400 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

FEDERAL RESERVE SYSTEM

12 CFR Part 225

Regulation Y; Docket Nos. R–1057 and

R–1062; Bank Holding Companies and

Change in Bank Control

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board of Governors of the

Federal Reserve System has adopted a

final rule that implements the financial

holding company provisions of the

Gramm-Leach-Bliley Act. This final rule

replaces the interim rules governing

financial holding companies that the

Board adopted previously. The final

rule describes the procedures a

domestic bank holding company and a

foreign banking organization must

follow and the capital, management,

and Community Reinvestment Act

requirements they must meet in order to

qualify as a financial holding company.

The final rule also contains provisions

that apply to a financial holding

company that subsequently ceases to

meet the applicable requirements.

In addition, the final rule lists the

activities that the Gramm-Leach-Bliley

Act defines as financial in nature and

thereby authorizes a FHC to conduct.

The final rule contains procedures that

apply to a financial holding company

that conducts those activities, a

procedure that allows any interested

party to request that the Board

determine, in consultation with the

Secretary of the Treasury, that

additional activities are financial in

nature or incidental to a financial

activity and thus permissible for a

financial holding company, and a

procedure that allows a financial

holding company to request the Board’s

prior approval to conduct an activity

that is complementary to a financial

activity.

The final rule also amends Regulation

Y to define the term ‘‘depository

institution’’ and to revise the existing

definitions of the terms ‘‘well

capitalized’’ and ‘‘well managed,’’ and

makes conforming and other technical

changes.

DATES: The final rule is effective

February 2, 2001.

FOR FURTHER INFORMATION CONTACT:

Scott G. Alvarez, Associate General

Counsel (202/452–3583), Kathleen M.

O’Day, Associate General Counsel (202/

452–3786), Ann E. Misback, Assistant

General Counsel (202/452–3788);

Christopher W. Clubb, Senior Counsel

(202/452–3904); Kieran J. Fallon, Senior

Counsel (202/452–5270), or Adrianne G.

Threatt, Senior Attorney (202/452–

3554), Legal Division; or Betsy Cross,

Deputy Associate Director (202/452–

2574), Division of Banking Supervision

and Regulation; Board of Governors of

the Federal Reserve System, 20th Street

and Constitution Avenue, NW.,

Washington, DC, 20551. For users of

Telecommunications Device for the Deaf

(‘‘TDD’’), contact Janice Simms at 202/

452–4984.

SUPPLEMENTARY INFORMATION:

Background and Summary of Final

Rule

The Gramm-Leach-Bliley Act (Pub. L.

106–102, 113 Stat. 1338 (1999)) (‘‘GLB

Act’’) amended the Bank Holding

Company Act (12 U.S.C. 1841 et seq.)

(‘‘BHC Act’’) to allow a bank holding

company that elects to become a FHC (a

‘‘FHC’’) and a foreign banking

organization that elects to be treated as

a FHC to engage in a broad range of

financial activities, including securities

underwriting, insurance sales and

underwriting, and merchant banking.

On January 18, 2000, the Board

approved an interim rule implementing

these provisions and detailing the

procedures that allow a bank holding

company and foreign banking

organization to qualify for and maintain

FHC status (65 FR 3786 (January 25,

2000)). This interim rule also

enumerated the capital, management,

and Community Reinvestment Act (12

U.S.C. 2901 et seq.) (‘‘CRA’’)

requirements that must be satisfied in

order to establish and maintain FHC

status. On March 15, 2000, the Board

amended the management criterion and

certain provisions concerning the FHC

election process applicable to foreign

banking organizations. (65 FR 15053

(March 21, 2000)).

On March 10, 2000, the Board

approved an additional interim rule

containing a list of the financial

activities that are permissible for a FHC

to conduct. This interim rule also set

forth the procedures a FHC must follow

to engage in a financial activity; the

process for requesting a Board

determination that an additional activity

is financial in nature or incidental

thereto; and a procedure for requesting

the Board’s prior approval to engage in

an activity that is complementary to a

financial activity (65 FR 14433 (March

17, 2000)).

The interim rules on elections and

activities both became effective on

March 11, 2000, the effective date of the

GLB Act, so that qualifying companies

immediately could take advantage of the

expanded powers granted by the statute.

The vast majority of the provisions of

the interim rules were included in a

new subpart I of Regulation Y, entitled

‘‘Financial Holding Companies.’’

The Board solicited comment on the

interim rules and received a total of 59

public comments on these rules. The

commenters included bank holding

companies and foreign banking

organizations; state bank supervisory

officials; trade associations representing

the banking, insurance, and securities

industries; foreign central banks and

governmental officials; law firms;

community groups; and individuals.

Many commenters supported the

Board’s interim rules and commended

the Board for issuing the rules swiftly

and using an easily comprehensible

format. Commenters representing the

interests of foreign banking

organizations urged the Board to amend

the FHC election procedures and

requirements applicable to those

organizations, including use of the

leverage ratio in assessing comparability

of capital, while domestic organizations

asked the Board to hold foreign banking

organizations to the same requirements

that apply to U.S. bank holding

companies. Commenters also were

divided as to whether the Board should

retain sections of the interim rules that

reserved the Board’s supervisory

authority to impose restrictions on a

bank holding company that met the

statutory criteria to become a FHC but

about which the Board nonetheless had

supervisory concerns. Most comments

regarding this section asserted that the

Board did not have a statutory basis for

imposing a requirement on a company

that met the GLB Act’s criteria to

become a FHC. Several commenters also

suggested that the Board should not

require bank holding companies to

submit supporting information with

their FHC elections and that the Board

should amend the definition of the term

‘‘well managed.’’

Commenters asked for guidance about

the application of various aspects of the

rule, including the interplay between

Regulation Y and Regulation K with

respect to activities conducted abroad

by a FHC and the procedures for

requesting to become a FHC as part of

a section 3 proposal to become a bank

holding company. A number of

commenters suggested that the Board

allow public comment on FHC

declarations and condition the

effectiveness of a FHC election on

compliance with CRA-related

requirements not enumerated in the

GLB Act.

After carefully reviewing the public

comments, the Board has adopted a

final rule that largely incorporates the

framework contained in the interim

rules. The Board has made a number of

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 401

1Section 225.81 also sets forth the provisions that

apply to a foreign bank that controls a depository

institution in the United States, as well as U.S. bank

holding companies that control a foreign bank with

U.S. operations. These provisions are described in

more detail below in the discussion of §§ 225.90 to

225.93.

2The final rule also defines the term ‘‘depository

institution’’ at § 225.2(t) using the definition

provided at section 2 of the BHC Act as amended

by the GLB Act. For purposes of Regulation Y, the

term ‘‘depository institution’’ has the same meaning

as in section 3(c) of the Federal Deposit Insurance

Act (12 U.S.C. 1813(c)).

3See 12 CFR 225.14 and 225.23, as amended by

this rule.

revisions in response to the public

comments as well as revisions based on

the experience of the Federal Reserve

System in administering the interim

rules since March 11, 2000. The

suggestions made by commenters, the

Board’s responses thereto, and the

Board’s revisions are discussed in

greater detail below.

Explanation of Final Rule

Section 225.81—What Is a FHC?

Consistent with the GLB Act, the

interim rules defined a FHC as a bank

holding company that meets the

following requirements: (1) The

company has made an effective election

to become a FHC, and (2) all depository

institutions controlled by the bank

holding company are at the time of

election and remain both well managed

and well capitalized.1 One commenter

suggested that the Board allow a bank

holding company that controls multiple

banks to become a FHC if a depository

institution representing a small

percentage of the company’s assets was

not well managed. However, the GLB

Act explicitly provides that a bank

holding company may become a FHC

only if each depository institution

controlled by the company is well

managed, and the Board cannot alter

this requirement by regulation.

Accordingly, the Board has adopted

§ 225.81 of the interim rule without

amendment.

Definitions of Well Capitalized and Well

Managed

As noted above, a bank holding

company may become a FHC only if

each of its subsidiary depository

institutions is both well capitalized and

well managed. The final rule, like the

interim rule, provides that an uninsured

depository institution is considered well

capitalized if it meets or exceeds the

capital ratios that its appropriate

Federal banking agency has established

under section 38 of the Federal Deposit

Insurance Act (12 U.S.C. 1831o) (‘‘FDI

Act’’) for insured depository

institutions.2

The final rule also amends and

simplifies the existing definition of

‘‘well managed’’ in Regulation Y so that

it can be used both for purposes of

determining whether expedited

processing of a bank holding company’s

application is appropriate and for

determining whether a bank holding

company qualifies to be a FHC. The

final rule eliminates the requirement

that a depository institution receive at

least a satisfactory compliance rating to

be deemed well managed, because the

compliance criterion applies only to the

availability of the expedited application

process and not to an organization’s

status as a FHC. The rule amends the

expedited processing procedures to

adjust for these changes and to provide

that a bank holding company’s

depository institutions must satisfy a

compliance requirement for the bank

holding company to qualify for

expedited processing.3 This revision

does not change in any substantive way

the application of the previous well

managed criteria.

The FDI Act allows the appropriate

Federal banking agency for a depository

institution to use an examination

conducted by a state banking agency in

lieu of a Federal examination, provided

the state examination meets the criteria

at section 10(d) of the FDI Act (see 12

U.S.C. 1820(d)). To reflect this, the final

rule allows the Board to rely on

examinations conducted by the

appropriate state agency where

applicable in determining whether an

institution is well managed.

Where a depository institution has not

yet been examined, the final rule retains

the provision of the interim rule that

allows the Board to determine that the

institution is well managed after

reviewing the institution’s managerial

and other resources and consulting with

the appropriate Federal banking agency

for the institution. Moreover, the final

rule provides that a depository

institution resulting from the merger of

two or more well managed depository

institutions would be considered well

managed unless the Board determined

otherwise after consulting with the

appropriate Federal banking agency.

Commenters supported both these

provisions.

Commenters requested additional

guidance on whether a depository

institution would remain well managed

if it merged with an institution that was

not well managed. In these

circumstances, the Board believes that

the managerial status of the combined

institution likely would depend on the

particular facts and circumstances.

Accordingly, the final rule provides that

an institution resulting from the merger

of a well managed institution with an

institution that is not well managed or

that has not been examined will be

considered well managed if the Board

determines, after a review of managerial

and other resources and after consulting

the appropriate Federal banking agency,

that the resulting institution is well

managed.

Section 225.82—How Does a Bank

Holding Company Elect to Become a

FHC?

Section 225.82 sets forth the

procedures that a bank holding

company must follow to elect to become

a FHC and describes when an election

will and will not become effective. The

rule allows a bank holding company to

elect to become a FHC by filing a simple

declaration with the appropriate Federal

Reserve Bank. The declaration must

contain a statement that the bank

holding company elects to be a FHC;

provide the name and head office

addresses of the company and each of

the depository institutions it controls;

certify that each depository institution

controlled by the company is well

capitalized as of the date the company

submits its declaration; provide the

capital ratios as of the close of the

previous quarter for each depository

institution controlled by the company;

and certify that each depository

institution controlled by the company is

well managed as of the date the

company submits its declaration. In

light of its experience with declarations

under the interim rule, the Board has

amended § 225.82 to clarify that a

declaration is not deemed complete and

the 30-day processing period for the

declaration does not commence until

the declaration contains all of the

information required by § 225.82(b).

Several commenters requested that

the Board eliminate the requirement

that a declaration include capital ratio

information because the Board already

has access to capital data about

depository institutions. However, the

Board has retained this requirement for

several reasons. The Board’s experience

administering the interim rule indicated

that the capital data received from bank

holding companies at times is different

than the capital data otherwise available

to the Board, particularly in the weeks

immediately following the end of a

quarter. In several cases, the capital

information provided by a bank holding

company was more favorable than the

data otherwise available to the Board

and thus resulted in an effective FHC

election that the Board’s data alone

would not have supported. Moreover,

the Board’s experience suggests that

402 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

4The Board notes that it cannot exclude a

recently acquired institution with a poor CRA rating

unless the appropriate Federal banking agency for

the institution has accepted an affirmative

correction plan to restore the institution’s CRA

rating to at least a satisfactory level. Thus, the

company’s CRA correction plan for the institution

must be reviewed carefully by both the institution’s

primary Federal regulator and the Board.

requiring a bank holding company to

submit the capital data may improve the

quality of declarations submitted to the

Board because it aids the company in

determining whether it can in fact

certify that all of its subsidiary

depository institutions are well

capitalized.

Section 225.82(f) of the final rule

provides that a bank holding company’s

election to become a FHC becomes

effective on the 31st day after the date

that the declaration was received unless

the Board notifies the company prior to

that time the election is ineffective. The

rule also provides that the Board or the

appropriate Federal Reserve Bank

affirmatively may notify a company that

its election is effective prior to the

expiration of the 30-day review period.

CRA Requirement

For a bank holding company’s FHC

election to be effective, the final rule

requires the Board to determine that

each insured depository institution

controlled by the bank holding company

has achieved a rating of at least

‘‘satisfactory record of meeting

community credit needs’’ at its most

recent examination under the CRA.

Consistent with the GLB Act, the final

rule also allows the Board, when

evaluating the CRA criterion, to exclude

an insured depository institution that a

bank holding company acquired in the

12 months prior to submitting its FHC

declaration. To qualify for this

exclusion, the company must submit

and the appropriate Federal banking

agency for the insured depository

institution must accept a plan to restore

the institution’s CRA rating to a

satisfactory level.

Commenters asked for clarification

about how the Board in practice would

apply the CRA requirement. In

particular, commenters requested

guidance on whether a bank holding

company that controls an institution

that has not been examined may make

an effective FHC election. The GLB Act

states that the Board must find a FHC

election to be ineffective if not all of the

subsidiary insured depository

institutions of the company have

achieved at least a satisfactory CRA

rating at its ‘‘most recent examination.’’

In light of this statutory language, the

final rule allows a bank holding

company to qualify as a FHC if it

controls an institution that has not been

examined for CRA compliance and thus

has not yet achieved any CRA rating,

provided that the company meets all

other applicable criteria. As with any

other insured depository institution, if

an unrated institution does not achieve

at least a satisfactory rating at its next

CRA examination, the FHC would be

subject to the limitations that apply

under § 225.84.

A number of commenters requested

the Board, when determining whether

the insured depository institutions

controlled by a bank holding company

have met the CRA requirement, to (1)

publish FHC declarations for comment,

particularly when the Board excludes a

recently acquired institution; (2) take

into account additional facts related to

the CRA record of a bank holding

company and the insured depository

institutions it controls; and (3)

condition the effectiveness of a FHC

election on a company’s compliance

with various CRA-related criteria not

mentioned in the GLB Act.

The GLB Act establishes the

requirements that a bank holding

company must meet to become a FHC

and sets forth a detailed framework that

limits the Board’s evaluation of the CRA

criterion. The GLB Act provides that the

Board must find a bank holding

company’s election to be ineffective

only if all of the insured depository

institutions controlled by the company,

except for an institution that qualifies

for the limited exclusion discussed

above, have not achieved an overall

CRA rating that was at least

satisfactory.4 The GLB Act specifically

ties the CRA requirement to the CRA

examination rating of each insured

depository institution and neither

provides for public comment on FHC

elections nor authorizes the Board to

condition the effectiveness of an

election based on the CRA criterion. The

Board therefore believes that

incorporating the suggestions

mentioned above would be inconsistent

with the terms of the GLB Act and,

accordingly, has not amended the rule

as suggested.

Proposals To Become a Bank Holding

Company and a FHC

The final rule allows a company that

is not a bank holding company to

submit simultaneously an application

under section 3(a)(1) of the BHC Act to

become a bank holding company and a

request to become a FHC on

consummation of that transaction. The

process applicable to simultaneous

filings to become both a bank holding

company and a FHC is included in a

new § 225.82(f). The FHC request must

(1) state that the company seeks to

become a FHC on consummation of its

section 3 proposal to become a bank

holding company and (2) certify that

each depository institution that would

be controlled by the company on

consummation of the section 3 proposal

will be both well capitalized and well

managed on the date of consummation.

In order to coordinate action on these

two requests, the final rule delays the

official acceptance of the FHC

declaration to the date the company

consummates its section 3 proposal and

becomes a lawful bank holding

company. The Board generally will find

this declaration effective on the date the

company becomes a bank holding

company through consummation of its

section 3 proposal to become a bank

holding company. However, the rule

provides that a declaration will not be

effective if the Board determines that (1)

a depository institution that would be

controlled by the company on

consummation of its section 3 proposal

is not both well capitalized and well

managed; or (2) any insured depository

institution to be controlled by the

company on consummation did not

achieve at least a satisfactory rating at

its most recent CRA examination. The

Board may make this determination at

any time prior to the date the company

becomes a bank holding company.

