stock and surplus, or if the bank is well 
capitalized and in good condition, exceeding 150 percent of its capital 
stock and surplus. In the final rule, the Board decided to base its 
analysis on the bank's perpetual preferred stock and related surplus 
plus common stock plus surplus, which is a more conservative measure 
than the capital stock and surplus proposed initially. In addition, 
after-the-fact notification is no longer required from banks for 
investments within the limits. The net effect of these changes is 
expected to have a minimal effect on the annual respondent burden for 
this information collection of eight hours.
    The Federal Reserve has a continuing interest in the public's 
opinions of our collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of these collections 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, N.W., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0097, 7100-
0278, 7100-0046, or 7100-0139), Washington, DC 20503.

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                            

[[Page 37637]]

                                                                        
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.............................  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 is amending 
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, 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.

Subpart B--Investments and Loans

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

Subpart C--Bank Securities and Securities-Related Activities

208.30  Authority, purpose, and scope.
208.31  State member banks as transfer agents.
208.32  Notice of disciplinary sanctions imposed by registered 
clearing agency.
208.33  Application for stay or review of disciplinary sanctions 
imposed by registered clearing agency.
208.34  Recordkeeping and confirmation of certain securities 
transactions effected by State member banks.
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.

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.

Subpart G--Interpretations

208.100  Sale of bank's money orders off premises as establishment 
of branch office.
208.101  Obligations concerning institutional customers.

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure

Appendix B to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Tier 1 Leverage Measure

Appendix C to Part 208--Interagency Guidelines for Real Estate Lending 
Policies

Appendix D to Part 208--Interagency Guidelines Establishing Standards 
for Safety and Soundness

Appendix E to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Market Risk Measure

    3. Subparts A through E are revised and Subparts F and G are added 
to read as follows:

Subpart A--General Membership and Branching Requirements


Sec. 208.1  Authority, purpose, and scope.

    (a) Authority. Subpart A of Regulation H (12 CFR part 208, Subpart 
A) is issued by the Board of Governors of the Federal Reserve System 
(Board) under 12 U.S.C. 24, 36; sections 9, 11, 21, 25 and 25A of the 
Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 
and 611); sections 1814, 1816, 1818, 1831o, 1831p-1, 1831r-1 and 1835a 
of the Federal Deposit Insurance Act (FDI 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 of Part 208. The requirements of this part 
208 govern State member banks and state banks applying for admission to 
membership in the Federal Reserve System (System) under section 9 of 
the Federal Reserve Act (Act), except for Sec. 208.7, which also 
applies to certain foreign banks licensed by a State. This part 208 
does not govern banks eligible for membership under section 2 or 19 of 
the Act.<SUP>1</SUP> Any bank desiring to be admitted to the System 
under the provisions of section 2 or 19 should communicate with the 
Federal Reserve

[[Page 37638]]

Bank with which it would like to become a member.
---------------------------------------------------------------------------

    \1\ Under section 2 of the Federal Reserve Act, every national 
bank in any state shall, upon commencing business, or within 90 days 
after admission into the Union of the State in which it is located, 
become a member of the System. Under section 19 of the Federal 
Reserve Act, national banks and banks organized under local laws, 
located in a dependency or insular possession or any part of the 
United States outside of the States of the United States and the 
District of Columbia, are not required to become members of the 
System but may, with the consent of the board, become members of the 
System.
---------------------------------------------------------------------------

    (c) Purpose and scope of Subpart A. This Subpart A describes the 
eligibility requirements for membership of state-chartered banking 
institutions in the System, the general conditions imposed upon 
members, including capital and dividend requirements, as well as the 
requirements for establishing and maintaining branches.


Sec. 208.2  Definitions.

    For the purposes of this part:
    (a) Board of Directors means the governing board of any institution 
performing the usual functions of a board of directors.
    (b) Board means the Board of Governors of the Federal Reserve 
System.
    (c) Branch. (1) Branch means 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 or unaffiliated institution that 
provides services to customers of the member bank on behalf of the 
member bank so long as the institution is not established or operated 
by the 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 or appropriate Federal Reserve Bank in its 
discretion).
    (f) State bank means any bank incorporated by special law of any 
State, or organized under the general laws of any State, or of the 
United States, including a Morris Plan bank, or other incorporated 
banking institution engaged in a similar business.
    (g) State member bank or member bank means a state bank that is a 
member of the Federal Reserve System.


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

    (a) Applications for membership and stock. (1) State banks applying 
for membership in the Federal Reserve System shall file with the 
appropriate Federal Reserve Bank an application for membership in the 
Federal Reserve System and for stock in the Reserve Bank,<SUP>2</SUP> 
in accordance with this part and Sec. 262.3 of the Rules of Procedure, 
located at 12 CFR 262.3.
---------------------------------------------------------------------------

    \2\ A mutual savings bank not authorized to purchase Federal 
Reserve Bank stock may apply for membership evidenced initially by a 
deposit, but if the laws under which the bank is organized are not 
amended at the first session of the legislature after its admission 
to authorize the purchase, or if the bank fails to purchase the 
stock within six months of the amendment, its membership shall be 
terminated.
---------------------------------------------------------------------------

    (2) Board approval. If an applying bank conforms to all the 
requirements of the Federal Reserve Act and this section, and is 
otherwise qualified for membership, the Board may approve its 
application subject to such conditions as the Board may prescribe.
    (3) Effective date of membership. A State bank becomes a member of 
the Federal Reserve System on the date its Federal Reserve Bank stock 
is credited to its account (or its deposit is accepted, if it is a 
mutual savings bank not authorized to purchase Reserve Bank stock) in 
accordance with the Board's Regulation I (12 CFR part 209).
    (b) Factors considered in approving applications for membership. 
Factors given special consideration by the Board in passing upon an 
application are:
    (1) Financial condition and management. The financial history and 
condition of the applying bank and the general character of its 
management.
    (2) Capital. The adequacy of the bank's capital in accordance with 
Sec. 208.4, and its future earnings prospects.
    (3) Convenience and needs. The convenience and needs of the 
community.
    (4) Corporate powers. Whether the bank's corporate powers are 
consistent with the purposes of the Federal Reserve Act.
    (c) Expedited approval for eligible banks and bank holding 
companies. (1) Availability of expedited treatment. The expedited 
membership procedures described in paragraph (c)(2) of this section are 
available to:
    (i) An eligible bank; and
    (ii) A bank that cannot be determined to be an eligible bank 
because it has not received compliance or CRA ratings from a bank 
regulatory authority, if it is controlled by a bank holding company 
that meets the criteria for expedited processing under Sec. 225.14(c) 
of Regulation Y (12 CFR 225.14(c)).
    (2) Expedited procedures. A completed membership application filed 
with the appropriate Reserve Bank will be deemed approved on the 
fifteenth day after receipt of the complete application by the Board or 
appropriate Reserve Bank, unless the Board or the appropriate Reserve 
Bank notifies the bank that the application is approved prior to that 
date or the Board or the appropriate Federal Reserve Bank notifies the 
bank that the application 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 or bank holding company does not meet the criteria 
under Sec. 208.3(c)(1);
    (iii) The application contains a material error or is otherwise 
deficient; or
    (iv) The application raises significant supervisory, compliance, 
policy or legal issues that have not been resolved, or a timely 
substantive adverse comment is submitted. A comment will be considered 
substantive unless it involves individual complaints, or raises 
frivolous, previously considered, or wholly unsubstantiated claims or 
irrelevant issues.
    (d) Conditions of membership. (1) Safety and soundness. 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 FDI Act (12 U.S.C.

[[Page 37639]]

1831p-1), as set forth as appendix D to this part apply to all member 
banks.)
    (2) General character of bank's business. A member bank may not, 
without the permission of the Board, cause or permit any change in the 
general character of its business or in the scope of the corporate 
powers it exercises at the time of admission to membership.
    (3) Compliance with conditions of membership. Each member bank 
shall comply at all times with this Regulation H (12 CFR part 208) and 
any other conditions of membership prescribed by the Board.
    (e) Waivers. (1) Conditions of membership. A member bank may 
petition the Board to waive a condition of membership. The Board may 
grant a waiver of a condition of membership upon a showing of good 
cause and, in its discretion, may limit, among other items, the scope, 
duration, and timing of the waiver.
    (2) Reports of affiliates. Pursuant to section 21 of the Federal 
Reserve Act (12 U.S.C. 486), the Board waives the requirement for the 
submission of reports of affiliates of member banks, unless such 
reports are specifically requested by the Board.
    (f) Voluntary withdrawal from membership. Voluntary withdrawal from 
membership becomes effective upon cancellation of the Federal Reserve 
Bank stock held by the member bank, and after the bank has made due 
provision to pay any indebtedness due or to become due to the Federal 
Reserve Bank in accordance with the Board's Regulation I (12 CFR part 
209).


Sec. 208.4  Capital adequacy.

    (a) Adequacy. A member bank's capital, as defined in 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 judgment of the 
Board, shall be adequate.
    (b) Standards for evaluating capital adequacy. Standards and 
guidelines by which the Board evaluates the capital adequacy of member 
banks include those in appendices A and E to this part for risk-based 
capital purposes and appendix B to this part for leverage measurement 
purposes.


