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.

Proposed Rules Federal Register

29976

Vol. 61, No. 115

Thursday, June 13, 1996

1 61 FR 1162 (January 17, 1996).

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 559, 560, 563, 567,

571

[No. 96–47]

RIN 1550–AA88

Subsidiaries and Equity Investments

AGENCY: Office of Thrift Supervision,

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Office of Thrift

Supervision (OTS) is proposing to

update, reorganize, and streamline its

subsidiaries and equity investment

regulations and policy statements. This

proposal follows a detailed review of

each pertinent regulation and policy

statement to determine whether it is

necessary, imposes the least possible

burden consistent with safety and

soundness, and is written in a clear,

straightforward manner. Today’s

proposal is being made pursuant to the

Regulatory Reinvention Initiative of the

Vice President’s National Performance

Review and section 303 of the

Community Development and

Regulatory Improvement Act of 1994.

DATES: Comments must be received on

or before August 12, 1996.

ADDRESSES: Send comments to Manager,

Dissemination Branch, Records

Management and Information Policy,

Office of Thrift Supervision, 1700 G

Street, NW., Washington, D.C. 20552,

Attention Docket No. 96–47. These

submissions may also be hand-delivered

to 1700 G Street, NW., from 9:00 A.M.

to 5:00 P.M. on business days or may be

sent by facsimile transmission to FAX

Number (202) 906–7755. Comments will

be available for inspection at 1700 G

Street, NW., from 9:00 A.M. until 4:00

P.M. on business days.

FOR FURTHER INFORMATION CONTACT:

Debra Merkle, Project Manager,

Supervision Policy, (202) 906–5688;

Donna Miller, Senior Program Manager,

Supervision Policy, (202) 906–7488;

Susan Miles, Senior Attorney,

Regulations and Legislation Division,

(202) 906–6798; Dean Shahinian, Senior

Counsel for Corporate Activities,

Business Transactions Division, (202)

906–7289; or Deborah Dakin, Assistant

Chief Counsel, (202) 906–6445,

Regulations and Legislation Division,

Chief Counsel’s Office, Office of Thrift

Supervision, 1700 G Street, NW.,

Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background of the Proposal

II. Objectives

A. Create More User-Friendly Subsidiary

and Equity Investment Regulations

B. Codify Pass-through Investment

Authority

C. Update the List of Preapproved

Activities for Service Corporations

D. Streamline Subsidiary Notice and

Application Procedures

E. Clarify and Simplify Computation of the

Service Corporation Investment Limit

F. Clarify What Constitutes a ‘‘Subsidiary’’

Under Various Regulatory Provisions

and, in so Doing, Simplify Calculations

of Capital

III. Historical Overview

A. Service Corporations

B. Finance Subsidiaries

C. Operating Subsidiaries

D. Pass-Through Investments

IV. Section-by-Section Analysis

A. New Part 559—Subsidiaries

B. Amendments to Proposed New Part

560—Lending and Investment

C. Disposition of Existing Regulations

V. Chart Showing the Proposed Disposition

of Regulations

VI. Request for Comment

VII. Paperwork Reduction Act of 1995

VIII. Executive Order 12866

IX. Regulatory Flexibility Act Analysis

X. Unfunded Mandates Act of 1995

I. Background of the Proposal

In a comprehensive review of the

agency’s regulations in the spring of

1995, OTS identified numerous

provisions for immediate repeal, plus

several key regulatory areas for further

intensive, systematic regulatory burden

analysis. These areas—lending and

investment authority, subsidiaries and

equity investments, insurance referrals

and loan-related fees, and charter and

bylaws—were selected because they are

vital to thrift operations, and have not

been developed on an interagency basis

or been comprehensively reviewed for

many years. Today’s proposal presents

the results of an intensive review of

OTS’s subsidiary and equity

investments regulations and related

policy statements.

Since commencing its reinvention

initiative in the spring of 1995, OTS has

already repealed eight percent of its

regulations. In addition, in January of

1996, OTS issued a comprehensive

proposal on its lending and investment

regulations.1 That proposal, once

adopted in final form, will reduce the

number of lending and investment

regulations from 43 to 23. Burden

reduction proposals regarding charter

and bylaws and insurance referrals and

loan-related fees will be issued in the

near future.

Today’s proposal regarding

subsidiaries and equity investments is

also expected to result in significant

regulatory burden reduction. In

developing this proposal, OTS

considered the relevant regulations,

guidance, legal interpretations, and

reporting requirements of the other

federal banking agencies. In addition, as

with our other regulatory reinvention

efforts, this proposal was prepared in

consultation with those who use the

regulations on a daily basis, including

the agency’s regional examination staff

and a focus group composed of

representatives of the thrift industry.

The consensus that emerged from this

process is that the primary need in the

subsidiaries and equity investment area

is to enhance flexibility and clarify

available investment options, as

opposed to simply eliminating large

portions of regulatory text. Thus,

although today’s proposal does call for

the elimination of 12 paragraphs of

regulatory text, the most significant

burden reduction is expected to result

from clarifying investment options and

streamlining procedural requirements.

II. Objectives

The overarching goal of OTS’s

reinvention initiative is to reduce

regulatory burden on savings

associations to the greatest extent

possible consistent with statutory

requirements and safety and soundness.

In the context of the subsidiary and

equity investment regulations, we

believe that maximum burden reduction

can be achieved by pursuing the

following six specific objectives:
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29977

A. Create More User-Friendly Subsidiary

and Equity Investment Regulations

Our first objective is to make it easier

for savings associations to find and

understand the regulations governing

subsidiaries and equity investments.

Industry representatives and other

reviewers expressed concern that the

current subsidiary and equity

investment regulations are scattered

throughout the regulations and are

worded in a confusing manner.

Accordingly, this proposal:

• Reorganizes the regulations for

easier reference. New part 559

consolidates all of the regulations that

apply directly to subsidiaries. It features

a chart to allow ready comparisons of

the requirements applicable to operating

subsidiaries and service corporations.

This should make it easier for savings

associations to determine which

structure will best meet their needs. The

lending and investment chart and

regulations in proposed part 560 are

also being expanded to include

permissible equity investments.

• Employs plain language drafting.

Proposed part 559 utilizes plain

language drafting techniques that have

been pioneered by the Department of

the Interior and promoted by the Vice

President’s Regulatory Reinvention

Initiative. If thrifts find this approach

helpful, OTS will expand the use of

plain language drafting to encompass

other regulatory projects. The goal of

plain language drafting is to decrease

industry frustration, inadvertent errors,

the need to seek clarification in

correspondence and phone calls, and

the amount of staff time institutions

must devote to understanding the

regulations. Plain language drafting

emphasizes the use of informative

headings, lists and charts where

appropriate, short sentences, sections

and paragraphs, non-technical language

(including the use of ‘‘you’’), and

sentences in the active voice.

B. Codify Pass-Through Investment

Authority

Institutions and examiners have also

expressed concern that OTS’s subsidiary

and equity investment regulations do

not reflect all significant investment

options. As a result, some institutions

may not be aware of options that have

been recognized in various OTS

opinions and policy statements.

The most significant gap in the

current regulations concerns passthrough investment authority. As is

explained more fully below, federal

savings associations have long been

permitted to exercise pass-through

investment authority, that is, to invest

in companies that engage exclusively in

activities that federal savings

associations may conduct directly.

These companies generally are

organized as mutual funds or limited

partnerships. Indirect investments of

this type often offer important

benefits—such as risk spreading,

enhanced liquidity, and greater

investment security (due to any

overcollateralization or recourse

commitment offered by the organizer of

the pass-through entity).

Because pass-through investment

authority has been discussed in OTS

opinions and policy statements (rather

than the regulations), some institutions

may be unaware of this investment

option and applicable restrictions. Even

institutions that are aware of the option

frequently feel the need to write to OTS

seeking confirmation or clarification of

the circumstances under which they

may exercise this authority. To resolve

this uncertainty, OTS proposes to codify

pass-through investment authority in

proposed part 560.

C. Update the List of Preapproved

Activities for Service Corporations

OTS’s service corporation regulation

contains a list of preapproved activities

that service corporations of most federal

savings associations may conduct after

notifying OTS. Service corporations

wanting to engage in activities not on

the preapproved list must submit a

formal application to OTS

demonstrating, among other things, that

the proposed activity is reasonably

related to the business of a federal thrift.

The list of pre-approved service

corporation activities has not been

updated for many years. As a result,

institutions are often required to file

applications for activities that are

clearly reasonably related, but have not

yet been added to the preapproved list.

The proposal updates the

preapproved list in several respects.

First, the list is being amended to

confirm that all activities that federal

savings associations may conduct

directly are preapproved. This general

authorization is substituted for the

current detailed (but incomplete) listing

of specific activities that thrifts may

conduct directly. Second, the proposal

broadens the universe of customers for

whom certain services that are already

preapproved may be provided. Third,

the proposal adds activities that OTS

has routinely approved on a case-bycase basis and other specific financerelated activities that have been

authorized for bank service corporations

and bank operating subsidiaries. Each of

these changes is described in more

detail below.

The proposal also reemphasizes

OTS’s longstanding position that federal

thrifts may, on a case-by-case basis,

apply for approval for their service

corporations to engage in any activity

not on the preapproved list that is

reasonably related to the operation of a

thrift. The preapproved list reflects the

most common service corporation

activities and is not intended to be a

comprehensive statement of every

conceivable reasonably related activity.

D. Streamline Subsidiary Notice and

Application Procedures

The industry focus group made the

agency aware of confusion over

subsidiary notice and application

requirements, including what

procedures apply when converting a

subsidiary from a service corporation to

an operating subsidiary or the reverse.

Regulations governing service

corporations were first promulgated in

1965, finance subsidiaries in 1984, and

operating subsidiaries in 1992. The

procedures for establishing and

operating each type of entity have never

been thoroughly harmonized.

Thus, OTS has reviewed these

procedural requirements with a view

toward enhancing consistency and

clarity and substituting notices for more

burdensome applications (or

recordkeeping for notices) wherever

feasible. As a result, the proposal:

• Allows all savings associations to

establish or acquire operating

subsidiaries upon 30 days notice to

OTS. Under current regulations, all but

the strongest institutions must submit

an application for prior OTS approval to

establish an operating subsidiary. As

part of this application, institutions

must affirmatively demonstrate that the

proposed operating subsidiary will

improve the institution’s financial and

managerial condition. By contrast, the

strongest institutions (i.e., those eligible

for expedited treatment under 12 CFR

516.3(a)) need only notify OTS 30 days

before establishing an operating

subsidiary and, unless OTS objects, can

establish their subsidiaries at the end of

that period. Based on the agency’s

experience with operating subsidiaries,

we have concluded that the 30-day

notice procedure provides adequate

information and opportunity to object

whenever an operating subsidiary is

proposed by any federal thrift—

especially since operating subsidiaries

can only engage in activities that federal

thrifts may conduct directly.

Accordingly, OTS is proposing to apply

the notice procedure to all federal thrifts

who wish to form operating

subsidiaries.
29978 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

2Pub. L. 88–560, section 905, amending 12 U.S.C.

1464.

3H. Rep. 1703, 1964 U.S. Code Congressional and

Administrative News 3444.

• Clarifies the procedures for

redesignating a subsidiary as an

operating subsidiary or a service

corporation. The current regulations are

unclear about how and when a service

corporation may be converted into an

operating subsidiary, or an operating

subsidiary into a service corporation,

and whether a notice or application

must be filed with OTS. Both operating

subsidiaries and service corporations

are incorporated under state law. The

distinctions based on ownership,

control, and activities that separate an

operating subsidiary from a service

corporation for OTS regulatory purposes

do not affect this underlying corporate

form. OTS, therefore, has taken the

position that merely redesignating a

service corporation as an operating

subsidiary or vice versa, without adding

new activities, does not constitute an

event requiring notice or application to

OTS. The proposal makes this position

clear by establishing explicit,

streamlined recordkeeping provisions to

document all such redesignations.

