[Federal Register Volume 61, Number 129 (Wednesday, July 3, 1996)]
[Proposed Rules]
[Pages 34749-34751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16841]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 218 and 250

[Regulation R; Docket No. R-0931]


Relations With Dealers in Securities Under Section 32, Banking 
Act of 1933; Miscellaneous Interpretations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board is proposing to amend its regulations to remove 
Regulation R concerning relations with dealers in securities under 
section 32 of the Banking Act of 1933, which the Board believes is no 
longer necessary. The Board also is proposing to amend its regulations 
to remove an interpretation of section 32 of the Glass-Steagall Act, 
which the Board believes is no longer necessary. This interpretation 
explains the position of the Board regarding the application of the 
prohibitions of section 32 to bank holding companies.

DATES: Comments must be received by August 2, 1996.

ADDRESSES: Comments should refer to Docket No. R-0931 and may be mailed 
to William W. Wiles, Secretary, Board of Governors of the Federal 
Reserve System, Docket No. R-0931, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551. Comments addressed to Mr. Wiles may also be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and 
to the security control room outside of those hours. Both the mail room 
and control room are accessible from the courtyard entrance on 20th 
Street between Constitution Avenue and C Street, NW. Comments may be 
inspected in room MP-500 between 9 a.m. and 5 p.m., except as provided 
in Sec. 261.8 of the Board's Rules Regarding Availability of 
Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Richard M. Ashton, Associate General 
Counsel (202/452-3750), or Thomas M. Corsi, Senior Attorney (202/452-
3275), Legal Division. For the hearing impaired only, 
Telecommunications Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544).

SUPPLEMENTARY INFORMATION:

Section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (CDRI Act)

    Section 303(a) of the CDRI Act (12 U.S.C. 4803(a)) requires the 
Board, as well as the other federal banking agencies, to review its 
regulations and written policies in order to streamline and modify 
these regulations and policies to improve efficiency, reduce 
unnecessary costs, and eliminate unwarranted constraints on credit 
availability. The Board has reviewed its interpretations of section 32 
of the Glass-Steagall Act (12 U.S.C. 78) with this purpose in mind, 
and, as is explained in greater detail in the text that follows, 
proposes to amend these interpretations in a way designed to meet the 
goals of section 303(a).

Substantive Provisions of Regulation R

    The Board's Regulation R (12 CFR Part 218) implements section 32 of 
the Glass-Steagall Act. Section 32 prohibits officer, director and 
employee interlocks between member banks and firms ``primarily 
engaged'' in underwriting and dealing in securities, and authorizes the 
Board to exempt from this prohibition, under limited circumstances, 
certain interlocks by regulation. Currently, Regulation R restates the 
statutory language of section 32, and sets forth the only exemption 
adopted by the Board since passage of the Glass-Steagall Act. The Board 
also has codified in the CFR 14 interpretations of the substantive 
provisions of section 32 and the regulation.<SUP>1 The Board also has 
issued other interpretations of section 32 that are contained in the 
Federal Reserve Regulatory Service (FRRS).
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    \1\ 12 CFR 218.101-218.114.
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    The exemption in Regulation R, adopted by the Board in 1969, 
permits interlocks between member banks and securities firms whose 
securities underwriting and dealing activities are limited to 
underwriting and dealing in only securities that a national bank would 
be authorized to underwrite and deal in. The adoption of the express 
exemption was apparently based on the assumption that the literal 
language of the section 32 prohibition could at least arguably cover 
bank-eligible securities activities.
    Subsequently, in orders approving applications under the Bank 
Holding Company Act (12 U.S.C. 1841 et seq.), the Board interpreted the 
prohibitions of section 20 of the Glass-Steagall Act, which prohibits a 
member bank from being affiliated with a firm engaged principally in 
underwriting and dealing in securities, as not applying on their face 
to underwriting and dealing in securities that may be underwritten and 
dealt in directly by a state member bank. In these decisions, the Board 
also expressed the view that section 32 similarly did not cover an 
interlock between a member bank and a firm that was not engaged in 
securities activities covered by section 20.<SUP>2 Accordingly, in 
light of the Board's more recent view of the scope of section 32, the 
express exemption from the provisions of section 32 for bank-eligible 
securities activities is no longer necessary.<SUP>3 Moreover, the Board 
has never adopted any other exemption to the interlocks provision and 
historically, requests that the Board create new exemptions have been 
infrequent and have been uniformly denied.<SUP>4
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    \2\ This interpretation has been upheld by the courts. 
Securities Industry Association v. Board of Governors of the Federal 
Reserve System, 839 F.2d 47, 62 (2d Cir. 1988), cert. denied, 486 
U.S. 1059 (1988).
    \3\ The Board is proposing to adopt a new interpretation of 
section 32 to clarify this point.
    \4\ A footnote to Regulation R that dates to 1936 makes it clear 
that a broker who is engaged solely in executing orders for the 
purchase and sale of securities on behalf of others in the open 
market is not engaged in the business referred to in section 32. The 
Board has since authorized bank holding companies to engage in this 
activity directly, reiterating that securities brokerage is not a 
proscribed activity under either sections 32 or 20 of the Glass-
Steagall Act. BankAmerica Corporation, 69 Federal Reserve Bulletin 
105 (1983). The courts upheld the Board's interpretation. Securities 
Industry Assn. v. Board of Governors, 468 U.S. 207 (1984). The 
removal of Regulation R does not affect this interpretation.
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    Since the exemption in Regulation R is no longer necessary, and it 
is not necessary to have a substantive regulation solely to restate a 
statutory provision, the Board is proposing to rescind Regulation R.