Sec. 208.5  Dividends and other distributions.

    (a) Definitions. For the purposes of this section:
    (1) Capital surplus means the total of surplus as reportable in the 
bank's Reports of Condition and Income and surplus on perpetual 
preferred stock.
    (2) Permanent capital means the total of the bank's perpetual 
preferred stock and related surplus, common stock and surplus, and 
minority interest in consolidated subsidiaries, as reportable in the 
Reports of Condition and Income.
    (b) Limitations. The limitations in this section on the payment of 
dividends and withdrawal of capital apply to all cash and property 
dividends or distributions on common or preferred stock. The 
limitations do not apply to dividends paid in the form of common stock.
    (c) Earnings limitations on payment of dividends. (1) A member bank 
may not declare or pay a dividend if the total of all dividends 
declared during the calendar year, including the proposed dividend, 
exceeds the sum of the bank's net income (as reportable in its Reports 
of Condition and Income) during the current calendar year and the 
retained net income of the prior two calendar years, unless the 
dividend has been approved by the Board.
    (2) ``Retained net income'' in a calendar year is equal to the 
bank's net income (as reported in its Report of Condition and Income 
for such year), less any dividends declared during such 
year.<SUP>3</SUP> The bank's net income during the current year and its 
retained net income from the prior two calendar years is reduced by any 
net losses incurred in the current or prior two years and any required 
transfers to surplus or to a fund for the retirement of preferred 
stock.<SUP>4</SUP>
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    \3\ In the case of dividends in excess of net income for the 
year, a bank generally is not required to carry forward negative 
amounts resulting from such excess. Instead, the bank may attribute 
the excess to the prior two years, attributing the excess first to 
the earlier year and then to the immediately preceding year. If the 
excess is greater than the bank's previously undistributed net 
income for the preceding two years, prior Board approval of the 
dividend is required and a negative amount would be carried forward 
in future dividend calculations. However, in determining any such 
request for approval, the Board could consider any request for 
different treatment of such negative amount, including advance 
waivers for future periods. This applies only to earnings deficits 
that result from dividends declared in excess of net income for the 
year and does not apply to other types of current earnings deficits.
    \4\ State member banks are required to comply with state law 
provisions concerning the maintenance of surplus funds in addition 
to common capital. Where the surplus of a State member bank is less 
than what applicable state law requires the bank to maintain 
relative to its capital stock account, the bank may be required to 
transfer amounts from its undivided profits account to surplus.
---------------------------------------------------------------------------

    (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 Sec. 208.45 of subpart D of this part implementing section 
38 of the FDI Act (12 U.S.C. 1831o).
    (f) Compliance. A member bank shall use the date a dividend is 
declared to determine compliance with this section.


Sec. 208.6  Establishment and maintenance of branches.

    (a) Branching. (1) To the extent authorized by state law, a member 
bank may establish and maintain branches (including interstate 
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 
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, located at 12 CFR 
262.3, and must comply with the public notice and comment rules 
contained in paragraphs (a)(3) and (a)(4) of this section. 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

[[Page 37640]]

Puerto Rico, are subject to the Board's Regulation K (12 CFR part 211).
    (3) Public notice of branch applications. (i) Location of 
publication. A State member bank wishing to establish a branch in the 
United States or its territories must publish notice in a newspaper of 
general circulation in the form and at the locations specified in 
Sec. 262.3 of the Rules of Procedure (12 CFR 262.3).
    (ii) Contents of notice. The newspaper notice referred to in 
paragraph (a)(3) of this section shall provide an opportunity for 
interested persons to comment on the application for a period of at 
least 15 days.
    (iii) Timing of publication. Each newspaper notice shall be 
published no more than 7 calendar days before and no later than the 
calendar day on which an application is filed with the appropriate 
Reserve Bank.
    (4) Public comment. (i) Timely comments. Interested persons may 
submit information and comments regarding a branch application under 
Sec. 208.6. A comment shall be considered timely for purposes of this 
subpart if the comment, together with all supplemental information, is 
submitted in writing in accordance with the Board's Rules of Procedure 
(12 CFR 262.3) and received by the Board or the appropriate Reserve 
Bank prior to the expiration of the public comment period provided in 
paragraph (a)(3)(ii) of this section.
    (ii) Extension of comment period. The Board may, in its discretion, 
extend the public comment period regarding any application under 
Sec. 208.6. In the event that an interested person requests a copy of 
an application submitted under Sec. 208.6, the Board may, in its 
discretion and based on the facts and circumstances, grant such person 
an extension of the comment period for up to 15 calendar days.
    (b) Factors considered in approving domestic branch applications. 
Factors given special consideration by the Board in passing upon a 
branch application are:
    (1) Financial condition and management. The financial history and 
condition of the applying bank and the general character of its 
management;
    (2) Capital. The adequacy of the bank's capital in accordance with 
Sec. 208.4, and its future earnings prospects;
    (3) Convenience and needs. The convenience and needs of the 
community to be served by the branch;
    (4) CRA performance. In the case of branches with deposit-taking 
capability, the bank's performance under the Community Reinvestment Act 
(12 U.S.C. 2901 et seq.) and Regulation BB (12 CFR part 228); and
    (5) Investment in bank premises. Whether the bank's investment in 
bank premises in establishing the branch is consistent with 
Sec. 208.21.
    (c) Expedited approval for eligible banks and bank holding 
companies. (1) Availability of expedited treatment. The expedited 
branch application procedures described in paragraph (c)(2) of this 
section are available to:
    (i) An eligible bank; and
    (ii) A bank that cannot be determined to be an eligible bank 
because it has not received compliance or CRA ratings from a bank 
regulatory authority, if it is controlled by a bank holding company 
that meets the criteria for expedited processing under Sec. 225.14(c) 
of Regulation Y (12 CFR 225.14(c)).
    (2) Expedited procedures. A completed domestic branch application 
filed with the appropriate Reserve Bank will be deemed approved on the 
fifth day after the close of the 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 the Board or the appropriate Federal Reserve Bank notifies 
the bank that the application is not eligible for expedited review for 
any reason, including, without limitation, that:
    (i) The bank or bank holding company does not meet the criteria 
under Sec. 208.6(c)(1);
    (ii) The application contains a material error or is otherwise 
deficient; or
    (iii) The application or the notice required under paragraph (a)(3) 
of this section, raises significant supervisory, Community Reinvestment 
Act, compliance, policy or legal issues that have not been resolved, or 
a timely substantive adverse comment is submitted. A comment will be 
considered substantive unless it involves individual complaints, or 
raises frivolous, previously considered, or wholly unsubstantiated 
claims or irrelevant issues.
    (d) Consolidated Applications. (1) Proposed branches; 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 not later than 30 days 
after 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 judgment, 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 FDI Act (FDI Act), 12 U.S.C. 1831r-1, with regard to branch 
closings.
    (f) Branch relocations. A relocation of an existing branch does not 
require filing a branch application. A relocation of an existing 
branch, for purposes of determining whether to file a branch 
application, is a movement that does not substantially affect the 
nature of the branch's business or customers served.


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

    (a) Purpose and scope--(1) Purpose. The purpose of this section is 
to implement section 109 (12 U.S.C. 1835a) of the Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994 (Interstate 
Act).
    (2) Scope. (i) This section applies to any State member bank that 
has operated a covered interstate branch for a period of at least one 
year, and any foreign bank that has operated a covered interstate 
branch licensed by a State for a period of at least one year.
    (ii) This section describes the requirements imposed under 12 
U.S.C. 1835a, which requires the appropriate Federal banking agencies 
(the Board, the Office of the Comptroller of the Currency, and the 
Federal Deposit Insurance Corporation) to prescribe uniform rules that 
prohibit a bank from using any authority to engage in interstate 
branching pursuant to the Interstate Act, or any amendment made by the 
Interstate Act to any other provision of law, primarily for the purpose 
of deposit production.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Bank means, unless the context indicates otherwise:
    (i) A State member bank as that term is defined in 12 U.S.C. 
1813(d)(2); and
    (ii) A foreign bank as that term is defined in 12 U.S.C. 3101(7) 
and 12 CFR 211.21.
    (2) Covered interstate branch means any branch of a State member 
bank, and any uninsured branch of a foreign bank licensed by a State, 
that:

[[Page 37641]]