• Streamlines salvage power

procedures affecting service

corporations. Under the current

regulations, a savings association must

file an application and obtain formal

OTS approval before using its salvage

powers to make an additional

investment to protect its interest in a

troubled service corporation. The

proposal allows a savings association to

file a notice in lieu of a formal

application. Under the proposal,

institutions will be permitted to proceed

with salvage investments in service

corporations within 30 days of filing

notice, unless the OTS raises objection.

E. Clarify and Simplify Computation of

the Service Corporation Investment

Limit

Section 5(c)(4)(B) of the Home

Owners’ Loan Act (HOLA) limits a

federal savings association’s aggregate

investment in service corporations to

3% of total assets. The implementing

regulations have long provided that all

loans to service corporations count

toward this investment limit, except for

‘‘conforming loans.’’ The amount of

conforming loans that qualify for

exclusion from the 3% limit varies on

the basis of whether the lending

institution owns more than 10% of the

stock of the borrowing service

corporation.

Institutions have expressed frustration

at the complexity and ambiguity of

these service corporation investment

rules. Accordingly, today’s proposal

clarifies which loans to service

corporations may be considered

separately from the general statutory

service corporation investment limit of

3% of assets (see the discussion of

proposed § 559.4 below for details). The

proposal also removes the confusing

distinctions tied to a thrift’s percentage

ownership of the service corporation. A

single rule regarding the amount of

qualifying loans to service corporations

that will be exempt from the 3%

investment cap will be applied to all

federal thrifts regardless of percentage of

ownership of the service corporation.

F. Clarify What Constitutes a

‘‘Subsidiary’’ Under Various Regulatory

Provisions and, in so Doing, Simplify

Calculations of Capital

Another concern expressed by the

industry focus group was the

complexity of determining the

appropriate amount of capital to be held

against service corporation investments,

especially when the service corporation

itself has investments in lower-tier

entities. A further complication is that

the HOLA ties OTS regulations in the

areas of transactions with affiliates,

lending limits, and capital to a variety

of banking statutes and regulations that

in turn define ‘‘subsidiary’’ differently

and not entirely consistently.

• Defines ‘‘subsidiary’’ in a manner

that is more consistent with the other

banking agencies. The proposal adopts

the same definition of ‘‘subsidiary’’ used

by the other banking agencies for

purposes of transactions with affiliates,

lending limits, and notices regarding

subsidiaries. The proposal also modifies

the capital definition of ‘‘subsidiary’’ to

follow Generally Accepted Accounting

Principles (GAAP) and to be more

consistent with the other federal

banking agencies. Currently, the OTS

employs a definition of ‘‘subsidiary’’ for

capital purposes that is far more

encompassing than the definitions used

by the other banking agencies and

GAAP. This sometimes results in higher

capital requirements for thrifts.

• Defines ‘‘includable subsidiary’’ in

a manner that eliminates overstatement

of the risk presented by lower-tier

nonincludable subsidiaries. Under the

current capital regulations (as

interpreted by instructions in the Thrift

Financial Report), a savings

association’s investment in a first-tier

subsidiary engaged exclusively in

activities permissible for national banks

must be completely deducted from

capital if a lower-tier subsidiary engages

in any activity impermissible for a

national bank. Deduction is required

even when the first-tier subsidiary’s

investment in the lower-tier subsidiary

constitutes a tiny portion of its total

assets. Under the proposal, savings

associations will only be required to

deduct the actual amount of their

indirect investment in the lower-tier

nonincludable subsidiary.

The OTS is hopeful that the foregoing

reforms, taken as a whole, will result in

a significant decrease in the regulatory

burden associated with establishing and

operating thrift subsidiaries and making

pass-through equity investments. The

remainder of this preamble provides a

historical overview of the regulation of

thrift subsidiaries and a detailed

section-by-section description of the

proposed amendments.

III. Historical Overview

Regulations affecting the ability of

savings associations to invest in service

corporations and other subsidiaries and

to make limited equity investments have

evolved over the past 30 years in

response to changes in statutes,

competition, and the financial markets.

The result has been increased flexibility

in service corporation activities and in

the permissible form of corporate

structures (e.g., finance subsidiaries and

operating subsidiaries). With this

increased flexibility, however, has come

added complexity and elements of

inconsistency.

In order to provide a context for

OTS’s current proposal, a brief history

of key developments in the subsidiary

and equity investment authority of

federal thrifts is provided.

A. Service Corporations

In 1964, Congress authorized federal

savings associations to invest up to one

percent of their assets in service

corporations.2 The statute did not limit

the types of activities in which such

service corporations could engage. The

accompanying legislative history noted,

however, that such investments were

expected to be reasonably related in

purpose to the savings and loan

business.3 This standard was

incorporated into the implementing

regulations of the Federal Home Loan

Bank Board (FHLBB), the predecessor

regulatory agency to the OTS. The

FHLBB regulations expressly indicated

that certain service corporation

activities met the reasonably related

standard and established an application

process for considering other proposed

activities. This allowed federal savings

associations and the agency to gain

experience in identifying appropriate

service corporation activities.

The HOLA was amended in 1980 to

expand the authority of federal savings
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29979

4S. Rep. 96–368 at 13, 1980 U.S. Code

Congressional and Administrative News 248. See

also 45 FR 85049 (Dec. 24, 1980).

5 Depository Institutions Deregulation and

Monetary Control Act of 1980, Pub. L. 96–221, 94

Stat. 132, section 401, amending 12 U.S.C.

1464(c)(4)(B).

6 45 FR 85048 (Dec. 24, 1980) (proposed rule); 46

FR 24526 (May 1, 1981) (final rule).

7 45 FR at 85049.

8 In 1982, the FHLBB proposed a much broader

list of potential preapproved activities, 47 FR 9855

(March 8, 1982), but did not adopt the proposal in

the wake of the Garn-St Germain Depository

Institutions Act of 1982 (DIA), which significantly

expanded federal savings association activities. The

FHLBB did add personal property leasing and

commercial lending (activities that the DIA had

authorized for federal savings associations) and

rearranged the list for ease of reference, 48 FR

23032 (May 23, 1983).

9 54 FR 32954 (Aug. 11, 1989).

10 49 FR 29357 (July 20, 1984).

11 57 FR 48942 (Oct. 29, 1992).

12Memorandum T–79a, issued on June 10, 1986,

memorialized this authority. T-memoranda issued

by the FHLBB were the counterparts of OTS Thrift

Bulletins. Memorandum T–79a has not been

superseded by a later Thrift Bulletin.

associations ‘‘to act as one-stop family

financial centers’’ 4 and to increase the

amount a federal savings association

could invest in its service corporations

from one percent to a maximum of three

percent of its assets.5

In December 1980, the FHLBB

proposed to update the list of

preapproved activities for service

corporations.6 In determining which

activities were appropriate for

preapproval, the FHLBB ‘‘examined

activities that have been approved

consistently for service corporations

upon application to the Board, newly

authorized activities for Federal

associations, and the present needs of

the residential mortgage market.’’ 7 This

list of preapproved activities remains in

effect today,8 with only a few additions

and modifications, such as securities

brokerage services (added in 1989).9

In 1989, the Financial Institutions

Reform, Recovery, and Enforcement Act

(FIRREA) mandated that OTS adopt

capital regulations requiring substantial

amounts of additional capital to be held

against thrifts’ investments in

subsidiaries, such as service

corporations, that engaged as principal

in activities not permissible for national

banks. The OTS adopted these

regulations in November, 1989.

No new activities have been added to

the preapproved list since 1989,

although the OTS has continued to

receive, review, and process

applications to engage in new activities

on a case-by-case basis.

Thus, the same basic regulatory

structure for service corporations first

established in 1964—a list of

preapproved activities, coupled with

authorization to apply to engage in any

other reasonably related activities—has

continued until the present. Nothing in

today’s proposal would alter this basic

structure. Instead, OTS is proposing to

update the preapproved list, clarify how

to compute the service corporation

investment limit, and simplify the

capital treatment of investments in

subsidiaries.

B. Finance Subsidiaries

In 1984, the FHLBB recognized a

federal savings association’s incidental

authority to establish finance

subsidiaries.10 These entities are

dedicated financing vehicles created to

issue securities that the parent

association is authorized to issue and to

remit the proceeds to the parent. The

securities issued via finance

subsidiaries have typically been

collateralized mortgage obligations,

mortgage-backed bonds or Eurobonds

backed by mortgages or mortgage-related

securities. The finance subsidiary

regulation has fallen into disuse since

OTS promulgated the operating

subsidiary regulation. Operating

subsidiaries can do all that finance

subsidiaries can do and more. Thus, we

are proposing to repeal the finance

subsidiary rule.

C. Operating Subsidiaries

In October, 1992, the OTS authorized

federal savings associations to establish

operating subsidiaries.11 Thrift

operating subsidiaries were modeled on

national bank operating subsidiaries.

Under the OTS operating subsidiary

regulation, a federal thrift may make

unlimited investments in an operating

subsidiary, provided the thrift is the

majority owner and has effective

operating control and the subsidiary

engages only in activities that the thrift

could conduct directly. Unlike service

corporations, operating subsidiaries can

issue minority ownership interests to

investors that are not savings

associations. Thus, operating

subsidiaries offer federal thrifts greater

structural flexibility. Unlike service

corporations, however, operating

subsidiaries can only do what a federal

thrift could do directly.

D. Pass-Through Investments

Finance subsidiaries and operating

subsidiaries are examples of passthrough investments. In both instances,

a savings association acquires an

interest in a company that in turn

engages exclusively in activities that the

savings association can perform

directly. However, pass-through

investment options have not been

restricted to operating subsidiaries and

finance subsidiaries.

In 1982, the FHLBB issued a legal

opinion, which was followed by a

policy statement in 1986, recognizing

that federal thrifts have incidental

authority to invest indirectly in

permissible investments.12 In other

words, federal thrifts can purchase

shares of a mutual fund, a partnership

interest in a limited partnership, or

interests in a similar investment vehicle,

provided the pass-through entity’s

activities are limited to those a federal

thrift could conduct directly. At about

the same time, the OCC, through legal

opinions and guidance, authorized

similar investments for national banks.

These types of pass-through

investments do not count against service

corporation limits, nor are they deemed

to be operating subsidiaries. The passthrough entity must comply with the

same restrictions that would apply if the

thrift engaged in the activity or held the

asset directly. Additional restrictions

have been imposed on a case-by-case

basis. These include limiting the

amount of investment that a thrift can

make in any one pass-through entity to

the amount that would be permitted

under the loans to one borrower (LTOB)

rule. (Pass-through investment authority

has recently proven to be an important

vehicle for authorizing several

community development investments,

such as purchasing limited partnership

interests in Low Income Housing Tax

Credit partnerships.)

Several other legal opinions have

authorized federal savings associations

(like national banks) to invest, with

certain restrictions, in certain ‘‘special

purpose corporations’’ that engage

exclusively in activities federal savings

associations may conduct directly. To

date, such corporations have been used

to enable thrifts to pool resources with

others to obtain basic support services

(such as data processing and ATM

operations) free from the operating

subsidiary control requirement and the

service corporation investment limits.

One of the key objectives of today’s

proposal is to rationalize and harmonize

these various pass-through investment

options. Codification of these options

will ensure industry awareness, reduce

confusion, and facilitate consistent

application of relevant safety and

soundness standards.

IV. Section-by-Section Analysis

A. New Part 559—Subsidiaries

OTS proposes to adopt a new part

559, Subsidiaries, that will include all

of the agency’s regulations affecting
29980 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

13See 12 U.S.C. 1828(m) and 1831e, and 12 CFR

303.13.

federal thrift subsidiaries, that is,

operating subsidiaries and service

corporations. The agency believes this

action will make it much easier for

savings associations to find and use

these regulations. This new part will

utilize techniques of ‘‘plain language’’

drafting, employing simple expression

and short sentences to the full extent

possible.