Bank Holding Company Interpretation of Section 32 of the Glass-
Steagall Act

    With one exception, the 14 interpretations of section 32 now 
contained in the CFR, would be retained and transferred to 12 CFR Part 
250,

[[Page 34750]]

which contains miscellaneous Board interpretations.
    By their terms, the prohibitions of section 32 apply only to member 
banks. In 1969, the Board issued an interpretation that extended the 
prohibitions of section 32 to a bank holding company where the 
principal activity of the bank holding company is the ownership and 
control of member banks.<SUP>5 The Board is now seeking public comment 
on rescinding this interpretation.
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    \5\ 12 CFR 218.114.
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    The Board based its 1969 interpretation not so much on the literal 
language of section 32, but on its belief that where the ownership and 
control of member banks is the principal activity of a bank holding 
company, the same possibilities of abuse that section 32 was designed 
to prevent would be present in the case of a director of the holding 
company as in the case of the member bank.<SUP>6 The Board believed 
that giving cognizance to the separate corporate entities in such a 
situation would partially frustrate Congressional purpose in enacting 
section 32.
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    \6\ As noted in the Board's interpretation, section 32 is 
directed to the probability or likelihood that a bank director 
interested in the underwriting business may use his or her influence 
in the bank to involve it or its customers in securities sold by his 
or her underwriting house.
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    The Board now believes that it could rescind this interpretation 
and give some measure of regulatory burden relief to bank holding 
companies in a manner consistent with section 32, and without 
frustrating the Congressional purpose underlying the section. The Board 
is not barred by the literal terms of the Glass-Steagall Act from 
rescinding the interpretation. As noted above, section 32 specifically 
restricts only those interlocks involving member banks. While the bank 
holding company structure was not in widespread use when section 32 was 
adopted, Congress has amended section 32 since the section was adopted 
and since bank holding companies have become commonplace, but never has 
extended the prohibitions in the section to bank holding companies. 
Notably, in 1987, Congress extended the prohibitions of section 32 to 
cover interlocks involving nonmember banks and thrift institutions but 
not interlocks involving bank holding companies.<SUP>7
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    \7\ The provisions extending the prohibitions of section 32 to 
nonmember banks and thrifts expired in 1988.
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    The potential that removal of the interpretation could frustrate 
Congressional purpose in enacting section 32 is mitigated by the fact 
that the prohibitions of section 32 would continue to apply to member 
banks. Accordingly, the directors, officers and employees of these 
banks, none of whom may be interlocked with a securities firm, could 
serve as a check against the possibilities of abuse that section 32 is 
intended to prohibit. In addition, the Board believes that by 
rescinding this interpretation, it would be granting some measure of 
regulatory relief to bank holding companies by giving them access to a 
larger pool of persons from which to choose their officers, directors, 
and employees.<SUP>8
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    \8\ Should the Board determine to rescind this interpretation, 
this action would not affect other Board decisions or determinations 
that restrict interlocks to ensure compliance with section 20 of the 
Glass-Steagall Act (12 U.S.C. 377). See, e.g., Mellon Bank 
Corporation, 79 Federal Reserve Bulletin 626 (1993).
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Other Interpretations of Section 32