    (i) Is established or acquired outside the bank's home state 
pursuant to the interstate branching authority granted by the 
Interstate Act or by any amendment made by the Interstate Act to any 
other provision of law; or
    (ii) Could not have been established or acquired outside of the 
bank's home state but for the establishment or acquisition of a branch 
described in paragraph (b)(2)(i) of this section.
    (3) Home state means:
    (i) With respect to a state bank, the state that chartered the 
bank;
    (ii) With respect to a national bank, the state in which the main 
office of the bank is located; and
    (iii) With respect to a foreign bank, the home state of the foreign 
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR 
211.22.
    (4) Host state means a state in which a bank establishes or 
acquires a covered interstate branch.
    (5) Host state loan-to-deposit ratio generally means, with respect 
to a particular host state, the ratio of total loans in the host state 
relative to total deposits from the host state for all banks (including 
institutions covered under the definition of ``bank'' in 12 U.S.C. 
1813(a)(1)) that have that state as their home state, as determined and 
updated periodically by the appropriate Federal banking agencies and 
made available to the public.
    (6) State means state as that term is defined in 12 U.S.C. 
1813(a)(3).
    (7) Statewide loan-to-deposit ratio means, with respect to a bank, 
the ratio of the bank's loans to its deposits in a state in which the 
bank has one or more covered interstate branches, as determined by the 
Board.
    (c) Loan-to-deposit ratio screen--(1) Application of screen. 
Beginning no earlier than one year after a bank establishes or acquires 
a covered interstate branch, the Board will consider whether the bank's 
statewide loan-to-deposit ratio is less than 50 percent of the relevant 
host state loan-to-deposit ratio.
    (2) Results of screen. (i) If the Board determines that the bank's 
statewide loan-to-deposit ratio is 50 percent or more of the host state 
loan-to-deposit ratio, no further consideration under this section is 
required.
    (ii) If the Board determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit 
ratio, or if reasonably available data are insufficient to calculate 
the bank's statewide loan-to-deposit ratio, the Board will make a 
credit needs determination for the bank as provided in paragraph (d) of 
this section.
    (d) Credit needs determination--(1) In general. The Board will 
review the loan portfolio of the bank and determine whether the bank is 
reasonably helping to meet the credit needs of the communities in the 
host state that are served by the bank.
    (2) Guidelines. The Board will use the following considerations as 
guidelines when making the determination pursuant to paragraph (d)(1) 
of this section:
    (i) Whether covered interstate branches were formerly part of a 
failed or failing depository institution;
    (ii) Whether covered interstate branches were acquired under 
circumstances where there was a low loan-to-deposit ratio because of 
the nature of the acquired institution's business or loan portfolio;
    (iii) Whether covered interstate branches have a high concentration 
of commercial or credit card lending, trust services, or other 
specialized activities, including the extent to which the covered 
interstate branches accept deposits in the host state;
    (iv) The Community Reinvestment Act ratings received by the bank, 
if any, under 12 U.S.C. 2901 et seq.;
    (v) Economic conditions, including the level of loan demand, within 
the communities served by the covered interstate branches;
    (vi) The safe and sound operation and condition of the bank; and
    (vii) The Board's Regulation BB--Community Reinvestment (12 CFR 
part 228) and interpretations of that regulation.
    (e) Sanctions--(1) In general. If the Board determines that a bank 
is not reasonably helping to meet the credit needs of the communities 
served by the bank in the host state, and that the bank's statewide 
loan-to-deposit ratio is less than 50 percent of the host state loan-
to-deposit ratio, the Board:
    (i) May order that a bank's covered interstate branch or branches 
be closed unless the bank provides reasonable assurances to the 
satisfaction of the Board, after an opportunity for public comment, 
that the bank has an acceptable plan under which the bank will 
reasonably help to meet the credit needs of the communities served by 
the bank in the host state; and
    (ii) Will not permit the bank to open a new branch in the host 
state that would be considered to be a covered interstate branch unless 
the bank provides reasonable assurances to the satisfaction of the 
Board, after an opportunity for public comment, that the bank will 
reasonably help to meet the credit needs of the community that the new 
branch will serve.
    (2) Notice prior to closure of a covered interstate branch. Before 
exercising the Board's authority to order the bank to close a covered 
interstate branch, the Board will issue to the bank a notice of the 
Board's intent to order the closure and will schedule a hearing within 
60 days of issuing the notice.
    (3) Hearing. The Board will conduct a hearing scheduled under 
paragraph (e)(2) of this section in accordance with the provisions of 
12 U.S.C. 1818(h) and 12 CFR part 263.

Subpart B--Investments and Loans


Sec. 208.20  Authority, purpose, and scope.

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


Sec. 208.21  Investments in premises and securities.

    (a) Investment in bank premises. No state member bank shall invest 
in bank premises, or in the stock, bonds, debentures, or other such 
obligations of any corporation holding the premises of such bank, or 
make loans to or upon the security of any such corporation unless:
    (1) The bank notifies the appropriate Reserve Bank at least fifteen 
days prior to such investment and has not received notice that the 
investment is subject to further review by the end of the fifteen day 
notice period;
    (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 bank's 
perpetual preferred stock and related surplus plus common stock plus 
surplus, as those terms are defined in the FFIEC Consolidated Reports 
of Condition and Income; or
    (3)(i) The aggregate of all such investments and loans, together 
with the

[[Page 37642]]

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 
bank's perpetual preferred stock and related surplus plus common stock 
plus surplus, as those terms are defined in the FFIEC Consolidated 
Reports of Condition and Income; and
    (ii) The bank:
    (A) Has a CAMELS composite rating of 1 or 2 under the Uniform 
Interagency Bank Rating System <SUP>5</SUP> (or an equivalent rating 
under a comparable rating system) as of the most recent examination of 
the bank; and
---------------------------------------------------------------------------

    \5\ See FRRS 3-1575 for an explanation of the Uniform 
Interagency Bank Rating System. (For availability, see 12 CFR 
261.10(f).)
---------------------------------------------------------------------------

    (B) Is well capitalized and will continue to be well capitalized, 
in accordance with subpart D of this part, after the investment or 
loan.
    (b) Investments in securities. Member banks are subject to the same 
limitations and conditions with respect to purchasing, selling, 
underwriting, and holding investment securities and stocks as are 
national banks under 12 U.S.C. 24, para. 7th. To determine whether an 
obligation qualifies as an investment security for the purposes of 12 
U.S.C. 24, para. 7th, and to calculate the limits with respect to the 
purchase of such obligations, a state member bank may look to part 1 of 
the rules of the Comptroller of the Currency (12 CFR part 1) and 
interpretations thereunder. A state member bank may consult the Board 
for a determination with respect to the application of 12 U.S.C. 24, 
para. 7th, with respect to issues not addressed in 12 CFR part 1. The 
provisions of 12 CFR part 1 do not provide authority for a state member 
bank to purchase securities of a type or amount that the bank is not 
authorized to purchase under applicable state law.


Sec. 208.22  Community development and public welfare investments.

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

[[Page 37643]]

    (iv) A description of the member bank's potential liability under 
the proposed investment;
    (v) The amount of the member bank's aggregate outstanding public 
welfare investments under paragraph 23 of section 9 of the Federal 
Reserve Act;
    (vi) The amount of the member bank's capital stock and surplus; and
    (vii) If the bank investment is not eligible under paragraph (b) of 
this section, explain the reason or reasons why it is ineligible.
    (3) The Board shall act on a request under this paragraph (d) 
within 60 calendar days of receipt of a request that meets the 
requirements of paragraph (d)(2) of this section, unless the Board 
notifies the requesting member bank that a longer time period will be 
required.
    (e) Divestiture of investments. A member bank shall divest itself 
of an investment made under paragraph (b) or (d) of this section to the 
extent that the investment exceeds the scope of, or ceases to meet, the 
requirements of paragraphs (b)(1) through (b)(4) or paragraph (d) of 
this section. The divestiture shall be made in the manner specified in 
12 CFR 225.140, Regulation Y, for interests acquired by a lending 
subsidiary of a bank holding company or the bank holding company itself 
in satisfaction of a debt previously contracted.


Sec. 208.23  Agricultural loan loss amortization.