Section 559.1 What Does This Part

Cover? (Proposed)

This proposed section explains the

scope of new part 559 and sets forth

OTS’s basic statutory authority over

operating subsidiaries and service

corporations. The section first explains

which regulations in part 559 apply

only to federal savings associations and

which apply to all savings associations.

It then incorporates into one place

language from current §§ 545.74(b)(5)

and 545.81(h) regarding limits that OTS

may impose on subsidiary activities for

supervisory, safety or soundness, or

legal reasons.

Proposed § 559.1 also incorporates

language from current § 545.81(i). That

paragraph provides that the OTS may

impose conditions in writing when

authorizing a federal thrift to acquire or

establish an operating subsidiary or to

engage in new activities in an existing

operating subsidiary and that such

conditions are enforceable. This

statement is true for conditions OTS

imposes in all of its approvals and

authorizations, not just those involving

operating subsidiaries. The regulation

merely makes explicit what is already

implicit in OTS’s safety and soundness

jurisdiction.

Subpart A—Regulations Applicable to

Federal Savings Associations (Proposed)

This subpart will contain regulations

directly applicable only to operating

subsidiaries and service corporations of

federal savings associations. The

subpart may indirectly apply to

operating subsidiaries and service

corporations of state-chartered savings

associations by virtue of various

statutory and regulatory provisions that

tie state savings associations to certain

requirements applicable to federal

thrifts.13

Section 559.2 What Are the

Characteristics of, and What

Requirements Apply to, Operating

Subsidiaries and Service Corporations

of Federal Savings Associations?

(Proposed)

Proposed § 559.2 authorizes federal

savings associations to establish or

acquire operating subsidiaries and

service corporations. The introductory

text explains that OTS may limit this

authority for supervisory, legal, or safety

and soundness reasons.

The majority of proposed § 559.2

takes the form of a chart that lists, in a

side-by-side format, the different

characteristics of, and requirements that

apply to, operating subsidiaries and

service corporations. These include

ownership, activities, investment limits,

the applicability of other federal statutes

and regulations, and notices. The chart

reiterates that in addition to

preapproved service corporation

activities, a federal thrift may continue

to apply to the OTS for case-by-case

approval to engage in any activity that

is reasonably related to the operation of

a thrift.The regulation also confirms that

state law is preempted for operating

subsidiaries to the same extent as it is

for the parent federal savings

association, as has been the case since

operating subsidiaries were first

authorized. However, state law is not

preempted for service corporations.

Where appropriate, and for ease of

reference, the subsidiaries chart crossreferences other applicable OTS

regulations that have been the subject of

frequent questions to the agency. The

chart is derived in large part from the

current regulations at 12 CFR 545.74

and 12 CFR 545.81. OTS expects that

this format will make it easier for a

federal savings association to compare

these two structures and determine

which best fits the association’s needs.

Section 559.3 What Activities Are

Permissible for Service Corporations?

(Proposed)

This section replaces the list of

preapproved activities found in current

§ 545.74(c). OTS proposes to revise the

list of preapproved activities to:

• Specifically affirm that any activity

a federal thrift may conduct directly,

except deposit-taking, is preapproved

for a service corporation, when

conducted in the same manner as

allowed at the federal savings

association level. This includes all

activities listed in the HOLA and

proposed part 560, as well as other

incidental powers addressed in OTS

legal opinions and guidance. As a result,

OTS proposes to delete various

activities from the preapproved list that

federal thrifts are obviously permitted to

conduct (e.g., lending) and to reiterate

only those activities the service

corporation may conduct without being

subject to the same limitations that

would apply to the federal savings

association (e.g., data processing

services and leasing). As set forth in the

subsidiaries chart at § 559.2(i),

investments made by service

corporations are not aggregated with the

parent thrift for purposes of determining

the parent thrift’s compliance with any

investment limits, such as those that

appear in section 5(c) of the HOLA. For

example, the educational loans made by

a service corporation do not count

against the parent thrift’s educational

lending cap (5% of assets).

• Include certain activities that the

OTS already routinely approves on a

case-by-case basis (i.e., foreign currency

exchange, operating a collection agency,

and distributing welfare benefits).

• Specifically include community

development and charitable activities,

including investing in community

development financial institutions.

• Allow business and professional

activities that involve financial

documents, financial clients, or are

generally finance-related to be

performed for any person. These

activities—clerical, accounting, and

internal auditing services, advertising,

liquidity management and credit

analysis, developing personnel benefit

plans, establishing and maintaining

remote service units, and purchasing

office supplies and equipment—

currently have been preapproved only

when performed for other financial

institutions.

• Expand the list to include a limited

number of services that have not been

previously authorized, but are

reasonably related to the operation of a

federal savings association and have

been permitted for bank operating

subsidiaries and bank service

corporations. These include financial

courier services and check and credit

card guaranty and verification services.

OTS seeks comment on whether

certain other activities that have been

permitted only upon application, such

as acting as an insurance agent for

private mortgage insurance, or

underwriting insurance or reinsurance,

should be preapproved activities for

service corporations.

Section 559.4 How Much May a

Savings Association Invest in Service

Corporations? (Proposed)

This proposed section replaces

current § 545.74(d). It reiterates that a

savings association may invest in the
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29981

14The LTOB regulation is also being amended to

clarify that it does apply to service corporations. It

will remain inapplicable to a savings association’s

loans to its operating subsidiaries.

aggregate 3% of its assets in one or more

service corporations as long as the

excess investment over 2% serves

primarily community, inner city, or

community development purposes. In

addition, the proposal revises and

significantly simplifies the rules

governing when a federal savings

association may make loans to service

corporations separate from the 3% of

assets limit. Such loans are only

permitted when:

(1) The federal savings association has

the authority elsewhere under the

HOLA to make the loan;

(2) The thrift has adequate capacity

under any applicable percentage of

assets limit to make the loan (e.g., 10%

of assets for commercial loans); and

(3) The loan complies with the loansto-one borrower regulation.14

This proposed treatment is more

consistent with the OCC’s treatment of

loans to bank service corporations. It

would remove the current aggregate

regulatory limit of 50% of capital on

loans to multiple service corporations,

but subjects loans to any one service

corporation to the LTOB requirements.

A thrift (like a bank) would be able to

exceed this limit only when making

loans to a service corporation that are

secured with exceptionally high quality

collateral.

Subpart B—Regulations Applicable to

All Savings Associations (Proposed)

Section 559.10 What Must a Savings

Association and Its Subsidiary Do To

Maintain Separate Corporate Identities?

This section describes what a savings

association and its subsidiaries must do

to establish that they have separate

identities. The purpose for these

requirements is to reduce the potential

for customer confusion or for a court to

hold the parent liable for the

subsidiary’s conduct or obligations. The

requirements are derived from current

§§ 545.81(f), 563.37, and 571.21.

Section 559.11 What Notices Are

Required To Establish or Acquire a New

Subsidiary or Engage in New Activities

Through an Existing Subsidiary?

This section combines and

streamlines the overlapping notice

requirements currently contained in

§§ 545.74(b)(2), 545.81(c), and 563.37(c).

Section 559.12 How May a Subsidiary

of a Savings Association Issue

Securities?

This section replaces current

§ 563.132 and reiterates its basic

requirement: a savings association must

notify OTS before a subsidiary issues

securities. The section also incorporates

requirements from existing § 545.82,

requiring that securities issued by all

subsidiaries indicate that they are not

covered by federal deposit insurance

and may not be called or accelerated in

the event of the savings association’s

insolvency.

Section 559.13 How May a Savings

Association Exercise Its Salvage Power

in Connection With Its Service

Corporation?

This section replaces the application

procedure of current § 563.38 with a 30-

day notice requirement. In its notice, an

institution must fully document its

additional investment in a manner that

demonstrates how its action is

consistent with safety and soundness

and document other salvage alternatives

considered. The agency may take

objection to, or grant conditional

approval of, a notice to exercise salvage

power to assist a troubled service

corporation.

B. Amendments to Proposed New Part

560—Lending and Investment

OTS is also proposing to add

provisions dealing with subsidiary and

equity-related investments to proposed

new part 560—Lending and

Investments.

Section 560.30 General Lending and

Investment Powers for Federal Savings

Associations

In the interest of completeness, OTS

proposes to add several equity- and

subsidiary-related investments to the

lending and investment powers chart

contained in this regulation. The chart

will now include investments in small

business investment corporations

chartered pursuant to section 301(d) of

the Small Business Act, open-end

management investment companies,

and service corporations.

Section 560.32 Pass-Through

Investments

This new section will codify federal

savings associations’ authority to invest

in entities, such as limited partnerships

and mutual funds, that hold only assets,

and engage only in activities,

permissible for federal savings

associations. Unlike an operating

subsidiary, a thrift does not have

effective operating control over such

investments. To allow thrifts flexibility

while maintaining effective OTS

supervision of such investments, OTS

proposes to establish a safe harbor.

Investments made in accordance with

the safe harbor standards will not

require advance notice to OTS. Under

the safe harbor, a federal savings

association may invest up to 15% of its

capital without prior OTS approval in:

(1) A limited partnership;

(2) An open-end management

investment company (mutual fund);

(3) A closed-end investment trust; or

(4) An entity in which the federal

savings association invests primarily to

use the services provided (e.g., data

processing);

so long as the entity in which the

investment is made:

(1) Is engaged solely in activities in

which the federal savings association

itself may engage directly; and

(2) Would not be controlled by the

savings association;

and the thrift:

(1) Has liability limited to the amount

of its investment;

(2) Has adequate capacity within the

relevant HOLA investment category

(e.g., 10% of assets for commercial

loans);

(3) Is able to monitor internal

managerial controls to ensure they are

equivalent to those the thrift would be

required to have in place if engaging in

the activity directly; and

(4) Does not, after making the

investment, have more than 50% of its

capital invested in pass-through

investments.

A savings association must provide

written notice to OTS before making any

pass-through investment that does not

meet the foregoing standards. OTS will

review these notices and may object or

impose conditions for supervisory,

legal, or safety and soundness reasons.

This structure will clarify the rules

applicable to pass-through investments,

thereby enhancing savings association

access to this investment option and

establishing uniform safety and

soundness constraints. This structure

will ensure that the OTS is aware of,

and has opportunity to object, to any

move by a thrift to place significant

amounts of its assets under the

operating control of third parties.

OTS solicits comments on whether

other structures, such as limited liability

companies, should be preapproved.

Section 560.33 De Minimis

Investments

OTS and its predecessor have long

recognized that a federal savings

association’s incidental powers include

the ability to make charitable

contributions that assist its community.

In the past, thrifts have sometimes

requested permission to make (and

book) de minimis equity investments in

community organizations in an amount
29982 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

equal to what they could otherwise

directly contribute. To further thrifts’

community development activities, OTS

proposes to add a section specifically

confirming that a federal savings

association may make these types of de

minimis investments. The proposed

regulation provides that the investments

must be of a type that would be

permissible for a national bank under 12

CFR Part 24 and in the aggregate may

not exceed the greater of $100,000 or

one-fourth of 1% of a thrift’s total

capital.

C. Disposition of Existing Regulations

Part 545 Operations (Federal Savings

Associations)

Section 545.74 Service Corporations

Paragraph (a) of § 545.74 defines

terms specific to the service corporation

section. The OTS is proposing to

remove this paragraph. The operative

provisions of new part 559 will cover

the matters now addressed by the

definitions.

Paragraph (b) begins by restating the

broad statutory authority of federal

savings associations under section

5(c)(4)(B) of the HOLA to invest in

service corporations that are organized

under the laws of the state in which the

association’s home office is located.

This authority will be incorporated into

the proposed lending/investment chart

in part 560, with a cross-reference to the

more extensive provisions contained in

proposed part 559.

