[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2005 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



          12


          Parts 220 to 299

                         Revised as of January 1, 2005


          Banks and Banking
          
          


________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2005
          With Ancillaries
                    Published by
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 12:
          Chapter II--Federal Reserve System (Continued)             3
  Finding Aids:
      Table of CFR Titles and Chapters........................     891
      Alphabetical List of Agencies Appearing in the CFR......     909
      List of CFR Sections Affected...........................     919

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                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  12 CFR 220.1 refers 
                       to title 12, part 220, 
                       section 1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

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Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
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inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
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and Finding Aids. This volume contains the Parallel Table of Statutory 
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that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
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    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

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[[Page vii]]

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                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

January 1, 2005.

[[Page ix]]



                               THIS TITLE

    Title 12--Banks and Banking is composed of seven volumes. The parts 
in these volumes are arranged in the following order: parts 1-199, 200-
219, 220-299, 300-499, 500-599, part 600-899, and 900-end. The first 
volume containing parts 1-199 is comprised of chapter I--Comptroller of 
the Currency, Department of the Treasury. The second and third volumes 
containing parts 200-299 are comprised of chapter II--Federal Reserve 
System. The fourth volume containing parts 300-499 is comprised of 
chapter III--Federal Deposit Insurance Corporation and chapter IV--
Export-Import Bank of the United States. The fifth volume containing 
parts 500-599 is comprised of chapter V--Office of Thrift Supervision, 
Department of the Treasury. The sixth volume containing parts 600-899 is 
comprised of chapter VI--Farm Credit Administration, chapter VII--
National Credit Union Administration, chapter VIII--Federal Financing 
Bank. The seventh volume containing part 900-end is comprised of chapter 
IX--Federal Housing Finance Board, chapter XI--Federal Financial 
Institutions Examination Council, chapter XIV--Farm Credit System 
Insurance Corporation, chapter XV--Department of the Treasury, chapter 
XVII--Office of Federal Housing Enterprise Oversight, Department of 
Housing and Urban Development and chapter XVIII--Community Development 
Financial Institutions Fund, Department of the Treasury. The contents of 
these volumes represent all of the current regulations codified under 
this title of the CFR as of January 1, 2005.

    For this volume, Ruth Green was Chief Editor. The Code of Federal 
Regulations publication program is under the direction of Frances D. 
McDonald, assisted by Alomha S. Morris.

[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                  (This book contains parts 220 to 299)

  --------------------------------------------------------------------
                                                                    Part

chapter ii--Federal Reserve System (Continued)..............         220

Cross References: Farmers Home Administration: See Agriculture, 7 CFR, 
  chapter XVIII.

  Office of Assistant Secretary for Housing--Federal Housing 
Commissioner, Department of Housing and Urban Development: See Housing 
and Urban Development, 24 CFR, chapter II.

  Fiscal Service: See Money and Finance: Treasury, 31 CFR, chapter II.

  Monetary Offices: See Money and Finance: Treasury, 31 CFR, chapter I.

  Commodity Credit Corporation: See Agriculture, 7 CFR, chapter XIV.

  Small Business Administration: See Business Credit and Assistance, 13 
CFR, chapter I.

  Rural Electrification Administration: See Agriculture, 7 CFR, chapter 
XVII.

[[Page 3]]



                   CHAPTER II--FEDERAL RESERVE SYSTEM




  --------------------------------------------------------------------

     SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Part                                                                Page
220             Credit by brokers and dealers (Regulation T)           5
221             Credit by banks and persons other than 
                    brokers or dealers for the purpose of 
                    purchasing or carrying margin stock 
                    (Regulation U)..........................          34
222             Fair credit reporting (regulation V)........          55
223             Transactions between member banks and their 
                    affiliates (Regulation W)...............          57
224             Borrowers of securities credit (Regulation 
                    X)......................................          81
225             Bank holding companies and change in bank 
                    control (Regulation Y)..................          82
226             Truth in lending (Regulation Z).............         253
227             Unfair or deceptive acts or practices 
                    (Regulation AA).........................         500
228             Community reinvestment (Regulation BB)......         503
229             Availability of funds and collection of 
                    checks (Regulation CC)..................         523
230             Truth in savings (Regulation DD)............         655
231             Netting eligibility for financial 
                    institution (Regulation EE).............         691
250             Miscellaneous interpretations...............         692
261             Rules regarding availability of information.         721
261a            Rules regarding access to personal 
                    information under the Privacy Act of 
                    1974....................................         738
261b            Rules regarding public observation of 
                    meetings................................         744
262             Rules of procedure..........................         749
263             Rules of practice for hearings..............         757
264             Employee responsibilities and conduct.......         803
264a            [Reserved]
264b            Rules regarding foreign gifts and 
                    decorations.............................         803
265             Rules regarding delegation of authority.....         806
266             Limitations on activities of former members 
                    and employees of the Board..............         824
267             Rules of organization and procedure of the 
                    Consumer Advisory Council...............         826
268             Rules regarding equal opportunity...........         828