    (a) Definitions. For purposes of this section:
    (1) Accepting official means:
    (i) The Reserve Bank in whose district the bank is located; or
    (ii) The Director of the Division of Banking Supervision and 
Regulation in cases in which the Reserve Bank cannot determine that the 
bank qualifies.
    (2) Agriculturally related other property means any property, real 
or personal, that the bank owned on January 1, 1983, and any additional 
property that it acquired prior to January 1, 1992, in connection with 
a qualified agricultural loan. For the purposes of paragraph (d) of 
this section, the value of such property shall include the amount 
previously charged off as a loss.
    (3) Participating bank means an agricultural bank (as defined in 12 
U.S.C. 1823(j)(4)(A)) that, as of January 1, 1992, had a proposal for a 
capital restoration plan accepted by an accepting official and received 
permission from the accepting official, subject to paragraphs (d) and 
(e) of this section, to amortize losses in accordance with paragraphs 
(b) and (c) of this section.
    (4) Qualified agricultural loan means:
    (i) Loans that finance agricultural production or are secured by 
farm land for purposes of Schedule RC-C of the FFIEC Consolidated 
Report of Condition or such other comparable schedule;
    (ii) Loans secured by farm machinery;
    (iii) Other loans that a bank proves to be sufficiently related to 
agriculture for classification as an agricultural loan by the Board; 
and
    (iv) The remaining unpaid balance of any loans described in 
paragraphs (a)(4) (i), (ii) and (iii) of this section that have been 
charged off since January 1, 1984, and that qualify for deferral under 
this section.
    (b)(1) Provided there is no evidence that the loss resulted from 
fraud or criminal abuse on the part of the bank, the officers, 
directors, or principal shareholders, a participating bank may amortize 
in its Reports of Condition and Income:
    (i) Any loss on a qualified agricultural loan that the bank would 
be required to reflect in its financial statements for any period 
between and including 1984 and 1991; or
    (ii) Any loss that the bank would be required to reflect in its 
financial statements for any period between and including 1983 and 1991 
resulting from a reappraisal or sale of agriculturally-related other 
property.
    (2) Amortization under this section shall be computed over a period 
not to exceed seven years on a quarterly straight-line basis commencing 
in the first quarter after the loan was or is charged off so as to be 
fully amortized not later than December 31, 1998.
    (c) Accounting for amortization. Any bank that is permitted to 
amortize losses in accordance with paragraph (b) of this section may 
restate its capital and other relevant accounts and account for future 
authorized deferrals and authorizations in accordance with the 
instructions to the FFIEC Consolidated Reports of Condition and Income. 
Any resulting increase in the capital account shall be included in 
qualifying capital pursuant to appendix A of this part.
    (d) Conditions of participation. In order for a bank to maintain 
its status as a participating bank, it shall:
    (1) Adhere to the approved capital plan and obtain the prior 
approval of the accepting official before making any modifications to 
the plan;
    (2) Maintain accounting records for each asset subject to loss 
deferral under the program that document the amount and timing of the 
deferrals, repayments, and authorizations;
    (3) Maintain the financial condition of the bank so that it does 
not deteriorate to the point where it is no longer a viable, 
fundamentally sound institution;
    (4) Make a reasonable effort, consistent with safe and sound 
banking practices, to maintain in its loan portfolio a percentage of 
agricultural loans, including agriculturally-related other property, 
not less than the percentage of such loans in its loan portfolio on 
January 1, 1986; and
    (5) Provide the accepting official, upon request, with any 
information the accepting official deems necessary to monitor the 
bank's amortization, its compliance with the conditions of 
participation, and its continued eligibility.
    (e) Revocation of eligibility for loss amortization. The failure to 
comply with any condition in an acceptance, with the capital 
restoration plan, or with the conditions stated in paragraph (d) of 
this section, is grounds for revocation of acceptance for loss 
amortization and for an administrative action against the bank under 12 
U.S.C. 1818(b). In addition, acceptance of a bank for loss amortization 
shall not foreclose any administrative action against the bank that the 
Board may deem appropriate.
    (f) Expiration date. The terms of this section will no longer be in 
effect as of January 1, 1999.


Sec. 208.24  Letters of credit and acceptances.

    (a) Standby letters of credit. For the purpose of this section, 
standby letters of credit include every letter of credit (or similar 
arrangement however named or designated) that represents an obligation 
to the beneficiary on the part of the issuer:
    (1) To repay money borrowed by or advanced to or for the account of 
the account party; or
    (2) To make payment on account of any evidence of indebtedness 
undertaken by the account party; or
    (3) To make payment on account of any default by the party 
procuring the issuance of the letter of credit in the performance of an 
obligation.<SUP>6</SUP>
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    \6\ A standby letter of credit does not include: (1) Commercial 
letters of credit and similar instruments, where the issuing bank 
expects the beneficiary to draw upon the issuer, and which do not 
guaranty payment of a money obligation; or (2) a guaranty or similar 
obligation issued by a foreign branch in accordance with and subject 
to the limitations of 12 CFR part 211 (Regulation K).
---------------------------------------------------------------------------

    (b) Ineligible acceptance. An ineligible acceptance is a time draft 
accepted by a bank, which does not meet the requirements for discount 
with a Federal Reserve Bank.
    (c) Bank's lending limits. Standby letters of credit and ineligible

[[Page 37644]]

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


Sec. 208.25  Loans in areas having special flood hazards.

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

[[Page 37645]]

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

Appendix A to Sec. 208.25 Sample Form of Notice

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

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ____________________. This area has 
a one percent (1%) chance of a flood equal to or exceeding the base 
flood elevation (a 100-year flood) in any given year. During the 
life of a 30-year mortgage loan, the risk of a 100-year flood in a 
special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______ The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have 
applied for if you do not purchase flood

[[Page 37646]]

insurance. The flood insurance must be maintained for the life of 
the loan. If you fail to purchase or renew flood insurance on the 
property, Federal law authorizes and requires us to purchase the 
flood insurance for you at your expense.
    <bullet> Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
    <bullet> At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) the outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
    <bullet> Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally declared 
flood disaster.

Subpart C--Bank Securities and Securities-Related Activities


Sec. 208.30  Authority, purpose, and scope.

    (a) Authority. Subpart C of Regulation H (12 CFR part 208, subpart 
C) is issued by the Board of Governors of the Federal Reserve System 
under 12 U.S.C. 24, 92a, 93a; sections 1818 and 1831p-1(a)(2) of the 
FDI 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.


Sec. 208.31  State member banks as transfer agents.

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


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

    (a) Notice requirement. Any member bank or any of its subsidiaries 
that is a registered clearing agency pursuant to section 17A(b) of the 
Securities Exchange Act of 1934 (the Act), and that:
    (1) Imposes any final disciplinary sanction on any participant 
therein;
    (2) Denies participation to any applicant; or
    (3) Prohibits or limits any person in respect to access to services 
offered by the clearing agency, shall file with the Board (and the 
appropriate regulatory agency, if other than the Board, for a 
participant or applicant) notice thereof in the manner prescribed in 
this section.
    (b) Notice of final disciplinary actions. (1) Any registered 
clearing agency for which the Board is the appropriate regulatory 
agency that takes any final disciplinary action with respect to any 
participant shall promptly file a notice thereof with the Board in 
accordance with paragraph (c) of this section. For the purposes of this 
paragraph (b), final disciplinary action means the imposition of any 
disciplinary sanction pursuant to section 17A(b)(3)(G) of the Act, or 
other action of a registered clearing agency which, after notice and 
opportunity for hearing, results in final disposition of charges of:
    (i) One or more violations of the rules of the registered clearing 
agency; or
    (ii) Acts or practices constituting a statutory disqualification of 
a type defined in paragraph (iv) or (v) (except prior convictions) of 
section 3(a)(39) of the Act.
    (2) However, if a registered clearing agency fee schedule specifies 
certain charges for errors made by its participants in giving 
instructions to the registered clearing agency which are de minimis on 
a per error basis, and whose purpose is, in part, to provide revenues 
to the clearing agency to compensate it for effort expended in 
beginning to process an erroneous instruction, such error charges shall 
not be considered a final disciplinary action for purposes of this 
paragraph (b).
    (c) Contents of final disciplinary action notice. Any notice filed 
pursuant to paragraph (b) of this section shall consist of the 
following, as appropriate:
    (1) The name of the respondent and the respondent's last known 
address, as reflected on the records of the clearing agency, and the 
name of the person, committee, or other organizational unit that 
brought the charges. However, identifying information as to any 
respondent found not to have violated a provision covered by a charge 
may be deleted insofar as the notice reports the disposition of that 
charge and, prior to the filing of the notice, the respondent does not 
request that identifying information be included in the notice;
    (2) A statement describing the investigative or other origin of the 
action;
    (3) As charged in the proceeding, the specific provision or 
provisions of the rules of the clearing agency violated by the 
respondent, or the statutory disqualification referred to in paragraph 
(b)(2) of this section, and a statement describing the answer of the 
respondent to the charges;
    (4) A statement setting forth findings of fact with respect to any 
act or practice in which the respondent was charged with having engaged 
in or omitted; the conclusion of the clearing agency as to whether the 
respondent violated any rule or was subject to a statutory 
disqualification as charged; and a statement of the clearing agency in 
support of its resolution of the principal issues raised in the 
proceedings;
    (5) A statement describing any sanction imposed, the reasons 
therefor, and the date upon which the sanction became or will become 
effective; and
    (6) Such other matters as the clearing agency may deem relevant.
    (d) Notice of final denial, prohibition, termination or limitation 
based on qualification or administrative rules. (1) Any registered 
clearing agency, for which the Board is the appropriate regulatory 
agency, that takes any final action that denies or conditions the 
participation of any person, or prohibits or limits access, to services 
offered by the clearing agency, shall promptly file notice thereof with 
the Board (and the appropriate regulatory agency, if other than the 
Board, for the affected person) in accordance with paragraph (e) of 
this section; but such action shall not be

[[Page 37647]]

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


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

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


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

    (a) Exceptions and safe and sound operations. (1) A State member 
bank may be excepted from one or more of the requirements of this 
section if it

