`[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Proposed Rules]
[Pages 66152-66163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30969]



      
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 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / 
Proposed Rules  

[[Page 66152]]


DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 1 and 7

[Docket No. 95-34]
RIN 1557-AB37


Investment Securities

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing to clarify and update its rules that prescribe the standards 
under which national banks may purchase, sell, deal in, and underwrite 
securities. This proposal is part of the OCC's Regulation Review 
Program, a project designed to review comprehensively, modernize and 
simplify OCC regulations and reduce unnecessary regulatory burdens. The 
proposed revisions reorganize the regulation by placing related 
subjects together, clarify areas where the rules are unclear and 
confusing, and update various provisions to address market developments 
and to incorporate significant OCC interpretations, judicial decisions 
and statutory amendments.

DATES: Comments must be received by February 20, 1996.

ADDRESSES: Comments should be directed to: Communications Division, 250 
E Street, SW., Washington, DC 20219, Attention: Docket No. 95-34. 
Comments will be available for public inspection and photocopying at 
the same location. In addition, comments may be sent by facsimile 
transmission to FAX number 202/874-5274 or by electronic mail to 
[email protected]

FOR FURTHER INFORMATION CONTACT: Kay Bondehagen, Special Assistant to 
the Deputy Chief Counsel (202) 874-5200; Stuart Feldstein, Senior 
Attorney, Legislative and Regulatory Activities Division (202) 874-
5090; Lee Walzer, Senior Attorney, Securities and Corporate Practices 
Division, (202) 874-5210; Lisa Lintecum, Director, Fiduciary 
Activities, (202) 874-5419.

SUPPLEMENTARY INFORMATION:

Background

OCC Regulation Review Program

    The OCC is proposing to revise 12 CFR part 1 pursuant to its 
Regulation Review Program. Pursuant to this Program, the OCC is 
reviewing all its rules. Rules that are not necessary to protect 
against unacceptable risks, that do not support equitable access to 
banking services for all consumers or that are not needed to accomplish 
other statutory responsibilities of the OCC will be revised or 
eliminated.
    Where risks are meaningful and regulation is appropriate, rules 
will be examined to determine if they achieve their purpose at the 
least possible cost. The OCC also recognizes that one source of 
regulatory cost is the failure of regulations to provide clear guidance 
because they are difficult to follow and understand. Therefore, an 
important component of the Regulation Review Program is to revise 
regulations, where appropriate, to improve clarity and better 
communicate the standards that the rules are intended to convey.

Investment Securities Limitations

    Most of the limitations on the ability of national banks to 
purchase, sell, deal in, and underwrite securities trace to the Banking 
Act of 1933, Section 16, Public Law 73-66, 48 Stat. 184 (codified as 
amended at 12 U.S.C. 24 (Seventh) (1933)). More recently, the Secondary 
Mortgage Market Enhancement Act of 1984 (SMMEA) 1 and the Riegle 
Community Development and Regulatory Improvement Act of 1994 (RCDRI 
Act) 2 removed quantitative limits on national banks' purchases of 
certain types of mortgage- and small business-related securities, 
subject to any regulations prescribed by the OCC.

    \1\ Sec. 105(c), Pub. L. 98-440, Title I, 98 Stat. 1691 
(codified as amended at 12 U.S.C. 24 (Seventh) (1984)).
    \2\ Pub. L. 103-325, 108 Stat. 2160 (1994).
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    Although the OCC has revised part 1 a number of times since the 
early 1960s, the current version still contains many provisions dating 
from 1963. See 28 FR 9916 (1963). The OCC revised part 1 in 1971, 
adding the distinctions among ``Type I security,'' ``Type II security'' 
and ``Type III security.'' See 36 FR 6737 (1971). Guidelines were added 
to the part in 1982. See 47 FR 5701 (1982). The OCC revised part 1 
again in 1989 principally to reflect amendments to 12 U.S.C. 24 
(Seventh) by adding obligations of the African Development Bank and 
Inter-American Investment Corporation to the description of Type II 
securities. See 54 FR 1333 (1989). To reduce regulatory burden, the OCC 
also amended part 1 in 1993 to eliminate a requirement that a national 
bank maintain certain information for a specified period of time to 
demonstrate prudence in making determinations and carrying out 
securities transactions. See 58 FR 27443 (1993). The OCC tended to 
graft these changes onto the previous regulatory framework, resulting 
in a sometimes confusing combination of definitions and restrictions.
    The OCC did not amend part 1 to reflect the statutory change 
resulting from the enactment of SMMEA in 1984. Nor have changes been 
made to the rule to reflect significant judicial decisions and 
interpretations of the OCC.

Proposal

    This proposal modernizes the rules in part 1 and furthers the goals 
of the OCC's Regulation Review Program. In order to make part 1 more 
accessible and comprehensive, the proposal restructures many sections 
of the rule. The proposal also updates the rule to incorporate 
statutory changes to 12 U.S.C. 24 (Seventh), judicial decisions and 
long-standing OCC interpretations. The following discussion identifies 
and explains the significant proposed changes. The OCC requests 
comments on all aspects of this proposal, and, in addition, requests 
specific comments on certain changes that are highlighted. The OCC also 
welcomes any additional comments relevant to this proposal. A table 
summarizing the areas where changes are proposed is set forth at the 
end of this preamble.

Authority, purpose, and scope (section 1.1)

    The proposal consolidates the current ``Scope and application'' 
section (Sec. 1.2) with the ``Authority'' section (Sec. 1.1). The 
sections are substantially condensed to eliminate redundant and 
unnecessary language.
    The limitations set forth in part 1 apply to national banks, 
Federal branches of foreign banks, District of 

[[Page 66153]]
Columbia banks and state banks that are members of the Federal Reserve 
System.3 This section further clarifies that foreign branches of 
national banks may be authorized to conduct additional international 
activities pursuant to 12 CFR part 211.

    \3\ State banks that are members of the Federal Reserve System 
are subject to the same limitations and conditions with respect to 
the purchasing, selling, underwriting and holding of investment 
securities and stock applicable to national banks under 12 U.S.C. 24 
(Seventh). 12 U.S.C. 335.
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Definitions (section 1.2)

    The proposal substantially revises the definitions section to add 
several definitions, updates others, and brings the definitions that 
currently appear in various places in the regulation into a single 
section. The following definitions have been added: ``investment 
company,'' ``Type IV security,'' and ``Type V security.'' The 
definitions of Type I, II, and III securities also have been 
substantially revised so that these types of securities are defined by 
their characteristics, not by the statutory limitations on the extent 
to which national banks may deal in, underwrite, purchase, or sell 
them. No substantive change in the authority of a national bank results 
from these revisions. In addition, as indicated with various individual 
definitions below, many definitions are revised to clarify their 
meaning and to incorporate the results of statutory changes, judicial 
decisions, and established OCC interpretations. Of particular note are 
the following proposed revisions:

Capital and surplus (section 1.2(a))

    The proposal defines ``capital and surplus'' as Tier 1 and Tier 2 
capital includable in risk-based capital under the Minimum Capital 
Ratios in 12 CFR part 3, plus the balance of a bank's allowance for 
loan and lease losses that is not included in Tier 2 capital. This is 
the same standard used in the OCC's recent revisions to its lending 
limit regulation. See 60 FR 8526 (February 15, 1995). As stated in the 
Preamble to the new lending limit rule, 60 FR 8528, the OCC's reasons 
for revising the definition of ``capital and surplus'' are to reduce 
the different definitions of capital currently used for various 
regulatory purposes and to use a well-recognized standard that banks 
are already required to calculate.

Investment grade (section 1.2(d))

    ``Investment grade'' means that a security is rated in one of the 
top four rating categories by each nationally recognized statistical 
rating organization that has rated the security. For example, if two 
nationally recognized statistical rating organizations rate the 
security in one of their top four categories, the security would 
qualify as ``investment grade'' even if other nationally recognized 
statistical rating organizations had not rated the security. However, 
if one of the two organizations rating the security did not rate the 
security in one of the top four categories, the security would not 
qualify as ``investment grade.'' Thus, when a security is given 
different ratings by different nationally recognized rating 
organizations, the lowest rating governs for purposes of this 
definition.

Investment security (section 1.2(e))

    To be an ``investment security'' under the proposed definition, a 
security must be an investment grade marketable debt obligation or, if 
the security is not rated, it must be the credit equivalent of an 
investment grade marketable debt obligation. These standards reflect 
current OCC guidance and practice.
    The OCC requests comments on whether the regulation should describe 
more specifically the characteristics of securities that are the 
``credit equivalent of investment grade'' securities, and, if so, what 
description would be appropriate.
    Commenters also are requested to address whether other securities 
with characteristics functionally equivalent to a debt obligation might 
be classified as an ``investment security.''