Paragraphs (b)(1)–(5) set forth general

notice, application, examination, and

activities provisos. The proposed

subsidiaries chart at § 559.2(e)(2)

incorporates the requirement in

paragraph (b)(1) that a service

corporation’s activities be either preapproved by regulation or specifically

approved by application. The OTS

proposes to move the notice

requirements contained in paragraph

(b)(2) into new § 559.11. Paragraph

(b)(3) requires weaker savings

associations to apply to OTS for

permission to engage in any activities

beyond what a federal savings

association may conduct directly. This

requirement has been incorporated into

proposed § 559.2(e)(2)(ii). The

examination requirement currently

found in paragraph (b)(4) will be

included in the subsidiaries chart at

§ 559.2(o)(2). The restriction on

activities where OTS has supervisory

objections contained in paragraph (b)(5)

has been incorporated into the

introductory text of § 559.1.

Paragraph (c) of § 545.74 first sets

forth the OTS’s general rule that federal

savings associations may invest in

service corporations that can engage in

such activities reasonably related to the

activities of federal associations as the

OTS may approve. The OTS proposes to

retain this general rule and move it to

the new subsidiaries chart at

§ 559.2(e)(2). Paragraph (c) next explains

how to apply for approval to engage in

such activities. OTS proposes to

incorporate this requirement into the

chart at § 559.2(e)(2)(iii).

The next sentence in paragraph (c)

authorizes service corporations of most

savings associations to engage in the

listed preapproved activities upon

satisfying a notice requirement. This

requirement has been moved to

§ 559.2(e)(2)(i).

Finally, paragraph (c) lists the

preapproved activities. The proposal

would replace this list with a revised,

updated compilation of new

preapproved activities. For example,

currently, a variety of activities that a

federal savings association itself may

conduct are scattered throughout the list

as preapproved for service corporations.

Instead of individually listing these

activities, the proposal simply

preapproves for service corporations all

activities that a thrift may conduct

directly, other than taking deposits. The

list would be reorganized by grouping

related activities and moving the list to

proposed § 559.3, as discussed more

fully in section IV.A. of this preamble.

Paragraph (c)(4) contains safeguards

that apply to securities brokerage

activities of service corporations. These

safeguards will remain in that

paragraph, with one exception, while

OTS considers whether to incorporate

them into new part 559, or modify the

safeguards and apply them to all

securities sales programs taking place

on thrift premises by subsidiaries,

affiliates, and broker dealers. OTS is

proposing to remove paragraph

(c)(4)(ii)(F), which has barred savings

associations (not their service

corporations) from contracting with

third parties for securities brokerage

activities. This restriction predates the

1994 Interagency Guidelines on Retail

Sales of Nondeposit Investment

Products. The Guidelines now contain

safeguards to ensure that any

contractual relationship with a thirdparty broker-dealer will be conducted in

a proper manner. Thus, paragraph

(c)(4)(ii)(F) has become unnecessary.

Removing this restriction will provide

thrifts with greater flexibility in

structuring operations involving the sale

of nondeposit investment products.

Paragraph (d) addresses the

permissible aggregate amount of

investments in, or loans to, service

corporations by a federal thrift. The

HOLA specifically authorizes thrifts to

invest up to 3% of their assets in the

stock and obligations of service

corporations (generally, 2%

undesignated authority plus an

additional 1% for communitydevelopment). Since 1970, the

regulations have allowed a federal thrift

to make additional loans to its service

corporations if the thrift has the

authority under the HOLA to make the

same loan to a third party. This lending

authority has been subject to limitations

that changed over time, but has always

been separate and apart from the 3% of

assets limitation.

For example, the current regulatory

provisions allow a federal thrift to make

‘‘conforming loans’’ of up to 100% of its

capital to any service corporation in

which the thrift has an ownership

interest of less than 10%, with no

aggregate limit. A separate aggregate

limit of 50% of capital applies to loans

made to all other service corporations.

‘‘Conforming loans’’ is broadly defined

at § 545.74(a)(2) as any type of loan a

federal savings association may make

except for nonconforming real estate

loans and unsecured construction loans.

Thus, if a thrift currently has only one

wholly-owned service corporation, it

may, to the extent it has commercial

loan authority available under the

statutory 10% of assets limit, make

commercial loans to its service

corporation of up to 50% of its capital.

When these provisions were last

substantively amended in 1985, the

100% of capital limit paralleled the

then-existing LTOB limit. The

percentage limits in the regulation do

not reflect the new lower LTOB limit of

12 CFR 563.93, although paragraph (d)

does state that these loans are subject to

any applicable LTOB requirements. The

LTOB regulation itself, however, states

that it does not apply to loans made to

subsidiaries.

As the foregoing overview indicates,

the rules governing service corporation

investment limits and conforming loans

are needlessly complex and confusing,

and in some respects inconsistent. The

OTS proposes to substantially revise

and simplify these rules and incorporate

them into new § 559.4, as discussed

more fully in Section IV.A. of this

preamble.

Paragraph (e) describes the

circumstances under which a federal

savings association must dispose of its

investment in a service corporation. The

OTS proposes to retain this paragraph in

the new subsidiaries chart as

§ 559.2(q)(2).
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29983

15 12 U.S.C. 1464(c)(1)(Q).

Section 545.76 Investment in OpenEnd Management Investment

Companies

Paragraph (a) reiterates the HOLA’s

statutory grant of authority to federal

savings associations to buy, sell or

otherwise deal in registered securities of

any open-end management investment

company that restricts its portfolio to

investments that federal savings

associations may buy, sell or otherwise

deal in without limitation as to

percentage of assets.15 The OTS

proposes to incorporate this provision

into the lending and investment chart in

proposed § 560.30. An endnote to that

chart will indicate that federal thrifts

may be able to invest limited amounts

in a broader range of pass-through

investments under proposed new

§ 560.32.

Paragraph (b) provides that the

maximum investment a federal thrift

may make in any one open-end

management investment company is

limited to 5% of total assets. Paragraph

(b) also applies the regulatory

limitations imposed on a federal thrift’s

investments in commercial paper and

corporate debt securities to the

commercial paper and corporate debt

securities investments of open-end

management investment companies in

which thrifts invest. The OTS proposes

to remove paragraph (b) because its

subject matter will be covered by the

pass-through investment provisions of

proposed new § 560.32.

Section 545.80 Small Business

Investment Corporations

Section 545.80 reiterates section

5(c)(4)(D) of the HOLA’s grant of

statutory authority for federal savings

associations to invest in small business

investment corporations pursuant to

section 301(d) of the Small Business

Investment Company Act of 1958. The

proposal moves this section into the

proposed lending and investment

powers chart in § 560.30.

Section 545.81 Operating Subsidiaries

Paragraph (a) sets forth federal savings

associations’ authority to establish or

acquire operating subsidiaries subject to

certain requirements. The OTS proposes

to incorporate this paragraph into the

introductory text of § 559.2.

Paragraph (b) defines the term

‘‘operating subsidiary.’’ The substance

of this definition would be covered in

the proposed subsidiaries chart as

§ 559.2 (c)(1) and (e)(1).

Paragraph (c) spells out the notice and

application requirements that a federal

savings association must meet to acquire

or establish an operating subsidiary.

Paragraph (c)(1) contains requirements

for federal savings associations that are

eligible for ‘‘expedited treatment’’ in the

processing of applications as defined in

§ 516.3. Paragraph (c)(2) covers

requirements for all other federal

savings associations. In general,

institutions that qualify for expedited

treatment need only give 30 days notice

to OTS before establishing an operating

subsidiary, whereas other institutions

must file an application and obtain

advance approval. OTS proposes to

apply the notice procedure to all

institutions. Because operating

subsidiaries can only engage in

activities that are permissible for federal

thrifts themselves, requiring a formal

application and advance approval seems

unduly burdensome. OTS can always

object during the 30-day notice period

in the unlikely event that an operating

subsidiary proposal raises concerns.

Paragraph (c)(3) addresses the

additional notice requirements of

section 18(m) of the FDIA, the

regulations associated with section

18(m) and all applicable clearances

under those requirements. The notice

requirements will be consolidated with

similar requirements for all subsidiaries

and moved into the new notice § 559.11.

Paragraph (d) details the conditions

under which a federal savings

association may convert its service

corporation to an operating subsidiary.

The OTS proposes to substantially

simplify this paragraph and incorporate

the conditions in new § 559.2(p).

Paragraph (e) indicates that all federal

laws, regulations and policies of the

OTS covering the operations of federal

thrifts apply to the operations of

operating subsidiaries. The paragraph

also requires consolidation of the parent

association and its operating subsidiary

for application of statutory and

regulatory requirements and limitations,

unless otherwise provided by statute,

regulation or OTS policy. OTS proposes

to incorporate the substance of this

paragraph into the subsidiaries chart at

§ 559.2(h)(1).

Paragraph (f) subjects operating

subsidiaries and their parent federal

savings associations to the same

separate corporate existence

requirements as apply to service

corporations of savings associations

under 12 CFR 571.21 and 563.37. As

discussed below, OTS proposes to

consolidate these overlapping sections

into a new § 559.10.

Paragraph (g) subjects each operating

subsidiary to the same examination and

supervision authority as its parent

federal savings association. This

requirement will be included in the

subsidiaries chart at § 559.2(o)(1).

Paragraph (h) provides that OTS may

limit, at any time, the activities of an

operating subsidiary for supervisory or

legal reasons. OTS proposes to place

this provision in § 559.1(a).

Paragraph (i) sets forth OTS’s

authority to impose conditions on an

operating subsidiary for supervisory,

legal or safety and soundness reasons.

This authority has also been inherent in

the review of the establishment of, or

commencement of new activities by,

service corporations, but has not been

specifically set forth in regulation. The

OTS proposes to move this paragraph to

§ 559.1(b), where it will explicitly apply

to all conditions contained in all

approvals affecting subsidiaries.

Paragraph (j) authorizes parent

savings associations to own a deposittaking operating subsidiary under

certain conditions. This authority would

be retained and included in the

proposed subsidiaries chart at

§ 559.2(e)(1)(ii).

Paragraph (k) addresses changing

from an operating subsidiary to a service

corporation. The OTS proposes to

incorporate this provision into the

subsidiaries chart at § 559.2(p), where

the rules governing changes from a

service corporation to an operating

subsidiary will also be stated.

Section 545.82 Finance Subsidiaries

Section 545.82 authorizes federal

savings associations to establish

subsidiaries solely for the purpose of

issuing securities that the thrift may

issue directly. Thrifts were authorized

to establish finance subsidiaries before

being authorized to establish operating

subsidiaries. Because operating

subsidiaries may perform the same

activities as finance subsidiaries

without as many restrictions, the OTS

proposes to delete this section as

redundant and obsolete, except for

paragraphs (d)(2) and (d)(3). Paragraph

(d)(2) of current § 545.82 prohibits a

finance subsidiary from issuing or

dealing in the deposits or savings

accounts of its parent federal savings

association and from representing in

any way that securities issued by it are

insured by the Federal Deposit

Insurance Corporation. Paragraph (d)(3)

prohibits a finance subsidiary from

issuing any security that would permit

accelerated payment, maturity or

redemption upon the condition that its

parent federal savings association was

insolvent or had been placed in

receivership. The agency believes both

of these restrictions should apply to the

issuance of securities by any subsidiary

of a federal savings association.
29984 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

16 12 U.S.C. 1464(t)(5)

Therefore, it proposes to incorporate

them into proposed § 559.12, which will

replace current § 563.132 and cover

those issuances, as discussed below.

Because the requirements for finance

subsidiaries go beyond those applicable

to operating subsidiaries, OTS proposes

to deem all existing finance subsidiaries

to be operating subsidiaries for all

purposes.

Part 563—Operations

Section 563.37 Operation of Service

Corporation, Liability of Savings

Association for Debt of Service

Corporation

Paragraphs (a) and (b) of section

563.37 require savings associations and

their service corporations to maintain a

separate corporate existence and

insulate the thrift from liability for debt

of its service corporation. The OTS

proposes to combine these requirements

with those of 12 CFR 571.21, the policy

statement regarding separate corporate

existence of a service corporation, and

move them into a new § 559.10.

Paragraph (c), which sets forth notice

requirements for all savings association

service corporations (not just service

corporations of federal thrifts), would be

incorporated in the new notice section,

§ 559.11, where the notice requirements

applicable to federal thrift service

corporations will also appear.