[[Page 37648]]

meets one of the following conditions of paragraphs (a)(1)(i) through 
(a)(1)(iv) of this section:
    (i) De minimis transactions. The requirements of paragraphs (c)(2) 
through (c)(4) and paragraphs (e)(1) through (e)(3) of this section 
shall not apply to banks having an average of less than 200 securities 
transactions per year for customers over the prior three calendar year 
period, exclusive of transactions in government securities;
    (ii) Government securities. The recordkeeping requirements of 
paragraph (c) of this section shall not apply to banks effecting fewer 
than 500 government securities brokerage transactions per year; 
provided that this exception shall not apply to government securities 
transactions by a State member bank that has filed a written notice, or 
is required to file notice, with the Federal Reserve Board that it acts 
as a government securities broker or a government securities dealer;
    (iii) Municipal securities. The municipal securities activities of 
a State member bank that are subject to regulations promulgated by the 
Municipal Securities Rulemaking Board shall not be subject to the 
requirements of this section; and
    (iv) Foreign branches. The requirements of this section shall not 
apply to the activities of foreign branches of a State member bank.
    (2) Every State member bank qualifying for an exemption under 
paragraph (a)(1) of this section that conducts securities transactions 
for customers shall, to ensure safe and sound operations, maintain 
effective systems of records and controls regarding its customer 
securities transactions that clearly and accurately reflect appropriate 
information and provide an adequate basis for an audit of the 
information.
    (b) Definitions. For purposes of this section:
    (1) Asset-backed security shall mean a security that is serviced 
primarily by the cash flows of a discrete pool of receivables or other 
financial assets, either fixed or revolving, that by their terms 
convert into cash within a finite time period plus any rights or other 
assets designed to assure the servicing or timely distribution of 
proceeds to the security holders.
    (2) Collective investment fund shall mean funds held by a State 
member bank as fiduciary and, consistent with local law, invested 
collectively as follows:
    (i) In a common trust fund maintained by such bank exclusively for 
the collective investment and reinvestment of monies contributed 
thereto by the bank in its capacity as trustee, executor, 
administrator, guardian, or custodian under the Uniform Gifts to Minors 
Act; or
    (ii) In a fund consisting solely of assets of retirement, pension, 
profit sharing, stock bonus or similar trusts which are exempt from 
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
    (3) Completion of the transaction effected by or through a state 
member bank shall mean:
    (i) For purchase transactions, the time when the customer pays the 
bank any part of the purchase price (or the time when the bank makes 
the book-entry for any part of the purchase price if applicable); 
however, if the customer pays for the security prior to the time 
payment is requested or becomes due, then the transaction shall be 
completed when the bank transfers the security into the account of the 
customer; and
    (ii) For sale transactions, the time when the bank transfers the 
security out of the account of the customer or, if the security is not 
in the bank's custody, then the time when the security is delivered to 
the bank; however, if the customer delivers the security to the bank 
prior to the time delivery is requested or becomes due then the 
transaction shall be completed when the banks makes payment into the 
account of the customer.
    (4) Crossing of buy and sell orders shall mean a security 
transaction in which the same bank acts as agent for both the buyer and 
the seller.
    (5) Customer shall mean any person or account, including any 
agency, trust, estate, guardianship, or other fiduciary account, for 
which a State member bank effects or participates in effecting the 
purchase or sale of securities, but shall not include a broker, dealer, 
bank acting as a broker or dealer, municipal securities broker or 
dealer, or issuer of the securities which are the subject of the 
transactions.
    (6) Debt security as used in paragraph (c) of this section shall 
mean any security, such as a bond, debenture, note or any other similar 
instrument which evidences a liability of the issuer (including any 
security of this type that is convertible into stock or similar 
security) and fractional or participation interests in one or more of 
any of the foregoing; provided, however, that securities issued by an 
investment company registered under the Investment Company Act of 1940, 
15 U.S.C. 80a-1 et seq., shall not be included in this definition.
    (7) Government security shall mean:
    (i) A security that is a direct obligation of, or obligation 
guaranteed as to principal and interest by, the United States;
    (ii) A security that is issued or guaranteed by a corporation in 
which the United States has a direct or indirect interest and which is 
designated by the Secretary of the Treasury for exemption as necessary 
or appropriate in the public interest or for the protection of 
investors;
    (iii) A security issued or guaranteed as to principal and interest 
by any corporation whose securities are designated, by statute 
specifically naming the corporation, to constitute exempt securities 
within the meaning of the laws administered by the Securities and 
Exchange Commission; or
    (iv) Any put, call, straddle, option, or privilege on a security as 
described in paragraphs (b)(7) (i), (ii), or (iii) of this section 
other than a put, call, straddle, option, or privilege that is traded 
on one or more national securities exchanges, or for which quotations 
are disseminated though an automated quotation system operated by a 
registered securities association.
    (8) Investment discretion with respect to an account shall mean if 
the State member bank, directly or indirectly, is authorized to 
determine what securities or other property shall be purchased or sold 
by or for the account, or makes decisions as to what securities or 
other property shall be purchased or sold by or for the account even 
though some other person may have responsibility for such investment 
decisions.
    (9) Municipal security shall mean a security which is a direct 
obligation of, or obligation guaranteed as to principal or interest by, 
a State or any political subdivision thereof, or any agency or 
instrumentality of a State or any political subdivision thereof, or any 
municipal corporate instrumentality of one or more States, or any 
security which is an industrial development bond (as defined in 26 
U.S.C. 103(c)(2) the interest on which is excludable from gross income 
under 26 U.S.C. 103(a)(1), by reason of the application of paragraph 
(4) or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5) 
and (7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26 
U.S.C. 103(c) does not apply to such security.
    (10) Periodic plan shall mean:
    (i) A written authorization for a State member bank to act as agent 
to purchase or sell for a customer a specific security or securities, 
in a specific amount (calculated in security units or dollars) or to 
the extent of dividends and funds available, at specific time 
intervals, and setting forth the commission or charges to be paid by 
the customer or the manner of calculating them (including

[[Page 37649]]

dividend reinvestment plans, automatic investment plans, and employee 
stock purchase plans); or
    (ii) Any prearranged, automatic transfer or sweep of funds from a 
deposit account to purchase a security, or any prearranged, automatic 
redemption or sale of a security with the funds being transferred into 
a deposit account (including cash management sweep services).
    (11) Security shall mean:
    (i) Any note, stock, treasury stock, bond, debenture, certificate 
of interest or participation in any profit-sharing agreement or in any 
oil, gas, or other mineral royalty or lease, any collateral-trust 
certificate, preorganization certificate or subscription, transferable 
share, investment contract, voting-trust certificate, for a security, 
any put, call, straddle, option, or privilege on any security, or group 
or index of securities (including any interest therein or based on the 
value thereof), any instrument commonly known as a ``security''; or any 
certificate of interest or participation in, temporary or interim 
certificate for, receipt for, or warrant or right to subscribe to or 
purchase, any of the foregoing.
    (ii) But does not include a deposit or share account in a federally 
or state insured depository institution, a loan participation, a letter 
of credit or other form of bank indebtedness incurred in the ordinary 
course of business, currency, any note, draft, bill of exchange, or 
bankers acceptance which has a maturity at the time of issuance of not 
exceeding nine months, exclusive of days of grace, or any renewal 
thereof the maturity of which is likewise limited, units of a 
collective investment fund, interests in a variable amount (master) 
note of a borrower of prime credit, or U.S. Savings Bonds.
    (c) Recordkeeping. Except as provided in paragraph (a) of this 
section, every State member bank effecting securities transactions for 
customers, including transactions in government securities, and 
municipal securities transactions by banks not subject to registration 
as municipal securities dealers, shall maintain the following records 
with respect to such transactions for at least three years. Nothing 
contained in this section shall require a bank to maintain the records 
required by this paragraph in any given manner, provided that the 
information required to be shown is clearly and accurately reflected 
and provides an adequate basis for the audit of such information. 
Records may be maintained in hard copy, automated, or electronic form 
provided the records are easily retrievable, readily available for 
inspection, and capable of being reproduced in a hard copy. A bank may 
contract with third party service providers, including broker/dealers, 
to maintain records required under this part.
    (1) Chronological records of original entry containing an itemized 
daily record of all purchases and sales of securities. The records of 
original entry shall show the account or customer for which each such 
transaction was effected, the description of the securities, the unit 
and aggregate purchase or sale price (if any), the trade date and the 
name or other designation of the broker/dealer or other person from 
whom purchased or to whom sold;
    (2) Account records for each customer which shall reflect all 
purchases and sales of securities, all receipts and deliveries of 
securities, and all receipts and disbursements of cash with respect to 
transactions in securities for such account and all other debits and 
credits pertaining to transactions in securities;
    (3) A separate memorandum (order ticket) of each order to purchase 
or sell securities (whether executed or canceled), which shall include:
    (i) The account(s) for which the transaction was effected;
    (ii) Whether the transaction was a market order, limit order, or 
subject to special instructions;
    (iii) The time the order was received by the trader or other bank 
employee responsible for effecting the transaction;
    (iv) The time the order was placed with the broker/dealer, or if 
there was no broker/dealer, the time the order was executed or 
canceled;
    (v) The price at which the order was executed; and
    (vi) The broker/dealer utilized;
    (4) A record of all broker/dealers selected by the bank to effect 
securities transactions and the amount of commissions paid or allocated 
to each such broker during the calendar year; and
    (5) A copy of the written notification required by paragraphs (d) 
and (e) of this section.
    (d) Content and time of notification. Every State member bank 
effecting a securities transaction for a customer shall give or send to 
such customer either of the following types of notifications at or 
before completion of the transaction or; if the bank uses a broker/
dealer's confirmation, within one business day from the bank's receipt 
of the broker/dealer's confirmation:
    (1) A copy of the confirmation of a broker/dealer relating to the 
securities transaction; and if the bank is to receive remuneration from 
the customer or any other source in connection with the transaction, 
and the remuneration is not determined pursuant to a prior written 
agreement between the bank and the customer, a statement of the source 
and the amount of any remuneration to be received; or
    (2) A written notification disclosing:
    (i) The name of the bank;
    (ii) The name of the customer;
    (iii) Whether the bank is acting as agent for such customer, as 
agent for both such customer and some other person, as principal for 
its own account, or in any other capacity;
    (iv) The date of execution and a statement that the time of 
execution will be furnished within a reasonable time upon written 
request of such customer specifying the identity, price and number of 
shares or units (or principal amount in the case of debt securities) of 
such security purchased or sold by such customer;
    (v) The amount of any remuneration received or to be received, 
directly or indirectly, by any broker/dealer from such customer in 
connection with the transaction;
    (vi) The amount of any remuneration received or to be received by 
the bank from the customer and the source and amount of any other 
remuneration to be received by the bank in connection with the 
transaction, unless remuneration is determined pursuant to a written 
agreement between the bank and the customer, provided, however, in the 
case of Government securities and municipal securities, this paragraph 
(d)(2)(vi) shall apply only with respect to remuneration received by 
the bank in an agency transaction. If the bank elects not to disclose 
the source and amount of remuneration it has or will receive from a 
party other than the customer pursuant to this paragraph (d)(2)(vi), 
the written notification must disclose whether the bank has received or 
will receive remuneration from a party other than the customer, and 
that the bank will furnish within a reasonable time the source and 
amount of this remuneration upon written request of the customer. This 
election is not available, however, if, with respect to a purchase, the 
bank was participating in a distribution of that security; or with 
respect to a sale, the bank was participating in a tender offer for 
that security;
    (vii) The name of the broker/dealer utilized; or, where there is no 
broker/dealer, the name of the person from whom the security was 
purchased or to whom it was sold, or the fact that such information 
will be furnished within a reasonable time upon written request;
    (viii) In the case of a transaction in a debt security subject to 
redemption before maturity, a statement to the effect