Marketable (section 1.2(f))

    This proposed definition attempts to rely on more objective 
standards than the current definition of ``marketable.'' Currently, a 
marketable security is defined in Sec. 1.5(a) as one that ``may be sold 
with reasonable promptness at a price which corresponds reasonably to 
its fair value.'' The proposed definition places more emphasis on 
indicators of a ready market for a security rather than a prediction of 
whether the security can be sold quickly at a particular price. As 
proposed, marketable securities include: (1) Securities registered 
under the Securities Act of 1933 (the Securities Act), 15 U.S.C. 77a et 
seq.; (2) certain government securities and municipal revenue bonds not 
required to be registered under the Securities Act; and (3) investment 
grade securities sold pursuant to SEC Rule 144A, 17 CFR 230.144A.
    SEC Rule 144A provides a ``safe harbor'' exemption from the 
registration requirements of the Securities Act for resales of 
privately offered or ``restricted'' securities to qualified 
institutional buyers. The rationale for treating securities that 
qualify under SEC Rule 144A as readily marketable is that they may be 
sold without the need to prepare and receive SEC clearance of a 
registration statement used in connection with the sale. There may be a 
situation, however, based upon the particular security, when the 
security is not necessarily immediately sellable.
    The OCC requests comments regarding whether this definition of 
``marketable'' is sufficiently inclusive, particularly regarding other 
exemptions under the Securities Act, such as the statutory nonpublic 
offering exemption, that enable a seller to sell a security promptly at 
market or fair value, and whether the definition is appropriately 
inclusive of foreign sovereign debt.
    The OCC also welcomes comments regarding alternative definitions of 
``marketable'' that would address the OCC's concerns about liquidity. 
Commenters may suggest adopting a more general standard, or retaining 
the current standard whereby a security sold with reasonable promptness 
for a price that reasonably corresponds to its fair value is 
marketable. Commenters are asked to address how the OCC might 
objectively measure such a standard.

Type I security (section 1.2(h))

    As in the current rule, the proposal defines a ``Type I'' security 
to mean specified government securities. The proposal also incorporates 
into the definition the key elements of the interpretation now found in 
Sec. 1.110 regarding securities backed by the full faith and credit of 
the U.S. Government. The proposed definition is consistent with 12 
U.S.C. 24 (Seventh), which does not require that government securities 
be ``marketable'' or otherwise qualify as ``investment securities.''

Type II security (section 1.2(i))

    The proposal redefines a ``Type II'' security to mean an investment 
security that is issued by certain state, international or multilateral 
organizations, or that is otherwise listed or described in the statute. 
The definition differs from the current rule, which describes a Type II 
security both by the investment limits that apply to it, and by 
examples of qualifying types of issuers. The proposed definition also 
includes the statutory requirement that this type of security must 
qualify as an ``investment security,'' in addition to being issued by a 
qualifying type of issuer.

Type III security (section 1.2(j))

    Part 1 currently defines a ``Type III'' security to mean a security 
that ``a bank may purchase and sell for its own 

[[Page 66154]]
account, subject to a 10 percent limitation, but may neither deal in 
nor underwrite.'' Sec. 1.3(e). Instead of defining a Type III security 
in this manner, the proposal redefines a Type III security as an 
investment security that does not qualify as a Type I, II, IV, or V 
security. Examples of Type III securities include corporate bonds and 
municipal revenue bonds.
    Commenters are asked to address whether other examples of Type III 
securities also should be specifically referenced in the regulation. In 
particular, commenters are asked to address whether foreign securities 
that are currently eligible for investment by foreign branches of U.S. 
banks should be included as Type III securities.

Type IV security (section 1.2(k))

    The substance of a ``Type IV'' security was established, although 
not named ``Type IV,'' by amendments made to 12 U.S.C. 24 (Seventh) in 
1984 by SMMEA and in 1994 by the RCDRI Act. The proposed definition 
tracks the statutory changes. SMMEA amended 12 U.S.C. 24 (Seventh) to 
permit national banks to purchase without limitation certain 
residential and commercial mortgage-related securities offered and sold 
pursuant to section 4(5) of the Securities Act, 15 U.S.C. 77d(5), or 
residential mortgage-related securities as defined in section 3(a)(41) 
of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. 
78c(a)(41). As previously noted, part 1 was never amended to 
incorporate this 1984 statutory revision. The RCDRI Act defined a new 
type of small business-related security in section 3(a)(53)(A) of the 
Exchange Act, 15 U.S.C. 78c(a)(53)(A), and added a class of commercial 
mortgage-related securities to section 3(a)(41) of the Exchange Act, 15 
U.S.C. 78c(a)(41).
    The amendments to 12 U.S.C. 24 (Seventh) made by the RCDRI Act 
removed limitations on purchases by national banks of certain small 
business-related and commercial mortgage-related securities. The 
amendments provide the OCC authority to prescribe regulations to ensure 
that acquisitions of such securities are conducted in a manner 
consistent with safe and sound banking practices. The OCC has concerns 
that undue concentration of risk could arise if a bank invested in a 
security backed by a small number of loans or where one or a small 
number of loans represented a large percentage of the assets in the 
pool. This type of concentration of risk is more likely to arise with 
respect to commercial mortgage- and small business-related securities 
than with respect to residential mortgage-related securities. For this 
reason, the proposal requires a Type IV security that is small 
business- or commercial mortgage-related be fully secured by interests 
in a pool of homogeneous loans of numerous obligors. The definitions of 
a Type IV small business-related security and a commercial mortgage-
related security also require that the aggregate amount of collateral 
from loans of any one obligor not exceed 5 percent of the total amount 
of collateral for the security when the security is issued, in order to 
assure diversification.
    In some instances, such as the prepayment of underlying loans, an 
issuer or trustee may have the legal right to substitute collateral. If 
the issuer or trustee has the legal right to substitute collateral, the 
diversification requirement applies whenever the issuer or trustee 
substitutes collateral throughout the term of an issue, rather than 
merely at issuance.
    Where the issuer or trustee does not have the legal right to 
substitute collateral or elects not to exercise the right, the 
diversification requirement applies only at issuance. If the 
diversification requirement applied throughout the term of an issue 
without ongoing substitution of collateral, prepayment of loans in the 
pool would reduce the number of loans that serve as collateral for the 
security and, at some point, the aggregate amount of collateral from 
loans of one obligor could exceed the proposed 5 percent limit and 
result in a violation of the regulation. Such a result would have the 
unintended consequence of deterring potential issuers from securitizing 
existing collateral.
    The OCC requests comments on whether the term ``homogeneous loans'' 
should be specifically defined. The OCC also welcomes comments on 
whether the proposed requirement for certain Type IV and all Type V 
securities, that the aggregate amount of collateral from loans of any 
one obligor may not exceed 5 percent of the total amount of collateral 
for that security, or some other standard, would be appropriate to 
assure adequate diversification of the collateral.

Type V security (Section 1.2(l))

    The proposal adds a definition of ``Type V security'' in order to 
address separately investment grade securities that represent interests 
in assets a national bank may invest in directly. The definition 
reflects the OCC's long-standing interpretations that in addition to 
the investments specifically described in 12 U.S.C. 24 (Seventh), 
national banks may hold securitized forms of assets in which they may 
invest directly.4 In order to assure the high quality of this type 
of asset-backed security, however, the definition requires that Type V 
securities be rated investment grade. The practical effect of the 
definition is that Type V securities are recognized as high quality 
indirect interests in assets in which a national bank could invest 
directly.