Unless the Board determines otherwise

based on the specific facts of the case,

a company that becomes a bank holding

company by acquiring an insured

depository institution with a poor CRA

rating cannot attain an effective FHC

election until the acquired institution

achieves at least a satisfactory CRA

rating.

The Board’s Ability To Take

Supervisory Action

Section 225.82(d) of the interim rule

on elections noted that the Board

retained authority to take supervisory

actions against a bank holding company

that had made an effective election to

become a FHC. These actions could, for

example, include imposing supervisory

limits on the activities and acquisitions

of a FHC. Although one commenter

supported this provision, several

commenters asserted that the Board did

not have statutory authority to limit the

operations of a FHC that met the

applicable statutory criteria.

Section 8 of the BHC Act, section 8 of

the Federal Deposit Insurance Act, and

other applicable statutes long have

given the Board supervisory authority to

restrict the conduct of bank holding

companies where necessary or

appropriate to protect the safety and

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 403

5The interim rule provided that a company could

choose to comply with an order to divest by ceasing

to engage in any activity that would not be

permissible for a bank holding company under

section 4(c)(8) of the BHC Act. The Board has

changed the statutory reference in order to clarify

that a company that complies with a divestiture

order by ceasing to engage in certain activities may

continue to engage in any conduct permissible for

a bank holding company under section 4(c), not just

the conduct permitted by section 4(c)(8).

soundness of depository institutions or

otherwise further the purpose of Federal

banking laws. Although the GLB Act

amended several of these provisions, it

did not limit the general applicability of

the Board’s supervisory power over

bank holding companies that become

financial holding companies. Therefore,

the final rule continues to provide that

the Board may take appropriate

supervisory action against a FHC if the

Board believes that the company does

not have the appropriate financial and

managerial resources to commence or

conduct an activity, make an

acquisition, or retain ownership of a

company, or the Board believes such

action is appropriate to enforce

applicable Federal law.

Section 225.83—What Are the

Consequences of Failing to Continue To

Meet Applicable Capital and

Management Requirements?

Under the GLB Act, a FHC is subject

to special corrective action requirements

if any depository institution controlled

by the company ceases to be both well

capitalized and well managed. Section

225.83 of the rule implements these

provisions.

The Board received comments about a

variety of aspects of § 225.83. Several

commenters requested that the Board

clarify when and under what

circumstances a company must provide

notice to the Board of a change in the

capital or management status of a

subsidiary depository institution. Some

commenters questioned the Board’s

authority and decision to require a

company that it is subject to a corrective

action agreement to obtain the Board’s

prior approval to engage in an

additional activity or acquires shares of

any company under section 4(k). Other

commenters suggested that a FHC

should be allowed to acquire an

institution that is less than well

managed without thereafter being

subject to the prior approval

requirement.

After carefully considering these

comments and the Board’s experience in

administering the interim rule, the

Board has adopted a final rule that

retains the substantive provisions of

§ 225.83. This final rule contains the

following modifications.

First, because a FHC may have access

to capital and managerial data on its

subsidiaries before the Board does, the

final rule requires that a FHC notify the

Board within 15 days of becoming

aware that any of its subsidiary

depository institutions has ceased to be

well capitalized or well managed. The

Board has amended § 225.83(b) to

provide that a company becomes aware

that a subsidiary depository institution

is not well capitalized upon the

occurrence of any material event that

would change the capital category

assigned to the institution for purposes

of section 38 of the FDI Act (12 U.S.C.

1831o). These are the same events that

would trigger a depository institution to

provide notice to its appropriate Federal

banking agency under the prompt

corrective action rules (see, e.g., 12 CFR

208.42(b) and (c)). A company is

deemed to become aware that a

subsidiary depository institution is no

longer well managed at the time the

depository institution receives written

notice from its appropriate Federal

banking agency that either the

institution’s composite rating or

management rating is not at least

satisfactory. The final rule also provides

that this notice may come from the state

banking agency in an examination

conducted in accordance with section

10(d) of the FDI Act.

As noted above, the GLB Act

specifically authorizes the Board to

impose limitations on the conduct or

activities of a company that is subject to

a corrective action agreement if the

Board believes that such limitations are

appropriate under the circumstances

and consistent with the purposes of the

BHC Act. The Board believes it is

appropriate and consistent with the

purposes of the BHC Act to require a

FHC that ceases to meet applicable

capital and management standards to

obtain the Board’s approval prior to

conducting any of the activities that are

newly authorized for FHCs by the GLB

Act. This allows the Board to assure that

the FHC is not inappropriately diverting

resources from improving the condition

of its subsidiary depository institutions.

It also recognizes that the new powers

and streamlined review process

contained in the GLB Act were intended

to be available only to companies that

maintain strong capital and

management at their subsidiary

depository institutions. For these

reasons, the final rule retains the prior

approval requirement for companies

subject to a corrective action agreement.

The Board may determine to grant

approval to engage in additional

activities on a general basis or only on

a transaction-by-transaction basis as

appropriate, given the circumstances

that caused the FHC to fail to meet the

well capitalized and well managed

requirements. For example, the Board

has given general approval to a FHC that

controlled only well capitalized and

well managed institutions and then

acquired a relatively small troubled

institution and immediately developed

a plan to improve the condition of the

troubled institution.

The final rule retains the requirement

that a company that received notice

from the Board that one or more of its

subsidiary depository institutions is not

both well capitalized and well managed

execute an agreement with the Board to

comply with the capital and

management requirements applicable to

financial holding companies (a

‘‘corrective action agreement’’). This

corrective action agreement must be

executed within 45 days of the

company’s receipt of the notice or such

additional time as the Board may allow

if a company requests an extension of

time, must explain the actions the

company will take to correct all areas of

noncompliance and the time frame

within which each action will be take,

must provide any other information the

Board may require, and must be

acceptable to the Board.

If a company subject to a corrective

action agreement does not cause all of

its subsidiary depository institutions to

be well capitalized and well managed

within 180 days (or such other time as

the Board may permit) of receiving

notice of a deficiency from the Board,

the Board may order the company to

divest ownership or control of any

depository institution the company

owns or controls. The GLB Act and the

final rule state that a company may

comply with a Board order to divest by

ceasing to engage in any activity that

may be conducted only under sections

4(k), 4(n), or 4(o) of the BHC Act.5

Section 225.84—What Are the

Consequences of Failing To Maintain a

Satisfactory or Better Rating Under the

Community Reinvestment Act at All

Insured Depository Institution

Subsidiaries?

The GLB Act requires the Board to

prohibit a FHC from engaging in or

acquiring control of a company engaged

in any new activity under sections 4(k)

and 4(n) of the BHC Act if any insured

depository institution controlled by the

FHC has received a rating of less than

‘‘satisfactory record of meeting

community credit needs’’ in its most

recent CRA examination. Section 225.84

implements this provision by providing

that the statutory prohibitions apply

404 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

6Moreover, although the GLB Act requires the

Board to impose prohibitions on the activities and

acquisitions of a FHC if an insured depository

institution of the FHC has received a less-thansatisfactory rating at its most recent CRA

examination, the statute does not enumerate a

specific procedure or time frame within which the

Board must implement this requirement.

7The term ‘‘financial activities’’ refers to

activities that have been determined to be financial

in nature or incidental to a financial activity either

by the GLB Act or by the Board in consultation with

the Secretary of the Treasury. A list of financial

activities is included at § 225.86 of the rule.

8For example, the rule clarifies that a FHC must

obtain prior Board approval to acquire control or

more than 5 percent of the shares of a company that

owns, operates, or controls a savings association.

9Complementary activities are subject to prior

approval on a case-by-case basis under section 4(j)

of the BHC Act and, therefore, a company engaged

in complementary activities generally could not be

acquired using the post-transaction notice

procedure. Consequently, complementary activities

have not been included for the purpose of

determining whether a company with mixed

activities meets the requirement that it be

substantially engaged in permissible activities for

FHCs.

upon receipt by the FHC of notice that

any subsidiary insured depository

institution has received a less-thansatisfactory CRA rating.

Section 225.84 provides that a FHC

receives notice of a less-thansatisfactory CRA rating when (1) an

insured depository institution

controlled by the FHC receives written

notice from its appropriate Federal

banking agency that the institution has

received a less-than-satisfactory CRA

performance rating at its most recent

examination; or (2) the FHC receives

written notice from the Board that an

insured depository institution it

controls has received such a rating. The

prohibitions imposed by § 225.84

remain in effect until each insured

depository institution controlled by the

FHC has received at least a satisfactory

CRA rating at its most recent

examination.

The Board also has considered the

applicability of the CRA provisions to

the situation in which a FHC acquires

an insured depository institution with a

poor CRA rating. The terms of the GLB

Act require that the Board apply the

prohibitions if ‘‘any insured depository

institution subsidiary of such FHC

* * * has received in its most recent

examination under the CRA a rating of

less than ‘satisfactory record of meeting

community credit needs.’ ’’ The Board

believes that this language is best read

to apply only when an insured

depository institution receives a lessthan-satisfactory CRA rating while it is

under the control of the FHC.6 A FHC

is responsible for the CRA rating of an

insured depository institution only if

the FHC controlled the institution

during the period that the examination

occurs. Moreover, it would discourage

FHCs with well rated institutions from

acquiring and correcting poorly rated

institutions if a penalty were imposed

on the FHC immediately upon acquiring

the poorly rated institution. The Board

believes that there are strong public

benefits in allowing a bank holding

company with a proven CRA

performance record at its existing

insured depository institutions to

acquire a poorly rated insured

depository institution.

Accordingly, the final rule retains the

provisions of the interim rule that

provide that the CRA prohibitions apply

to a FHC when an insured depository

institution that is controlled by the FHC

receives notice from the appropriate

Federal banking agency that the insured

depository institution has received a

less-than-satisfactory CRA rating. This

notice typically will occur, if at all, at

the first CRA examination after the

poorly rated insured depository

institution is acquired by the FHC. If the

institution does not achieve at least a

satisfactory CRA rating at its first CRA

examination following the acquisition,

the prohibitions would apply to the

FHC. This interpretation is consistent

with the provision of the GLB Act that

allows the Board when evaluating a

FHC election to exclude the poor rating

of any institution acquired by the

company within the preceding 12

months.

The Board will monitor the FHC’s

progress in addressing the CRA

performance of any recently acquired

insured depository institution and

reserves the right also to provide notice

that the CRA prohibitions apply if the

FHC is not taking appropriate action to

improve the insured depository

institution’s CRA performance.

The rule states that a FHC’s ability to

engage in certain activities is not

affected while the prohibitions are in

effect. First, consistent with the GLB

Act, a FHC that notified the Board it was

engaged in merchant banking or

insurance company investment

activities prior to the time one of its

subsidiary insured depository

institutions received a less-thansatisfactory CRA rating may continue to

make investments in the ordinary

course of conducting such investment

activities. Second, a FHC may engage in

activities and make acquisitions under

section 4(c)(8) of the BHC Act, subject

to the applicable notice and approval

requirements.

Section 225.85—Is Notice To or

Approval From the Board Required

Prior to Engaging in a Financial

Activity?

Section 225.85 of the final rule

generally permits a FHC to commence

any financial activity or acquire control

of a company engaged exclusively in

one or more financial activities without

the Board’s prior approval.7 The final

rule specifically provides that a FHC

may conduct any financial activity

either in the United States or abroad,

subject to the laws of the jurisdiction in

which the activity is conducted.

Consistent with the GLB Act, § 225.85

of the final rule provides that a FHC

must obtain prior Board approval to

acquire more than 5 percent of the

shares of a savings association. In

addition, for the reasons explained

above, the rule notes that the Board, in

the exercise of its supervisory authority,

may require a FHC to obtain prior Board

approval to engage in or acquire a

company engaged in a financial activity.

In each of these cases, the final rule

adopts the provisions of the interim rule

with only minor, technical revisions.8

Section 225.85(a)(3) of the interim

rule also allowed a FHC to control or

acquire more than 5 percent of the

voting shares of a financial company

that engaged in limited nonfinancial

activities if certain conditions were met,

including the condition that the

acquired company be substantially

engaged in activities that are

permissible for a FHC. The Board has

revised this provision in several

respects in light of its experience

administering the interim rule. First, the

Board has clarified that the acquired

must be substantially engaged in

activities that are financial in nature,

incidental to a financial activity, or

otherwise permissible for a FHC under

section 4(c) of the BHC Act.9 The final

rule provides that a company generally

is considered to be ‘‘substantially

engaged’’ in permissible activities if at

least 85 percent of the company’s

consolidated total annual gross revenues

and 85 percent of the company’s

consolidated total assets are attributable

to the conduct of financial and

incidental activities and other activities

that are permissible under section 4(c)

of the BHC Act.

Although a FHC may acquire any

percentage of shares or control of a

company engaged in limited

impermissible activities, the FHC need

only provide a post-transaction notice

under § 225.87 if such an acquisition

results in control of the company. The

final rule continues to require that the

FHC conform, terminate, or divest all of

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 405

10The Board by order has authorized bank

holding companies under section 4(c)(8) to

underwrite and deal in bank-ineligible securities

provided that the company does not derive more

than 25 percent of its revenues from such activities.

See J.P. Morgan & Co., Incorporated, 75 Federal

Reserve Bulletin 192 (1989). The list in subsection

(a)(2) does not include underwriting and dealing in

bank-ineligible securities, however, because

financial holding companies may conduct these

activities under section 4(k)(4)(E) of the BHC Act

without regard to the 25-percent revenue limit.

Some commenters requested that the Board also

remove the 25-percent revenue limit applicable to

the conduct of securities underwriting and dealing

activities by bank holding companies under section

4(c)(8) of the BHC Act. In the GLB Act, Congress

authorized only those bank holding companies that

meet the capital, management and CRA standards

applicable to financial holding companies to engage

in expanded securities activities. The Board does

not believe at this time that it would be appropriate

to allow bank holding companies that do not meet

these standards to engage in expanded securities

activities.

11Section 4(k)(4)(G) and the rule do not authorize

a FHC to engage in activities that the Board

authorized a bank holding company to provide in

individual orders issued under section 4(c)(13) of

the BHC Act.

12As discussed more thoroughly below, the

notice procedures in Regulation K do not apply to

activities that are conducted under section 4(k)(4)

of the BHC Act and Regulation Y.

the acquired companies impermissible

activities within two years of the

acquisition. A commitment to terminate

impermissible activities is unnecessary,

because, under the final rule as written,

an acquisition would be unauthorized if

the activities of the company are not

conformed to Regulation Y within two

years of the acquisition.

Section 225.86—What Activities Are

Permissible for a FHC?

Section 225.86 of the rule provides a

list of the activities that the GLB Act

defines as financial in nature and thus

permissible for a FHC to conduct

directly or indirectly.

Activities Previously Determined To Be

Closely Related to Banking

Subsection (a)(1) permits a FHC to

conduct any activity that the Board had

determined by regulation or order prior

to November 12, 1999, to be so closely

related to banking as to be a proper

incident thereto under section 4(c)(8) of

the BHC Act. These activities are listed

in § 225.28 of Regulation Y, and the rule

incorporates these activities through a

cross-reference to that section.

Subsection (a)(2) specifically lists

each of the activities the Board

approved by order as closely related to

banking prior to November 12, 1999,

and provides a citation to the most

recent or the most comprehensive Board

order concerning the activity. These

activities are: Providing administrative

and other services to mutual funds;

owning shares of a securities exchange;

providing employment histories to third

parties; check cashing and wire

transmissions services; providing notary

public services, selling postage stamps

and postage-paid envelopes; providing

vehicle registration services, and selling

public transportation tickets and tokens

in connection with offering banking

services; and real estate title abstracting.

The interim rule on activities also

authorized financial holding companies

to act as a certification authority for

digital signatures. The final rule clarifies

that this activity includes authenticating

the identity of persons conducting

financial and nonfinancial transactions

abroad, which is consistent with the

scope of activities approved by the

relevant Board order (See Bayerische

Hypo-und Vereinsbank AG, et al., 86

Federal Reserve Bulletin 56 (2000)).

Financial holding companies that

engage in any activity pursuant to

paragraph (a) must conduct the activity

in accordance with the terms and

conditions contained in Regulation Y

and the Board’s orders authorizing the

activity, unless such terms and

conditions are modified by the Board.10

Some commenters requested that the

Board amend the rule to include a

description of the conditions and

limitations governing the conduct of

each activity listed in subsection (a).