[[Page 37650]]

that the debt security may be redeemed in whole or in part before 
maturity, that the redemption could affect the yield represented and 
that additional information is available on request;
    (ix) In the case of a transaction in a debt security effected 
exclusively on the basis of a dollar price:
    (A) The dollar price at which the transaction was effected;
    (B) The yield to maturity calculated from the dollar price; 
provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to 
a transaction in a debt security that either has a maturity date that 
may be extended by the issuer with a variable interest payable thereon, 
or is an asset-backed security that represents an interest in or is 
secured by a pool of receivables or other financial assets that are 
subject to continuous prepayment;
    (x) In the case of a transaction in a debt security effected on the 
basis of yield:
    (A) The yield at which the transaction was effected, including the 
percentage amount and its characterization (e.g., current yield, yield 
to maturity, or yield to call) and if effected at yield to call, the 
type of call, the call date, and the call price; and
    (B) The dollar price calculated from the yield at which the 
transaction was effected; and
    (C) If effected on a basis other than yield to maturity and the 
yield to maturity is lower than the represented yield, the yield to 
maturity as well as the represented yield; provided, however, that this 
paragraph (c)(2)(x)(C) shall not apply to a transaction in a debt 
security that either has a maturity date that may be extended by the 
issuer with a variable interest rate payable thereon, or is an asset-
backed security that represents an interest in or is secured by a pool 
of receivables or other financial assets that are subject to continuous 
prepayment;
    (xi) In the case of a transaction in a debt security that is an 
asset-backed security which represents an interest in or is secured by 
a pool of receivables or other financial assets that are subject 
continuously to prepayment, a statement indicating that the actual 
yield of such asset-backed security may vary according to the rate at 
which the underlying receivables or other financial assets are prepaid 
and a statement of the fact that information concerning the factors 
that affect yield (including at a minimum, the estimated yield, 
weighted average life, and the prepayment assumptions underlying yield) 
will be furnished upon written request of such customer; and
    (xii) In the case of a transaction in a debt security, other than a 
government security, that the security is unrated by a nationally 
recognized statistical rating organization, if that is the case.
    (e) Notification by agreement; alternative forms and times of 
notification. A State member bank may elect to use the following 
alternative procedures if a transaction is effected for:
    (1) Accounts (except periodic plans) where the bank does not 
exercise investment discretion and the bank and the customer agree in 
writing to a different arrangement as to the time and content of the 
notification; provided, however, that such agreement makes clear the 
customer's right to receive the written notification pursuant to 
paragraph (c) of this section at no additional cost to the customer;
    (2) Accounts (except collective investment funds) where the bank 
exercises investment discretion in other than an agency capacity, in 
which instance the bank shall, upon request of the person having the 
power to terminate the account or, if there is no such person, upon the 
request of any person holding a vested beneficial interest in such 
account, give or send to such person the written notification within a 
reasonable time. The bank may charge such person a reasonable fee for 
providing this information;
    (3) Accounts, where the bank exercises investment discretion in an 
agency capacity, in which instance:
    (i) The bank shall give or send to each customer not less 
frequently than once every three months an itemized statement which 
shall specify the funds and securities in the custody or possession of 
the bank at the end of such period and all debits, credits and 
transactions in the customer's accounts during such period; and
    (ii) If requested by the customer, the bank shall give or send to 
each customer within a reasonable time the written notification 
described in paragraph (c) of this section. The bank may charge a 
reasonable fee for providing the information described in paragraph (c) 
of this section;
    (4) A collective investment fund, in which instance the bank shall 
at least annually furnish a copy of a financial report of the fund, or 
provide notice that a copy of such report is available and will be 
furnished upon request, to each person to whom a regular periodic 
accounting would ordinarily be rendered with respect to each 
participating account. This report shall be based upon an audit made by 
independent public accountants or internal auditors responsible only to 
the board of directors of the bank;
    (5) A periodic plan, in which instance the bank:
    (i) Shall (except for a cash management sweep service) give or send 
to the customer a written statement not less than every three months if 
there are no securities transactions in the account, showing the 
customer's funds and securities in the custody or possession of the 
bank; all service charges and commissions paid by the customer in 
connection with the transaction; and all other debits and credits of 
the customer's account involved in the transaction; or
    (ii) Shall for a cash management sweep service or similar periodic 
plan as defined in Sec. 208.34(b)(10)(ii) give or send its customer a 
written statement in the same form as prescribed in paragraph (e)(3) 
above for each month in which a purchase or sale of a security takes 
place in a deposit account and not less than once every three months if 
there are no securities transactions in the account subject to any 
other applicable laws or regulations;
    (6) Upon the written request of the customer the bank shall furnish 
the information described in paragraph (d) of this section, except that 
any such information relating to remuneration paid in connection with 
the transaction need not be provided to the customer when paid by a 
source other than the customer. The bank may charge a reasonable fee 
for providing the information described in paragraph (d) of this 
section.
    (f) Settlement of securities transactions. All contracts for the 
purchase or sale of a security shall provide for completion of the 
transaction within the number of business days in the standard 
settlement cycle for the security followed by registered broker dealers 
in the United States unless otherwise agreed to by the parties at the 
time of the transaction.
    (g) Securities trading policies and procedures. Every State member 
bank effecting securities transactions for customers shall establish 
written policies and procedures providing:
    (1) Assignment of responsibility for supervision of all officers or 
employees who:
    (i) Transmit orders to or place orders with broker/dealers;
    (ii) Execute transactions in securities for customers; or
    (iii) Process orders for notification and/or settlement purposes, 
or perform other back office functions with respect to securities 
transactions effected for customers; provided that procedures 
established under this paragraph

[[Page 37651]]

(g)(1)(iii) should provide for supervision and reporting lines that are 
separate from supervision of personnel under paragraphs (g)(1)(i) and 
(g)(1)(ii) of this section;
    (2) For the fair and equitable allocation of securities and prices 
to accounts when orders for the same security are received at 
approximately the same time and are placed for execution either 
individually or in combination;
    (3) Where applicable and where permissible under local law, for the 
crossing of buy and sell orders on a fair and equitable basis to the 
parties to the transaction; and
    (4) That bank officers and employees who make investment 
recommendations or decisions for the accounts of customers, who 
participate in the determination of such recommendations or decisions, 
or who, in connection with their duties, obtain information concerning 
which securities are being purchased or sold or recommended for such 
action, must report to the bank, within ten days after the end of the 
calendar quarter, all transactions in securities made by them or on 
their behalf, either at the bank or elsewhere in which they have a 
beneficial interest. The report shall identify the securities purchased 
or sold and indicate the dates of the transactions and whether the 
transactions were purchases or sales. Excluded from this requirement 
are transactions for the benefit of the officer or employee over which 
the officer or employee has no direct or indirect influence or control, 
transactions in mutual fund shares, and all transactions involving in 
the aggregate $10,000 or less during the calendar quarter. For purposes 
of this paragraph (g)(4), the term securities does not include 
government securities.