Section 563.38 Salvage Power of

Savings Association To Assist Service

Corporation

Section 563.38 addresses a savings

association’s use of its salvage power to

assist a troubled service corporation.

The salvage power doctrine permits a

thrift to exceed applicable investment

limitations where an infusion of

additional capital is necessary to

preserve the existing investment.

Paragraph (a) prohibits a savings

association from exercising its salvage

power to assist a troubled service

corporation without prior OTS

approval. Paragraph (b) conditions such

approval on the OTS receiving an

application demonstrating that the

proposed action ‘‘is for the protection of

the savings association’s investment and

is consistent with safe, sound, and

economical home financing.’’ The

application must also address

alternative solutions, including those

not involving financial assistance, to the

service corporation’s financial problem,

and contain other information as the

OTS deems necessary.

While it is important for the OTS to

have advance knowledge of proposed

salvage investments in service

corporations, the OTS proposes to

reduce burden by substituting a notice

for the current application. While the

notice would still contain much of the

current information, the change would

allow the savings association to make

the salvage investment if OTS had not

objected to the notice or imposed

conditions within 30 days. The notice

requirement will appear as new

§ 559.13.

Section 563.41 Loans and Other

Transactions With Affiliates and

Subsidiaries.

OTS proposes to modify the

definition of ‘‘subsidiary’’ in this

regulation to mirror the statutory

definition of section 23A of the Federal

Reserve Act, 12 U.S.C. 371c, rather than

the OTS capital regulation. This will

make it clear that the scope of the

subsidiaries covered by the regulation is

the same for thrifts as for banks.

Section 563.93 Lending Limitations

Similarly, the OTS proposes to amend

the scope of its loans-to-one-borrower

regulation to better conform with the

scope of the OCC’s lending limits

regulation. This section will not apply

to loans to a thrift’s operating

subsidiaries, but will apply to loans to

its service corporations.

Section 563.132 Securities Issued

Through Subsidiaries

This section requires savings

associations to notify OTS when issuing

securities through a subsidiary. OTS

proposes to remove outdated provisions

from this section and transfer the

remaining notice requirements to new

§ 559.12.

Paragraph (a), which defines terms for

this section, is being deleted as those

terms are no longer necessary.

Paragraph (b), which excludes certain

securities in addressing the amount of

securities issued by a subsidiary, is

being removed as obsolete. The

proposed regulation does not limit the

amount of securities a subsidiary may

issue.

Paragraph (c) sets forth the notice and

application requirements that a parent

savings association must satisfy prior to

establishing a finance subsidiary,

transferring additional assets to an

existing finance subsidiary, or issuing

securities through a subsidiary defined

in paragraph (a)(1)(ii) of the section. The

OTS proposes to modify the notice

requirements of paragraph (c) by

removing the references and

requirements pertaining to finance

subsidiaries and by reducing the

application requirements to uniform

notice requirements.

Part 567—Capital

Section 567.1 Definitions

OTS proposes to amend two

definitions in its capital regulation.

First, § 567.1(dd), which defines

subsidiary, is being amended to mirror

the OCC’s definition of a subsidiary in

its risk-based capital regulation, 12 CFR

Part 3, Appendix A. This definition is

more consistent with GAAP, defining a

subsidiary as a company where the

institution owns a majority of the stock.

Currently, OTS employs a much broader

definition of subsidiary, which can

sometimes result in higher capital

requirements. Proposed § 567.1(dd)

includes language from the footnote

currently located in § 567.1(dd), which

provides that OTS reserves the right to

review investments on a case-by-case

basis to determine whether the

investment is more appropriately

treated as a subsidiary or as an equity

investment.

Second, § 567.1(l), which defines

‘‘includable subsidiary,’’ currently

encompasses subsidiaries that ‘‘directly

or indirectly’’ engage in any activity not

permissible for a national bank. The

regulatory reference to ‘‘indirect’’

activities, which does not appear in the

statutory provision upon which the

regulation is based,16 has been

interpreted (in the Thrift Financial

Report) as requiring a savings

association’s entire investment in a

subsidiary engaged exclusively in

activities permissible for national banks

to be deducted from capital if a lowertier subsidiary engages in any activity

impermissible for a national bank.

Deduction is required even when the

first-tier subsidiary’s investment in the

lower-tier subsidiary constitutes a

minute portion of its total assets.

Eliminating the regulatory reference to

‘‘indirect’’ activities will enable OTS to

revise the instruction in the Thrift

Financial Report. Thereafter, savings

associations will only be required to

deduct the actual amount of their

indirect investment in the lower-tier

nonincludable subsidiary.

Part 571—Statements of Policy

Section 571.21 Separate Corporate

Existence of a Service Corporation

Paragraph (a) sets forth the attributes

of corporate separateness that should be

maintained by a savings association and

its service corporation. Maintaining this

separate corporate identity is important

to minimize the risks that a court, for

equitable reasons, might pierce the

corporate veil of a service corporation

and hold the parent savings association
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29985

liable for the obligations or conduct of

its service corporation. Paragraph (b), in

addressing operation of service

corporations and monitoring their

compliance with paragraph (a),

references § 563.37(a) and reiterates the

potential for serious risk to the savings

association from failure to maintain

corporate separateness. The proposal

would incorporate the substantive

requirements of § 571.21 and § 563.37

into new § 559.10, which will apply to

all subsidiaries.

V.—CHART SHOWING THE PROPOSED DISPOSITION OF REGULATIONS

Original provision New provision Comment

545.74(a) ........................................................................................................................ ............................................ Removed

545.74(b) introductory text ............................................................................................. 560.30 ................................ Incorporated into lending

and investment powers

chart.

545.74(b)(1) .................................................................................................................... 559.2(e)(2)

545.74(b)(2) .................................................................................................................... 559.11

545.74(b)(3) .................................................................................................................... 559.2(e)(2)(ii)

545.74(b)(4) .................................................................................................................... 559.2(o)(2)

545.74(b)(5) .................................................................................................................... 559.1(a)

545.74(c) introductory text ............................................................................................. 559.2(e)(2)

545.74(c)(1)–(7) ............................................................................................................. 559.3

545.74(d) ........................................................................................................................ 559.4 .................................. Substantially revised.

545.74(e) ........................................................................................................................ 559.2(q)(2)

545.76(a) ........................................................................................................................ 560.30

545.76(b) ........................................................................................................................ ............................................ Removed.

545.80 ............................................................................................................................ 560.30

545.81(a) ........................................................................................................................ 559.2

545.81(b) ........................................................................................................................ 559.2(c)(1), (e)(1)

545.81(c)(1),(2) .............................................................................................................. 559.2(a)(1)

545.81(c)(3) .................................................................................................................... 559.11

545.81(d) ........................................................................................................................ 559.2(p)

545.81(e) ........................................................................................................................ 559.2(h)(1)

545.81(f) ......................................................................................................................... 559.10

545.81(g) ........................................................................................................................ 559.2(o)(1)

545.81(h) ........................................................................................................................ 559.1(a)

545.81(i) ......................................................................................................................... 559.1(b) .............................. Modified.

545.81(j) ......................................................................................................................... 559.2(e)(1)(ii)

545.81(k) ........................................................................................................................ 559.2(p)

545.82 ............................................................................................................................ ............................................ Removed.

563.37(a), (b) ................................................................................................................. 559.10 ................................ Modified.

563.37(c) ........................................................................................................................ 559.11

563.38 ............................................................................................................................ 559.13 ................................ Modified.

563.41(b)(4) .................................................................................................................... ............................................ Modified.

563.93(a) ........................................................................................................................ ............................................ Modified.

563.132(a),(b) ................................................................................................................. ............................................ Removed.

563.132(c) ...................................................................................................................... 559.12 ................................ Modified.

567.1(l) ........................................................................................................................... ............................................ Modified.

567.1(dd) ........................................................................................................................ ............................................ Modified.

571.21 ............................................................................................................................ 559.10 ................................ Modified.

VI. Request for Comment

The OTS requests comments on all

aspects of this proposal.

VII. Paperwork Reduction Act

The reporting requirements contained

in this proposed rule have been

submitted to the Office of Management

and Budget for review in accordance

with the Paperwork Reduction Act of

1995. Comments on the collection of

information should be sent to the Office

of Management and Budget, Paperwork

Reduction Project (1550), Washington,

DC 20503, with copies to the Office of

Thrift Supervision, 1700 G Street, NW.,

Washington, DC 20552.

Comments are invited on (i) whether

the collection of information is

necessary for the proper performance of

the functions of the agency, including

whether the information shall have

practical utility, (ii) the accuracy of the

estimate of the burden of the collection

of information, (iii) ways to enhance the

quality of the information collected, and

(iv) ways to minimize the burden of the

collection of information on

respondents, including the use of

automated collection techniques or

other forms of information technology.

The reporting requirements in this

proposed rule are currently found in 12

CFR 545.74, 545.81, 563.38, and

563.132. These requirements will be

now be found in §§ 559.2, 559.3, 559.11,

559.12, and 559.13. These requirements

are currently addressed in the following

OMB approved packages: Control Nos.

1550–0013; 1550–0077; and 1550–0065.

We are proposing to repeal § 545.82

(finance subsidiaries) and the related

OMB package (Control No. 1550–0033).

The requirements in new § 560.32

will be reflected in the OMB approved

package No. 1550–0078. The package

has been amended to reflect the

following data for the requirements in

new § 560.32.

The information is needed by the OTS

to assist in regulating savings

associations and their subsidiaries.

Estimated number of respondents:

1,460.

Estimated average burden per

respondent: 8 hours.

Estimated annual frequency of

responses: 1.

Estimated total annual reporting

burden: 11,680.
29986 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

Under the Paperwork Reduction Act

of 1995, no persons are required to

respond to a collection of information

unless it displays a valid OMB control

number. The valid OMB control number

assigned to the collection of information

in these proposed regulations will be

displayed in the table at 12 CFR

506.1(b).

VIII. Executive Order 12866

The Director of the OTS has

determined that this proposed rule does

not constitute a ‘‘significant regulatory

action’’ for the purposes of Executive

Order 12866.

IX. Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the OTS

certifies that this proposed rule will not

have a significant economic impact on

a substantial number of small entities.

The proposal reorganizes the regulation

to make it easier for small savings

associations to locate applicable rules. It

streamlines requirements for all savings

associations. It simplifies the applicable

requirements when savings associations

create, invest in, or conduct new

activities through subsidiaries and

clarifies the statutorily required notices

for such actions.

X. Unfunded Mandates Act of 1995

Section 202 of the Unfunded

Mandates Reform Act of 1995, Pub. L.

104–4 (Unfunded Mandates Act)

requires that an agency prepare a

budgetary impact statement before

promulgating a rule that includes a

federal mandate that may result in

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.

As discussed in the preamble, this

proposed rule streamlines and reduces

requirements on savings associations.

The OTS has therefore determined that

the proposed rule will not result in

expenditures by state, local, or tribal

governments or by the private sector of

$100 million or more. Accordingly,

sections 202 and 205 do not require a

budgetary impact statement or

discussion of regulatory alternatives to

this proposal.

List of Subjects

12 CFR Part 545

Accounting, Consumer protection,

Credit, Electronic funds transfers,

Investments, Manufactured homes,

Mortgages, Reporting and recordkeeping

requirements, Savings associations.

12 CFR Part 559

Savings associations, Subsidiaries.

12 CFR Part 560

Consumer protection, Investments,

Manufactured homes, Mortgages,

Reporting and recordkeeping

requirements, Savings associations,

Securities.

12 CFR Part 563

Accounting, Advertising, Crime,

Currency, Flood insurance, Investments,

Morgages, Reporting and recordkeeping

requirements, Savings associations,

Securities, Surety bonds.

12 CFR Part 567

Capital, Savings associations.

12 CFR Part 571

Accounting, Conflict of interests,

Investments, Reporting and

recordkeeping requirements, Savings

associations.