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269             Policy on labor relations for the Federal 
                    Reserve banks...........................         860
269a            Definitions.................................         865
269b            Charges of unfair labor practices...........         866
               SUBCHAPTER B--FEDERAL OPEN MARKET COMMITTEE
270             Open market operations of Federal Reserve 
                    banks...................................         875
271             Rules regarding availability of information.         876
272             Rules of procedure..........................         883
281             Statements of policy........................         885
       SUBCHAPTER C--FEDERAL RESERVE SYSTEM LABOR RELATIONS PANEL
290-299         [Reserved]

Supplementary Publications: The Federal Reserve Act, as amended through 
  December 31, 1976, with an Appendix containing provisions of certain 
  other statutes affecting the Federal Reserve System. Rules of 
  Organization and Procedure--Board of Governors of the Federal Reserve 
  System. Regulations of the Board of Governors of the Federal Reserve 
  System. The Federal Reserve System--Purposes and Functions. Annual 
  Report. Federal Reserve Bulletin. Monthly. Federal Reserve Chart Book 
  Quarterly; Historical Chart Book issued in September.

[[Page 5]]



      SUBCHAPTER A_BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM





PART 220_CREDIT BY BROKERS AND DEALERS (REGULATION T)--Table of Contents




Sec.
220.1 Authority, purpose, and scope.
220.2 Definitions.
220.3 General provisions.
220.4 Margin account.
220.5 Special memorandum account.
220.6 Good faith account.
220.7 Broker-dealer credit account.
220.8 Cash account.
220.9 Clearance of securities, options, and futures.
220.10 Borrowing and lending securities.
220.11 Requirements for the list of marginable OTC stocks and the list 
          of foreign margin stocks.
220.12 Supplement: margin requirements.

                             Interpretations

220.101 Transactions of customers who are brokers or dealers.
220.102 [Reserved]
220.103 Borrowing of securities.
220.104 [Reserved]
220.105 Ninety-day rule in special cash account.
220.106-220.107 [Reserved]
220.108 International Bank Securities.
220.109 [Reserved]
220.110 Assistance by Federal credit union to its members.
220.111 Arranging for extensions of credit to be made by a bank.
220.112 [Reserved]
220.113 Necessity for prompt payment and delivery in special cash 
          accounts.
220.114-220.116 [Reserved]
220.117 Exception to 90-day rule in special cash account.
220.118 Time of payment for mutual fund shares purchased in a special 
          cash account.
220.119 Applicability of margin requirements to credit extended to 
          corporation in connection with retirement of stock.
220.120 [Reserved]
220.121 Applicability of margin requirements to joint account between 
          two creditors.
220.122 ``Deep in the money put and call options'' as extensions of 
          credit.
220.123 Partial delayed issue contracts covering nonconvertible bonds.
220.124 Installment sale of tax-shelter programs as ``arranging'' for 
          credit.
220.125-220.126 [Reserved]
220.127 Independent broker/dealers arranging credit in connection with 
          the sale of insurance premium funding programs.
220.128 Treatment of simultaneous long and short positions in the same 
          margin account when put or call options or combinations 
          thereof on such stock are also outstanding in the account.
220.129-220.130 [Reserved]
220.131 Application of the arranging section to broker-dealer activities 
          under SEC Rule 144A.
220.132 Credit to brokers and dealers.

    Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.

    Editorial Note: A copy of each form referred to in this part is 
filed as a part of the original document. Copies are available upon 
request to the Board of Governors of the Federal Reserve System or any 
Federal Reserve Bank.