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


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

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

[[Page 37652]]

public interest, a finding and determination to that effect shall be 
entered and notice of the finding and determination sent by registered 
or certified mail to the person.
    (7) If the Board determines not to sustain the objection, pursuant 
to paragraph (d)(6) of this section, the confidential portion shall be 
made available to the public:
    (i) 15 days after notice of the Board's determination not to 
sustain the objection has been given, as required by paragraph (d)(6) 
of this section, provided that the person filing the objection has not 
previously filed with the Board a written statement that he intends, in 
good faith, to seek judicial review of the finding and determination; 
or
    (ii) 60 days after notice of the Board's determination not to 
sustain the objection has been given as required by paragraph (d)(6) of 
this section and the person filing the objection has filed with the 
Board a written statement of intent to seek judicial review of the 
finding and determination, but has failed to file a petition for 
judicial review of the Board's determination; or
    (iii) Upon final judicial determination, if adverse to the party 
filing the objection.
    (8) If the confidential portion is made available to the public, a 
copy thereof shall be attached to each copy of the statement, report, 
or document filed with the Board.


Sec. 208.37  Government securities sales practices.

    (a) Scope. This subpart is applicable to state member banks that 
have filed notice as, or are required to file notice as, government 
securities brokers or dealers pursuant to section 15C of the Securities 
Exchange Act (15 U.S.C. 78o-5) and Department of the Treasury rules 
under section 15C (17 CFR 400.1(d) and part 401).
    (b) Definitions. For purposes of this section:
    (1) Bank that is a government securities broker or dealer means a 
state member bank that has filed notice, or is required to file notice, 
as a government securities broker or dealer pursuant to section 15C of 
the Securities Exchange Act (15 U.S.C. 78o-5) and Department of the 
Treasury rules under section 15C (17 CFR 400.1(d) and Part 401).
    (2) Customer does not include a broker or dealer or a government 
securities broker or dealer.
    (3) Government security has the same meaning as this term has in 
section 3(a)(42) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(42)).
    (4) Non-institutional customer means any customer other than:
    (i) A bank, savings association, insurance company, or registered 
investment company;
    (ii) An investment adviser registered under section 203 of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-3); or
    (iii) Any entity (whether a natural person, corporation, 
partnership, trust, or otherwise) with total assets of at least $50 
million.
    (c) Business conduct. A bank that is a government securities broker 
or dealer shall observe high standards of commercial honor and just and 
equitable principles of trade in the conduct of its business as a 
government securities broker or dealer.
    (d) Recommendations to customers. In recommending to a customer the 
purchase, sale or exchange of a government security, a bank that is a 
government securities broker or dealer shall have reasonable grounds 
for believing that the recommendation is suitable for the customer upon 
the basis of the facts, if any, disclosed by the customer as to the 
customer's other security holdings and as to the customer's financial 
situation and needs.
    (e) Customer information. Prior to the execution of a transaction 
recommended to a non-institutional customer, a bank that is a 
government securities broker or dealer shall make reasonable efforts to 
obtain information concerning:
    (1) The customer's financial status;
    (2) The customer's tax status;
    (3) The customer's investment objectives; and
    (4) Such other information used or considered to be reasonable by 
the bank in making recommendations to the customer.

Subpart D--Prompt Corrective Action


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

    (a) Authority. Subpart D of Regulation H (12 CFR part 208, Subpart 
D) is issued by the Board of Governors of the Federal Reserve System 
(Board) under section 38 (section 38) of the 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.


Sec. 208.41  Definitions for purposes of this subpart.

    For purposes of this subpart, except as modified in this section or 
unless the context otherwise requires, the terms used have the same 
meanings as set forth in section 38 and section 3 of the FDI Act.
    (a) Control--(1) Control has the same meaning assigned to it in 
section 2 of the Bank Holding Company Act (12 U.S.C. 1841), and the 
term controlled shall be construed consistently with the term control.
    (2) Exclusion for fiduciary ownership. No insured depository 
institution or company controls another insured depository institution 
or company by virtue of its ownership or control of shares in a 
fiduciary capacity. Shares shall not be deemed to have been acquired in 
a fiduciary capacity if the acquiring insured depository institution or 
company has sole discretionary

[[Page 37653]]

authority to exercise voting rights with respect to the shares.
    (3) Exclusion for debts previously contracted. No insured 
depository institution or company controls another insured depository 
institution or company by virtue of its ownership or control of shares 
acquired in securing or collecting a debt previously contracted in good 
faith, until two years after the date of acquisition. The two-year 
period may be extended at the discretion of the appropriate Federal 
banking agency for up to three one-year periods.
    (b) Controlling person means any person having control of an 
insured depository institution and any company controlled by that 
person.
    (c) Leverage ratio means the ratio of Tier 1 capital to average 
total consolidated assets, as calculated in accordance with the Board's 
Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage 
Measure (Appendix B to this part).
    (d) Management fee means any payment of money or provision of any 
other thing of value to a company or individual for the provision of 
management services or advice to the bank, or related overhead 
expenses, including payments related to supervisory, executive, 
managerial, or policy making functions, other than compensation to an 
individual in the individual's capacity as an officer or employee of 
the bank.
    (e) Risk-weighted assets means total weighted risk assets, as 
calculated in accordance with the Board's Capital Adequacy Guidelines 
for State Member Banks: Risk-Based Measure (Appendix A to this part).
    (f) Tangible equity means the amount of core capital elements in 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part), plus the amount of outstanding 
cumulative perpetual preferred stock (including related surplus), minus 
all intangible assets except mortgage servicing rights to the extent 
that the Board determines that mortgage servicing rights may be 
included in calculating the bank's Tier 1 capital.
    (g) Tier 1 capital means the amount of Tier 1 capital as defined in 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
    (h) Tier 1 risk-based capital ratio means the ratio of Tier 1 
capital to weighted risk assets, as calculated in accordance with the 
Board's Capital Adequacy Guidelines for State Member Banks: Risk-Based 
Measure (Appendix A to this part).
    (i) Total assets means quarterly average total assets as reported 
in a bank's Report of Condition and Income (Call Report), minus 
intangible assets as provided in the definition of tangible equity. At 
its discretion the Federal Reserve may calculate total assets using a 
bank's period-end assets rather than quarterly average assets.
    (j) Total risk-based capital ratio means the ratio of qualifying 
total capital to weighted risk assets, as calculated in accordance with 
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).


Sec. 208.42  Notice of capital category.

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


Sec. 208.43  Capital measures and capital category definitions.

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

[[Page 37654]]

    (5) ``Critically undercapitalized'' if the bank has a ratio of 
tangible equity to total assets that is equal to or less than 2.0 
percent.
    (c) Reclassification based on supervisory criteria other than 
capital. The Board may reclassify a well capitalized member bank as 
adequately capitalized and may require an adequately-capitalized or an 
undercapitalized member bank to comply with certain mandatory or 
discretionary supervisory actions as if the bank were in the next lower 
capital category (except that the Board may not reclassify a 
significantly undercapitalized bank as critically undercapitalized) 
(each of these actions are hereinafter referred to generally as 
``reclassifications'') in the following circumstances:
    (1) Unsafe or unsound condition. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that the 
bank is in unsafe or unsound condition; or
    (2) Unsafe or unsound practice. The Board has determined, after 
notice and opportunity for hearing pursuant to 12 CFR 263.203, that, in 
the most recent examination of the bank, the bank received and has not 
corrected, a less-than-satisfactory rating for any of the categories of 
asset quality, management, earnings, liquidity, or sensitivity to 
market risk.


Sec. 208.44  Capital restoration plans.

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

[[Page 37655]]

restoration plan that does not contain the guarantee required under 
section 38(e)(2) of the FDI Act, the bank shall, upon submission of the 
plan, be subject to the provisions of section 38 and this subpart that 
are applicable to banks that have not submitted an acceptable capital 
restoration plan.
    (3) Failure to perform guarantee. Failure by any company that 
controls a bank to perform fully its guarantee of any capital plan 
shall constitute a material failure to implement the plan for purposes 
of section 38(f) of the FDI Act. Upon such failure, the bank shall be 
subject to the provisions of section 38 and this subpart that are 
applicable to banks that have failed in a material respect to implement 
a capital restoration plan.


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

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

Subpart E--Real Estate Lending and Appraisal Standards


Sec. 208.50  Authority, purpose, and scope.

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


Sec. 208.51  Real estate lending standards.

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

Subpart F--Miscellaneous Requirements


Sec. 208.60  Authority, purpose, and scope.

    (a) Authority. Subpart F of Regulation H (12 CFR part 208, subpart 
F) is issued 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, 
1831o, 1831p-1 and 1831r-1 of the FDI 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 implement security procedures to discourage certain 
crimes, to file suspicious activity reports, and to comply with the 
Bank Secrecy Act's

[[Page 37656]]

requirements for reporting and recordkeeping of currency and foreign 
transactions. It also describes the examination schedule for certain 
small insured member banks.


Sec. 208.61  Bank security procedures.

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


Sec. 208.62  Suspicious activity reports.

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

[[Page 37657]]

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


Sec. 208.63  Procedures for monitoring Bank Secrecy Act compliance.