Accordingly, and for the reasons set

forth in the preamble, the Office of

Thrift Supervision proposes to amend

chapter V, title 12, Code of Federal

Regulations, as set forth below.

PART 545—OPERATIONS

1. The authority citation for part 545

continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464,

1828.

§ 545.74 [Amended]

2. Section 545.74 is amended by

removing and reserving paragraphs (a),

(b), (d) and (e), by amending paragraph

(c) by removing and reserving the

introductory text and paragraphs (c)(1)

through (c)(3) and (c)(5) through (c)(7),

by removing and reserving paragraph

(c)(4)(ii)(F), and by amending the

introductory text to paragraph (c)(4)(i)

by removing the words ‘‘Execution of’’

and adding in their place ‘‘A service

corporation may execute’’.

§§ 545.76, 545.80 through 545.82

[Removed]

3. Sections 545.76, 545.80, 545.81,

and 545.82 are removed.

4. Part 559 is added to read as follows:

PART 559—SUBSIDIARIES

Sec.

559.1 What does this part cover?

Subpart A—Regulations Applicable to

Federal Savings Associations

559.2 What are the characteristics of, and

what requirements apply to, operating

subsidiaries and service corporations of

federal savings associations?

559.3 What activities are preapproved for

service corporations?

559.4 How much may a savings association

invest in service corporations?

Subpart B—Regulations Applicable to All

Savings Associations

559.10 What must a savings association and

its subsidiary do to maintain separate

corporate identities?

559.11 What notices are required to

establish or acquire a new subsidiary or

engage in new activities through a

subsidiary?

559.12 How may a subsidiary of a savings

association issue securities?

559.13 How may a savings association

exercise its salvage power in connection

with its service corporation?

Authority: 12 U.S.C. 1462, 1462a, 1463,

1464, 1828.

§ 559.1 What does this part cover?

(a) Subpart A of this part 559 contains

requirements applicable to operating

subsidiaries and service corporations of

federal savings associations. Subpart B

of this part 559 applies to subsidiaries

of all savings associations. OTS is

issuing this part 559 pursuant to its

general rulemaking and supervisory

authority under the Home Owners’ Loan

Act, 12 U.S.C. 1462 et seq., and its

specific authority under section 18(m)

of the Federal Deposit Insurance Act, 12

U.S.C. 1828(m). OTS may at any time

limit a savings association’s investment

in a subsidiary or service corporation, or

may limit or refuse to permit any

activities of a subsidiary or service

corporation for supervisory, legal, or

safety and soundness reasons.

(b) Notices under this part are deemed

to be applications for purposes of

statutory and regulatory references to

‘‘applications.’’ Any conditions that

OTS imposes for supervisory, legal, or

safety and soundness reasons in

approving any application shall be

enforceable as a condition imposed in

writing by the OTS in connection with

the granting of a request by a savings

association within the meaning of 12

U.S.C. 1818(b) or 1818(i).

Subpart A—Regulations Applicable to

Federal Savings Associations

§ 559.2 What are the characteristics of,

and what requirements apply to, operating

subsidiaries and service corporations of

federal savings associations?

A federal savings association (‘‘you’’)

that meets the requirements of this

section, as detailed in the following

chart, may establish, acquire, or acquire
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29987

in an interest in an operating subsidiary

or a service corporation. For ease of

reference, this section cross-references

other regulations in this chapter

affecting subsidiaries. You should refer

to those regulations for the details of

how they apply to an operating

subsidiary or a service corporation. The

chart follows:

Operating subsidiaries Service corporations

(a) How may a savings association establish an operating subsidiary or a

service corporation?

(1) To establish an operating subsidiary, you must

file a notice satisfying § 559.11

(2) To establish a service corporation, you must

file a notice satisfying § 559.11. Depending

upon your condition and the activities in which

the service corporation will engage, you may

have to submit an application under

§ 559.2(e)(2).

(b) Who may own stock? (1) Anyone may own stock in an operating subsidiary(2) Only savings associations with home offices in

the state where you have your home office may

own stock in any service corporation in which

you invest.

(c) What are the ownership requirements?(1) You must hold at least 50% of the voting stock

of the operating subsidiary. No one else may

exercise effective operating control

(2) You are not required to hold a particular

amount of stock and need not have control of

the service corporation.

(d) Where may the subsidiary be incorporated?(1) There are no geographic restrictions on where

an operating subsidiary may be incorporated.

(2) A service corporation must be incorporated in

the state where your home office is located.

(e) What activities are permissible? (1)(i) After you have notified OTS in accordance

with § 559.11, an operating subsidiary may engage in any activity that you may conduct directly.

(2) (i) If you are eligible for expedited treatment

under § 516.3(a) of this chapter, and notify OTS

as required by § 559.11, your service corporation may engage in activities listed in § 559.3.

(ii) You may hold another insured depository institution as an operating subsidiary.(ii) If you are subject to standard treatment under

§ 516.3(b) of this chapter, you must apply and

receive OTS approval for your service corporation to engage in any activities except those authorized by § 559.3(a).

(iii) Any finance subsidiary that existed on [insert

effective date of final rule] shall be deemed an

operating subsidiary.

(iii) A service corporation may also engage in any

activity reasonably related to the activities of financial institutions, but not preapproved under

§ 559.3, after applying to OTS in accordance

with § 516.1 of this chapter and receiving OTS’s

prior written approval.

(f) May the subsidiary invest in other

entities?

(1)(i) An operating subsidiary may itself hold an

operating subsidiary. All of the requirements of

this part 559 apply equally to such a lower tier

operating subsidiary. In applying the regulations

in this part, operating subsidiaries should substitute ‘‘operating subsidiary’’ wherever this part

refers to ‘‘you’’ or ‘‘savings association.’’

(2) A service corporation may invest in other entities, including corporations, partnerships, and

other joint ventures. All of the requirements of

this part apply equally to such entities except for

paragraphs (b)(2), (d)(2), and (g)(2) of this section.

(ii) An operating subsidiary may invest in a service

corporation. Such a service corporation is subject to all of the requirements of this part.

(g) Are there any limits on how much a

savings association may invest?

(1) There are no limits on the amount you may invest in your operating subsidiaries, either separately or in the aggregate..(2) You may invest up to the amounts set forth in

§ 559.4 in service corporations.

(h) Do federal statutes and regulations

that apply to the savings association

also apply to its subsidiaries?

(1) Unless otherwise specifically provided by statute, regulation, or OTS policy, all federal statutes and regulations apply to operating subsidiaries in the same manner as they apply to you.

You and your operating subsidiary are generally

consolidated and treated as a unit for statutory

and regulatory purposes.

(2) (i) If the federal statute or regulation specifically refers to ‘‘service corporation,’’ it applies to

all service corporations, regardless of whether

you control the service corporation or whether it

would be a subsidiary under GAAP.

(ii) If the federal statute or regulation refers to

‘‘subsidiary,’’ it applies only to service corporations that you control.

(i) Do the investment limits that apply

to federal savings associations

(HOLA section 5(c) and part 560 of

this chapter) apply to subsidiaries?

(1) Your assets and those of your operating subsidiary are aggregated when calculating investment limitations.(2) Your service corporation’s assets are not subject to the same investment limitations that

apply to you.

(j) How does the capital regulation

(part 567 of this chapter) apply?

(1) Your assets and those of your operating subsidiary are consolidated for all capital purposes.(2) The capital treatment of a service corporation

depends upon whether it is an includable subsidiary. That determination is based upon factors set forth in part 567 of this chapter, including your percentage ownership of the service

corporation and the activities in which the service corporation engages.
29988 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

Operating subsidiaries Service corporations

(k) How does the loans-to-one-borrower (LTOB) regulation (§ 563.93 of

this chapter) apply?

(1) The LTOB regulation does not apply to loans

from you to your operating subsidiary or loans

from your operating subsidiary to you. Other

loans made by your operating subsidiary are

aggregated with your loans for LTOB purposes.

(2) The LTOB regulation applies to loans from you

to your service corporation, but does not apply

to loans from your service corporation to you.

Other loans made by your service corporation

are aggregated with your loans for LTOB purposes.

(l) How does transactions with affiliates

(TWA) apply to subsidiaries?

(1) Section 563.41 of this chapter explains how

TWA applies to subsidiaries.

(2) Section 563.41 of this chapter explains how

TWA applies to subsidiaries.

(m) How does the Qualified Thrift

Lender (QTL) test apply to subsidiaries?

(1) Under 12 U.S.C. 1467a(m)(5), you may determine whether you wish to consolidate the assets of a particular subsidiary for purposes of

calculating your qualified thrift investments. Section 563.51 of this chapter contains the calculations that follow from this determination.

(2) Under 12 U.S.C. 1467a(m)(5), you may determine whether you wish to consolidate the assets of a particular subsidiary for purposes of

calculating your qualified thrift investments. Section 563.51 of this chapter contains the calculations that follow from this determination.

(n) Does state law apply? (1) State law applies to operating subsidiaries only

to the extent it applies to you.

(2) State law applies to service corporations regardless of whether it applies to you.

(o) Is the subsidiary subject to examination by OTS?(1) An operating subsidiary is subject to examination by OTS.(2) A service corporation must agree in writing to

permit and to pay the cost of such examinations

as OTS deems necessary.

(p) What must be done to redesignate

an operating subsidiary as a service

corporation or a service corporation

as an operating subsidiary.

(1) Before redesignating an operating subsidiary

as a service corporation, you should consult

with the OTS Regional Director for the Region

in which your home office is located. You must

maintain adequate internal records, available for

examination by OTS, demonstrating that the redesignated subsidiary meets all of the applicable requirements of this part and that your

board of directors has approved the redesignation.

(2) Before redesignating a service corporation as

an operating subsidiary, you should consult with

the OTS Regional Director for the Region in

which your home office is located. You must

also maintain adequate internal records, available for examination by OTS, demonstrating

that the redesignated subsidiary meets all of the

applicable requirements of this part and that

your board of directors has approved the redesignation.

(q) What happens if the subsidiary fails

to comply with the requirements of

this part.

(1) If an operating subsidiary fails to continue to

qualify as an operating subsidiary for any reason, you must notify OTS. Unless otherwise advised by OTS, if the subsidiary cannot comply

within 90 days with all of the requirements for

either an operating subsidiary or a service corporation under this section, you must promptly

dispose of your investment in the subsidiary.

(2) If a service corporation, or any entity in which

the service corporation invests pursuant to paragraph (f)(2) of this section, fails to meet any of

the requirements of this section, you must notify

OTS. Unless otherwise advised by OTS, if the

subsidiary cannot comply within 90 days with all

of the requirements for either an operating subsidiary or a service corporation under this section, you must promptly dispose of your investment in the subsidiary.

§ 559.3 What activities are preapproved for

service corporations?

To the extent permitted by

§ 559.2(e)(2), a service corporation may

engage in the following activities:

(a) Any activity that all federal

savings associations may conduct

directly, except taking deposits.

(b) Business and professional services.

The following services are preapproved

for service corporations only when they

are limited to financial documents or

financial clients or are generally

finance-related:

(1) Accounting or internal audit;

(2) Advertising, marketing research

and other marketing;

(3) Clerical;

(4) Courier;

(5) Data processing;

(6) Data storage facilities operation

and related services;

(7) Office supplies, furniture, and

equipment purchasing and distribution;

(8) Personnel benefit program

development or administration;

(9) Relocation of personnel;

(10) Remote service unit operation,

leasing, ownership or establishment;

(11) Research studies and surveys;

and

(12) Software development and

systems integration.

(c) Credit related activities:

(1) Abstracting;

(2) Appraising;

(3) Collection agency;

(4) Credit analysis;

(5) Check or credit card guaranty and

verification;

(6) Escrow agent or trustee (under

deeds of trust, including executing and

deliverance of conveyances,

reconveyances and transfers of title);

(7) Leasing; and

(8) Loan inspection.