The Board notes that the conditions and

limits governing the activities listed in

subsection (a) are set forth in § 225.28 of

Regulation Y or in the orders referenced

in § 225.28(a)(2), and the Board believes

that adding a list of conditions and

limitations to the rule would lengthen

the rule without significantly facilitating

compliance with it. Where companies

have questions concerning the

conditions or limitations applicable to

an activity, the company may contact

the Board or appropriate Reserve Bank.

Activities Usual in Connection With the

Transaction of Banking Abroad

The GLB Act also defined as financial

in nature any activity that the Board had

determined by regulation in effect on

November 11, 1999, to be usual in

connection with the transaction of

banking or other financial operations

abroad (see 12 CFR 211.5(d)).

Subsection (b) lists the three activities

that the Board had determined to be

usual in connection with the transaction

of banking abroad that are not otherwise

defined as financial in nature by other

provisions of the GLB Act. These

activities are management consulting

(beyond that which is allowed under

§ 225.28 and incorporated by reference

at section 225.86(a)(1)); operating a

travel agency in connection with the

offering of financial services; and

organizing and sponsoring a mutual

fund.11 These activities must be

conducted in accordance with the

limitations set forth in Regulation K

regarding the scope and conduct of the

activity.12

The GLB Act authorizes financial

holding companies to conduct the

activities listed at § 211.5(d) of

Regulation K that, prior to the GLB Act,

a bank holding company could conduct

abroad. One commenter stated that the

activity list at § 225.86(b) should

include ‘‘commercial and other banking

activities,’’ which is the activity

described at § 211.5(d)(1) of Regulation

K. As a general matter, the GLB Act was

intended to expand the range of

nonbanking activities that a FHC could

conduct and was not meant to affect the

provisions of the BHC Act relating to the

conduct of banking activities.

Specifically, the GLB did not amend the

prior approval requirement at section 3

of the BHC Act that governs the

acquisition by a bank holding company,

including a FHC, of a domestic bank.

The Board therefore believes that the

GLB Act did not authorize a FHC to

conduct commercial and other banking

activities in the United States by using

the post-transaction notice procedure. In

addition, the Board believes that a

FHC’s acquisition of a foreign bank

should continue to be subject to the

procedures set forth in Regulation K in

order to ensure that the Board fulfills its

responsibilities as home country

supervisor in relation to international

expansion of U.S. banking

organizations, consistent with the

standards established by the Basel

Committee on Banking Supervision

(Basel Committee). Accordingly, the

Board has not included commercial and

other banking activities on the activities

list at § 225.86 that may be conducted

by using the post-transaction notice

procedure.

Other Activities Defined as Financial in

Nature by the GLB Act

In addition to authorizing activities

that the Board previously has

authorized a bank holding company to

conduct, the GLB defines several other

activities as financial in nature. These

activities, which are listed at sections

4(k)(4)(A)–(E), (H), and (I) of the BHC

Act, include acting as principal, agent or

broker in the sale of insurance products

(including annuities and reinsurance

products); underwriting, dealing in, and

making a market in securities without

any limitation on revenues that can be

derived from bank ineligible securities;

and merchant banking an insurance

406 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

13For example, the Board, in conjunction with

the Secretary of the Treasury, adopted and

requested public comment on an interim rule

implementing the merchant banking investment

provisions of the GLB Act. See 65 FR 16460 (March

28, 2000).

14The GLB Act states that a FHC may conduct in

the United States those activities previously

authorized by the Board at § 211.5(d) of Regulation

K (emphasis added). The Board has received several

inquiries as to whether a FHC also may conduct

these activities outside the United States using the

post-transaction notice. The GLB Act generally

intended to authorize FHCs to conduct all of the

activities it defined as financial in nature in the

United and abroad using the streamlined procedure.

Moreover, all but the three Regulation K activities

listed separately at § 225.86(b) have been authorized

in the same form under Regulation Y. The

preexisting Regulation Y activities authorized for

FHCs do not have the ‘‘in the United States’’

reference and may be conducted abroad using the

streamlined procedure. The Board has determined,

as reflected in this final rule, that no regulatory

purpose would be served by requiring a FHC to

follow the more restrictive Regulation K procedures

to conduct the remaining three listed activities

abroad. An FHC therefore may conduct all activities

listed at § 225.86 either in the United States or

abroad using the post-transaction notice procedure.

15 Domestic financial holding companies should

use the FR Y–6A, which soon will be replaced by

the FR Y–10, and foreign banking organizations

should use the FR Y–7A, which soon will be

replaced by the FR Y–10F.

company investment activities.

Subsection 225.86(c) provides that a

FHC may engage in any activity set forth

in the above-referenced sections of the

BHC Act. These activities must be

conducted in accordance with

applicable restrictions and limitations

contained in the GLB Act and any

implementing regulations or

supervisory guidance adopted by the

Board.13

Several commenters on the interim

rule requested that the Board amend

section 225.86 to eliminate cross

references to the GLB Act and other

sections of Regulation Y and to provide

a complete description of each activity

permissible for a FHC, including the

conditions and limitations applicable to

that activity. The Board believes the

activities incorporated in the rule by

reference are easily located elsewhere in

the Board’s Regulation Y and the BHC

Act, and that including the requested

provisions in the rule would lengthen

the rule without adding a commensurate

level of convenience. Accordingly, the

Board has not included the requested

provisions in the final rule. The Board

has, however, prepared a single list of

all activities permitted under section

225.86 that may be obtained from the

Reserve Banks.

The GLB Act directs the Board, by

regulation or order, to define the extent

to which three activities listed in

section 4(k)(5) are financial in nature or

incidental to a financial activity. The

Board anticipates proposing a rule to

implement section 4(k)(5) in the near

future.

The GLB Act also permits the Board,

in consultation with the Secretary of the

Treasury, to determine that additional

activities not listed in section 225.86 are

financial in nature of incidental thereto.

In this regard, the Board recently

determined by rule that acting as a

finder is an activity that is incidental to

a financial activity (see 65 FR 80735

(December 22, 2000)). The Board also

has requested comment on a proposal to

allow FHCs, as an activity that is

complementary to a financial activity, to

invest in companies engaged in certain

data processing and Internet-related

activities (see 65 FR 80384 (December

21, 2000)).

Interplay Between § 225.86 and Other

Authorities

Although the Board is not listing each

limitation and condition that applies to

the activities described at § 225.86, the

Board believes that some general

guidance on the how the limitations

apply is warranted in light of a number

of public comments and informal

inquiries received by Board staff on this

subject. As the Board previously has

indicated in connection with issuing the

interim rules, the various sections that

authorize activities for bank holding

companies and financial holding

companies, most notably sections

4(c)(8), 4(c)(13), and 4(k), remain

separate sources of authority under

which a FHC may engage in various

activities. If an activity is listed in more

than one provision of section 4, the FHC

may choose to conduct the activity

under any applicable provision, subject

only to the procedures and limitations

that the chosen source of authority

imposes on the activity.

For example, a FHC that wishes to

engage in securities underwriting could

choose to conduct that activity under

section 4(c)(8). If it chose that source of

authority, the FHC would be required to

obtain prior Board approval under

subpart C of Regulation Y and would be

required to conduct the underwriting

activity subject to the revenue

restrictions and other limitations

applicable to securities underwriting

activities conducted under section

4(c)(8). Alternatively, a FHC could

engage in securities underwriting under

section 4(k)(4)(E), in which case only a

post-transaction notice would be

required and the limitations of section

4(c)(8) would not apply to the activity.

As discussed above, the final rule

states that a FHC may conduct any

activity listed at § 225.86 either in the

United States or abroad using the posttransaction notice procedure.14 As with

the conduct of financial activities in the

United States, the limitations that apply

to an activity conducted abroad by a

FHC depend on the legal authority

under which the FHC conducts the

activity. If the FHC conducts an activity

abroad under section 4(c)(13) of the

BHC Act as implemented by § 211.5(d)

of Regulation K, all the requirements

and investment limitations described in

§ 211.5 would apply. If, however, a FHC

conducts an activity listed at 4(c)(13)

abroad using section 4(k)(4)(G) of the

BHC Act, which incorporates by

reference the activities authorized by

the Board under section 4(c)(13), the

Regulation K general consent

procedures and investment limitations

do not apply.

Section 225.87—Is Notice to the Board

Required After Engaging in a Financial

Activity?

Section 225.87(a) of the final rule

describes when a FHC must provide

notice to the Board after commencing or

acquiring a company engaged in a

permissible financial activity. As a

general matter, the final rule states that

a FHC may engage in any activity listed

in § 225.86 by providing the appropriate

Reserve Bank with a notice within 30

days of commencing the activity or

acquiring control of a company engaged

in the activity. The interim rule

provided that this notice could take the

form of a letter that contained

information about the activity

commenced and the company that

conducts it. In response to public

comments and to ensure that the posttransaction notices contain the basic

information necessary for the Board to

monitor a FHC’s activities, the Board

has designated forms that domestic and

foreign financial holding companies

must use to satisfy the post-transaction

notice requirement.15 The authorized

form requires limited information about

the activity commenced or the company

acquired, as well as information about

the location of the company conducting

the activity and its status within the

FHC’s organization structure. The

appropriate form for submitting the

post-transaction notice may be obtained

from any Federal Reserve Bank or from

the Board.

Section 225.87(b) of the final rule

outlines the exceptions under which

post-transaction notice is not required to

engage in an activity or make an

acquisition. Consistent with the GLB

Act, no notice is required in connection

with the acquisition of shares of a

company if the FHC would not control

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 407

16One commenter stated that a FHC should be

allowed to commence the same financial activity in

different subsidiaries using different sources of

authority. As discussed above, some activities are

authorized by more than one source of authority. A

FHC therefore may commence the same activity in

different subsidiaries using different sources of

authority in accordance with the procedures

applicable to the chosen authority.

the company after the acquisition. The

final rule retains this provision.

The rule also provides that a FHC that

properly has notified the appropriate

Federal Reserve Bank that the FHC is

engaged in securities underwriting and

dealing, merchant banking, or insurance

company investment activities generally

is not required to provide an additional

post-transaction notice when the FHC

makes particular investments in the

ordinary of course of conducting those

activities. Notwithstanding this

exception for individual investments,

investments in more than 5 percent of

the shares, assets, or other ownership

interests of a company that have a cost

that exceeds the lesser of 5 percent of

the FHC’s Tier I capital or $200 million

must be reported under § 225.87. In

response to comments that the

provisions of the interim rule on

activities related to merchant banking

investments were difficult to

understand, the Board has restructured

those provisions to explain more

succinctly when notice is and is not

required for individual merchant

banking investments.

The final rule also adds a new

exception at § 225.87(b)(2) to the general

post-transaction notice requirement.

This new section provides that a FHC

that has submitted a post-transaction

notice in connection with a particular

financial activity is not required to

submit an additional notice under this

section to commence the activity de

novo through any other authorized

subsidiary of the FHC without providing

additional notice under § 225.87(a).16

This exception applies only if the FHC

already controls the company through

which the activity will be commenced,

and, thus, the acquisition by a FHC of

control of a company engaged in a listed

activity does not qualify for this

exception. In addition, this new

exception is not available if the Board,

in the exercise of its supervisory

authority, informs the FHC that notice is

required for the commencement de novo

of a financial activity.

Section 225.88—How To Request the

Board To Determine That an Activity Is

Financial in Nature or Incidental to a

Financial Activity?

Under the GLB Act, the Board, in

consultation with the Secretary of the

Treasury, may expand the list of

activities that are permissible for a FHC

by determining that an additional

activity is financial in nature or

incidental to a financial activity. Section

225.88 permits a FHC or other interested

party to request such a determination.

The rule provides that a request for a

determination that an activity is

financial in nature or incidental to a

financial activity must identify and

define the activity for which a

determination is sought, explain in

detail why the activity should be

considered financial in nature or

incidental, and provide information

supporting the requested determination

and any other information requested by

the Board. The rule requires the Board

to provide the Secretary of the Treasury

a copy of the request and consult with

the Secretary in accordance with section

4(k)(4)(2) of the BHC Act. The rule also

allows the Board, after consultation

with the Secretary, to publish a

description of the proposal in the

Federal Register with a request for

public comment. The Board will

attempt to make a final decision on a

request filed under § 225.88 within 60

days of completion of both the

consultative process and the public

comment period, if any.

Like the interim rule, § 225.88 of the

final rule also allows a FHC to request

an advisory opinion from the Board

regarding the scope an activity already

determined to be financial and listed in

§ 225.86. Such a request must be in

writing and provide a detailed

description of the activity, product, or

service about which the company is

inquiring, an explanation supporting an

interpretation regarding the scope of the

permissible financial activity, and any

other information required by the Board.

The Board will respond to a requester

within 45 days of receiving a complete

written request.

Several commenters suggested that

the Board, without waiting for a specific

request, evaluate whether an activity is

financial in nature or incidental to a

financial activity if another Federal

banking agency has authorized or

authorizes depository institutions under

its supervision to conduct the activity.

The GLB Act allows the Board at its

own initiative to propose authorizing an

additional activity. In this regard, the

Board anticipates monitoring

developments in the banking and

financial services industries in order to

identify new activities that might be

considered financial in nature or

incidental thereto. However, the Board

does not believe it is appropriate to

propose as financial in nature or

incidental all activities that another

Federal banking agency may have

authorized. The standards the Board

must consider when authorizing a

financial activity under the GLB Act

may differ from the standards governing

the authorization of new activities

under other Federal banking laws. In

light of these differences, the

requirement that the Board consult with

the Secretary of the Treasury in

connection with financial activities, and

the potential impact of new activities on

the depository institution subsidiaries of

financial holding companies, the Board

believes that it is important to evaluate

each activity authorized by another

Federal banking agency on a case-bycase basis before proposing that the

financial holding companies be allowed

to conduct the activity.

Section 225.89—How To Request

Approval To Engage in an Activity That

Is Complementary to a Financial

Activity?

The Board has adopted without

amendment § 225.89 as originally

proposed. This section includes a

procedure for a FHC to obtain the

Board’s prior approval to engage in

activity that the company believes is

complementary to a financial activity in

which the company is engaged.

Generally, such a request must identify

the proposed complementary activity

and specifically discuss how it would

be conducted; identify the financial

activity for which the proposed activity

would be complementary and provide

information to support why the

proposed activity should be considered

complementary to the identified

financial activity; describe the scope

and relative size of the proposed

activity; discuss the risks that

conducting the activity reasonably may

be expected to post to the safety and

soundness of the company’s subsidiary

depository institutions and the financial

system generally; describe the potential

adverse effects and potential public

benefits that could result from

conducting the activity; and provide any

additional information requested by the

Board.

In acting on a proposal to engage in

a complementary activity, the Board

will consider whether the activity is

complementary to the identified

financial activity, whether the proposed

activity would pose a substantial risk to

the safety or soundness of depository

institutions or the financial system

generally, and whether the proposal

could be expected to produce benefits to

the public that outweigh possible

adverse effects. The Board will act on a

request for prior approval to engage in

a complementary activity within the

408 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

17A foreign bank that operates a branch, agency,

or commercial lending company subsidiary in the

United States is subject to the BHC Act as if it were

a bank holding company. In this portion of the

preamble, the term ‘‘branch’’ is used to include all

three of these forms of operation unless otherwise

noted.

18The financial information necessary for System

staff to compute a foreign bank’s leverage ratio will

be required as part of the certification process and

ongoing reporting required of foreign FHCs.

time period described at section 4(j) of

the BHC Act.

Section 225.90—What Are the

Requirements for a Foreign Bank To Be

Treated as a Financial Holding

Company?

A foreign bank that is a bank holding

company because it owns a subsidiary

bank in the United States must comply

with the same requirements as any other

bank holding company that elects to be

a financial holding company under the

GLB Act. Most foreign banks, however,

do not own subsidiary banks in the

United States; instead, they operate U.S.

branches that are part of the foreign

bank itself.17 Such foreign banks may,

like U.S. bank holding companies, also

elect to be treated as financial holding

companies and thereby be able to

engage in the new financial activities.

For purposes of a foreign bank with a

U.S. branch qualifying to be treated as

a FHC, the Act requires the Board to

apply capital and management

standards to the foreign bank that are

comparable to the standards applied to

a U.S. bank owned by a FHC, giving due

regard to the principle of national

treatment and equality of competitive

opportunity.

Well Capitalized Standards

Under the interim rule, a foreign bank

with a U.S. branch could be considered

well capitalized if either: (i) Its home

country supervisor had adopted capital

standards consistent with the Basel

Capital Accord, the foreign bank

maintained capital ratios generally

equivalent to those required for a well

capitalized U.S. bank (Tier 1 capital to

total risk-based assets ratio of 6 percent

and total capital to total risk-based

assets ratio of 10 percent and a Tier 1

capital to total assets leverage ratio of at

least 3 percent), and the Board

determined that the foreign bank’s

capital was comparable to the capital

required for a well capitalized U.S.

bank; or (ii) the foreign bank had

obtained a determination from the

Board under § 225.91(c) that the bank’s

capital is otherwise comparable to the

capital required of a well capitalized

U.S. bank (the ‘‘pre-clearance process’’).