    \4\ Interpretive Letter No. 362 (May 22, 1986), reprinted in 
[1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,532 
(bonds collateralized by mortgages); Interpretive Letter No. 388 
(June 16, 1987), reprinted in [1988-1989 Transfer Binder] Fed. 
Banking L. Rep. (CCH) para. 85,612 (mortgage-backed pass-through 
certificates); Interpretive Letter No. 416 (February 16, 1988), 
reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) 
para. 85,640 (securitized automobile loans); Investment Securities 
Letter No. 29 (August 3, 1988), reprinted in [1988-1989 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para. 85,899 (investment limits 
for asset-backed securities consisting of GMAC receivables); 
Interpretive Letter No. 514 (May 5, 1990), reprinted in [1990-1991 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218 
(securitized mortgages); Interpretive Letter No. 540 (December 12, 
1990), reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep. 
(CCH) para. 83,252 (securitized credit card receivables); Security 
Pacific v. Clarke, 885 F.2d 1034 (2d Cir. 1989), cert. denied, 493 
U.S. 1070 (1990) (national bank authority to securitize assets).
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    A Type V security also must be fully secured by interests in a pool 
of homogeneous loans to numerous obligors. The definition requires a 
pool of loans homogeneous as to type of loan, term of loan, or other 
distinguishing characteristics, in order to facilitate performance 
projections based on the common features of loans in the pool. As an 
added safeguard to assure diversification of the collateral supporting 
the security, the definition requires that the aggregate amount of 
collateral from loans of any one obligor not exceed 5 percent of the 
total amount of collateral for the security. Like the similar 
requirement for Type IV securities, this diversification requirement 
applies throughout the term of the issue only if the issuer exercises a 
legal right to substitute collateral.
    Commenters are invited to address whether these standards, which 
also apply to certain Type IV securities, are appropriate.

Limitations on dealing in, underwriting, and purchasing and selling 
securities (Section 1.3)

    The proposal consolidates into one section the provisions regarding 
limitations on dealing in, underwriting, purchasing, and selling 
different types of securities. Proposed Sec. 1.3 incorporates portions 
of current Secs. 1.4, ``Type I securities; standards for authorized 
transactions;'' 1.5(b), ``Judgment based predominantly upon 

[[Page 66155]]
reliable estimates;'' 1.6, ``Type II securities; authority to deal in 
and underwrite;'' and 1.7, ``Types II and III securities; limitations 
on holdings.'' Current Sec. 1.7(c), ``Limitations prescribed in 
eligibility rulings,'' has been removed as unnecessary. Current 
references to ``prudent banking judgment'' have been changed to ``safe 
and sound banking practices.'' The latter change is consistent with the 
OCC's implementation of this requirement and is not intended to change 
the applicable standard. Most of the limitations on Type I, II, III, 
and IV securities reflected in this section are derived from 12 U.S.C. 
24 (Seventh).
    In the proposal, the limitations with respect to Types II, III, and 
V securities are expressed in terms of ``the aggregate par value of the 
obligations of any one obligor,'' which is essentially the current 
approach. The OCC requests comments on whether this is an appropriate 
measure and, if not, whether alternative measures would be preferable.

Type II and III securities; other investment securities limitations 
(Section 1.3(d))

    As in current Sec. 1.7, the proposal provides that a national bank 
may not hold Type II and III securities of any one obligor that have a 
combined aggregate par value exceeding 10 percent of the bank's capital 
and surplus. However, aggregation is not required with respect to 
industrial development bonds. Instead, the 10 percent limitation 
applies separately to each security issue of a single obligor when the 
proceeds of that issuance are to be used to acquire and lease real 
estate and related facilities to economically and legally separate 
industrial tenants, and the issuance is payable solely from and secured 
by a first lien on the revenues to be derived from rentals paid by the 
lessee under net noncancellable leases. This provision incorporates the 
substance of the interpretation that currently appears at 12 CFR 
7.7570. The OCC proposes to remove Sec. 7.7570 in conjunction with this 
change.

Type IV securities (Section 1.3.(e))

    The new section describing eligible Type IV securities confirms the 
authority granted to national banks by SMMEA and the RCDRI Act to 
purchase and sell certain mortgage- and small business-related 
securities. The section also reflects OCC interpretations concerning 
the authority of a national bank to deal in obligations that are fully 
secured by Type I securities, in which national banks may deal.5 
These interpretations reflect the OCC's consistent approach of looking 
to the substance of an instrument, and not just its form, to determine 
the activities a bank may conduct in connection with the instrument. In 
the case of Type IV securities that are fully secured by Type I 
securities, the ultimate source of repayment is Type I securities. The 
proposal does not limit the categories of Type IV securities in which 
banks may deal, provided that the securities are collateralized by Type 
I securities. Thus, a bank's authority to deal in the securities under 
this part would be determined with reference to the standards that 
apply to Type I securities. (The ability of a bank to securitize and 
sell its loans, including loans that qualify as collateral for Type IV 
securities, is addressed in Sec. 1.3(g).)

    \5\ See Interpretive Letter No. 514 (May 5, 1990), reprinted in 
[1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218; 
Interpretive Letter No. 362 (May 22, 1986), reprinted in [1985-1987 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,532.
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Type V securities (Section 1.3(f))

    The proposal establishes a quantitative concentration limitation of 
15 percent of a bank's capital and surplus for purchases and sales of 
Type V securities of any one obligor (or certain related obligors), 
rather than the 10 percent limit that the OCC currently applies to 
asset-backed securities that qualify as Type III securities. The OCC 
believes this approach is appropriate because: (1) The 15 percent 
standard is the same level used for the basic lending limit threshold; 
(2) the qualitative standards for a Type V security have been 
tightened, so that Type V securities are a high quality type of asset-
backed security; and (3) under certain circumstances set forth in 
Sec. 1.4(c), holdings of Type V securities of different issuers will be 
aggregated for purposes of calculating compliance with the 15 percent 
limitation. Therefore, the OCC believes an investment limitation of 15 
percent of a bank's capital and surplus should not present undue 
investment or concentration risk.
    The OCC solicits comments on whether a higher investment 
limitation, such as 25 percent of a bank's capital and surplus, would 
be sufficient to prevent excessive concentration.

Asset securitization (Section 1.3(g))

    This new section reflects the OCC's established position that 
national banks may securitize and sell their loan assets. The ability 
of banks to sell conventional bank assets through the issuance and sale 
of certificates evidencing interests in pools of the assets provides 
flexibility that can enhance banks' safety and soundness.6 Asset 
securitization provides an important source of liquidity by allowing 
banks to convert relatively illiquid assets into instruments with 
maturities and other features that investors are readily willing to 
purchase. Another important benefit is the increased credit available, 
due to the fact that a bank may make more loans with a given level of 
capital (when the assets are removed from the bank's balance sheet) and 
may diversify its lending into new markets without incurring undue 
risk. Also, a bank is less dependent on deposits to fund its loans, 
improving bank profitability, with positive implications for reducing 
bank failure rates and minimizing draws on the deposit insurance funds. 
The treatment described in the proposal reflects the OCC's long-
standing treatment of national banks' asset sales activities as 
affirmed by case law.7

     6  See, e.g., Remarks by Alan Greenspan, Chairman, Board of 
Governors of the Federal Reserve System before the American Bankers 
Association (October 8, 1994). See also Statement by Donald G. 
Coonley, Chief National Bank Examiner, OCC, Asset Securitization and 
Secondary Markets: Hearings Before the Subcomm. on Policy, Research, 
and Insurance of the Comm. on Banking, Finance and Urban Affairs, 
102d Cong., 1st Sess. 2-4 (1991), reprinted in OCC Quarterly Journal 
(December 1991); and Joint Statement by Richard Spillenkothen, 
Director, Division of Banking Supervision and Regulation, Board of 
Governors of the Federal Reserve System, and Donald H. Wilson, 
Financial Markets Officer, Federal Reserve Bank of Chicago, 
Secondary Market for Commercial Real Estate Loans: Hearings Before 
the Subcomm. on Policy, Research, and Insurance of the Comm. on 
Banking, Finance and Urban Affairs, 102d Cong., 2d Sess. 16-19 
(1992), reprinted in 78 Fed. Res. Bull. 492 (1992).
     7  See, e.g., Interpretive Letter No. 585 (June 8, 1992), 
reprinted in [1992-1993 Transfer Binder] Fed. Banking L. Rep. (CCH) 
para. 83,406 (securitized motor vehicle retail installment sales 
contracts purchased from automobile dealers); Interpretive Letter 
No. 540 (December 12, 1990), reprinted in [1990-1991 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para. 83,252 (securitized credit 
card receivables originated by bank or purchased from others); 
Interpretive Letter No. 514 (May 5, 1990), reprinted in [1990-1991 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218 
(securitized mortgages); Interpretive Letter No. 416 (February 16, 
1988), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. 
(CCH) para. 85,640 (securitized automobile loans); Interpretive 
Letter No. 388 (June 16, 1987), reprinted in [1988-1989 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para. 85,612 (sale of mortgage-
backed pass-through certificates); No Objection Letter No. 87-9 
(December 16, 1987), reprinted in [1988-1989 Transfer Binder] Fed. 
Banking L. Rep. (CCH) para. 84,038(securitization of commercial 
loans originated by the bank); Interpretive Letter No. 362 (May 22, 
1986), reprinted in [1985-1987 Transfer Binder] Fed. Banking L. Rep. 
(CCH) para. 85,532 (sales of bonds collateralized by mortgages). 
Regarding sales of participations in pools of loans, see Letter from 
Billy C. Wood, Deputy Comptroller, Multinational Banking (May 29, 
1981), reprinted in [1981-82 Transfer Binder] Fed. Banking L. Rep. 
(CCH) para. 85,275; Letter from Paul M. Homan, Senior Deputy 
Comptroller for Bank Supervision (February 1, 1980), reprinted in 
[1981-82 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,213; 
Letter from John M. Miller, Deputy Chief Counsel (July 31, 1979), 
reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep. (CCH) 
para. 85,182; Letter from Paul M. Homan, Senior Deputy Comptroller 
for Bank Supervision (April 20, 1979), reprinted in [1978-79 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,167; Letter 
from H. Joe Selby, Deputy Comptroller for Operations (October 17, 
1978), reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep. 
(CCH) para. 85,144; Letter from John G. Heimann, Comptroller of the 
Currency (May 18, 1978), reprinted in [1978-79 Transfer Binder] Fed. 
Banking L. Rep. (CCH) para. 85,116; Letter from Charles B. Hall, 
Deputy Comptroller for Banking Operations (February 14, 1978), 
reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep. (CCH) 
para. 85,100; Letter from Robert Bloom, Acting Comptroller of the 
Currency (March 30, 1977), reprinted in [1973-78 Transfer Binder] 
Fed. Banking L. Rep. (CCH) para. 97,093. Regarding national bank 
authority to securitize assets, see Security Pacific v. Clarke, 885 
F.2d 1034 (2d Cir. 1989), cert. denied, 493 U.S. 1070 (1990). 