(d) Consumer services:

(1) Financial advisory or consulting;

(2) Foreign currency exchange;

(3) Home ownership counseling;

(4) Income tax return preparation;

(5) Postal services;

(6) Stored value instrument sales; and

(7) Welfare benefit distribution.

(e) Real estate related services:

(1) Acquiring real estate for prompt

development or subdivision, for

construction of improvements, for resale

or leasing to others for such

construction, or for use as manufactured

home sites, in accordance with a

prudent program of property

development;

(2) Acquiring improved real estate or

manufactured homes to be held for

rental or resale, for remodeling,

renovating, or demolishing and

rebuilding for sale or rental, or to be

used for offices and related facilities of

a stockholder of the service corporation;

(3) Maintaining and managing real

estate; and

(4) Real estate brokerage for property

owned by an association that owns

capital stock of the service corporation,

the service corporation, or a joint

venture in which the service

corporation participates.

(f) Securities brokerage, insurance and

related services:

(1) Nondeposit investment product

brokerage. Execution of transactions in

securities or other nondeposit

investment products on an agency or

riskless principal basis solely upon the

order of and for the account of

customers, provided that the service
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29989

corporation complies with the

provisions of § 545.74(c)(4) of this

chapter;

(2) Investment advice, provided that

the service corporation complies with

the provisions of § 545.74(c)(4) of this

chapter;

(3) Insurance brokerage or agency for

liability, casualty, automobile, life,

health, accident or title insurance;

(4) Liquidity management;

(5) Issuing notes, bonds, debentures or

other obligations or securities; and

(6) Purchase or sale of coins issued by

the U.S. Treasury.

(g) Investments:

(1) Tax-exempt bonds used to finance

residential real property for family

units;

(2) Tax-exempt obligations of public

housing agencies used to finance

housing projects with rental assistance

subsidies;

(3) Small business investment

companies licensed by the U.S. Small

Business Administration to invest in

small businesses engaged exclusively in

the activities listed in paragraphs (a)

through (i) of this section; and

(4) Investing in savings accounts of a

stockholder thrift.

(h) Community development and

charitable activities:

(1) Investments in governmentally

insured, guaranteed, subsidized or

otherwise sponsored programs for

housing, small farms, or businesses that

are local in character;

(2) Investments that meet the

community development needs of, and

primarily benefit, low- and moderateincome communities;

(3) Investments in low-income

housing tax credit projects and entities

authorized by statute (e.g., Community

Development Financial Institutions) to

promote community, inner city, and

community development purposes; and

(4) Establishing a corporation that is

recognized by the Internal Revenue

Service as organized for charitable

purposes under Section 501(c)(3) of the

Internal Revenue Code (26 U.S.C.

501(c)(3)) and making a reasonable

contribution to capitalize it, provided

that the corporation engages exclusively

in activities designed to promote the

well-being of communities in which the

shareholders of the service corporation

operate.

(i) Activities reasonably incident to

those listed in paragraphs (a) through

(h) of this section for service

corporations engaged in those activities.

§ 559.4 How much may a savings

association invest in service corporations?

(a) A federal savings association

(‘‘you’’) may invest in the capital stock,

obligations, and other securities of a

service corporation. Your aggregate

investment in all such service

corporations may not exceed 3% of your

assets. If you have an aggregate

outstanding investment in excess of 2%

of your assets, that excess investment

must serve primarily community, inner

city, or community development

purposes. You must designate the

investments serving those purposes,

which include:

(1) Investments in governmentally

insured, guaranteed, subsidized or

otherwise sponsored programs for

housing, small farms, or businesses that

are local in character;

(2) Investments for the preservation or

revitalization of either urban or rural

communities;

(3) Investments designed to meet the

community development needs of, and

primarily benefit, low- and moderateincome communities; or

(4) Other community, inner city, or

community development-related

investments approved by OTS.

(b) Except as provided in paragraph

(c) of this section, your aggregate

investment in service corporations

includes all loans (except accounts

payable incurred in the ordinary course

of business and paid within 60 days)

and all guarantees or take out

commitments of such loans to a service

corporation and to any entity in which

the service corporation invests, whether

or not you hold stock in that entity.

(c) In addition to the amounts you

may invest under paragraph (a) of this

section, and to the extent you have

authority under section 5(c) of the

HOLA and part 560 of this chapter, you

may make loans to any service

corporation in which you hold stock.

Such loans are subject to the loans-toone-borrower regulation, § 563.93 of this

chapter. For purposes of the investment

limits of section 5(c) of the HOLA and

part 560 of this chapter, loans under this

paragraph (c) will be aggregated with

any other loans of that type you make.

Subpart B—Regulations Applicable to

All Savings Associations

§ 559.10 What must a savings association

and its subsidiary do to maintain separate

corporate identities?

(a) Each savings association and

subsidiary thereof must be operated in

a manner that demonstrates to the

public the separate corporate existence

of the savings association and

subsidiary. Each must operate so that:

(1) Their respective business

transactions, accounts, and records are

not intermingled;

(2) Each observes the formalities of

their separate corporate procedures;

(3) Each is adequately financed as a

separate unit in the light of normal

obligations reasonably foreseeable in a

business of its size and character;

(4) Each is held out to the public as

a separate enterprise; and

(5) Unless the parent savings

association has guaranteed a loan by the

subsidiary, all borrowings by the

subsidiary indicate that the parent is not

liable.

(b) OTS regulations that apply both to

savings associations and subsidiaries

shall not be construed as requiring a

savings association and its subsidiaries

to operate as a single entity.

§ 559.11 What notices are required to

establish or acquire a new subsidiary or

engage in new activities through an existing

subsidiary?

When required by section 18(m) of the

Federal Deposit Insurance Act, a savings

association (‘‘you’’) must file a notice

(‘‘Notice’’) in accordance with § 516.1(c)

of this chapter at least 30 days before

establishing or acquiring a subsidiary or

engaging in new activities in a

subsidiary. The Notice must contain all

of the information the FDIC requires

pursuant to 12 CFR 303.13. Providing

OTS with a copy of the notice you file

with the FDIC will satisfy this

requirement. If OTS notifies you within

30 days that the Notice presents

supervisory concerns, or raises

significant issues of law or policy, you

must apply for and receive OTS’s prior

written approval in accordance with

§ 516.1(c) of this chapter before

establishing or acquiring the subsidiary

or engaging in new activities in the

subsidiary.

§ 559.12 How may a subsidiary of a

savings association issue securities?

(a) A subsidiary may issue, either

directly or through a third party

intermediary, any securities that its

parent savings association (‘‘you’’) are

authorized to issue (or if you are a

mutual savings association, would be

authorized to issue if you converted to

the stock form). The subsidiary must not

state or imply that the securities it

issues are covered by federal deposit

insurance. A subsidiary may not issue

any security the payment, maturity, or

redemption of which may be accelerated

upon the condition that you are

insolvent or have been placed into

receivership.

(b) You must file a notice with OTS

in accordance with § 516.1 of this

chapter at least 30 days before issuing

any securities through an existing

subsidiary or in conjunction with

establishing or acquiring a new

subsidiary. If OTS notifies you within
29990 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

30 days that the notice presents

supervisory concerns or raises

significant issues of law or policy, you

must receive OTS’s prior written

approval before issuing securities

through your subsidiary. The notice

must contain:

(1) The amount of your assets or

liabilities (including any guarantees you

make with respect to the securities

issuance) that you will transfer or make

available to the subsidiary; the

percentage that such amount represents

of the current book value of your assets

on an unconsolidated basis; and the

current book value of all such assets of

the subsidiary;

(2) The terms of any guarantee(s) to be

issued by you or any third party;

(3) A description of the securities the

subsidiary will issue;

(4) An estimate of the net proceeds

from the issuance of securities (or the

pro rata portion of the net proceeds from

securities issued through a jointly

owned subsidiary); the anticipated

amount of gross proceeds of the

securities issuance; and the current

market value of assets collateralizing the

securities issuance (any assets of the

subsidiary, including any guarantees of

its securities issuance you have made);

(5) The anticipated interest or

dividend rates and yields, or the range

thereof, and the frequency of payments

on the subsidiary’s securities;

(6) The minimum denomination of

the subsidiary’s securities;

(7) Where the subsidiary intends to

market the securities; and

(8) A statement that within 10 days

after the issuance of any securities

through a subsidiary, you will notify the

OTS in writing that you have issued the

securities and provide a copy of any

prospectus, offering circular, or similar

document concerning such issuance.

(c) Sales of the subsidiary’s securities

to retail customers must comply with

§ 545.74(c)(4) of this chapter.

§ 559.13 How may a savings association

exercise its salvage power in connection

with its service corporation?

(a) In accordance with this section, a

savings association (‘‘you’’) may

exercise your salvage power to make a

contribution or a loan (including a

guarantee of a loan made by any other

person) to your service corporation

(‘‘salvage investment’’) that exceeds the

maximum amount otherwise permitted

under law or regulation. You must

notify OTS at least 30 days before

making a salvage investment in a service

corporation. This notice must

demonstrate that:

(1) The salvage investment protects

your interest in the service corporation;

(2) The salvage investment is

consistent with safety and soundness;

and

(3) You considered alternatives to the

salvage investment and determined that

such alternatives would not adequately

satisfy paragraphs (a)(1) and (a)(2).

(b) If OTS notifies you within 30 days

that the Notice presents supervisory

concerns, or raises significant issues of

law or policy, you must apply for and

receive OTS’s prior written approval in

accordance with § 516.1(c) of this

chapter before making a salvage

investment in a service corporation.

PART 560—LENDING AND

INVESTMENT

5. Part 560 as proposed to be added

at 61 FR 1177 is amended as follows:

a. The authority citation for part 560

continues to read as follows:

Authority: 12 U.S.C. 1462, 1462a, 1463,

1464, 1828, 1701j–3, 3803, 3806; 42 U.S.C.

4106.

b. Section 560.30 is revised to read as

follows:

§ 560.30 General lending and investment

powers of federal savings associations.

Pursuant to section 5(c) of the Home

Owners Loan Act (HOLA), 12 U.S.C.

1464(c), a federal savings association

may make, invest in, purchase, sell,

participate in, or otherwise deal in

(including brokerage or warehousing) all

loans and investments allowed under

section 5(c) of the HOLA including,

without limitation, the following loans,

extensions of credit, and investments,

subject to the limitations indicated and

any such terms, conditions, or

limitations as may be prescribed from

time to time by the Office by policy

directive, order, or regulation:

LENDING AND INVESTMENT POWERS CHART

Category HOLA authorization

Statutory percentage of assets limitations

(endnotes contain applicable regulatory limitations)

Commercial loans ....................................................................................................... 5(c)(2)(A) 10% of total assets.

Commercial paper and corporate debt securities ...................................................... 5(c)(2)(D) Up to 30% of total assets.1 2

Community development ............................................................................................ 5(c)(3)(B) 5% of total assets.

Community development direct investments ............................................................. 5(c)(3)(B) 2% of total assets.3

Consumer loans ......................................................................................................... 5(c)(2)(D) Up to 35% of total assets.1 4

Credit cards ................................................................................................................ 5(b)(4) None.5

Education loans .......................................................................................................... 5(c)(3)(A) 5% of total assets.