Most commenters criticized the use of

a leverage ratio in assessing the capital

of foreign banks. Some of the arguments

made against imposing a leverage ratio

on foreign banks were that: (i) It is

contrary to the internationally accepted

Basel Capital Accord and

counterproductive to the work of the

Basel Committee on Banking

Supervision (the ‘‘Basel Committee’’);

(ii) the imposition of a leverage ratio on

foreign banks is inequitable due to the

different composition of their balance

sheets and the amount of nonbanking

assets commonly held by foreign banks;

and (iii) a leverage ratio requirement

would require foreign banks to manage

their worldwide capital accounts to

meet a specific U.S. requirement, which

is contrary to the principle of

comprehensive consolidated home

country supervision. One foreign bank

supervisory authority, however, stated

that it did not agree that the Basel

Capital Accord was the only possible

capital adequacy measure for a national

regulator and could see how a Tier 1

leverage test could supplement the

Basel Capital Accord in a meaningful

way. Some domestic commenters

expressed support for the imposition of

a leverage ratio requirement on foreign

bank FHCs. One commenter stated that

requiring foreign banks to meet a

leverage ratio of only 3 percent favors

foreign institutions contrary to the

provisions of the GLB Act and that, to

ensure consistency, the lower capital

requirement should be available to

foreign banks only if they can

demonstrate in their declaration and

certification that they have

implemented the market risk guidelines.

As the Board has previously noted,

the numerical screening levels for

capital are not the only determining

factors in whether a foreign bank may be

considered comparably capitalized. The

pre-clearance process established by the

interim rule allows a foreign bank that

does not meet one or more of the

screening levels to request a

determination that it is nevertheless

comparably well capitalized.

Consequently, meeting the leverage ratio

set out in the regulation has not been a

prerequisite for FHC status, and a

number of foreign banks have been

found to meet FHC requirements despite

not having met the leverage screening

level.

The foreign bank FHC elections

processed to date indicate that the

application of a leverage ratio screen to

non-U.S. banks may have limited value

as a general rule in the assessment of

comparability for FHC purposes because

of the significant differences between

U.S. and foreign banking balance sheets.

The home country supervisors of most

foreign banks do not require a bank to

meet or manage toward any specific

leverage ratio and generally do not take

it into account in the consolidated

supervision of the bank. In light of the

comments received and the Board’s

experience to date in assessing foreign

bank capital in FHC cases, the Board has

determined to make several changes in

the final regulation. The leverage ratio

has been removed from the screening

test in the definition of well capitalized

in § 225.90(b)(1)(iii) in the final rule.

The screening test will now reference a

foreign bank’s Tier 1 and total riskbased capital levels calculated under the

Basel Accord. Accordingly, foreign

banks from countries that follow Basel

capital rules may submit declarations to

be treated as FHCs without reference to

any particular leverage ratio. For those

countries that do not follow the Basel

Accord, capital will continue to be

assessed in the pre-clearance process.

The Board also believes, however,

review of a non-U.S. bank’s leverage

ratio in particular cases may serve as an

indicator that the bank’s capital should

receive further scrutiny in determining

whether the bank has capital

comparable to a well capitalized U.S.

bank. Consequently, a foreign bank’s

leverage ratio will be considered by the

Board as one of the factors that can be

taken into account for purposes of the

comparability review under § 225.92(e)

and has been added to the list of factors

in that section. Under this approach, the

Board may consider whether the level of

a foreign bank’s leverage ratio is such

that it indicates that additional analysis

should be undertaken in assessing

comparability.18 Such assessments

would in all cases be based on all

relevant factors, and not merely on the

leverage ratio. Thus, the Board would

retain any benefits associated with

reviewing the leverage ratio, but the

foreign bank’s qualification for FHC

status would not be dependent upon it.

Instead, qualification would depend on

the overall capital strength of the foreign

bank.

The Board intends that such reviews

would be carried out within the 31-day

processing period in cases where a

certification has been filed and as

expeditiously as possible in other cases.

The Board also expects that staff would

consult with the foreign bank’s home

country supervisor on issues relating to

capital.

Well Managed Standards

Under the interim rule, a foreign bank

was considered well managed if: (i)

Each of the foreign bank’s U.S. offices

had received at least a satisfactory

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 409

19See SR Letter No. 00–14 (SUP) (Oct. 23, 2000).

The ‘‘combined ROCA rating’’ encompasses a

foreign bank’s U.S. branches, agencies, and

commercial lending companies, but not its U.S.

nonbanking subsidiaries. The combined ROCA

rating will be factored into the foreign banking

organization’s overall Combined U.S. Operations

Rating, which will continue to be a single

composite rating that reflects the U.S. supervisors’

collective assessment of all operations (i.e., banking

and nonbanking) of the foreign banking

organization in the United States.

20Each U.S. depository institution subsidiary of

a foreign bank would continue to be required to

meet the well capitalized and well managed

standards on an individual basis for the foreign

bank or company to obtain FHC status in the same

manner as required for U.S. bank holding

companies.

21The Core Principles also indicate that the home

country supervisor’s responsibility extends to a

bank’s foreign subsidiaries as well as its branches,

and supervisors should determine that a bank has

the expertise needed to conduct its foreign

activities, which may be fundamentally different

from the bank’s domestic operations, in a safe and

sound manner. Basel Committee on Banking

Supervision, ‘‘Core Principles for Effective Banking

Supervision’’ pp. 40–41 (1997).

22Basel Committee on Banking Supervision,

‘‘Minimum Standards for the Supervision of

International Banking Groups and Their CrossBorder Establishments’’ § II.2 (1992). In reviewing

proposals for inward and outward expansion, the

Basel Committee states that host country and home

country authorities should, at a minimum, give

weight to (a) the strength of the bank’s and banking

group’s capital and (b) the appropriateness of the

bank’s and banking group’s organization and

operating procedures for the effective management

of risks on a local and consolidated basis

respectively.

composite rating at its most recent

assessment; (ii) the foreign bank’s home

country supervisor considered the

overall operations of the foreign bank to

be satisfactory or better; and (iii) the

management of the foreign bank met

standards comparable to those required

of a well managed U.S. bank.

Several commenters criticized the

interim rule’s requirement that each

individual U.S. office of a foreign bank

must have received at least a satisfactory

composite rating at its most recent

assessment in order for the foreign bank

to certify that it is well managed. Some

commenters argued that branches and

agencies are not properly equated to

domestic bank subsidiaries because

many are small offices that do not

function as independent financial

institutions, but rather as marketing or

relationship outposts of large,

centralized regional headquarters. In

addition, some commenters argued that

a problem in one such office that can

affect the rating of that office may, in

fact, have an insignificant impact on the

FBO’s consolidated banking operations

in the United States. Moreover, some

commenters have noted that a U.S. bank

may have a single branch in less than

satisfactory condition and still be given

a satisfactory rating overall.

In the final rule, the Board has revised

this provision to require that each

foreign bank be evaluated on the basis

of a composite rating of all of its direct

U.S. banking offices, while continuing

to evaluate each U.S. depository

institution subsidiary of the foreign

bank separately. Although the Federal

Reserve has traditionally tracked each

branch or agency of a foreign bank as a

separate entity, in order to make a

comparison between U.S. and foreign

banks for purposes of the FHC election,

the Board has determined that each

foreign bank should be evaluated for

FHC purposes on the basis of a

consolidated rating of all of its direct

U.S. banking operations. Thus, in order

to achieve comparable treatment, the

well managed standard applicable to

foreign bank FHCs has been revised in

the final rule to require that a foreign

bank have a satisfactory rating for its

U.S. branches, agencies, and

commercial lending company

subsidiaries on a composite basis.

The Federal Reserve’s foreign bank

examination process has been amended

to include assignment of a combined

assessment of a foreign banking

organization’s U.S. branch, agency, and

commercial lending company

operations through the regular

examination cycle.19 Until this

amendment is applied throughout the

regular examination cycle, such

combined U.S. banking assessments will

be determined by the Board on a case

by case basis based on the most recent

individual office ratings. If a foreign

bank that wishes to obtain FHC status

has not been assigned a combined U.S.

banking assessment as part of the

regular examination cycle, the foreign

bank should contact its responsible

Federal Reserve Bank or utilize the preclearance process. A combined U.S.

banking assessment may be assigned to

a foreign bank as part of the FHC preclearance process. If a foreign banking

group contains more than one foreign

bank with U.S. banking offices, each

such foreign bank in the group must

have a satisfactory combined U.S.

banking assessment in order for the

foreign banking group or any of its

subsidiaries to obtain FHC status.20

Several commenters also criticized

the interim rule’s requirement that the

foreign bank’s home country supervisor

consider the overall operations of the

foreign bank to be satisfactory or better.

Commenters claimed that this

requirement was vague, provided very

little guidance to the home country

supervisors, and would result in

unwarranted delays and expense in FHC

processing. Some commenters also

claimed that this requirement was an

extra-territorial expansion of the Board’s

jurisdiction and the Board, as a host

country supervisor, should not require a

foreign bank to satisfy a U.S.

management standard in its operations

outside the United States. Some

commenters also incorrectly interpreted

this provision as requiring a foreign

bank’s home country supervisors to

evaluate the bank’s global management

according to the U.S. regulatory

definition of ‘‘satisfactory.’’

The final rule amends this

requirement to clarify that a foreign

bank’s home country supervisor must

confirm that it consents to the proposed

expansion of the foreign bank’s U.S.

operations. This formulation is based on

guidelines issued by the Basel

Committee. The Basel Committee has

recognized the need for host country

supervisors to seek the views of the

home country supervisor prior to

issuing a license to a foreign bank for

new business in the host country. In its

Core Principles for Effective Banking

Supervision, the Basel Committee

indicates that a key component of

consolidated supervision is establishing

contact and information exchange with

the various other supervisors involved

and that this contact ‘‘should commence

at the authorisation stage when the host

supervisor should seek the approval

from the home supervisor before issuing

a license.21 Moreover, the Basel

Committee has indicated that a host

country supervisor should consent to

expansion of a foreign banking

organization’s activities within its

jurisdiction only after the home country

supervisor has given its consent to the

expansion.22 The final rule’s

requirement that the home country

supervisor consent to the foreign bank’s

expansion of its U.S. operations under

the GLB Act is well within the

parameters of these guidelines. In

accordance with Basel Committee

guidelines, the home country supervisor

should consider the foreign banking

organization’s consolidated capital and

management before providing its

consent to the expansion. In those

situations in which there is no formal

consent process in the home country,

the Board will consult with the home

country supervisor to assure itself that

the supervisor considers the capital and

management of the bank to satisfy its

home country standards and that the

supervisor has no objections to the

expansion.

410 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

23Assuming that a top tier foreign bank in a

foreign banking group is determined to be subject

to comprehensive consolidated supervision,

subsidiary foreign banks of the group should be

incorporated into the supervisory framework of the

home country supervisor of the top tier foreign bank

and, thus, should be subject to comprehensive

consolidated supervision even if the subsidiary

foreign bank is not subject to comprehensive

consolidated supervision by its own home country

supervisor.

24The Basel Committee has stated that, as part of

comprehensive consolidated supervision, a bank’s

home country supervisor should confirm to its own

satisfaction the reliability of the consolidated

financial and prudential information supplied by

the bank on its global operations. Basel Committee

on Banking Supervision, ‘‘Minimum Standards for

the Supervision of International Banking Groups

and Their Cross-Border Establishments’’ § II(1)

(1992).

Comparability of Capital and

Management

In order for a foreign bank to qualify

as a FHC under the interim rule, the

Board must make affirmative findings

that the foreign bank’s capital and

management are comparable to that

required for a U.S. bank owned by a

FHC. The interim rule lists discretionary

factors that the Board may take into

account in making this determination,

such as the composition of capital,

accounting standards, long-term debt

ratings, reliance on government support

to meet capital requirements, and the

extent to which the foreign bank is

subject to comprehensive consolidated

supervision by its home country

supervisor.

Some commenters objected to the

inclusion of a Board comparability

determination in the definitions of well

capitalized and well managed, claiming

that it is too vague and provides too

much discretion to the Board. They also

argue that the range of factors that can

be taken into account in the

comparability analysis and the required

consultation with home country

supervisors will significantly increase

the likelihood that the 31-day

processing period will be extended in

the case of foreign banks. Some

commenters argue that the final rule

should not retain the Board’s right to

reject foreign banks’ FHC elections if

they fulfill the required capital ratios as

calculated under the home country

standard that is consistent with the

Basel Capital Accord.

The final rule essentially retains the

provisions contained in the interim rule

that relate to the factors the Board may

consider in making a comparability

finding. The Board does not believe that

these factors are either vague or

overbroad. Rather, they are factors that

allow a decision on comparability of

capital and management to be made. All

U.S. banks are subject to essentially the

same regulatory framework, which

includes frequent examinations and

extensive quarterly reporting. Foreign

banks, on the other hand, operate under

supervisory and accounting systems that

can differ significantly from U.S.

systems and do not (and should not)

report to U.S. authorities as extensively

as U.S. banks. Under these

circumstances, it is reasonable for the

Board to retain the ability to evaluate

these differences in deciding whether a

foreign bank’s capital and management

meet the requirements of the FHC

regulations.

One commenter specifically

questioned whether the Board should

take into account a foreign bank’s

reliance on government support to meet

capital requirements in determining

whether the foreign bank is well

capitalized. The commenter argued that

the Basel Capital Accord does not

consider this factor in determining

capital adequacy. The final rule retains

this factor in the list of factors for

determinations of capital and

management comparability. In order to

assure equality of competitive

opportunity with U.S. banking

organizations, the Board must be able to

consider the impact of any assistance a

foreign banking organizations receives

from its home country for purposes of

meeting capital requirements.

Comprehensive Consolidated

Supervision

The interim rule included the ‘‘extent

to which’’ a foreign bank is subject to

comprehensive supervision on a

consolidated basis by its home country

supervisor in the list of factors the

Board may take into account in

determining whether a foreign bank is

well capitalized and well managed. The

interim rule also stated that a foreign

bank chartered in a country where no

other bank from that country has been

reviewed by the Board for

comprehensive consolidated

supervision under the BHC Act or the

International Banking Act is encouraged

to use the pre-clearance process.

In the preamble to the January 19,

2000, interim rule, the Board stated that

it expects that most foreign banks that

elect to be treated as financial holding

companies will be subject to

comprehensive consolidated

supervision, and that an election by a

foreign bank that is not subject to

comprehensive consolidated

supervision will receive a more detailed

review. The preamble to the Board’s

March 15, 2000, amendments to the

interim rule specifically requested

public comment on whether a foreign

bank should be required to be subject to

comprehensive consolidated

supervision in order to obtain FHC

status.

Two commenters addressed whether

the final rule should include a

comprehensive consolidated

supervision requirement for foreign

banks to obtain FHC status. One

commenter argued that a foreign bank’s

eligibility to be treated as a FHC should

not be conditioned on a comprehensive

consolidated supervision standard. The

commenter recognized, however, that it

may be appropriate for the Board, when

warranted by the circumstances of a

particular case, to take into account the

extent to which a foreign bank with a

U.S. branch or agency is subject to

comprehensive consolidated

supervision as a factor that is relevant

to its determination of whether the bank

is well capitalized and well managed for

purposes of the GLB Act. Another

commenter encouraged the Board to

require foreign banks to meet a

comprehensive consolidated

supervision standard, or follow the preclearance process, as a means of

insuring that the foreign banks meet

standards comparable to those required

of U.S. banks.

The Board believes that, as a general

rule, the top tier foreign bank in a

foreign banking group should be subject

to comprehensive consolidated

supervision by its home country

supervisor in order for the foreign

banking group to obtain FHC status.23

The fact that a foreign bank is subject to

comprehensive consolidated

supervision provides a host country

supervisor, such as the Board for foreign

FHCs, with a higher level of confidence

that the capital and management

information being submitted by the

applicant is accurate and reliable.24

Accordingly, the final rule adopts the

position that, as a general matter, a

foreign bank may not be considered to

be well capitalized and well managed if

the foreign bank is not subject to

comprehensive consolidated

supervision. The pre-clearance

provision has been amended to clarify

that a foreign bank that has not been

determined to be subject to

comprehensive consolidated

supervision by the Board, and is

chartered in a country where no other

bank from that country has been

determined by the Board to be subject

to comprehensive consolidated

supervision, is required (not merely

encouraged) to use the pre-clearance

process, even if it otherwise meets the

objective screening criteria. The Board

may review the home country

supervision of a foreign bank through

the pre-clearance process and make a

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 411

comprehensive consolidated

supervision determination in that

context. If the Board makes an

affirmative comprehensive consolidated

supervision determination through the

FHC pre-clearance process, the

determination will be relied upon for

the foreign bank to establish additional

branches and agencies under the

Foreign Bank Supervision Enhancement

Act.