Sec. 220.1  Authority, purpose, and scope.

    (a) Authority and purpose. Regulation T (this part) is issued by the 
Board of Governors of the Federal Reserve System (the Board) pursuant to 
the Securities Exchange Act of 1934 (the Act) (15 U.S.C.78a et seq.). 
Its principal purpose is to regulate extensions of credit by brokers and 
dealers; it also covers related transactions within the Board's 
authority under the Act. It imposes, among other obligations, initial 
margin requirements and payment rules on certain securities 
transactions.
    (b) Scope. (1) This part provides a margin account and four special 
purpose accounts in which to record all financial relations between a 
customer and a creditor. Any transaction not specifically permitted in a 
special purpose account shall be recorded in a margin account.
    (2) This part does not preclude any exchange, national securities 
association, or creditor from imposing additional requirements or taking 
action for its own protection.
    (3) This part does not apply to:
    (i) Financial relations between a customer and a creditor to the 
extent that they comply with a portfolio margining system under rules 
approved or amended by the SEC;
    (ii) Credit extended by a creditor based on a good faith 
determination that the borrower is an exempted borrower;

[[Page 6]]

    (iii) Financial relations between a customer and a broker or dealer 
registered only under section 15C of the Act; and
    (iv) Financial relations between a foreign branch of a creditor and 
a foreign person involving foreign securities.

[Reg. T, 63 FR 2820, Jan. 16, 1998]



Sec. 220.2  Definitions.

    The terms used in this part have the meanings given them in section 
3(a) of the Act or as defined in this section as follows:
    Affiliated corporation means a corporation of which all the common 
stock is owned directly or indirectly by the firm or general partners 
and employees of the firm, or by the corporation or holders of the 
controlling stock and employees of the corporation, and the affiliation 
has been approved by the creditor's examining authority.
    Cash equivalent means securities issued or guaranteed by the United 
States or its agencies, negotiable bank certificates of deposit, bankers 
acceptances issued by banking institutions in the United States and 
payable in the United States, or money market mutual funds.
    Covered option transaction means any transaction involving options 
or warrants in which the customer's risk is limited and all elements of 
the transaction are subject to contemporaneous exercise if:
    (1) The amount at risk is held in the account in cash, cash 
equivalents, or via an escrow receipt; and
    (2) The transaction is eligible for the cash account by the rules of 
the registered national securities exchange authorized to trade the 
option or warrant or by the rules of the creditor's examining authority 
in the case of an unregistered option, provided that all such rules have 
been approved or amended by the SEC.
    Credit balance means the cash amount due the customer in a margin 
account after debiting amounts transferred to the special memorandum 
account.
    Creditor means any broker or dealer (as defined in sections 3(a)(4) 
and 3(a)(5) of the Act), any member of a national securities exchange, 
or any person associated with a broker or dealer (as defined in section 
3(a)(18) of the Act), except for business entities controlling or under 
common control with the creditor.
    Current market value of:
    (1) A security means:
    (i) Throughout the day of the purchase or sale of a security, the 
security's total cost of purchase or the net proceeds of its sale 
including any commissions charged; or
    (ii) At any other time, the closing sale price of the security on 
the preceding business day, as shown by any regularly published 
reporting or quotation service. If there is no closing sale price, the 
creditor may use any reasonable estimate of the market value of the 
security as of the close of business on the preceding business day.
    (2) Any other collateral means a value determined by any reasonable 
method.
    Customer excludes an exempted borrower and includes:
    (1) Any person or persons acting jointly:
    (i) To or for whom a creditor extends, arranges, or maintains any 
credit; or
    (ii) Who would be considered a customer of the creditor according to 
the ordinary usage of the trade;
    (2) Any partner in a firm who would be considered a customer of the 
firm absent the partnership relationship; and
    (3) Any joint venture in which a creditor participates and which 
would be considered a customer of the creditor if the creditor were not 
a participant.
    Debit balance means the cash amount owed to the creditor in a margin 
account after debiting amounts transferred to the special memorandum 
account.
    Delivery against payment, Payment against delivery, or a C.O.D. 
transaction refers to an arrangement under which a creditor and a 
customer agree that the creditor will deliver to, or accept from, the 
customer, or the customer's agent, a security against full payment of 
the purchase price.
    Equity means the total current market value of security positions 
held in the margin account plus any credit balance less the debit 
balance in the margin account.