[[Page 66156]]

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Investment company shares (Section 1.3(h))

    The proposal permits a national bank to purchase and sell for its 
own account shares of a registered investment company, subject to two 
requirements: First, the investment company's portfolio must be 
comprised entirely of assets in which the bank could invest directly. 
Second, the amount of the bank's investment in shares of any one 
investment company is subject to the most stringent investment 
limitations applicable to the underlying securities and loans that 
comprise that investment company's portfolio. This provision 
incorporates OCC interpretations concerning the authority of a national 
bank to hold instruments representing indirect interests in assets that 
the bank could invest in directly. See Banking Circular 220 (November 
21, 1986); An Examiner's Guide to Investment Products and Practices at 
23 (December 1992).8

     8  The Federal Reserve Board has adopted a similar 
interpretation relating to state member banks' investments in mutual 
funds that invest only in eligible securities. See 12 CFR 208.124.
---------------------------------------------------------------------------

    The OCC seeks comments on whether the definition of ``investment 
company'' should be revised to include limited partnerships with 
fewer than 100 investors, i.e., a partnership that would not qualify 
as an investment company within the meaning of section 3(c)(1) of 
the Investment Company Act of 1940, 15 U.S.C. 80a-3(c)(1), provided 
that the partnerships' portfolios consist solely of Type I 
securities that the bank may purchase and sell for its own account.

Securities held based on estimates of obligor's performance (Section 
1.3(i))

    Notwithstanding the general definition of an investment security 
(Sec. 1.2(e)), the proposal retains the flexibility contained in the 
current rule, for a bank to treat certain debt securities as investment 
securities when the bank concludes, on the basis of estimates that the 
bank reasonably believes are reliable, that the obligor will be able to 
meet its obligations under that security. The bank may not hold 
securities classified as investment securities solely in reliance on 
projections of an obligor's future performance that in the aggregate 
exceed 5 percent of the bank's capital and surplus. The bank must also 
believe that the security may be sold with reasonable promptness at a 
price which corresponds reasonably to its fair value. This approach is 
modeled upon the OCC's current rule, which allows banks an additional 
degree of flexibility to determine the quality of debt obligations, for 
a limited portion of the bank's investment portfolio. The OCC notes 
that securities representing interests in loans made for community 
development purposes are one type of security that could, depending 
upon their characteristics, be eligible for investment by national 
banks under this standard.
    The OCC requests comments as to whether it should provide further 
clarification of the standards applicable to securities held based on 
estimates of obligor's performance and, if so, in what respects 
clarification is needed.

Calculation of limits (Section1.4)

    Proposed Sec. 1.4 is new. Paragraphs (a) and (b), relating to the 
calculation date and authority to require more frequent calculations, 
are modeled on provisions contained in the OCC's new lending limit 
regulation. As explained in connection with the lending limit rule, the 
provision reduces regulatory burden by allowing banks to rely on 
information they already collect for their Call Reports to calculate 
compliance with their lending limits. The same reasoning applies to 
calculating limits of banks' securities holdings, and the proposal 
achieves a consistent approach in those two areas.

Calculation of Type III and Type V securities holdings (Section 1.4(c))

    This proposed paragraph is a new approach to investment securities 
limitations designed to address situations where a bank's investments 
in securities of different issuers present similar sources of risk, 
and, therefore, warrant aggregation. In calculating the amount of its 
investment in Type III or Type V securities, the proposal requires a 
bank to combine obligations of issuers that are related directly or 
indirectly through common control and securities that are credit-
enhanced by the same entity. These aggregation rules, which result in a 
bank being treated as if it has a greater investment in the securities 
of one obligor than would otherwise be the case, apply separately to 
Type III and Type V securities held by a bank. Current OCC policies 
already apply comparable standards for aggregation of Type III 
securities. As applied to Type V securities, the aggregation rules 
provide important safeguards in connection with the 15 percent limit 
provided for investments in Type V securities. Thus, banks are given 
more investment flexibility with Type V securities, but the increased 
investment authority is subject to explicit safeguards to address risk 
concentrations.
    Comment is invited regarding other bases upon which a bank should 
combine its holdings when calculating its investment in Type III or 
Type V securities of any one obligor. Specifically, the OCC seeks 
comments as to whether a bank should combine obligations that are 
predominately collateralized by loans made by the same originator or by 
originators that are related directly or indirectly through common 
control. In addition, commenters are asked to address whether and under 
what circumstances an issuer or affiliate of the issuer would provide a 
guarantee or other form of credit enhancement for Type V securities 
that could be a source of credit exposure of the investing bank to the 
issuer or its affiliate. Comment is also invited on whether the 15 
percent investment limitation or a lower limitation is appropriate 
under these circumstances.
    The OCC is not at this time proposing to apply an aggregate limit 
to a bank's combined holdings of Type III and Type V securities, but 
requests commenters to address whether some form of an aggregate 
limitation should apply to a bank's exposure to a single obligor, 
regardless of the type of the obligation. For example, under the 
proposal, a bank could invest in Type V securities of any one obligor 
in an amount not exceeding 15 percent of the bank's capital and 
surplus, and Type III securities of the same obligor in an amount not 
exceeding 10 percent of the bank's capital and surplus. In addition, 
under the lending limit rules, the bank could also make loans to the 
same obligor in an amount up to 15 percent--or 25 percent depending 
upon the collateral--of the bank's capital and surplus. Of course, the 
OCC retains the ability to take action in connection with 
concentrations inconsistent with safe and sound banking practices. 

[[Page 66157]]


Calculation of investment company holdings (section 1.4(d))

    In calculating the amount of its investment in investment company 
shares under this proposal, a bank must use reasonable efforts to 
calculate and combine its pro rata share of a particular security in 
the portfolios of each investment company with the bank's direct 
holdings of securities of that issuer.

Safe and sound banking practices; credit information required (Section 
1.5)

    The requirement of ``prudent banking judgment'' in current Sec. 1.8 
is moved to Sec. 1.5 and changed to require banks to adhere to ``safe 
and sound banking practices,'' in addition to any specific requirements 
of part 1. The OCC will continue its supervision of national bank 
investment securities activities, including those activities covered by 
the changes to part 1, to ensure that these investments are effected in 
a safe and sound manner. In recognition of the different types of risks 
that may affect the quality of a security, the proposal reflects the 
OCC position that safe and sound banking practices entail appropriate 
consideration of the market, interest rate, liquidity, legal, and 
operations and systems risks, as well as credit risk, posed by certain 
types of securities investments.9 These standards are made clearly 
applicable to all types of permissible securities activities and 
holdings described in Sec. 1.3. This change also makes the language of 
part 1 consistent with the authority of a federal banking agency to 
institute a cease-and-desist proceeding against an insured depository 
institution that has engaged or is about to engage in an ``unsafe and 
unsound practice.'' 12 U.S.C. 1818(b). The ``unsafe and unsound 
practice'' standard is well recognized by the courts. See, e.g., 
Northwest National Bank, Fayetteville, Arkansas v. U.S. Department of 
the Treasury, Office of the Comptroller of the Currency, 917 F.2d 1111 
(8th Cir. 1990); Gulf Federal Savings and Loan v. Federal Home Loan 
Bank Board, 651 F.2d 259 (5th Cir.. 1981), cert. denied, 458 U.S. 1121 
(1982); Groos National Bank v. Comptroller of the Currency, 573 F.2d 
889 (5th Cir. 1978). The proposed section also gives banks additional 
flexibility in maintenance of records for examination purposes.