The Board also believes, however,

that there may be limited situations in

which an exceptionally strong bank

from a country that has not yet fully

implemented comprehensive

consolidated supervision should be able

to be considered for FHC status.

Accordingly, the regulation has been

revised to allow a foreign bank that

cannot be determined to be subject fully

to comprehensive consolidated

supervision to qualify for FHC status if

certain factors are present. Such factors

are: (i) That the home country

supervisor has made significant progress

in adopting and implementing

arrangements for the consolidated

supervision of its banks; and (ii) the

foreign bank itself demonstrates

significant financial strength, such as

through high levels of capital or

exceptional asset quality. A foreign bank

that is not subject to comprehensive

consolidated supervision may use the

pre-clearance process to explain to the

Board why it should be granted FHC

status even in the absence of the

supporting comprehensive consolidated

supervision framework. The Board,

however, anticipates granting FHC

status to foreign banks that are not

subject to comprehensive consolidated

supervision only in rare instances.

Section 225.91—How May a Foreign

Bank Elect To Be Treated as a Financial

Holding Company?

Section 225.91 sets out the procedures

to be followed by a foreign bank that

operates a U.S. branch, or a company

that owns or controls such a foreign

bank in order to elect to be treated as a

FHC. In order to be treated as a FHC, a

foreign bank must file a written

declaration with the appropriate Federal

Reserve Bank. Generally, the declaration

must: (i) State that the foreign bank or

company elects to be treated as a FHC;

(ii) provide the appropriate capital

information on the foreign bank, any

foreign bank that maintains a U.S.

branch and is controlled by the foreign

bank or company certificant, and any

U.S. depository institution subsidiary of

the foreign bank or company certificant;

(iii) certify that the foreign bank, any

foreign bank that maintains a U.S.

branch and is controlled by the foreign

bank or company certificant, and all

U.S. depository institutions controlled

by the foreign bank or company

certificant are well capitalized and well

managed as of the date the foreign bank

or company files its election. This

provision also provides for a preclearance process whereby a foreign

bank or company may request a review

of its qualifications to be treated as a

FHC for the purposes of making the

required certifications in the declaration

prior to submitting its declaration.

The interim rule required that all

foreign banks with direct U.S.

operations that are controlled by a

foreign bank or company seeking FHC

status be well capitalized and well

managed in order for the foreign

banking group to be treated as a FHC.

Commenters raised two distinct issues

regarding this requirement. As an initial

issue, some commenters suggested that

a foreign bank with a U.S. branch that

is controlled by another foreign bank

should not be required to meet the well

capitalized and well managed standards

if the controlling foreign bank does not

intend for the subsidiary foreign bank to

exercise any of the expanded powers

authorized by the GLB Act. One

commenter stated that, if a foreign bank

FHC has a subsidiary foreign bank, but

the subsidiary foreign bank does not

intend to engage in the expanded FHC

activities in the United States, the GLB

Act does not require that the subsidiary

foreign bank be made subject to the

capital and management standards. The

commenter suggested that the Board

should assess the capital and

management of the controlling foreign

bank both separately and on a

consolidated basis after taking account

of the subsidiary foreign bank, but

should not apply the well capitalized

and well managed standards separately

to such subsidiary foreign bank.

The final rule retains the requirement

that each foreign bank that maintains a

U.S. branch and is controlled by a

foreign bank or company electing to be

treated as a FHC must meet capital and

management standards comparable to

those required of U.S. banks owned by

FHCs. Under the GLB Act, all of the

depository institution subsidiaries of a

bank holding company must be well

capitalized and well managed in order

for the bank holding company to qualify

for FHC status, regardless of where in

the corporate structure the expanded

activities are to be located. Permitting a

foreign bank to evade a similar

requirement merely by placing the

expanded activities in a particular

location in its organization could

provide foreign banks with a

competitive advantage over U.S. bank

holding companies. If a foreign bank

competes directly against U.S. banks in

the U.S. banking market, the Board

believes it should meet capital and

management standards comparable to

the standards applied to U.S. banks.

As a second issue, some commenters

claim that this requirement could

greatly impact the ability of a foreign

bank electing FHC status to align itself

with other non-U.S. banks through

strategic minority investments of greater

than 25 percent of voting shares.

Commenters argue that the electing

foreign bank or company can have

statutory ‘‘control’’ over another foreign

bank for purposes of U.S. banking law

when the electing foreign bank does not

have majority control over the other

foreign bank. If the other foreign bank

does not meet the well capitalized and

well managed standards, the electing

foreign bank may not have the ability to

direct the other foreign bank to improve

its capital and management in order to

meet the FHC standards or,

alternatively, to close or divest its U.S.

offices. In such instance, the electing

foreign bank would be required to either

divest its investment in the other foreign

bank or forgo the opportunity to engage

in the expanded activities in the United

States.

The final rule retains as a general rule

the requirement that each foreign bank

within a banking group that maintains

U.S. offices must meet the comparable

capital and management standards.

There may be limited situations

involving strategic minority investments

between foreign banks where some

relief from this requirement may be

justified. A foreign bank or company in

this type of situation may utilize the

pre-clearance process to request a

determination that it should not be held

accountable for another foreign bank

with U.S. offices that does not meet the

capital and management standards. The

Board anticipates, however, that any

relief from this requirement would be

granted only in limited circumstances

where the foreign bank can clearly

demonstrate that it has no ability to

control the other foreign bank.

Section 225.92—How Does an Election

by a Foreign Bank Become Effective?

Section 225.92 describes the

procedures and timing under which a

foreign bank’s FHC election will be

effective and the situations under which

the Board will find that the election is

ineffective. Generally, an election will

be effective on the 31st day after the

date the election was received by the

appropriate Federal Reserve Bank,

unless the Board notifies the foreign

bank or company prior to that time that

412 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

25The Basel Committee has recognized the need

for a banking authority to have the right to reject

a license application ‘‘if it cannot be satisfied that

the criteria set are met.’’ Basel Committee on

Banking Supervision, ‘‘Core Principles for Effective

Banking Supervision’’ p.16 (1997).

26Under the IBA, the Board has the authority to

take supervisory action against the U.S. offices of

foreign bank if the Board determines that the

foreign bank, or any affiliate of the foreign bank, has

committed a violation of law or engaged in any

unsafe or unsound banking practice in the United

States. 12 U.S.C. 3105(e). In addition, the IBA

expressly makes foreign banks with U.S. branches

subject to the provisions of the BHC Act in the same

manner and to the same extent that bank holding

companies are subject to such provisions. 12 U.S.C.

3106(a).

the Board has found that the election is

ineffective or the period is extended

with the consent of the foreign bank or

company. The election may become

effective prior to the 31st day after the

date it was received if the foreign bank

or company is so notified by the Board

or the appropriate Federal Reserve

Bank.

An election may be found by the

Board to be ineffective if the Board finds

that the foreign bank electing FHC

status, any other foreign bank with U.S.

offices that is controlled by the foreign

bank or company electing FHC status, or

any U.S. depository institution

controlled by the electing foreign bank

or company does not meet the

applicable standards for capital or

management. In addition, the Board

may find an election ineffective if the

Board determines that it does not have

sufficient information to assess whether

the foreign bank or company making the

election meets the requirements of this

subpart.

Some commenters criticized the

processing provisions of the interim

rule. As it was initially issued on

January 19, 2000, § 225.92 stated that an

election filed by a foreign bank or

company would not be effective until

the Board made an affirmative finding

that the foreign bank was well

capitalized and well managed. In its

March 15, 2000, amendments to the

interim rule, based on the Board’s

experience in reviewing and acting on

foreign bank FHC elections during that

period and to accommodate concerns

expressed by commenters regarding the

difference in process applicable to

foreign banks, the Board revised the

processing provision to make an

election filed by a foreign bank that met

the interim rule’s quantitative capital

requirements and the well managed

standards effective on the 31st day after

filing. The interim rule was amended at

that time, however, to allow the Board

to find an election ineffective if the

Board did not have sufficient

information to assess whether the

foreign bank meets the capital and

management standards.

One commenter argued that the

separate election processing track for

foreign banks may be in conflict with

the Board’s longstanding principle of

providing national treatment for foreign

banks. The commenter also claimed that

the likelihood that the 31-day

processing period for foreign banks will

be extended is significantly increased

because of the range of factors that the

Board may, in its discretion, evaluate

with respect to foreign banks and that

this additional discretion also may

cause the Board to determine that it

does not have sufficient information to

declare the FHC election effective.

Another commenter argued that if a

foreign bank certified that it met the

applicable capital and management

standards in its FHC election, it must be

permitted to engage in expanded

financial activities on the 31st day after

the date the election is received.

The final rule retains the processing

provision in the amended interim rule.

The Board has found that this provision

does not lead to delays in dealing with

certifications filed by foreign banks, all

of which have been processed within 31

days. Similarly, a number of preclearance requests have been processed

in the same time frame. The Board notes

that it has ready access to all relevant

information for U.S. banks and, thus, is

assured of being able to make the

appropriate judgments within the

statutory timeframes. The Board does

not similarly have ready access to all

relevant information for foreign banks.

The GLB Act requires the Board to

apply comparable capital and

management standards to foreign banks.

There may be situations where foreign

banks must submit additional

information in order for the Board to be

able to make a judgment on the

qualifications of the foreign bank under

the regulation. The limited discretion

provided by the processing provisions

of the final rule should ensure that the

Board is not forced to deny a FHC

election of a foreign bank because the

foreign bank has not supplied additional

information requested by the Board on

a timely basis.25

Section 225.93—What Are the

Consequences of a Foreign Bank Failing

To Continue To Meet Applicable Capital

and Management Requirements?

Section 225.93 establishes the

procedures to be followed when the

Board finds that a foreign bank FHC no

longer complies with the FHC

standards. This section parallels

§ 225.83, with appropriate

modifications. It sets out the procedures

to be followed in the event that a foreign

bank that is treated as a FHC ceases to

meet the applicable capital and

management requirements. It provides

for the execution of an agreement

designed to bring the foreign bank or

company back into compliance with the

requirements of the regulation and

permits the Board to impose certain

limitations on the U.S. activities of such

a foreign bank or company during any

period of noncompliance. Finally, the

section sets forth the consequences of a

failure to correct the noncompliance

within a period of 180 days. Such

consequences could include termination

of the foreign bank’s U.S. branches and

agencies and divestiture of its

commercial lending company

subsidiaries or ceasing to engage in the

expanded activities permitted for

financial holding companies.

The interim rule stated that, in taking

any action under this provision, the

Board would consult with the relevant

Federal and state regulatory authorities.

Some commenters noted that the section

did not also expressly state that the

Board would consult with the foreign

bank’s home country supervisor. Several

commenters argued that consultations

between the Board and the foreign

banks’ home country supervisors must

take place in the case of non-compliance

of a foreign bank with the FHC

requirements. One commenter also

stated that the interim rule’s section

provides for the active intervention of

the Board in the management of the

parent company of a foreign FHC which

ceases to meet applicable capital and

management standards and this

authority harbors potentially serious

extra-territorial implications.

As the U.S. supervisor responsible for

the operations of foreign banks in the

United States and of FHCs generally, the

Board has supervisory responsibility to

ensure that foreign banks and

companies treated as FHCs engage in

the expanded activities permitted by the

GLB Act in the United States in a safe

and sound manner.26 This section

relates only to the U.S. activities of a

foreign bank or company FHC and does

not involve extra-territorial extension of

the Board’s authority as host country

supervisor. In accordance with Basel

Committee guidelines, the Board

generally informs a foreign bank’s home

country supervisor regarding any area of

the foreign bank’s U.S. business that

raises a significant level of supervisory

concern for the Board, including

whether the foreign bank or its affiliates

are in compliance with U.S. law and

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 413

27Working group of the Basel Committee on

Banking Supervision and the Offshore Group of

Banking Supervisors, ‘‘The Supervision of CrossBorder Banking’’ section III(b) ¶ 14 (Oct. 1996).

regulation.27 For the avoidance of

doubt, the final rule expressly states that

the Board will consult with the relevant

home country supervisor of a foreign

bank in taking any action under this

section.

The final rule also adopts provisions

that generally parallel the amendments

made to § 225.83 with respect to

triggering events for notifying the Board

that the foreign bank has ceased to be

well capitalized or well managed under

the regulation.

Regulatory Flexibility Act

The Board has reviewed the final rule

in accordance with the Regulatory

Flexibility Act. This final rule

implements provisions of Title I of the

Gramm-Leach-Bliley Act that allow

entities that qualify as FHCs to engage

in a broad range of securities, insurance,

and other financial activities by

providing the Board with a simple, posttransaction notice. The rule should

enable bank holding companies and

foreign banks that qualify as financial

holding companies to engage in an

expanded range of activities by, in most

cases, submitting a simple form to the

appropriate Federal Reserve Bank

describing the relevant activity.

The FHC election procedures

described in this rule are voluntary, and

the criteria set forth in the rule for an

effective election filing are those

established by the GLB Act. The rule

implements this part of the GLB Act by

requiring a simple, one-time procedure

involving minimum paperwork to fulfill

the statutory election requirement. In

addition, the new powers described in

the GLB Act and implemented by this

rule should enhance the overall

efficiency of bank holding companies

and the other financial companies that

seek to affiliate with them. The rule

applies to all companies that attempt to

qualify as financial holding companies,

regardless of their size, and allows small

organizations to take advantage of the

broad new powers conferred by the GLB

Act with minimal additional burden.

Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3506;

5 CFR part 1320 Appendix A.1), the

Board reviewed the rule under the

authority delegated to the Board by the

Office of Management and Budget. The

Federal Reserve may not conduct or

sponsor, and an organization is not

required to respond to, this information

collection unless it displays a currently

valid OMB control number. The OMB

control number is 7100–0292.

The collection of information

requirements in this final rulemaking

are found in 12 CFR 225.82 (a) and (b),

225.83 (b) and (c), 225.91 (a), 225.93 (b)

and (c); and 225.87, 225.88, and 225.89.

This information is required to evidence

compliance with the requirements of

Title I of the Gramm-Leach-Bliley Act

(Pub. L. 106–103, 113 Stat. 1338 (1999))

which amends section 4 of the Bank

Holding Company Act (12 U.S.C. 1843).

The respondents are current and future

bank holding companies and foreign

banking organizations; and financial

holding companies, respectively.

The notice cited in 12 CFR 225.82(a)

provides that a bank holding company

may elect to become a financial holding

company by filing a simple written

declaration with the Federal Reserve.

The declaration must include

information identifying the company’s

subsidiary depository institutions and

their capital ratios, and a certification

that each depository institution is well

capitalized and well managed (for

specific details, see 12 CFR 225.82 (b)).

There will be no reporting form for this

information collection. The agency form

number for this declaration will be the

FR 4010. The Board estimates that

approximately 500 bank holding

companies will file this declaration

during the first year and that it will take

approximately 15 minutes to complete

this information. This would result in

estimated annual burden of 125 hours.

Based on a rate of $20 per hour, the

annual cost to the public for this

information collection is estimated to be

$2,500.

The notice cited in 12 CFR 225.91(a)

provides that a foreign bank that

operates a branch or agency or owns or

controls a commercial lending company

in the United States, or a company that

owns or controls such a foreign bank,

may elect to be treated as a financial

holding company by filing a written

declaration with the appropriate

Reserve Bank. The declaration must

state that they intend to be treated as an

FHC; include their risk-based capital

ratios, amount of Tier 1 capital, and

total assets; certify that they are well

capitalized and well managed; certify

that all U.S. depository institution

subsidiaries of the foreign bank or

company are well capitalized and well

managed; and provide the capital ratios

for each U.S. depository institution

subsidiaries of the foreign bank or

company (for specific details, see 12

CFR 225.91(b)). There will be no

reporting form for this information

collection. The agency form number for

this declaration will be the FR 4010.

The Board estimates that approximately

15 foreign banks will file this

declaration during the first year and that

it will take approximately 30 minutes to

complete this information. This would

result in estimated annual burden of 7.5

hours. Based on a rate of $20 per hour,

the annual cost to the public for this

information collection is estimated to be

$150.