Finance leasing .......................................................................................................... 5(c)(1)(B)

5(c)(2)(A)

5(c)(2)(D)

Based on collateral type for property financed.6

Foreign assistance investments ................................................................................. 5(c)(4)(C) 1% of total assets.7

General leasing .......................................................................................................... 5(c)(2)(C) 10% of assets.6

Home improvement loans .......................................................................................... 5(c)(1)(J) None.5

Home (residential) loans 8 .......................................................................................... 5(c)(1)(B) None.5 9

Letters of credit ........................................................................................................... 5(c)(2)(A) Included in aggregate 10% of assets commercial lending limitation.10

Loans secured by accounts ....................................................................................... 5(c)(1)(A) None.5 11

Loans to financial institutions, brokers, and dealers .................................................. 5(c)(1)(L) None.5 12

Manufactured home loans .......................................................................................... 5(c)(1)(J) None.5 13

Nonresidential real property loans ............................................................................. 5(c)(2)(B) 400% of total capital.14

Open-end management investment companies a ....................................................... 5(c)(1)(Q) None.5

Service corporations ................................................................................................... 5(c)(4)(B) 3% of total assets, as long as any amount

in excess of 2% of total assets furthers

community, inner city, or community development purposes.b

Small business investment companies c .................................................................... 5(c)(4)(D) 1% of total assets.
Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules 29991

LENDING AND INVESTMENT POWERS CHART—Continued

Category HOLA authorization

Statutory percentage of assets limitations

(endnotes contain applicable regulatory limitations)

State and local government obligations ..................................................................... 5(c)(1)(H) None.5 15

State housing corporations ......................................................................................... 5(c)(1)(P) None.5 16

Transaction account loans, including overdrafts ........................................................ 5(c)(1)(A) None.5 17

Notes:

1For purposes of determining a Federal savings association’s percentage assets limitation, investment in commercial paper and corporate debt

securities must be aggregated with the Federal savings association’s investment in consumer loans. 2A Federal savings association may invest in commercial paper and corporate debt securities, which includes corporate debt securities convertible into stock, subject to the provisions of § 560.40. 3This 2% of assets limitation is a sublimit within the overall 5% of assets limitation on community development loans and investments.

4Amounts in excess of 30% of assets, in aggregate, may be invested only in loans made by the association directly to the original obligor and

for which no finder’s or referral fees have been paid. A Federal savings association may include loans to dealers in consumer goods to finance

inventory and floor planning in the total investment made under this section. 5While there is no statutory limit on certain categories of loans and investments, including credit card loans, home improvement loans, and deposit account loans, the OTS may establish an individual limit on such loans or investments if the association’s concentration in such loans or investments presents a safety and soundness concern. 6A Federal savings association may engage in leasing activities subject to the provisions of § 560.41. 7This 1% of assets limitation applies to the aggregate outstanding investments made under the Foreign Assistance Act and in the capital of

the Inter-American Savings and Loan Bank. Such investments may be made subject to the provisions of § 560.43. 8A home (or residential) loan includes loans secured by on one-to-four family dwellings, multi-family residential property and loans secured by

a unit or units of a condominium or housing cooperative. 9A Federal savings association may make home loans subject to the provisions of § 560.34. 10A Federal savings association may issue letters of credit subject to the provisions of § 560.120. 11 Loans secured by savings accounts and other time deposits may be made without limitation, provided the Federal savings association obtains a lien on, or a pledge of, such accounts. Such loans may not exceed the withdrawable amount of the account. 12A Federal savings association may only invest in loans secured by obligations of, or by obligations fully guaranteed as to principal and interest by, the United States or any of its agencies or instrumentalities where the borrower is a financial institution insured by the Federal Deposit Insurance Corporation or is a broker or dealer registered with the Securities and Exchange Commission and the market value of the securities for

each loan at least equals the amount of the loan at the time it is made. 13 If the wheels and axles of the manufactured home have been removed and it is permanently affixed to a foundation, a loan secured by a

combination of a manufactured home and developed residential lot on which it sits may be treated as a home loan. 14Without regard to any limitations of this part, a Federal savings association may make or invest in the fully insured or guaranteed portion of

nonresidential real estate loans insured or guaranteed by the Economic Development Administration, the Farmers Home Administration, or the

Small Business Administration. Unguaranteed portions of guaranteed loans must be aggregated with uninsured loans when determining an association’s compliance with the 400% of capital limitation for other real estate loans. aThis authority is limited to investments in open-end management investment companies that are registered with the Securities and Exchange

Commission under the Investment Company Act of 1940. The portfolio of the investment company must be restricted by the company’s investment policy (changeable only if authorized by shareholder vote) solely to investments that a Federal savings association may, without limitation

as to percentage of assets, invest in, sell, redeem, hold, or otherwise deal in. Separate and apart from this authority, a Federal savings association may make pass-through investments to the extent authorized by § 560.32. bA Federal savings association may invest in service corporations subject to the provisions of part 559 of this chapter.

cA Federal savings association may only invest in small business investment companies formed pursuant to section 301(d) of the Small Business Investment Act of 1958. 15This category includes obligations issued by any state, territory, or possession of the United States or political subdivision thereof (including

any agency, corporation, or instrumentality of a state or political subdivision), subject to § 560.42. 16A Federal savings association may invest in state housing corporations subject to the provisions of § 560.121. 17Payments on accounts in excess of the account balance (overdrafts) on commercial deposit or transaction accounts shall be considered

commercial loans for purposes of determining the association’s percentage of assets limitation.

C. Sections 560.32 and 560.33 are

added to read as follows:

§ 560.32 Pass-Through Investments

(a) A federal savings association

(‘‘you’’) may make pass-through

investments. A pass-through investment

is one where you invest in an entity

(‘‘company’’) that engages only in

activities that you may conduct directly.

You must comply with all the statutes

and regulations that would apply if you

were engaging in the activity directly.

For example, your proportionate share

of the company’s assets will be

aggregated with the assets you hold

directly in calculating investment limits

(e.g., 10% of assets for commercial

loans).

(b) You may make a pass-through

investment without prior notice to OTS

if all of the following conditions are

met:

(1) You do not invest more than 15%

of your capital in one company;

(2) You have not invested more than

50% of your total capital in passthrough investments;

(3) Your investment would not give

you direct or indirect control of the

company;

(4) Your liability is limited to the

amount of your investment;

(5) The company falls into one of the

following categories:

(i) A limited partnership;

(ii) An open-end mutual fund;

(iii) A closed-end investment trust; or

(iv) An entity in which you are

investing primarily to use the

company’s services (e.g., data

processing).

(c) If you want to make other passthrough investments, you must provide

OTS with 30 days’ advance notice. If

within that 30-day period OTS notifies

you that an investment presents

supervisory, legal, or safety and

soundness concerns, you must file an

application with OTS in accordance

with § 516.1 of this chapter and may not

make the investment without first

receiving OTS’s prior written approval.

Notices under this section are deemed

to be applications for purposes of

statutory and regulatory references to

‘‘applications.’’ Any conditions that

OTS imposes for supervisory, legal, or

safety and soundness reasons on any

pass-through investment shall be

enforceable as a condition imposed in

writing by the OTS in connection with

the granting of a request by a savings

association within the meaning of 12

U.S.C. 1818(b) or 1818(i).
29992 Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 / Proposed Rules

1The Office reserves the right to review a savings

association’s investment in a subsidiary on a caseby-case basis. If the Office determines that such

investment is more appropriately treated as an

equity security or an ownership interest in a

subsidiary it will make such determination

regardless of the percentage of ownership held by

the savings association.

§ 560.33 De minimis investments.

A federal savings association may

invest in the aggregate up to the greater

of one-fourth of 1% of its capital or

$100,000, in community development

investments of the type permitted for a

national bank under 12 CFR Part 24.

PART 563—OPERATIONS

6. The authority citation for part 563

continues to read as follows:

Authority: 12 U.S.C. 375b, 1462, 1462a,

1463, 1464, 1467a, 1468, 1817, 1828, 3806;

42 U.S.C. 4106.

§§ 563.37, 563.38, 563.132 [Removed]

7. Sections 563.37, 563.38, and

563.132 are removed.

8. Section 563.41 is amended by

revising paragraph (b)(4) to read as

follows:

§ 563.41 Loans and other transactions

with affiliates and subsidiaries.

* * * * *

(b) * * *

(4) The term subsidiary with respect

to a specified savings association means

a company that is controlled by such

specified savings association;

* * * * *

9. Section 563.93 is amended by

revising paragraph (a) to read as follows:

§ 563.93 Lending limitations.

(a) Scope. This section applies to all

loans and extensions of credit to third

parties made by a savings association

and its subsidiaries or service

corporations. This section does not

apply to loans made by a savings

association to operating subsidiaries or

affiliates of the savings association. The

term operating subsidiary has the same

meaning indicated in § 559.2 of this

chapter. The terms subsidiary and

affiliate have the same meanings as

those terms are defined in § 563.41.

* * * * *

PART 567—CAPITAL

10. The authority citation for part 567

continues to read as follows:

Authority: 12 U.S.C. 1462, 1462a, 1463,

1464, 1467a, 1828 (note).

11. Section 567.1 is amended by

removing in paragraph (l)(1) the phrase

‘‘(either directly or through ownership

of a subsidiary)’’, and by revising

paragraph (dd) to read as follows:

§ 567.1 Definitions.

* * * * *

(dd) Subsidiary. The term subsidiary

means any corporation, partnership,

business trust, joint venture, association

or similar organization in which a

savings association directly or indirectly

holds more than a 50% ownership

interest.1 This definition does not

include ownership interests that were

taken in satisfaction of debts previously

contracted, provided that the reporting

association has not held the interest for

more than five years or a longer period

approved by the OTS.

* * * * *

PART 571—STATEMENTS OF POLICY

12. The authority citation for part 571

continues to read as follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C.

1462a, 1463, 1464.

§ 571.21 [Removed]

13. Section 571.21 is removed.

Dated: May 28, 1996.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 96–13828 Filed 6–12–96; 8:45 am]

BILLING CODE 6720–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 95–CE–21–AD]

RIN 2120–AA64

Airworthiness Directives; The New

Piper Aircraft, Inc. (Formerly Piper

Aircraft Corporation) Model PA31T2

Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Supplemental notice of

proposed rulemaking (NPRM);

Reopening of the comment period.

SUMMARY: This document proposes to

revise an earlier proposed airworthiness

directive (AD), which would have

required rerouting the landing gear

emergency extension air line on The

New Piper Aircraft, Inc. (Piper) Model

PA31T2 airplanes that have Parker

Hannifin Wheel and Brake Conversion

Kit 199–111 incorporated in accordance

with Supplemental Type Certificate

(STC) SA599GL. Three incidents of the

brake cylinder contacting the landing

gear emergency extension air line on

both wheel wells of the affected

airplanes prompted the proposal. Since

issuance of the proposal, the Federal

Aviation Administration (FAA) has

determined that additional serial

numbers of Piper Model PA31T2

airplanes should be included in the

Applicability section of the proposed

AD, and that revised service information

should be incorporated. The actions

specified by the proposed AD are

intended to prevent the brake cylinder

from chafing against the landing gear

emergency extension air line when the

gear is in the up and locked position,

which could result in damage to the air

line and subsequent loss of emergency

gear extension capability. Since the

comment period for the original

proposal has closed and the change

described above goes beyond the scope

of what was originally proposed, the

FAA is allowing additional time for the

public to comment.

DATES: Comments must be received on

or before August 16, 1996.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), Central Region,

Office of the Assistant Chief Counsel,

Attention: Rules Docket No. 95–CE–21–

AD, Room 1558, 601 E. 12th Street,

Kansas City, Missouri 64106. Comments

may be inspected at this location

between 8 a.m. and 4 p.m., Monday

through Friday, holidays excepted.

Service information that applies to the

proposed AD may be obtained from the

Parker Hannifin Corporation, Aircraft

Wheel & Brake, 1160 Center Road, P.O.

Box 158, Avon, Ohio 44011; telephone

(216) 937–6211; facsimile (216) 937–

5409. This information also may be

examined at the Rules Docket at the

address above.

FOR FURTHER INFORMATION CONTACT:

Mr. Nick Miller, Aerospace Engineer,

FAA, Chicago Aircraft Certification

Office, FAA, 2300 East Devon Avenue,

Des Plaines, Illinois 60018; telephone

(847) 294–7837; facsimile (847) 294–

7834.

SUPPLEMENTARY INFORMATION:

Comments Invited

Interested persons are invited to

participate in the making of the

proposed rule by submitting such

written data, views, or arguments as

they may desire. Communications

should identify the Rules Docket

number and be submitted in triplicate to

the address specified above. All

communications received on or before

the closing date for comments, specified

above, will be considered before taking

action on the proposed rule. The

proposals contained in this