     9  See OCC Banking Circular 277, reprinted in 5 Fed. 
Banking L. Rep. (CCH) para. 58,717 (October 27, 1993).
---------------------------------------------------------------------------

Convertible securities (section 1.6)

    Proposed Sec. 1.6 revises current Sec. 1.9 to clarify the 
restrictions on investment in certain convertible securities and how 
banks must account for securities that are convertible into stock or 
have stock purchase warrants attached.

Securities held in satisfaction of debts previously contracted; holding 
period; disposal; accounting treatment; non-speculative purpose 
(section 1.7)

    Proposed Sec. 1.7 contains new information in paragraphs (b) 
``holding period,'' (c) ``accounting treatment,'' and (d) ``non-
speculative purpose,'' which embody standards consistent with OCC's 
Other Real Estate Owned regulation, see 58 FR 46529 (September 2, 
1993), and the OCC's related interpretation, see Interpretive Letter 
No. 604 (October 8, 1992). A national bank holding securities in 
satisfaction of debts previously contracted may do so for a period of 
five years from the date that ownership of the securities was 
originally transferred to the bank, plus an additional five years, if 
permitted by the OCC.

Nonconforming investments (section 1.8)

    This new section clarifies that a bank does not violate an 
applicable investment limitation when an investment in securities that 
was legal when made becomes nonconforming as a result of any of certain 
enumerated events, provided the bank exercises reasonable efforts to 
bring the investment into conformity with applicable limitations. The 
events included in the regulation are: A decline in the bank's capital; 
a merger of obligors, issuers, or credit-enhancers; issuers becoming 
related directly or indirectly related through common control; 
deterioration in the quality of a security so that the security is no 
longer an investment security; the substitution of collateral by an 
issuer or trustee that causes a Type IV or Type V security no longer to 
conform to the diversification requirements of Secs. 1.2(k)(1) and (2) 
and 1.2(l); a change in the investment securities limitations rules; or 
other events identified by the OCC. This approach to nonconforming 
holdings is based upon the approach contained in the OCC's new lending 
limit regulation.
    Commenters are specifically asked to address whether: (1) The 
phrase ``reasonable efforts'' needs additional clarification, and if 
so, how it might be defined or should be documented for the purposes of 
this section; (2) the OCC should require a bank to make ``reasonable 
efforts'' to bring into conformity an investment where the quality of a 
security deteriorates so that the security is no longer an investment 
security; and (3) any other events should be added to the list of 
circumstances that may cause an investment in securities to become 
nonconforming.

Amortization of premiums (current section 1.10)

    Current Sec. 1.10 is removed. The OCC believes the section is no 
longer necessary because generally accepted accounting principles 
(GAAP) appropriately govern the treatment of premiums. GAAP requires 
that a bank defer recognition of a premium paid for an investment 
security and amortize the premium over the period to maturity of the 
security. In contrast, current Sec. 1.10 permits a bank to charge off 
the entire premium at the time of purchase or to amortize the premium 
in any manner the bank considers appropriate as long as the premium is 
extinguished entirely at or before the maturity of the security.

Interpretations

Indirect general obligations (section 1.100)

    Proposed Sec. 1.100 is derived from current Sec. 1.120, but 
clarifies and shortens the text. Current paragraphs (f) ``Tax 
anticipation notes,'' and (g) ``Bond anticipation notes'' of Sec. 1.120 
are removed as unnecessary.

Eligibility of securities for purchase, dealing in, and underwriting by 
national banks; general guidelines (current section 1.100)

    The proposal removes current Sec. 1.100, which contains 
introductory and explanatory comments that the OCC believes are 
unnecessary in light of other proposed changes to part 1.

Taxing powers of a State or a political subdivision (section 1.110)

    Section 1.110 is a shortened version of current Sec. 1.130, with 
portions removed that are no longer necessary. New text is added to 
provide standards for determining when obligations that are expressly 
or implicitly dependent upon voter or legislative authorization of 
appropriations are considered supported by the full faith and credit of 
a State or political subdivision.

Prerefunded or escrowed bonds and obligations secured by Type I 
securities (section 1.120)

    Proposed Sec. 1.120 is derived from current Sec. 1.120(e).

Type II securities; guidelines for obligations issued for university 
and housing purposes (section 1.130)

    Proposed Sec. 1.130 is a streamlined version of current Sec. 1.140, 
and also clarifies the types of issuers whose 

[[Page 66158]]
obligations qualify as Type II securities. Current Sec. 1.140(c)(1) and 
portions of (c)(2) have been removed. See Proposed Sec. 1.130(c).
    The OCC welcomes comments on any aspect of the proposed regulation, 
particularly, those issues specifically noted in this preamble.

                            Derivation Table                            
  [Only Substantive Modifications, Additions and Changes are Indicated] 
------------------------------------------------------------------------
     Revised provision        Original provision          Comments      
------------------------------------------------------------------------
Sec.  1.1.................  Secs.  1.1, 1.2......  Modified.            
Sec.  1.2(a)..............    ...................  Added.               
Sec.  1.2(b)..............  Sec.  1.3(g).........  Modified.            
Sec.  1.2(c)..............    ...................  Added.               
Sec.  1.2(d)..............    ...................  Added.               
Sec.  1.2(e)..............  Sec.  1.3(b).........  Modified.            
Sec.  1.2(f)..............  Sec.  1.5(a).........  Significant change.  
Sec.  1.2(g)..............  Sec.  1.3(f).........                       
Sec.  1.2(h)..............  Secs.  1.3(c), 1.110.  Modified.            
Sec.  1.2(i)..............  1.3(d)...............  Modified.            
Sec.  1.2(j)..............  Sec.  1.3(e).........  Modified.            
Sec.  1.2(k)..............    ...................  Added.               
Sec.  1.2(l)..............    ...................  Added.               
                            Sec.  1.3(a).........  Removed.             
Sec.  1.3(a)..............  Sec.  1.4............  Modified.            
Sec.  1.3(b)..............  Secs.  1.3(d), 1.6,    Modified.            
                             1.7(a).                                    
Sec.  1.3(c)..............  Secs.  1.3(e), 1.7(a)  Modified.            
Sec.  1.3(d)..............  Sec.  1.7(a), 12 CFR   Modified.            
                             7.7570.                                    
Sec.  1.3(e)..............    ...................  Added.               
Sec.  1.3(f)..............    ...................  Added.               
Sec.  1.3(g)..............    ...................  Added.               
Sec.  1.3(h)..............    ...................  Added.               
Sec.  1.3(i)..............  Secs.  1.5(b), 1.7(b)  Modified.            
Sec.  1.4.................    ...................  Added.               
Sec.  1.5.................  Sec.  1.8............  Significant change.  
Sec.  1.6.................  Sec.  1.9............  Modified.            
Sec.  1.7(a)..............  Sec.  1.11...........                       
Sec.  1.7(b)..............    ...................  Added.               
                            Sec.  1.7(c).........  Removed.             
                            Sec.  1.7(d).........  Added.               
Sec.  1.7(c)..............    ...................  Added.               
Sec.  1.8.................    ...................  Added.               
                            Sec.  1.10...........  Removed.             
                            Sec.  1.100..........  Removed.             
Sec.  1.100(a)............  Sec.  1.120..........                       
Sec.  1.100(b)(1).........  Sec.  1.120(a).......                       
Sec.  1.100(b)(2).........  Sec.  1.120(b).......                       
Sec.  1.100(b)(3).........  Sec.  1.120(c).......                       
Sec.  1.100(b)(4).........  Sec.  1.120(d).......                       
Sec.  1.110...............  Sec.  1.130..........  Modified.            
                            Sec.  1.120(f).......  Removed.             
                            Sec.  1.120(g).......  Removed.             
Sec.  1.120...............  Sec.  1.120(e).......                       
Sec.  1.130(a)............  Sec.  1.140(a).......  Modified.            
Sec.  1.130(b)............  Sec.  1.140(b).......                       
Sec.  1.130(c)............  Sec.  1.140(c).......  Modified.            
------------------------------------------------------------------------

Regulatory Flexibility Act

    It is hereby certified that this regulation will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. This 
regulation will reduce the regulatory burden on national banks, 
regardless of size, by simplifying and clarifying existing regulatory 
requirements.