The notice cited in 12 CFR 225.83(b)

provides that a financial holding

company with subsidiary depository

institutions that cease to be well

managed or capitalized, must notify the

Federal Reserve and execute an

agreement acceptable to the Federal

Reserve within 45 days. Similarly, the

notice cited in 12 CFR 225.93(b)

provides that if a foreign bank, any

foreign bank that maintains a U.S.

branch, agency, or commercial lending

company and is controlled by the

foreign bank or company, or any U.S.

depository institution subsidiary of the

foreign bank or company that cease to

be well capitalized or well managed, the

foreign bank or parent company must

notify the Federal Reserve and execute

an agreement acceptable to the Federal

Reserve within 45 days. If the financial

holding company or foreign bank would

like to request additional time they must

provide an explanation of why an

extension is necessary. For specific

details about what should be included

in this agreement, see 12 CFR

225.83(c)(3) and 225.93(c)(3),

respectively. There will be no reporting

form for this information collection. The

agency form number will be the FR

4012. The Federal Reserve estimates

that due to the new incentives, only 10

subsidiary depository institutions of

financial holding companies and only 1

subsidiary of a foreign bank will fall

into this category per year and that it

would take approximately 10 hours to

complete this information. This would

result in estimated annual burden of 110

hours. Based on a rate of $20 per hour,

the annual cost to the public for this

information collection would be $2,200.

The post-transaction notice cited in

12 CFR 225.87(a) provides that a

financial holding company that

commences an activity or acquires

shares of a company engaged in an

activity listed in § 225.86, must notify

the appropriate Federal Reserve Bank in

writing within 30 calendar days. See 12

CFR 225.87(a) for specific details on the

content of the notice. There are

reporting forms for this information

collection. For domestic FHCs, this form

is the FR Y–6A (OMB No. 7100–0124)

and for foreign FHCs, the form is the FR

Y–7A (OMB No. 7100–0125). 65 FR

20821 (April 18, 2000). These forms

414 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

shortly will be replaced by the FR Y–10

and FR Y–10F (OMB No. 7100–0297),

respectively.

The Federal Reserve estimates that

financial holding companies will make

450 filings of this notice annually and

that it would take approximately 1 hour

to complete this notification. This

would result in an estimated annual

burden of 450 hours. Based on a rate of

$20 per hour, the annual cost to the

public for this information collection

would be $9,000.

Financial holding companies

requesting the Board’s determination

that an activity is financial in nature or

incidental to a financial activity must

provide to the Board the information

described in 12 CFR 225.88(b).

Financial holding companies may

request an advisory opinion from the

Board about whether a specific

proposed activity falls within the scope

of an activity listed in 12 CFR 225.86 as

financial in nature or incidental to a

financial activity by submitting the

information described in 12 CFR

225.88(e). Financial holding companies

that seek prior approval to engage in an

activity that the financial holding

company believes is complementary to

a financial activity must provide to the

Board the information identified in 12

CFR 225.89(a). The Federal Reserve

estimates that only 25 financial holding

companies would file the information

requested in these sections annually and

that it would take approximately 1 hour

to complete each information collection.

This would result in estimated annual

burden of 25 hours. Based on a rate of

$20 per hour, the annual cost to the

public for this information collection

would be $500.

A bank holding company may request

confidentiality for the information

contained in these information

collections pursuant to section (b)(4)

and (b)(6) of the Freedom of Information

Act (5 U.S.C. 552(b)(4) and (b)(6)).

The Federal Reserve has a continuing

interest in the public’s opinions of our

collections of information. At any time,

comments regarding the burden

estimate, or any other aspect of this

collection of information, including

suggestions for reducing the burden,

may be sent to: Secretary, Board of

Governors of the Federal Reserve

System, 20th and C Streets, NW.,

Washington, DC 20551; and to the

Office of Management and Budget,

Paperwork Reduction Project (7100–

0292), Washington, DC 20503.

List of Subjects in 12 CFR Part 225

Administrative practice and

procedure, Banks, Banking, Federal

Reserve System, Holding companies,

Reporting and recordkeeping

requirements, Securities.

For the reasons set out in the

preamble, the Board amends 12 CFR

part 225 as follows:

PART 225—BANK HOLDING

COMPANIES AND CHANGE IN BANK

CONTROL (REGULATION Y)

1. The authority citation for part 225

is amended to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818,

1828(o), 1831i, 1831p–1, 1843(c)(8), 1843(k),

1844(b), 1972(l), 2903, 2905, 3106, 3108,

3310, 3331–3351, 3907, and 3909.

2. In subpart A, § 225.1, a new

paragraph (c)(9) is added to read as

follows:

§ 225.1 Authority, purpose, and scope.

* * * * *

(c) * * *

(9) Subpart I establishes the procedure

by which a bank holding company may

elect to become a financial holding

company, enumerates the consequences

if a financial holding company ceases to

meet a requirement applicable to a

financial holding company, lists the

activities in which a financial holding

company may engage, establishes the

procedure by which a person may

request the Board to authorize

additional activities as financial in

nature or incidental thereto, and

establishes the procedure by which a

financial holding company may seek

approval to engage in an activity that is

complementary to a financial activity.

* * * * *

3. In subpart A, § 225.2 is amended by

revising paragraph (r)(2) and (s) and

adding paragraph (t) to read as follows:

§ 225.2 Definitions

* * * * *

(r) * * *

(2) Insured and uninsured depository

institution—(i) Insured depository

institution. In the case of an insured

depository institution, ‘‘well

capitalized’’ means that the institution

has and maintains at least the capital

levels required to be well capitalized

under the capital adequacy regulations

or guidelines applicable to the

institution that have been adopted by

the appropriate Federal banking agency

for the institution under section 38 of

the Federal Deposit Insurance Act (12

U.S.C. 1831o).

(ii) Uninsured depository institution.

In the case of a depository institution

the deposits of which are not insured by

the Federal Deposit Insurance

Corporation, ‘‘well capitalized’’ means

that the institution has and maintains at

least the capital levels required for an

insured depository institution to be well

capitalized.

* * * * *

(s) Well managed—(1) In general.

Except as otherwise provided in this

part, a company or depository

institution is well managed if:

(i) At its most recent inspection or

examination or subsequent review by

the appropriate Federal banking agency

for the company or institution (or the

appropriate state banking agency in an

examination described in section 10(d)

of the Federal Deposit Insurance Act (12

U.S.C. 1820(d)), the company or

institution received:

(A) At least a satisfactory composite

rating; and

(B) At least a satisfactory rating for

management, if such rating is given.

(ii) In the case of a company or

depository institution that has not

received an inspection or examination

rating, the Board has determined, after

a review of the managerial and other

resources of the company or depository

institution and after consulting with the

appropriate Federal and state banking

agencies, as applicable, for the company

or institution, that the company or

institution is well managed.

(2) Merged depository institutions—(i)

Merger involving well managed

institutions. A depository institution

that results from the merger of two or

more depository institutions that are

well managed shall be considered to be

well managed unless the Board

determines otherwise after consulting

with the appropriate Federal and state

banking agencies, as applicable, for each

depository institution involved in the

merger.

(ii) Merger involving a poorly rated

institution. A depository institution that

results from the merger of a depository

institution that is well managed with

one or more depository institutions that

are not well managed or have not been

examined shall be considered to be well

managed if the Board determines, after

a review of the managerial and other

resources of the resulting depository

institution and after consulting with the

appropriate Federal and state banking

agencies for the institutions involved in

the merger, as applicable, that the

resulting institution is well managed.

(3) Foreign banking organizations.

Except as otherwise provided in this

part, a foreign banking organization is

considered well managed if the

combined operations of the foreign

banking organization in the United

States have received at least a

satisfactory composite rating at the most

recent annual assessment.

(t) Depository institution. For

purposes of this part, the term

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 415

‘‘depository institution’’ has the same

meaning as in section 3(c) of the Federal

Deposit Insurance Act (12 U.S.C.

1813(c)).

* * * * *

4. In subpart B, § 225.14(c)(2)(i) is

revised to read as follows:

§ 225.14 Expedited action for certain bank

acquisitions by well-run bank holding

companies i

* * * * *

(c) * * *

(2) Well managed organization—(i)

Satisfactory examination ratings. At the

time of the transaction, the acquiring

bank holding company, its lead insured

depository institution, and insured

depository institutions that control at

least 80 percent of the total riskweighted assets of insured depository

institutions controlled by the holding

company are well managed and have

received at least a satisfactory rating for

compliance at their most recent

examination if such rating was given;

* * * * *

5. In subpart C, § 225.23(c)(2)(i) is

revised to read as follows:

§ 225.23 Expedited action for certain

nonbanking proposals by well-run bank

holding companies

* * * * *

(c) * * *

(2) Well managed organization—(i)

Satisfactory examination ratings. At the

time of the transaction, the acquiring

bank holding company, its lead insured

depository institution, and insured

depository institutions that control at

least 80 percent of the total riskweighted assets of insured depository

institutions controlled by the holding

company are well managed and have

received at least a satisfactory rating for

compliance at their most recent

examination if such rating was given;

* * * * *

6. Subpart I is revised to read as

follows:

Subpart I—Financial Holding Companies

Sec.

225.81 What is a financial holding

company?

225.82 How does a bank holding company

elect to become a financial holding

company?

225.83 What are the consequences of failing

to continue to meet applicable capital

and management requirements?

225.84 What are the consequences of failing

to maintain a satisfactory or better rating

under the Community Reinvestment Act

at all insured depository institution

subsidiaries?

225.85 Is notice to or approval from the

Board required prior to engaging in a

financial activity?

225.86 What activities are permissible for

any financial holding company?

225.87 Is notice to the Board required after

engaging in a financial activity?

225.88 How to request the Board to

determine that an activity is financial in

nature or incidental to a financial

activity?

225.89 How to request approval to engage

in an activity that is complementary to

a financial activity?

225.90 What are the requirements for a

foreign bank to be treated as a financial

holding company?

225.91 How may a foreign bank elect to be

treated as a financial holding company?

225.92 How does an election by a foreign

bank become effective?

225.93 What are the consequences of a

foreign bank failing to continue to meet

applicable capital and management

requirements?

225.94 What are the consequences of an

insured branch or depository institution

failing to maintain a satisfactory or better

rating under the Community

Reinvestment Act?

Subpart I—Financial Holding

Companies

§ 225.81 What is a financial holding

company?

(a) Definition. A financial holding

company is a bank holding company

that meets the requirements of this

section.

(b) Requirements to be a financial

holding company. In order to be a

financial holding company:

(1) All depository institutions

controlled by the bank holding company

must be and remain well capitalized;

(2) All depository institutions

controlled by the bank holding company

must be and remain well managed; and

(3) The bank holding company must

have made an effective election to

become a financial holding company.

(c) Requirements for foreign banks

that are or are owned by bank holding

companies—(1) Foreign banks with U.S.

branches or agencies that also own U.S.

banks. A foreign bank that is a bank

holding company and that operates a

branch or agency or owns or controls a

commercial lending company in the

United States must comply with the

requirements of this section, § 225.82,

and §§ 225.90 through 225.92 in order to

be a financial holding company. After it

becomes a financial holding company, a

foreign bank described in this paragraph

will be subject to the provisions of

§§ 225.83, 225.84, 225.93, and 225.94.

(2) Bank holding companies that own

foreign banks with U.S. branches or

agencies. A bank holding company that

owns a foreign bank that operates a

branch or agency or owns or controls a

commercial lending company in the

United States must comply with the

requirements of this section, § 225.82,

and §§ 225.90 through 225.92 in order to

be a financial holding company. After it

becomes a financial holding company, a

bank holding company described in this

paragraph will be subject to the

provisions of §§ 225.83, 225.84, 225.93,

and 225.94.

§ 225.82 How does a bank holding

company elect to become a financial

holding company?

(a) Filing requirement. A bank holding

company may elect to become a

financial holding company by filing a

written declaration with the appropriate

Reserve Bank. A declaration by a bank

holding company is considered to be

filed on the date that all information

required by paragraph (b) of this section

is received by the appropriate Reserve

Bank.

(b) Contents of declaration. To be

deemed complete, a declaration must:

(1) State that the bank holding

company elects to be a financial holding

company;

(2) Provide the name and head office

address of the bank holding company

and of each depository institution

controlled by the bank holding

company;

(3) Certify that each depository

institution controlled by the bank

holding company is well capitalized as

of the date the bank holding company

submits its declaration;

(4) Provide the capital ratios as of the

close of the previous quarter for all

relevant capital measures, as defined in

section 38 of the Federal Deposit

Insurance Act (12 U.S.C. 1831o), for

each depository institution controlled

by the company on the date the

company submits its declaration; and

(5) Certify that each depository

institution controlled by the company is

well managed as of the date the

company submits its declaration.

(c) Effectiveness of election. An

election by a bank holding company to

become a financial holding company

shall not be effective if, during the

period provided in paragraph (e) of this

section, the Board finds that, as of the

date the declaration was filed with the

appropriate Reserve Bank:

(1) Any insured depository institution

controlled by the bank holding company

(except an institution excluded under

paragraph (d) of this section) has not

achieved at least a rating of ‘‘satisfactory

record of meeting community credit

needs’’ under the Community

Reinvestment Act at the institution’s

most recent examination; or

(2) Any depository institution

controlled by the bank holding company

416 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

is not both well capitalized and well

managed.

(d) Consideration of the CRA

performance of a recently acquired

insured depository institution. Except as

provided in paragraph (f) of this section,

an insured depository institution will be

excluded for purposes of the review of

the Community Reinvestment Act rating

provisions of paragraph (c)(1) of this

section if:

(1) The bank holding company

acquired the insured depository

institution during the 12-month period

preceding the filing of an election under

paragraph (a) of this section;

(2) The bank holding company has

submitted an affirmative plan to the

appropriate Federal banking agency for

the institution to take actions necessary

for the institution to achieve at least a

rating of ‘‘satisfactory record of meeting

community credit needs’’ under the

Community Reinvestment Act at the

next examination of the institution; and

(3) The appropriate Federal banking

agency for the institution has accepted

the plan described in paragraph (d)(2) of

this section.

(e) Effective date of election—(1) In

general. An election filed by a bank

holding company under paragraph (a) of

this section is effective on the 31st

calendar day after the date that a

complete declaration was filed with the

appropriate Reserve Bank, unless the

Board notifies the bank holding

company prior to that time that the

election is ineffective.

(2) Earlier notification that an election

is effective. The Board or the

appropriate Reserve Bank may notify a

bank holding company that its election

to become a financial holding company

is effective prior to the 31st day after the

date that a complete declaration was

filed with the appropriate Reserve Bank.

Such a notification must be in writing.

(f) Requests to become a financial

holding company submitted as part of

an application to become a bank

holding company—(1) In general. A

company that is not a bank holding

company and has applied for the

Board’s approval to become a bank

holding company under section 3(a)(1)

of the BHC Act (12 U.S.C. 1842(a)(1))

may as part of that application submit

a request to become a financial holding

company.

(2) Contents of request. A request to

become a financial holding company

submitted as part of an application to

become a bank holding company must:

(i) State that the company seeks to

become a financial holding company on

consummation of its proposal to become

a bank holding company; and

(ii) Certify that each depository

institution that would be controlled by

the company on consummation of its

proposal to become a bank holding

company will be both well capitalized

and well managed as of the date the

company consummates the proposal.

(3) Request becomes a declaration

and an effective election on date of

consummation of bank holding

company proposal. A complete request

submitted by a company under this

paragraph (f) becomes a complete

declaration by a bank holding company

for purposes of section 4(l) of the BHC

Act (12 U.S.C. 1843(l)) and becomes an

effective election for purposes of

§ 225.81(b) on the date that the company

lawfully consummates its proposal

under section 3 of the BHC Act (12

U.S.C. 1842), unless the Board notifies

the company at any time prior to

consummation of the proposal and that:

(i) Any depository institution that

would be controlled by the company on

consummation of the proposal will not

be both well capitalized and well

managed on the date of consummation;

or

(ii) Any insured depository institution

that would be controlled by the

company on consummation of the

proposal has not achieved at least a

rating of ‘‘satisfactory record of meeting

community credit needs’’ under the

Community Reinvestment Act at the

institution’s most recent examination.

(4) Limited exclusion for recently

acquired institutions not available.

Unless the Board determines otherwise,

an insured depository institution that is

controlled or would be controlled by the

company as part of its proposal to

become a bank holding company may

not be excluded for purposes of

evaluating the Community

Reinvestment Act criterion described in

this paragraph or in paragraph (d) of this

section.