    The Board also seeks comment on whether any of the other 
interpretations of section 32 previously adopted by the Board could be 
amended.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. 
L. 95-354, 5 U.S.C. 601 et seq.), the Board of Governors of the Federal 
Reserve System certifies that adoption of this proposed rule will not 
have a significant economic impact on a substantial number of small 
entities that would be subject to the regulation.
    This amendment will remove a regulation and an interpretation that 
the Board believes are no longer necessary. The amendment does not 
impose more burdensome requirements on bank holding companies than are 
currently applicable.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed rule 
under the authority delegated to the Board by the Office of Management 
and Budget. No collections of information pursuant to the Paperwork 
Reduction Act are contained in the proposed rule.

List of Subjects

12 CFR Part 218

    Antitrust, Federal Reserve System, Securities.

12 CFR Part 250

    Federal Reserve System.

    For the reasons set forth in the preamble and under the authority 
of 12 U.S.C. 248, the Board proposes to amend Chapter II of the Code of 
Federal Regulations as set forth below:

PART 218--[AMENDED]


Secs. 218.101 through 218.113  [Redesignated as Secs. 250.400 through 
250.412]

    1. Sections 218.101 through 218.113 are redesignated as set forth 
in the following table:

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                                                                  New   
                         0ld  Section                           section 
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218.101......................................................    250.400
218.102......................................................    250.401
218.103......................................................    250.402
218.104......................................................    250.403
218.105......................................................    250.404
218.106......................................................    250.405
218.107......................................................    250.406
218.108......................................................    250.407
218.109......................................................    250.408
218.110......................................................    250.409
218.111......................................................    250.410
218.112......................................................    250.411
218.113......................................................    250.412
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PART 218--[REMOVED]

    2. Part 218 is removed.

PART 250--MISCELLANEOUS INTERPRETATIONS

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

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

    2. A new center heading is added immediately preceding newly 
designated Sec. 250.400 to read as follows:

Interpretations of Section 32 of the Glass-Steagall Act

    3. Section 250.413 is added to read as follows:


Sec. 250.413  ``Bank-eligible'' securities activities.

    Section 32 of the Glass-Steagall Act (12 U.S.C. 78) prohibits any 
officer, director, or employee of any corporation or unincorporated 
association, any partner or employee of any partnership, and any 
individual, primarily engaged in the issue, flotation, underwriting, 
public sale, or distribution, at wholesale or retail, or through 
syndicate participation, of stocks, bonds, or other similar securities, 
from serving at the same time as an officer, director, or employee of 
any member bank of the Federal Reserve System. The Board is of the 
opinion that to the extent that a company, other entity or person is 
engaged in securities activities that are expressly authorized for a 
state member bank under section 16 of the Glass-Steagall Act (12 U.S.C. 
24(7), 335), the company, other entity or individual is not engaged in 
the types of activities described in section 32. In addition, a 
securities broker who is engaged solely in executing orders for the 
purchase and

[[Page 34751]]

sale of securities on behalf of others in the open market is not 
engaged in the business referred to in section 32.

    By order of the Board of Governors of the Federal Reserve 
System.

    Date: June 26, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-16841 Filed 7-02-96; 8:45am]
Billing Code 6210-01-P