Paperwork Reduction Act of 1995

    The OCC invites comment on:
    (1) Whether the proposed collection of information contained in 
this notice of proposed rulemaking is necessary for the proper 
performance of OCC functions, including whether the information has 
practical utility;
    (2) The accuracy of the estimate of the burden of the proposed 
information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected; and
    (4) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology.
    Respondents/recordkeepers are not required to respond to this 
collection of information unless it displays a currently valid OMB 
control number.
    The collection of information requirements contained in this notice 
of proposed rulemaking have been submitted to the Office of Management 
and Budget for review in accordance with the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)). Comments on 

[[Page 66159]]
the collections of information should be sent to the Office of 
Management and Budget, Paperwork Reduction Project (1557), Washington, 
DC 20503, with copies to the Legislative and Regulatory Activities 
Division (1557), Office of the Comptroller of the Currency, 250 E 
Street, SW., Washington, DC 20219.
    The collection of information requirements in this proposed rule 
are found in 12 CFR 1.6 and 1.7. This information is required to 
evidence compliance with statutory limitations on the quantity and type 
of investments by national banks. The likely respondents/recordkeepers 
are national banks.
    Estimated average annual burden hours per respondent/recordkeeper: 
2 hours.
    Estimated number of respondents and/or recordkeepers: 3,000.
    Estimated total annual reporting and recordkeeping burden: 6,000 
hours.
    Start-up costs to respondents: None.
    Records are to be maintained for life of the investment.

Executive Order 12866

    The OCC has determined that this proposal is not a significant 
regulatory action.

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded 
Mandates Act) (signed into law on March 22, 1995) requires that an 
agency prepare a budgetary impact statement before promulgating a rule 
that includes a Federal mandate that may result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more in any one year. If a budgetary 
impact statement is required, Section 205 of the Unfunded Mandates Act 
also requires an agency to identify and consider a reasonable number of 
regulatory alternatives before promulgating a rule. Because the OCC has 
determined that the proposed rule will not result in expenditures by 
State, local, and tribal governments or by the private sector of $100 
million or more in any one year, the OCC has not prepared a budgetary 
impact statement or specifically addressed the regulatory alternatives 
considered. Nevertheless, as discussed in the preamble, the rule has 
the effect of reducing burden and increasing the discretion of national 
banks regarding their sound investment activities.

List of Subjects

12 CFR Part 1

    Banks, banking, National banks, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 7

    Credit, Insurance, Investments, National banks, Reporting and 
recordkeeping requirements, Securities, Surety bonds.

Authority and Issuance

    For the reasons set out in the preamble, chapter I of title 12 of 
the Code of Federal Regulations is proposed to be amended as set forth 
below:
    1. Part 1 is revised to read as follows:

PART 1--INVESTMENT SECURITIES REGULATION

Sec.
1.1  Authority, purpose, and scope.
1.2  Definitions.
1.3  Limitations on dealing in, underwriting, and purchase and sale 
of securities.
1.4  Calculation of limits.
1.5  Safe and sound banking practices; credit information required.
1.6  Convertible securities.
1.7  Securities held in satisfaction of debts previously contracted; 
holding period; disposal; accounting treatment; non-speculative 
purpose.
1.8  Nonconforming investments.

Interpretations

1.100  Indirect general obligations.
1.110  Taxing powers of a State or political subdivision.
1.120  Prerefunded or escrowed bonds and obligations secured by Type 
I securities.
1.130  Type II securities; guidelines for obligations issued for 
university and housing purposes.

    Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.


Sec. 1.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq., 
12 U.S.C. 24 (Seventh), and 12 U.S.C. 93a.
    (b) Purpose. This part prescribes standards under which national 
banks may purchase, sell, deal in, underwrite, and hold securities, 
consistent with the authority contained in 12 U.S.C. 24 (Seventh) and 
safe and sound banking practices.
    (c) Scope. The standards set forth in this part apply to national 
banks, District of Columbia banks, and federal branches of foreign 
banks. Further, pursuant to 12 U.S.C. 335, State banks that are members 
of the Federal Reserve System are subject to the same limitations and 
conditions that apply to national banks in connection with purchasing, 
selling, dealing in, and underwriting securities and stock. In addition 
to activities authorized under this part, foreign branches of national 
banks also may be authorized to conduct international activities 
pursuant to part 211 of this title.


Sec. 1.2  Definitions.

    (a) Capital and surplus means:
    (1) A bank's Tier 1 and Tier 2 capital included in the bank's risk-
based capital under the OCC's Minimum Capital Ratios in Appendix A to 
part 3 of this chapter based upon the bank's Consolidated Report of 
Condition and Income filed under 12 U.S.C. 1817(a)(3); plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's Tier 2 capital, for purposes of the calculation 
of risk-based capital under 12 CFR part 3, based upon the bank's 
Consolidated Report of Condition and Income filed under 12 U.S.C. 
1817(a)(3).
    (b) General obligation of a State or political subdivision means:
    (1) An obligation supported by the full faith and credit of an 
obligor possessing general powers of taxation, including property 
taxation; or
    (2) An obligation payable from a special fund or by an obligor not 
possessing general powers of taxation, when an obligor possessing 
general powers of taxation, including property taxation, has 
unconditionally promised to make payments into the fund or otherwise 
provide funds to cover all required payments on the obligation.
    (c) Investment company means an investment company, including a 
mutual fund, registered under section 8 of the Investment Company Act 
of 1940, 15 U.S.C. 80a-8.
    (d) Investment grade means a security rated investment grade (in 
one of the top four rating categories) by each nationally recognized 
statistical rating organization that has rated the security.
    (e) Investment security means a marketable debt obligation that is 
not predominantly speculative in nature. A security is not 
predominantly speculative in nature if it is rated investment grade. 
When a security is not rated, the security must be the credit 
equivalent of securities rated investment grade.
    (f) Marketable means that the security is:
    (1) Registered under the Securities Act of 1933, 15 U.S.C. 77a et 
seq.;
    (2) Exempt from registration under the Securities Act of 1933, 15 
U.S.C. 77c, and authorized under 12 U.S.C. 24 (Seventh) as eligible for 
investment without limitation by a national bank, such as a security 
issued or guaranteed by: 

[[Page 66160]]