(g) Board’s authority to exercise

supervisory authority over a financial

holding company. An effective election

to become a financial holding company

does not in any way limit the Board’s

statutory authority under the BHC Act,

the Federal Deposit Insurance Act, or

any other relevant Federal statute to

take appropriate action, including

imposing supervisory limitations,

restrictions, or prohibitions on the

activities and acquisitions of a bank

holding company that has elected to

become a financial holding company, or

enforcing compliance with applicable

law.

§ 225.83 What are the consequences of

failing to continue to meet applicable

capital and management requirements?

(a) Notice by the Board. If the Board

finds that a financial holding company

controls any depository institution that

is not well capitalized or well managed,

the Board will notify the company in

writing that it is not in compliance with

the applicable requirement(s) for a

financial holding company and identify

the area(s) of noncompliance. The Board

may provide this notice at any time

before or after receiving notice from the

financial holding company under

paragraph (b) of this section.

(b) Notification by a financial holding

company required—(1) Notice to Board.

A financial holding company must

notify the Board in writing within 15

calendar days of becoming aware that

any depository institution controlled by

the company has ceased to be well

capitalized or well managed. This

notification must identify the depository

institution involved and the area(s) of

noncompliance.

(2) Triggering events for notice to the

Board—(i) Well capitalized. A company

becomes aware that a depository

institution it controls is no longer well

capitalized upon the occurrence of any

material event that would change the

category assigned to the institution for

purposes of section 38 of the Federal

Deposit Insurance Act (12 U.S.C.

1831o). See 12 CFR 6.3(b)–(c),

208.42(b)–(c), and 325.102(b)–(c).

(ii) Well managed. A company

becomes aware that a depository

institution it controls is no longer well

managed at the time the depository

institution receives written notice from

the appropriate Federal or state banking

agency that either its composite rating

or its rating for management is not at

least satisfactory.

(c) Execution of agreement acceptable

to the Board—(1) Agreement required;

time period. Within 45 days after

receiving a notice from the Board under

paragraph (a) of this section, the

company must execute an agreement

acceptable to the Board to comply with

all applicable capital and management

requirements.

(2) Extension of time for executing

agreement. Upon request by a company,

the Board may extend the 45-day period

under paragraph (c)(1) of this section if

the Board determines that granting

additional time is appropriate under the

circumstances. A request by a company

for additional time must include an

explanation of why an extension is

necessary.

(3) Agreement requirements. An

agreement required by paragraph (c)(1)

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 417

of this section to correct a capital or

management deficiency must:

(i) Explain the specific actions that

the company will take to correct all

areas of noncompliance;

(ii) Provide a schedule within which

each action will be taken;

(iii) Provide any other information

that the Board may require; and

(iv) Be acceptable to the Board.

(d) Limitations during period of

noncompliance—Until the Board

determines that a company has

corrected the conditions described in a

notice under paragraph (a) of this

section:

(1) The Board may impose any

limitations or conditions on the conduct

or activities of the company or any of its

affiliates as the Board finds to be

appropriate and consistent with the

purposes of the BHC Act; and

(2) The company and its affiliates may

not commence any additional activity or

acquire control or shares of any

company under section 4(k) of the BHC

Act without prior approval from the

Board.

(e) Consequences of failure to correct

conditions within 180 days—(1)

Divestiture of depository institutions. If

a company does not correct the

conditions described in a notice under

paragraph (a) of this section within 180

days of receipt of the notice or such

additional time as the Board may

permit, the Board may order the

company to divest ownership or control

of any depository institution owned or

controlled by the company. Such

divestiture must be done in accordance

with the terms and conditions

established by the Board.

(2) Alternative method of complying

with a divestiture order. A company

may comply with an order issued under

paragraph (e)(1) of this section by

ceasing to engage (both directly and

through any subsidiary that is not a

depository institution or a subsidiary of

a depository institution) in any activity

that may be conducted only under

section 4(k), (n), or (o) of the BHC Act

(12 U.S.C. 1843(k), (n), or (o)). The

termination of activities must be

completed within the time period

referred to in paragraph (e)(1) of this

section and in accordance with the

terms and conditions acceptable to the

Board.

(f) Consultation with other agencies.

In taking any action under this section,

the Board will consult with the relevant

Federal and state regulatory authorities.

§ 225.84 What are the consequences of

failing to maintain a satisfactory or better

rating under the Community Reinvestment

Act at all insured depository institution

subsidiaries?

(a) Limitations on activities—(1) In

general. Upon receiving a notice

regarding performance under the

Community Reinvestment Act in

accordance with paragraph (a)(2) of this

section, a financial holding company

may not:

(i) Commence any additional activity

under section 4(k) or 4(n) of the BHC

Act (12 U.S.C. 1843(k) or (n)); or

(ii) Directly or indirectly acquire

control, including all or substantially all

of the assets, of a company engaged in

any activity under section 4(k) or 4(n) of

the BHC Act (12 U.S.C. 1843(k) or (n)).

(2) Notification. A financial holding

company receives notice for purposes of

this paragraph at the time that the

appropriate Federal banking agency for

any insured depository institution

controlled by the company or the Board

provides notice to the institution or

company that the institution has

received a rating of ‘‘needs to improve

record of meeting community credit

needs’’ or ‘‘substantial noncompliance

in meeting community credit needs’’ in

the institution’s most recent

examination under the Community

Reinvestment Act.

(b) Exceptions for certain activities—

(1) Continuation of investment

activities. The prohibition in paragraph

(a) of this section does not prevent a

financial holding company from

continuing to make investments in the

ordinary course of conducting merchant

banking activities under section

4(k)(4)(H) of the BHC Act (12 U.S.C.

1843(k)(4)(H)) or insurance company

investment activities under section

4(k)(4)(I) of the BHC Act (12 U.S.C.

1843(k)(4)(I))if:

(i) The financial holding company

lawfully was a financial holding

company and commenced the merchant

banking activity under section 4(k)(4)(H)

of the BHC Act (12 U.S.C. 1843(k)(4)(H))

or the insurance company investment

activity under section 4(k)(4)(I) of the

BHC Act (12 U.S.C. 1843(k)(4)(I)) prior

to the time that an insured depository

institution controlled by the financial

holding company received a rating

below ‘‘satisfactory record of meeting

community credit needs’’ under the

Community Reinvestment Act; and

(ii) The Board has not, in the exercise

of its supervisory authority, advised the

financial holding company that these

activities must be restricted.

(2) Activities that are closely related

to banking. The prohibition in

paragraph (a) of this section does not

prevent a financial holding company

from commencing any additional

activity or acquiring control of a

company engaged in any activity under

section 4(c) of the BHC Act (12 U.S.C.

1843(c)), if the company complies with

the notice, approval, and other

requirements of that section and section

4(j) of the BHC Act (12 U.S.C. 1843(j)).

(c) Duration of prohibitions. The

prohibitions described in paragraph (a)

of this section shall continue in effect

until such time as each insured

depository institution controlled by the

financial holding company has achieved

at least a rating of ‘‘satisfactory record

of meeting community credit needs’’

under the Community Reinvestment Act

at the most recent examination of the

institution.

§ 225.85 Is notice to or approval from the

Board required prior to engaging in a

financial activity?

(a) No prior approval required

generally—(1) In general. A financial

holding company and any subsidiary

(other than a depository institution or

subsidiary of a depository institution) of

the financial holding company may

engage in any activity listed in § 225.86,

or acquire shares or control of a

company engaged exclusively in

activities listed in § 225.86, without

providing prior notice to or obtaining

prior approval from the Board unless

required under paragraph (c) of this

section.

(2) Acquisitions by a financial holding

company of a company engaged in other

permissible activities. In addition to the

activities listed in § 225.86, a company

acquired or to be acquired by a financial

holding company under paragraph (a)(1)

of this section may engage in activities

otherwise permissible for a financial

holding company under this part in

accordance with any applicable notice,

approval, or other requirement.

(3) Acquisition by a financial holding

company of a company engaged in

limited nonfinancial activities—(i)

Mixed acquisitions generally permitted.

A financial holding company may under

this subpart acquire more than 5 percent

of the outstanding shares of any class of

voting securities or control of a

company that is not engaged exclusively

in activities that are financial in nature,

incidental to a financial activity, or

otherwise permissible for the financial

holding company under section 4(c) of

the BHC Act (12 U.S.C. 1843(c)) if:

(A) The company to be acquired is

substantially engaged in activities that

are financial in nature, incidental to a

financial activity, or otherwise

permissible for the financial holding

418 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

company under section 4(c) of the BHC

Act (12 U.S.C. 1843(c));

(B) The financial holding company

complies with the notice requirements

of § 225.87, if applicable; and

(C) The company conforms,

terminates, or divests, within 2 years of

the date the financial holding company

acquires shares or control of the

company, all activities that are not

financial in nature, incidental to a

financial activity, or otherwise

permissible for the financial holding

company under section 4(c) (12 U.S.C.

1843(c))of the BHC Act.

(ii) Definition of ‘‘substantially

engaged.’’ Unless the Board determines

otherwise, a company will be

considered to be ‘‘substantially

engaged’’ in activities permissible for a

financial holding company for purposes

of paragraph (a)(3)(A) of this section if

at least 85 percent of the company’s

consolidated total annual gross revenues

is derived from and at least 85 percent

of the company’s consolidated total

assets is attributable to the conduct of

activities that are financial in nature,

incidental to a financial activity, or

otherwise permissible for a financial

holding company under section 4(c) of

the BHC Act (12 U.S.C. 1843(c)).

(b) Locations in which a financial

holding company may conduct financial

activities. A financial holding company

may conduct any activity listed in

§ 225.86 at any location in the United

States or at any location outside of the

United States subject to the laws of the

jurisdiction in which the activity is

conducted.

(c) Circumstances under which prior

notice to the Board is required—(1)

Acquisition of more than 5 percent of

the shares of a savings association. A

financial holding company must obtain

Board approval in accordance with

section 4(j) of the BHC Act (12 U.S.C.

1843(j)) and either § 225.14 or § 225.24,

as appropriate, prior to acquiring

control or more than 5 percent of the

outstanding shares of any class of voting

securities of a savings association or of

a company that owns, operates, or

controls a savings association.

(2) Supervisory actions. The Board

may, if appropriate in the exercise of its

supervisory or other authority,

including under § 225.82(g) or

§ 225.83(d) or other relevant authority,

require a financial holding company to

provide notice to or obtain approval

from the Board prior to engaging in any

activity or acquiring shares or control of

any company.

§ 225.86 What activities are permissible for

any financial holding company?

The following activities are financial

in nature or incidental to a financial

activity:

(a) Activities determined to be closely

related to banking. (1) Any activity that

the Board had determined by regulation

prior to November 12, 1999, to be so

closely related to banking as to be a

proper incident thereto, subject to the

terms and conditions contained in this

part, unless modified by the Board.

These activities are listed in § 225.28.

(2) Any activity that the Board had

determined by an order that was in

effect on November 12, 1999, to be so

closely related to banking as to be a

proper incident thereto, subject to the

terms and conditions contained in this

part and those in the authorizing orders.

These activities are:

(i) Providing administrative and other

services to mutual funds (Societe

Generale, 84 Federal Reserve Bulletin

680 (1998));

(ii) Owning shares of a securities

exchange (J.P. Morgan & Co, Inc., and

UBS AG, 86 Federal Reserve Bulletin 61

(2000));

(iii) Acting as a certification authority

for digital signatures and authenticating

the identity of persons conducting

financial and nonfinancial transactions

(Bayerische Hypo- und Vereinsbank AG,

et al., 86 Federal Reserve Bulletin 56

(2000));

(iv) Providing employment histories

to third parties for use in making credit

decisions and to depository institutions

and their affiliates for use in the

ordinary course of business (Norwest

Corporation, 81 Federal Reserve

Bulletin 732 (1995));

(v) Check cashing and wire

transmission services (Midland Bank,

PLC, 76 Federal Reserve Bulletin 860

(1990) (check cashing); Norwest

Corporation, 81 Federal Reserve

Bulletin 1130 (1995) (money

transmission));

(vi) In connection with offering

banking services, providing notary

public services, selling postage stamps

and postage-paid envelopes, providing

vehicle registration services, and selling

public transportation tickets and tokens

(Popular, Inc., 84 Federal Reserve

Bulletin 481 (1998)); and

(vii) Real estate title abstracting (The

First National Company, 81 Federal

Reserve Bulletin 805 (1995)).

(b) Activities determined to be usual

in connection with the transaction of

banking abroad. Any activity that the

Board had determined by regulation in

effect on November 11, 1999, to be usual

in connection with the transaction of

banking or other financial operations

abroad (see § 211.5(d) of this chapter),

subject to the terms and conditions in

part 211 and Board interpretations in

effect on that date regarding the scope

and conduct of the activity. In addition

to the activities listed in paragraphs (a)

and (c) of this section, these activities

are:

(1) Providing management consulting

services, including to any person with

respect to nonfinancial matters, so long

as the management consulting services

are advisory and do not allow the

financial holding company to control

the person to which the services are

provided;

(2) Operating a travel agency in

connection with financial services

offered by the financial holding

company or others; and

(3) Organizing, sponsoring, and

managing a mutual fund, so long as:

(i) The fund does not exercise

managerial control over the entities in

which the fund invests; and

(ii) The financial holding company

reduces its ownership in the fund, if

any, to less than 25 percent of the equity

of the fund within one year of

sponsoring the fund or such additional

period as the Board permits.

(c) Activities permitted under section

4(k)(4) of the BHC Act (12 U.S.C.

1843(k)(4)). Any activity defined to be

financial in nature under sections

4(k)(4)(A) through (E), (H) and (I) of the

BHC Act (12 U.S.C. 1843(k)(4)(A)

through (E), (H) and (I)).

§ 225.87 Is notice to the Board required

after engaging in a financial activity?

(a) Post-transaction notice generally

required to engage in a financial

activity. A financial holding company

that commences an activity or acquires

shares of a company engaged in an

activity listed in § 225.86 must notify

the appropriate Reserve Bank in writing

within 30 calendar days after

commencing the activity or

consummating the acquisition by using

the appropriate form.

(b) Cases in which notice to the Board

is not required—(1) Acquisitions that do

not involve control of a company. A

notice under paragraph (a) of this

section is not required in connection

with the acquisition of shares of a

company if, following the acquisition,

the financial holding company does not

control the company.

(2) No additional notice required to

engage de novo in an activity for which

a financial holding company already has

provided notice. After a financial

holding company provides the

appropriate Reserve Bank with notice

that the company is engaged in an

activity listed in § 225.86, a financial

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 419

holding company may, unless otherwise

notified by the Board, commence the

activity de novo through any subsidiary

that the financial holding company is

authorized to control without providing

additional notice under paragraph (a) of

this section.

(3) Conduct of certain investment

activities. Unless required by paragraph

(b)(4) of this section, a financial holding

company is not required to provide

notice under paragraph (a) of this

section of any individual acquisition of

shares of a company as part of the

conduct by a financial holding company

of securities underwriting, dealing, or

market making activities as described in

section 4(k)(4)(E) of the BHC Act (12

U.S.C. 1843(k)(4)(E)), merchant banking

activities conducted pursuant to section

4(k)(4)(H) of the BHC Act (12 U.S.C.

1843(k)(4)(H)), or insurance company

investment activities conducted

pursuant to section 4(k)(4)(I) of the BHC

Act (12 U.S.C. 1843(k)(4)(I)), if the

financial holding company previously

has notified the Board under paragraph

(a) of this section that the company has

commenced the relevant securities,

merchant banking, or insurance

company investment activities, as

relevant.

(4) Notice of large merchant banking

or insurance company investments.

Notwithstanding paragraph (b)(1) or

(b)(3) of this section, a financial holding

company must provide notice under

paragraph (a) of the section if:

(i) As part of a merchant banking

activity conducted under section

4(k)(4)(H) of the BHC Act (12 U.S.C.

1843(k)(4)(H)), the financial holding

company acquires more than 5 percent

of the shares, assets, or ownership

interests of any company at a total cost

that exceeds the lesser of 5 percent of

the financial holding company’s Tier 1

capital or $200 million;

(ii) As part of an insurance company

investment activity conducted under

section 4(k)(4)(I) of the BHC Act (12

U.S.C. 1843(k)(4)(I)), the financial

holding company acquires more than 5

percent of the shares, assets, or

ownership interests of any company at

a total cost that exceeds the lesser of 5

percent of the financial holding

company’s Tier 1 capital or $200

million; or

(iii) The Board in the exercise of its

supervisory authority notifies the

financial holding company that a notice

is necessary.

§ 225.88 How to request the Board to

determine that an activity is financial in

nature or incidental to a financial activity?