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


Sec. 208.64  Frequency of examination.

    (a) General. The Federal Reserve examines insured member banks 
pursuant to authority conferred by 12 U.S.C. 325 and the requirements 
of 12 U.S.C. 1820(d). The Federal Reserve is required to conduct a 
full-scope, on-site examination of every insured member bank at least 
once during each 12-month period.
    (b) 18-month rule for certain small institutions. The Federal 
Reserve may conduct a full-scope, on-site examination of an insured 
member bank at least once during each 18-month period, rather than each 
12-month period as provided in paragraph (a) of this section, if the 
following conditions are satisfied:
    (1) The bank has total assets of $250 million or less;
    (2) The bank is well capitalized as defined in subpart D of this 
part (Sec. 208.43);
    (3) At the most recent examination conducted by either the Federal 
Reserve or applicable State banking agency, the Federal Reserve found 
the bank to be well managed;
    (4) At the most recent examination conducted by either the Federal 
Reserve or applicable State banking agency, the Federal Reserve 
assigned the bank a CAMELS rating of 1 or 2;
    (5) The bank currently is not subject to a formal enforcement 
proceeding or

[[Page 37658]]

order by the FDIC, OCC, or Federal Reserve System; and
    (6) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been 
required but for this section.
    (c) Authority to conduct more frequent examinations. This section 
does not limit the authority of the Federal Reserve to examine any 
member bank as frequently as the agency deems necessary.

Subpart G--Interpretations


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

    (a) The Board of Governors has been asked to consider whether the 
appointment by a member bank of an agent to sell the bank's money 
orders, at a location other than the premises of the bank, constitutes 
the establishment of a branch office.
    (b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is 
also applicable to member banks, defines the term branch as including 
``any branch bank, branch office, branch agency, additional office, or 
any branch place of business * * * at which deposits are received, or 
checks paid, or money lent.'' The basic question is whether the sale of 
a bank's money orders by an agent amounts to the receipt of deposits at 
a branch place of business within the meaning of this statute.
    (c) Money orders are classified as deposits for certain purposes. 
However, they bear a strong resemblance to traveler's checks that are 
issued by banks and sold off premises. In both cases, the purchaser 
does not intend to establish a deposit account in the bank, although a 
liability on the bank's part is created. Even though they result in a 
deposit liability, the Board is of the opinion that the issuance of a 
bank's money orders by an authorized agent does not involve the receipt 
of deposits at a ``branch place of business'' and accordingly does not 
require the Board's permission to establish a branch.


Sec. 208.101  Obligations concerning institutional customers.

    (a) As a result of broadened authority provided by the Government 
Securities Act Amendments of 1993 (15 U.S.C. 78o-3 and 78o-5), the 
Board is adopting sales practice rules for the government securities 
market, a market with a particularly broad institutional component. 
Accordingly, the Board believes it is appropriate to provide further 
guidance to banks on their suitability obligations when making 
recommendations to institutional customers.
    (b) The Board's Suitability Rule, Sec. 208.37(d), is fundamental to 
fair dealing and is intended to promote ethical sales practices and 
high standards of professional conduct. Banks' responsibilities include 
having a reasonable basis for recommending a particular security or 
strategy, as well as having reasonable grounds for believing the 
recommendation is suitable for the customer to whom it is made. Banks 
are expected to meet the same high standards of competence, 
professionalism, and good faith regardless of the financial 
circumstances of the customer.
    (c) In recommending to a customer the purchase, sale, or exchange 
of any government security, the bank shall have reasonable grounds for 
believing that the recommendation is suitable for the customer upon the 
basis of the facts, if any, disclosed by the customer as to the 
customer's other security holdings and financial situation and needs.
    (d) The interpretation in this section concerns only the manner in 
which a bank determines that a recommendation is suitable for a 
particular institutional customer. The manner in which a bank fulfills 
this suitability obligation will vary, depending on the nature of the 
customer and the specific transaction. Accordingly, the interpretation 
in this section deals only with guidance regarding how a bank may 
fulfill customer-specific suitability obligations under 
Sec. 208.37(d).<SUP>7</SUP>
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    \7\ The interpretation in this section does not address the 
obligation related to suitability that requires that a bank have''* 
* * a `reasonable basis' to believe that the recommendation could be 
suitable for at least some customers.'' In the Matter of the 
Application of F.J. Kaufman and Company of Virginia and Frederick J. 
Kaufman, Jr., 50 SEC 164 (1989).
---------------------------------------------------------------------------

    (e) While it is difficult to define in advance the scope of a 
bank's suitability obligation with respect to a specific institutional 
customer transaction recommended by a bank, the Board has identified 
certain factors that may be relevant when considering compliance with 
Sec. 208.37(d). These factors are not intended to be requirements or 
the only factors to be considered but are offered merely as guidance in 
determining the scope of a bank's suitability obligations.
    (f) The two most important considerations in determining the scope 
of a bank's suitability obligations in making recommendations to an 
institutional customer are the customer's capability to evaluate 
investment risk independently and the extent to which the customer is 
exercising independent judgement in evaluating a bank's recommendation. 
A bank must determine, based on the information available to it, the 
customer's capability to evaluate investment risk. In some cases, the 
bank may conclude that the customer is not capable of making 
independent investment decisions in general. In other cases, the 
institutional customer may have general capability, but may not be able 
to understand a particular type of instrument or its risk. This is more 
likely to arise with relatively new types of instruments, or those with 
significantly different risk or volatility characteristics than other 
investments generally made by the institution. If a customer is either 
generally not capable of evaluating investment risk or lacks sufficient 
capability to evaluate the particular product, the scope of a bank's 
customer-specific obligations under Sec. 208.37(d) would not be 
diminished by the fact that the bank was dealing with an institutional 
customer. On the other hand, the fact that a customer initially needed 
help understanding a potential investment need not necessarily imply 
that the customer did not ultimately develop an understanding and make 
an independent investment decision.
    (g) A bank may conclude that a customer is exercising independent 
judgement if the customer's investment decision will be based on its 
own independent assessment of the opportunities and risks presented by 
a potential investment, market factors and other investment 
considerations. Where the bank has reasonable grounds for concluding 
that the institutional customer is making independent investment 
decisions and is capable of independently evaluating investment risk, 
then a bank's obligations under Sec. 208.25(d) for a particular 
customer are fulfilled.<SUP>8</SUP> Where a customer has delegated 
decision-making authority to an agent, such as an investment advisor or 
a bank trust department, the interpretation in this section shall be 
applied to the agent.
---------------------------------------------------------------------------

    \8\ See footnote 7 in paragraph (d) of this section.
---------------------------------------------------------------------------

    (h) A determination of capability to evaluate investment risk 
independently will depend on an examination of the customer's 
capability to make its own investment decisions, including the 
resources available to the customer to make informed decisions. 
Relevant considerations could include:
    (1) The use of one or more consultants, investment advisers, or 
bank trust departments;
    (2) The general level of experience of the institutional customer 
in financial markets and specific experience with the type of 
instruments under consideration;

[[Page 37659]]

    (3) The customer's ability to understand the economic features of 
the security involved;
    (4) The customer's ability to independently evaluate how market 
developments would affect the security; and
    (5) The complexity of the security or securities involved.
    (i) A determination that a customer is making independent 
investment decisions will depend on the nature of the relationship that 
exists between the bank and the customer. Relevant considerations could 
include:
    (1) Any written or oral understanding that exists between the bank 
and the customer regarding the nature of the relationship between the 
bank and the customer and the services to be rendered by the bank;
    (2) The presence or absence of a pattern of acceptance of the 
bank's recommendations;
    (3) The use by the customer of ideas, suggestions, market views and 
information obtained from other government securities brokers or 
dealers or market professionals, particularly those relating to the 
same type of securities; and
    (4) The extent to which the bank has received from the customer 
current comprehensive portfolio information in connection with 
discussing recommended transactions or has not been provided important 
information regarding its portfolio or investment objectives.
    (j) Banks are reminded that these factors are merely guidelines 
that will be utilized to determine whether a bank has fulfilled its 
suitability obligation with respect to a specific institutional 
customer transaction and that the inclusion or absence of any of these 
factors is not dispositive of the determination of suitability. Such a 
determination can only be made on a case-by-case basis taking into 
consideration all the facts and circumstances of a particular bank/
customer relationship, assessed in the context of a particular 
transaction.
    (k) For purposes of the interpretation in this section, an 
institutional customer shall be any entity other than a natural person. 
In determining the applicability of the interpretation in this section 
to an institutional customer, the Board will consider the dollar value 
of the securities that the institutional customer has in its portfolio 
and/or under management. While the interpretation in this section is 
potentially applicable to any institutional customer, the guidance 
contained in this section is more appropriately applied to an 
institutional customer with at least $10 million invested in securities 
in the aggregate in its portfolio and/or under management.

PART 250--MISCELLANEOUS INTERPRETATIONS

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

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


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

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


Secs. 250.300 through 250.302  [Removed]

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

    By order of the Board of Governors of the Federal Reserve 
System, July 6, 1998
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-18274 Filed 7-10-98; 8:45 am]
BILLING CODE 6210-01-P