    (i) The United States or a territory thereof;
    (ii) The District of Columbia;
    (iii) A State of the United States;
    (iv) A political subdivision of a State or territory;
    (v) A public instrumentality of one or more States or territories; 
or
    (vi) A person controlled or supervised by and acting as an 
instrumentality of the Government of the United States pursuant to 
authority granted by the Congress of the United States;
    (3) A municipal revenue bond exempt from registration under the 
Securities Act of 1933, 15 U.S.C. 77c(a)(2); or
    (4) Offered and sold pursuant to Securities and Exchange Commission 
Rule 144A, 17 CFR 230.144A, and rated investment grade.
    (g) Political subdivision means a county, city, town, or other 
municipal corporation, a public authority, and generally any publicly-
owned entity that is an instrumentality of a State or of a municipal 
corporation.
    (h) Type I security means:
    (1) Obligations of the United States;
    (2) Obligations issued, insured, or guaranteed by a department or 
an agency of the United States Government, if the obligation, insurance 
or guarantee commits the full faith and credit of the United States for 
the repayment of the obligation;
    (3) Obligations issued by a department or agency of the United 
States, or an agency or political subdivision of a State of the United 
States, that represent an interest in a loan or a pool of loans made to 
third parties, if the full faith and credit of the United States has 
been validly pledged for the full and timely payment of interest on, 
and principal of, the loans in the event of non-payment by the third 
party obligor(s);
    (4) General obligations of a State of the United States or any 
political subdivision;
    (5) Obligations authorized under 12 U.S.C. 24 (Seventh) as 
permissible for a national bank to deal in, underwrite, purchase, and 
sell for the bank's own account; and
    (6) Other securities the OCC deems eligible as Type I securities in 
accordance with 12 U.S.C. 24 (Seventh).
    (i) Type II security means an investment security that represents:
    (1) Obligations issued by a State, or a political subdivision or 
agency of a State, for housing, university, or dormitory purposes;
    (2) Obligations of international and multilateral development banks 
and organizations listed in 12 U.S.C. 24 (Seventh);
    (3) Other obligations listed in 12 U.S.C. 24 (Seventh) as 
permissible for a bank to deal in, underwrite, purchase, and sell for 
the bank's own account, subject to a limitation of 10 percent of the 
bank's capital and surplus; and
    (4) Other securities the OCC deems eligible as Type II securities 
in accordance with 12 U.S.C. 24 (Seventh).
    (j) Type III security means an investment security that does not 
qualify as a Type I, II, IV, or V security, such as corporate bonds and 
municipal revenue bonds.
    (k) Type IV security means:
    (1) A small business-related security as defined in section 
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(53)(A), that is fully secured by interests in a pool of 
homogeneous loans to numerous obligors. The aggregate amount of 
collateral from loans of any one obligor may not exceed 5 percent of 
the total amount of collateral for the security;
    (2) A commercial mortgage-related security that is offered or sold 
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), or a commercial mortgage-related security as defined in section 
3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(41), 
that represents ownership of a promissory note or certificate of 
interest or participation that is directly secured by a first lien on 
one or more parcels of real estate upon which one or more commercial 
structures are located and that is fully secured by interests in a pool 
of homogeneous loans to numerous obligors. The aggregate amount of 
collateral from loans of any one obligor may not exceed 5 percent of 
the total amount of collateral for the security.
    (3) A residential mortgage-related security that is offered and 
sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), or a residential mortgage-related security as defined in 
section 3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(41)), and that does not otherwise qualify as a Type I security.
    (l) Type V security means a security that:
    (1) Is rated investment grade;
    (2) Is not a Type IV security; and
    (3) Is fully secured by interests in a pool of homogeneous loans 
(that a national bank could invest in directly) to numerous obligors. 
The aggregate amount of collateral from loans of any one obligor may 
not exceed 5 percent of the total amount of collateral for the 
security.


Sec. 1.3  Limitations on dealing in, underwriting, and purchase and 
sale of securities.

    (a) Type I securities. A national bank may deal in, underwrite, 
purchase, and sell Type I securities for its own account. The amount of 
Type I securities that the bank may deal in, underwrite, purchase, and 
sell is not limited to a specified percentage of the bank's capital and 
surplus.
    (b) Type II securities. A national bank may deal in, underwrite, 
purchase, and sell Type II securities for its own account, provided the 
aggregate par value of the obligations of any one obligor held by the 
bank does not exceed 10 percent of the bank's capital and surplus. This 
limitation applies to obligations that the bank is legally committed to 
purchase and sell in addition to existing holdings.
    (c) Type III securities. A national bank may purchase and sell Type 
III securities for its own account, provided the aggregate par value of 
the obligations of any one obligor held by the bank does not exceed 10 
percent of the bank's capital and surplus. This limitation applies to 
obligations that the bank is legally committed to purchase and sell in 
addition to existing holdings.
    (d) Type II and III securities; other investment securities 
limitations. A national bank may not hold Type II and III securities of 
any one obligor with an aggregate par value exceeding 10 percent of the 
bank's capital and surplus. However, if the proceeds of each issue are 
to be used to acquire and lease real estate and related facilities to 
economically and legally separate industrial tenants, and if each issue 
is payable solely from and secured by a first lien on the revenues to 
be derived from rentals paid by the lessee under net noncancellable 
leases, the bank may apply the 10 percent investment limitation 
separately to each security issue of a single issuer of such 
securities.
    (e) Type IV securities. A national bank may purchase and sell Type 
IV securities for its own account. The amount of the Type IV securities 
that a bank may purchase and sell is not limited to a specified 
percentage of the bank's capital and surplus. A national bank also may 
deal in Type IV securities that are fully secured by Type I securities.
    (f) Type V securities. A national bank may purchase and sell Type V 
securities for its own account provided the aggregate par value of the 
obligations of any one obligor does not exceed 15 percent of the bank's 
capital and surplus. This limitation includes obligations the bank is 
legally committed to purchase and sell in addition to existing 
holdings.
    (g) Asset securitization. A national bank may securitize and sell 
its loan assets as a part of its banking business. 

[[Page 66161]]
The amount of securitized loans that a bank may sell is not limited to 
a specified percentage of the bank's capital and surplus.
    (h) Investment company shares. A national bank may purchase and 
sell for its own account investment company shares, provided that the 
portfolio of the investment company consists wholly of securities and 
loans that the national bank may purchase and sell for its own account 
under this part, subject to the most stringent investment and/or 
lending limitation that would apply to the underlying securities or 
loans that comprise such company's portfolio.
    (i) Securities held based on estimates of obligor's performance. 
(1) Notwithstanding Sec. 1.2(e) of this part, a national bank may treat 
a debt security as an investment security for purposes of this part if 
the bank concludes, on the basis of estimates that the bank reasonably 
believes are reliable, that the obligor will be able to satisfy its 
obligations under that security, and the bank believes that the 
security may be sold with reasonable promptness at a price which 
corresponds reasonably to its fair value.
    (2) The aggregate value of securities treated as investment 
securities under paragraph (i)(1) of this section may not exceed 5 
percent of the bank's capital and surplus.


Sec. 1.4  Calculation of limits.

    (a) Calculation date. For purposes of determining compliance with 
12 U.S.C. 24 (Seventh) and this part, a bank's limitations shall be 
determined as of the most recent of the following dates:
    (1) The date on which the bank's Consolidated Report of Condition 
and Income is properly signed and submitted;
    (2) The date on which the bank's Consolidated Report of Condition 
and Income is required to be submitted; or
    (3) When there is a change in the bank's capital category for 
purposes of 12 U.S.C. 1831o and 12 CFR 6.3.
    (b) Authority of OCC to require more frequent calculations. If the 
OCC determines for safety and soundness reasons that a bank should 
calculate its investment limits more frequently than required by 
paragraph (a) of this section, the OCC may provide written notice to 
the bank directing the bank to calculate its investment limitations at 
a more frequent interval. The bank shall thereafter calculate its 
investment limits at that interval until further notice.
    (c) Calculation of Type III and Type V securities holdings. In 
calculating the amount of its investment in Type III or Type V 
securities of any one obligor, a bank shall combine:
    (1) Obligations of issuers that are related directly or indirectly 
through common control; and
    (2) Securities that are credit-enhanced by the same entity.
    (d) Calculation of investment company holdings. In calculating the 
amount of its investment in investment company shares under this part, 
a bank shall use reasonable efforts to calculate and combine its pro 
rata share of a particular security in the portfolios of each 
investment company with the bank's direct holdings of securities of 
that issuer.


Sec. 1.5  Safe and sound banking practices; credit information 
required.

    (a) A national bank shall adhere to safe and sound banking 
practices and the specific requirements of this part in conducting the 
activities described in Sec. 1.3. This includes appropriate 
consideration of the market, interest rate, credit, liquidity, legal, 
and operations and systems risks presented by a proposed activity. The 
bank's particular activities must be appropriate for that bank.
    (b) In conducting these activities, the bank shall determine that 
there is adequate evidence that an obligor possesses resources 
sufficient to provide for all required payments on its obligations, or, 
in the case of securities deemed to be investment securities on the 
basis of reliable estimates of an obligor's performance, that the bank 
reasonably believes that the obligor will be able to satisfy the 
obligation.
    (c) Each bank shall maintain records available for examination 
purposes adequate to demonstrate that it meets the requirements of this 
section. The bank may store the information in any manner that can be 
readily retrieved and reproduced in a readable form.


Sec. 1.6  Convertible securities.

    (a) When a national bank purchases an investment security 
convertible into stock, or with a stock purchase warrant attached, the 
bank shall write down the carrying value of the security to an amount 
that represents the value of the security considered independently of 
the conversion feature or attached stock purchase warrant.
    (b) A national bank may not purchase securities convertible into 
stock at the option of the issuer.


Sec. 1.7  Securities held in satisfaction of debts previously 
contracted; holding period; disposal; accounting treatment; non-
speculative purpose.

    (a) Securities held in satisfaction of debts previously contracted. 
The restrictions and limitations of this part, other than those set 
forth in paragraphs (b),(c), and (d) of this section, do not apply to 
securities acquired:
    (1) Through foreclosure on collateral;
    (2) In good faith by way of compromise of a doubtful claim; or
    (3) To avoid loss in connection with a debt previously contracted.
    (b) Holding period. A national bank holding securities pursuant to 
paragraph (a) of this section may do so for a period not to exceed five 
years from the date that ownership of the securities was originally 
transferred to the bank. The OCC may extend the holding period for up 
to an additional five years.
    (c) Accounting treatment. A bank shall mark-to-market securities 
held pursuant to paragraph (a) of this section.
    (d) Non-speculative purpose. A bank may not hold securities 
pursuant to paragraph (a) of this section for speculative purposes.