(a) Requests regarding activities that

may be financial in nature or incidental

to a financial activity. A financial

holding company or other interested

party may request a determination from

the Board that an activity not listed in

§ 225.86 is financial in nature or

incidental to a financial activity.

(b) Required information. A request

submitted under this section must be in

writing and must:

(1) Identify and define the activity for

which the determination is sought,

specifically describing what the activity

would involve and how the activity

would be conducted;

(2) Explain in detail why the activity

should be considered financial in nature

or incidental to a financial activity; and

(3) Provide information supporting

the requested determination and any

other information required by the Board

concerning the proposed activity.

(c) Board procedures for reviewing

requests—(1) Consultation with the

Secretary of the Treasury. Upon receipt

of the request, the Board will provide

the Secretary of the Treasury a copy of

the request and consult with the

Secretary in accordance with section

4(k)(2)(A) of the BHC Act (12 U.S.C.

1843(k)(2)(A)).

(2) Public notice. The Board may, as

appropriate and after consultation with

the Secretary, publish a description of

the proposal in the Federal Register

with a request for public comment.

(d) Board action. The Board will

endeavor to make a decision on any

request filed under paragraph (a) of this

section within 60 calendar days

following the completion of both the

consultative process described in

paragraph (c)(1) of this section and the

public comment period, if any.

(e) Advisory opinions regarding scope

of financial activities—(1) Written

request. A financial holding company or

other interested party may request an

advisory opinion from the Board about

whether a specific proposed activity

falls within the scope of an activity

listed in § 225.86 as financial in nature

or incidental to a financial activity. The

request must be submitted in writing

and must contain:

(i) A detailed description of the

particular activity in which the

company proposes to engage or the

product or service the company

proposes to provide;

(ii) An explanation supporting an

interpretation regarding the scope of the

permissible financial activity; and

(iii) Any additional information

requested by the Board regarding the

activity.

(2) Board response. The Board will

provide an advisory opinion within 45

calendar days of receiving a complete

written request under paragraph (e)(1) of

this section.

§ 225.89 How to request approval to

engage in an activity that is complementary

to a financial activity?

(a) Prior Board approval is required.

A financial holding company that seeks

to engage in or acquire more than 5

percent of the outstanding shares of any

class of voting securities of a company

engaged in an activity that the financial

holding company believes is

complementary to a financial activity

must obtain prior approval from the

Board in accordance with section 4(j) of

the BHC Act (12 U.S.C. 1843(j)). The

notice must be in writing and must:

(1) Identify and define the proposed

complementary activity, specifically

describing what the activity would

involve and how the activity would be

conducted;

(2) Identify the financial activity for

which the proposed activity would be

complementary and provide detailed

information sufficient to support a

finding that the proposed activity

should be considered complementary to

the identified financial activity;

(3) Describe the scope and relative

size of the proposed activity, as

measured by the percentage of the

projected financial holding company

revenues expected to be derived from

and assets associated with conducting

the activity;

(4) Discuss the risks that conducting

the activity may reasonably be expected

to pose to the safety and soundness of

the subsidiary depository institutions of

the financial holding company and to

the financial system generally;

(5) Describe the potential adverse

effects, including potential conflicts of

interest, decreased or unfair

competition, or other risks, that

conducting the activity could raise, and

explain the measures the financial

holding company proposes to take to

address those potential effects;

(6) Describe the potential benefits to

the public, such as greater convenience,

increased competition, or gains in

efficiency, that the proposal reasonably

can be expected to produce; and

(7) Provide any information about the

financial and managerial resources of

the financial holding company and any

other information requested by the

Board.

(b) Factors for consideration by the

Board. In evaluating a notice to engage

in a complementary activity, the Board

must consider whether:

(1) The proposed activity is

complementary to a financial activity;

(2) The proposed activity would pose

a substantial risk to the safety or

420 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

soundness of depository institutions or

the financial system generally; and

(3) The proposal could be expected to

produce benefits to the public that

outweigh possible adverse effects.

(c) Board action. The Board will

inform the financial holding company

in writing of the Board’s determination

regarding the proposed activity within

the period described in section 4(j) of

the BHC Act (12 U.S.C. 1843(j)).

§ 225.90 What are the requirements for a

foreign bank to be treated as a financial

holding company?

(a) Foreign banks as financial holding

companies. A foreign bank that operates

a branch or agency or owns or controls

a commercial lending company in the

United States, and any company that

owns or controls such a foreign bank,

will be treated as a financial holding

company if:

(1) The foreign bank, any other foreign

bank that maintains a U.S. branch,

agency, or commercial lending company

and is controlled by the foreign bank or

company, and any U.S. depository

institution subsidiary that is owned or

controlled by the foreign bank or

company, is and remains well

capitalized and well managed; and

(2) The foreign bank, and any

company that owns or controls the

foreign bank, has made an effective

election to be treated as a financial

holding company under this subpart.

(b) Standards for ‘‘well capitalized.’’

A foreign bank will be considered ‘‘well

capitalized’’ if either:

(1)(i) Its home country supervisor, as

defined in § 211.21 of the Board’s

Regulation K (12 CFR 211.21), has

adopted risk-based capital standards

consistent with the Capital Accord of

the Basel Committee on Banking

Supervision (Basel Accord);

(ii) The foreign bank maintains a Tier

1 capital to total risk-based assets ratio

of 6 percent and a total capital to total

risk-based assets ratio of 10 percent, as

calculated under its home country

standard; and

(iii) The foreign bank’s capital is

comparable to the capital required for a

U.S. bank owned by a financial holding

company; or

(2) The foreign bank has obtained a

determination from the Board under

§ 225.91(c) that the foreign bank’s

capital is otherwise comparable to the

capital that would be required of a U.S.

bank owned by a financial holding

company.

(c) Standards for ‘‘well managed.’’ A

foreign bank will be considered ‘‘well

managed’’ if:

(1) The foreign bank has received at

least a satisfactory composite rating of

its U.S. branch, agency, and commercial

lending company operations at its most

recent assessment;

(2) The home country supervisor of

the foreign bank consents to the foreign

bank expanding its activities in the

United States to include activities

permissible for a financial holding

company; and

(3) The management of the foreign

bank meets standards comparable to

those required of a U.S. bank owned by

a financial holding company.

§ 225.91 How may a foreign bank elect to

be treated as a financial holding company?

(a) Filing requirement. A foreign bank

that operates a branch or agency or

owns or controls a commercial lending

company in the United States, or a

company that owns or controls such a

foreign bank, may elect to be treated as

a financial holding company by filing a

written declaration with the appropriate

Reserve Bank.

(b) Contents of declaration. The

declaration must:

(1) State that the foreign bank or the

company elects to be treated as a

financial holding company;

(2) Provide the risk-based capital

ratios and amount of Tier 1 capital and

total assets of the foreign bank, and of

each foreign bank that maintains a U.S.

branch, agency, or commercial lending

company and is controlled by the

foreign bank or company, as of the close

of the most recent quarter and as of the

close of the most recent audited

reporting period;

(3) Certify that the foreign bank, and

each foreign bank that maintains a U.S.

branch, agency, or commercial lending

company and is controlled by the

foreign bank or company, meets the

standards of well capitalized set out in

§ 225.90(b)(1)(i) and (ii) or § 225.90(b)(2)

as of the date the foreign bank or

company files its election;

(4) Certify that the foreign bank, and

each foreign bank that maintains a U.S.

branch, agency, or commercial lending

company and is controlled by the

foreign bank or company, is well

managed as defined in § 225.90(c)(1) as

of the date the foreign bank or company

files its election;

(5) Certify that all U.S. depository

institution subsidiaries of the foreign

bank or company are well capitalized

and well managed as of the date the

foreign bank or company files its

election; and

(6) Provide the capital ratios for all

relevant capital measures (as defined in

section 38 of the Federal Deposit

Insurance Act (12 U.S.C. 1831(o))) as of

the close of the previous quarter for

each U.S. depository institution

subsidiary of the foreign bank or

company.

(c) Pre-clearance process. Before filing

an election to be treated as a financial

holding company, a foreign bank or

company may file a request for review

of its qualifications to be treated as a

financial holding company. The Board

will endeavor to make a determination

on such requests within 30 days of

receipt. A foreign bank that has not been

found, or that is chartered in a country

where no bank from that country has

been found, by the Board under the

Bank Holding Company Act or the

International Banking Act to be subject

to comprehensive supervision or

regulation on a consolidated basis by its

home country supervisor is required to

use this process.

§ 225.92 How does an election by a foreign

bank become effective?

(a) In general. An election described

in § 225.91 is effective on the 31st day

after the date that an election was

received by the appropriate Federal

Reserve Bank, unless the Board notifies

the foreign bank or company prior to

that time that:

(1) The election is ineffective; or

(2) The period is extended with the

consent of the foreign bank or company

making the election.

(b) Earlier notification that an election

is effective. The Board or the

appropriate Federal Reserve Bank may

notify a foreign bank or company that its

election to be treated as a financial

holding company is effective prior to

the 31st day after the election was filed

with the appropriate Federal Reserve

Bank. Such notification must be in

writing.

(c) Under what circumstances will the

Board find an election to be ineffective?

An election to be treated as a financial

holding company shall not be effective

if, during the period provided in

paragraph (a) of this section, the Board

finds that:

(1) The foreign bank certificant, or any

foreign bank that operates a branch or

agency or owns or controls a

commercial lending company in the

United States and is controlled by a

foreign bank or company certificant, is

not both well capitalized and well

managed;

(2) Any U.S. insured depository

institution subsidiary of the foreign

bank or company (except an institution

excluded under paragraph (d) of this

section) or any U.S. branch of a foreign

bank that is insured by the Federal

Deposit Insurance Corporation has not

achieved at least a rating of ‘‘satisfactory

record of meeting community needs’’

under the Community Reinvestment Act

Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations 421

at the institution’s most recent

examination;

(3) Any U.S. depository institution

subsidiary of the foreign bank or

company is not both well capitalized

and well managed; or

(4) The Board does not have sufficient

information to assess whether the

foreign bank or company making the

election meets the requirements of this

subpart.

(d) How is CRA performance of

recently acquired insured depository

institutions considered? An insured

depository institution will be excluded

for purposes of the review of CRA

ratings described in paragraph (c)(2) of

this section consistent with the

provisions of § 225.82(d).

(e) Factors used in the Board’s

determination regarding comparability

of capital and management.—(1) In

general. In determining whether a

foreign bank is well capitalized and well

managed in accordance with

comparable capital and management

standards, the Board will give due

regard to national treatment and

equality of competitive opportunity. In

this regard, the Board may take into

account the foreign bank’s composition

of capital, Tier 1 capital to total assets

leverage ratio, accounting standards,

long-term debt ratings, reliance on

government support to meet capital

requirements, the foreign bank’s antimoney laundering procedures, whether

the foreign bank is subject to

comprehensive supervision or

regulation on a consolidated basis, and

other factors that may affect analysis of

capital and management. The Board will

consult with the home country

supervisor for the foreign bank as

appropriate.

(2) Assessment of consolidated

supervision. A foreign bank that is not

subject to comprehensive supervision

on a consolidated basis by its home

country authorities may not be

considered well capitalized and well

managed unless:

(i) The home country has made

significant progress in establishing

arrangements for comprehensive

supervision on a consolidated basis; and

(ii) The foreign bank is in strong

financial condition as demonstrated, for

example, by capital levels that

significantly exceed the minimum levels

that are required for a well capitalized

determination and strong asset quality.

§ 225.93 What are the consequences of a

foreign bank failing to continue to meet

applicable capital and management

requirements?

(a) Notice by the Board. If a foreign

bank or company has made an effective

election to be treated as a financial

holding company under this subpart

and the Board finds that the foreign

bank, any foreign bank that maintains a

U.S. branch, agency, or commercial

lending company and is controlled by

the foreign bank or company, or any

U.S. depository institution subsidiary

controlled by the foreign bank or

company, ceases to be well capitalized

or well managed, the Board will notify

the foreign bank and company, if any,

in writing that it is not in compliance

with the applicable requirement(s) for a

financial holding company and identify

the areas of noncompliance.

(b) Notification by a financial holding

company required.—(1) Notice to Board.

Promptly upon becoming aware that the

foreign bank, any foreign bank that

maintains a U.S. branch, agency, or

commercial lending company and is

controlled by the foreign bank or

company, or any U.S. depository

institution subsidiary of the foreign

bank or company, has ceased to be well

capitalized or well managed, the foreign

bank and company, if any, must notify

the Board and identify the area of

noncompliance.

(2) Triggering events for notice to the

Board—(i) Well capitalized. A foreign

bank becomes aware that it is no longer

well capitalized at the time that the

foreign bank or company is required to

file a report of condition (or similar

supervisory report) with its home

country supervisor or the appropriate

Federal Reserve Bank that indicates that

the foreign bank no longer meets the

well capitalized standards.

(ii) Well managed. A foreign bank

becomes aware that it is no longer well

managed at the time that the foreign

bank receives written notice from the

appropriate Federal Reserve Bank that

the composite rating of its U.S. branch,

agency, and commercial lending

company operations is not at least

satisfactory.

(c) Execution of agreement acceptable

to the Board—(1) Agreement required;

time period. Within 45 days after

receiving a notice under paragraph (a) of

this section, the foreign bank or

company must execute an agreement

acceptable to the Board to comply with

all applicable capital and management

requirements.

(2) Extension of time for executing

agreement. Upon request by the foreign

bank or company, the Board may extend

the 45-day period under paragraph (c)(1)

of this section if the Board determines

that granting additional time is

appropriate under the circumstances. A

request by a foreign bank or company

for additional time must include an

explanation of why an extension is

necessary.

(3) Agreement requirements. An

agreement required by paragraph (c)(1)

of this section to correct a capital or

management deficiency must:

(i) Explain the specific actions that

the foreign bank or company will take

to correct all areas of noncompliance;

(ii) Provide a schedule within which

each action will be taken;

(iii) Provide any other information

that the Board may require; and

(iv) Be acceptable to the Board.

(d) Limitations during period of

noncompliance—Until the Board

determines that a foreign bank or

company has corrected the conditions

described in a notice under paragraph

(a) of this section:

(1) The Board may impose any

limitations or conditions on the conduct

or the U.S. activities of the foreign bank

or company or any of its affiliates as the

Board finds to be appropriate and

consistent with the purposes of the

Bank Holding Company Act; and

(2) The foreign bank or company and

its affiliates may not commence any

additional activity in the United States

or acquire control or shares of any

company under section 4(k) of the Bank

Holding Company Act (12 U.S.C.

1843(k)) without prior approval from

the Board.

(e) Consequences of failure to correct

conditions within 180 days—(1)

Termination of Offices and Divestiture.

If a foreign bank or company does not

correct the conditions described in a

notice under paragraph (a) of this

section within 180 days of receipt of the

notice or such additional time as the

Board may permit, the Board may order

the foreign bank or company to

terminate the foreign bank’s U.S.

branches and agencies and divest any

commercial lending companies owned

or controlled by the foreign bank or

company. Such divestiture must be

done in accordance with the terms and

conditions established by the Board.

(2) Alternative method of complying

with a divestiture order. A foreign bank

or company may comply with an order

issued under paragraph (e)(1) of this

section by ceasing to engage (both

directly and through any subsidiary that

is not a depository institution or a

subsidiary of a depository institution) in

any activity that may be conducted only

under section 4(k), (n), or (o) of the BHC

Act (12 U.S.C. 1843(k), (n) and (o)). The

termination of activities must be

completed within the time period

referred to in paragraph (e)(1) of this

section and subject to terms and

conditions acceptable to the Board.

422 Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Rules and Regulations

(f) Consultation with Other Agencies.

In taking any action under this section,

the Board will consult with the relevant

Federal and state regulatory authorities

and the appropriate home country

supervisor(s) of the foreign bank.

§ 225.94 What are the consequences of an

insured branch or depository institution

failing to maintain a satisfactory or better

rating under the Community Reinvestment

Act?

(a) Insured branch as an ‘‘insured

depository institution.’’ A U.S. branch of

a foreign bank that is insured by the

Federal Deposit Insurance Corporation

shall be treated as an ‘‘insured

depository institution’’ for purposes of

§ 225.84.

(b) Applicability. The provisions of

§ 225.84, with the modifications

contained in this section, shall apply to

a foreign bank that operates an insured

branch referred to in paragraph (a) of

this section or an insured depository

institution in the United States, and any

company that owns or controls such a

foreign bank, that has made an effective

election under § 225.92 in the same

manner and to the same extent as they

apply to a financial holding company.

Dated: December 21, 2000.

By order of the Board of Governors of the

Federal Reserve System.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–34 Filed 1–2–01; 8:45 am]

BILLING CODE 6210–01–P