Sec. 1.8  Nonconforming investments.

    (a) An investment in securities, which conforms to this part when 
made, will not be deemed a violation, but will be treated as 
nonconforming if the investment no longer conforms to this part 
because;
    (1) The bank's capital declines;
    (2) Issuers, obligors, or credit-enhancers merge;
    (3) Issuers become related directly or indirectly through common 
control;
    (4) The investment securities rules change;
    (5) The security no longer qualifies as an investment security;
    (6) The substitution of collateral by an issuer or trustee causes a 
Type IV or Type V security no longer to conform to the diversification 
requirements of Secs. 1.2(k)(1) and (2) and 1.2(l)(3); or
    (7) Other events identified by the OCC occur;
    (b) A bank shall exercise reasonable efforts to bring an investment 
that is nonconforming as a result of events described in paragraph (a) 
of this section into conformity with this part unless to do so would be 
inconsistent with safe and sound banking practices.

Interpretations


Sec. 1.100  Indirect general obligations.

    (a) Obligation issued by an obligor not possessing general powers 
of taxation. Pursuant to Sec. 1.2(c) of this part, an obligation issued 
by an obligor not possessing general powers of taxation qualifies as a 
general obligation of a State or political subdivision for the purposes 
of 12 U.S.C. 24 (Seventh), if a party possessing general powers of 
taxation unconditionally promises to make sufficient funds available 
for all required payments in connection with the obligation. 

[[Page 66162]]

    (b) Indirect commitment of full faith and credit. The indirect 
commitment of the full faith and credit of a State or political 
subdivision (that possesses general powers of taxation) in support of 
an obligation may be demonstrated by any of the following methods, 
alone or in combination, when the State or political subdivision 
pledges its full faith and credit in support of the obligation.
    (1) Lease/rental agreement. The lease agreement must be valid and 
binding on the State or the political subdivision, and the State or 
political subdivision must unconditionally promise to pay rentals that, 
together with any other available funds, are sufficient for the timely 
payment of interest on, and principal of, the obligation. These lease/
rental agreements may, for instance, provide support for obligations 
financing the acquisition or operation of public projects in the areas 
of education, medical care, transportation, recreation, public 
buildings, and facilities.
    (2) Service/purchase agreement. The agreement must be valid and 
binding on the State or the political subdivision, and the State or 
political subdivision must unconditionally promise in the agreement to 
make payments for services or resources provided through or by the 
issuer of the obligation. These payments, together with any other 
available funds, must be sufficient for the timely payment of interest 
on, and principal of, the obligation. An agreement to purchase 
municipal sewer, water, waste disposal, or electric services may, for 
instance, provide support for obligations financing the construction or 
acquisition of facilities supplying those services.
    (3) Refillable debt service reserve fund. The reserve fund must at 
least equal the amount necessary to meet the annual payment of interest 
on, and principal of, the obligation as required by the applicable law. 
The maintenance of a refillable reserve fund may be provided, for 
instance, by statutory direction for an appropriation, or by statutory 
automatic apportionment and payment from the State funds of amounts 
necessary to restore the fund to the required level.
    (4) Other grants or support. A statutory provision or agreement 
must unconditionally commit the State or the political subdivision to 
provide funds which, together with other available funds, are 
sufficient for the timely payment of interest on, and principal of, the 
obligation. Those funds may, for instance, be supplied in the form of 
annual grants or may be advanced whenever the other available revenues 
are not sufficient for the payment of principal and interest.


Sec. 1.110  Taxing powers of a State or political subdivision.

    (a) An obligation is considered supported by the full faith and 
credit of a State or political subdivision possessing general powers of 
taxation when the promise or other commitment of the State or the 
political subdivision will produce funds, which (together with any 
other funds available for the purpose) will be sufficient to provide 
for all required payments on the obligation. In order to evaluate 
whether a commitment of a State or political subdivision is likely to 
generate sufficient funds, a bank shall consider the impact of any 
possible limitations regarding the State's or political subdivision's 
taxing powers, as well as the availability of funds in view of the 
projected revenues and expenditures. Quantitative restrictions on the 
general powers of taxation of the State or political subdivision do not 
necessarily mean that an obligation is not supported by the full faith 
and credit of the State or political subdivision. In such case, the 
bank shall determine the eligibility of obligations by reviewing, on a 
case-by-case basis, whether tax revenues available under the limited 
taxing powers are sufficient for the full and timely payment of 
interest on, and principal of, the obligation. The bank shall use 
current and reasonable financial projections in calculating the 
availability of the revenues. An obligation expressly or implicitly 
dependent upon voter or legislative authorization of appropriations may 
be considered supported by the full faith and credit of a State or 
political subdivision if the bank determines, on the basis of past 
actions by the voters or legislative body in similar situations 
involving similar types of projects, that it is reasonably probable 
that the obligor will obtain all necessary appropriations.
    (b) An obligation supported exclusively by excise taxes or license 
fees is not a general obligation for the purposes of 12 U.S.C. 24 
(Seventh). Nevertheless, an obligation that is primarily payable from a 
fund consisting of excise taxes or other pledged revenues qualifies as 
a ``general obligation,'' if, in the event of a deficiency of those 
revenues, the obligation is also supported by the general revenues of a 
State or a political subdivision possessing general powers of taxation.


Sec. 1.120  Prerefunded or escrowed bonds and obligations secured by 
Type I securities.

    (a) An obligation qualifies as a Type I security if it is secured 
by an escrow fund consisting of obligations of the United States or 
general obligations of a State or a political subdivision, and the 
escrowed obligations produce interest earnings sufficient for the full 
and timely payment of interest on, and principal of, the obligation.
    (b) If the interest earnings from the escrowed Type I securities 
alone are not sufficient to guarantee the full repayment of an 
obligation, a promise of a State or a political subdivision possessing 
general powers of taxation to maintain a reserve fund for the timely 
payment of interest on, and principal of, the obligation may further 
support a guarantee of the full repayment of an obligation.
    (c) An obligation issued to refund an indirect general obligation 
may be supported in a number of ways that, in combination, are 
sufficient at all times to support the obligation with the full faith 
and credit of the United States or a State or a political subdivision 
possessing general powers of taxation. During the period following its 
issuance, the proceeds of the refunding obligation may be invested in 
U.S. obligations or municipal general obligations that will produce 
sufficient interest income for payment of principal and interest. Upon 
the retirement of the outstanding indirect general obligation bonds, 
the same indirect commitment, such as a lease agreement or a reserve 
fund, that supported the prior issue, may support the refunding 
obligation.


Sec. 1.130  Type II securities; guidelines for obligations issued for 
university and housing purposes.

    (a) Investment quality. An obligation issued for housing, 
university, or dormitory purposes is a Type II security only if it:
    (1) Qualifies as an investment security, as defined in Sec. 1.2(e); 
and
    (2) Is issued for the appropriate purpose and by a qualifying 
issuer.
    (b) Obligation issued for university purposes. (1) An obligation 
issued by a State or political subdivision or agency of a State or 
political subdivision for the purpose of financing the construction or 
improvement of facilities at or used by a university or a degree-
granting college- level institution, or financing loans for studies at 
such institutions, qualifies as a Type II security. Facilities financed 
in this manner may include student buildings, classrooms, university 
utility buildings, cafeterias, stadiums, and university parking lots. 

[[Page 66163]]

    (2) An obligation that finances the construction or improvement of 
facilities used by a hospital may be eligible as a Type II security, if 
the hospital is a department or a division of a university, or 
otherwise provides a nexus with university purposes, such as an 
affiliation agreement between the university and the hospital, faculty 
positions of the hospital staff, and training of medical students, 
interns, residents, and nurses (e.g., a ``teaching hospital'').
    (c) Obligation issued for housing purposes. An obligation issued 
for housing purposes may qualify as a Type II security if the security 
otherwise meets the criteria for a Type II security.

PART 7--INTERPRETIVE RULINGS

    3. The authority citation for part 7 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 93a.


Sec. 7.7570  [Removed]

    4. Section 7.7570 is removed.

    Dated: December 14, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-30969 Filed 12-20-95; 8:45 am]
BILLING CODE 4810-33-P`