[[Page 7]]

    Escrow agreement means any agreement issued in connection with a 
call or put option under which a bank or any person designated as a 
control location under paragraph (c) of SEC Rule 15c3-3 (17 CFR 
240.15c3-3(c)), holding the underlying asset or required cash or cash 
equivalents, is obligated to deliver to the creditor (in the case of a 
call option) or accept from the creditor (in the case of a put option) 
the underlying asset or required cash or cash equivalent against payment 
of the exercise price upon exercise of the call or put.
    Examining authority means:
    (1) The national securities exchange or national securities 
association of which a creditor is a member; or
    (2) If a member of more than one self-regulatory organization, the 
organization designated by the SEC as the examining authority for the 
creditor.
    Exempted borrower means a member of a national securities exchange 
or a registered broker or dealer, a substantial portion of whose 
business consists of transactions with persons other than brokers or 
dealers, and includes a borrower who:
    (1) Maintains at least 1000 active accounts on an annual basis for 
persons other than brokers, dealers, and persons associated with a 
broker or dealer;
    (2) Earns at least $10 million in gross revenues on an annual basis 
from transactions with persons other than brokers, dealers, and persons 
associated with a broker or dealer; or
    (3) Earns at least 10 percent of its gross revenues on an annual 
basis from transactions with persons other than brokers, dealers, and 
persons associated with a broker or dealer.
    Exempted securities mutual fund means any security issued by an 
investment company registered under section 8 of the Investment Company 
Act of 1940 (15 U.S.C. 80a-8), provided the company has at least 95 
percent of its assets continuously invested in exempted securities (as 
defined in section 3(a)(12) of the Act).
    Foreign margin stock means a foreign security that is an equity 
security that:
    (1) Appears on the Board's periodically published List of Foreign 
Margin Stocks; or
    (2) Is deemed to have a ``ready market'' under SEC Rule 15c3-1 (17 
CFR 240.15c3-1) or a ``no-action'' position issued thereunder.
    Foreign person means a person other than a United States person as 
defined in section 7(f) of the Act.
    Foreign security means a security issued in a jurisdiction other 
than the United States.
    Good faith with respect to:
    (1) Margin means the amount of margin which a creditor would require 
in exercising sound credit judgment;
    (2) Making a determination or accepting a statement concerning a 
borrower means that the creditor is alert to the circumstances 
surrounding the credit, and if in possession of information that would 
cause a prudent person not to make the determination or accept the 
notice or certification without inquiry, investigates and is satisfied 
that it is correct.
    Margin call means a demand by a creditor to a customer for a deposit 
of additional cash or securities to eliminate or reduce a margin 
deficiency as required under this part.
    Margin deficiency means the amount by which the required margin 
exceeds the equity in the margin account.
    Margin equity security means a margin security that is an equity 
security (as defined in section 3(a)(11) of the Act).
    Margin excess means the amount by which the equity in the margin 
account exceeds the required margin. When the margin excess is 
represented by securities, the current value of the securities is 
subject to the percentages set forth in Sec. 220.12 (the Supplement).
    Margin security means:
    (1) Any security registered or having unlisted trading privileges on 
a national securities exchange;
    (2) After January 1, 1999, any security listed on the Nasdaq Stock 
Market;
    (3) Any non-equity security;
    (4) Any security issued by either an open-end investment company or 
unit investment trust which is registered under section 8 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-8);
    (5) Any foreign margin stock;
    (6) Any debt security convertible into a margin security;

[[Page 8]]

    (7) Until January 1, 1999, any OTC margin stock; or
    (8) Until January 1, 1999, any OTC security designated as qualified 
for trading in the national market system under a designation plan 
approved by the Securities and Exchange Commission (NMS security).
    Money market mutual fund means any security issued by an investment 
company registered under section 8 of the Investment Company Act of 1940 
(15 U.S.C. 80a-8) that is considered a money market fund under SEC Rule 
2a-7 (17 CFR 270.2a-7).
    Non-equity security means a security that is not an equity security 
(as defined in section 3(a)(11) of the Act).
    Nonexempted security means any security other than an exempted 
security (as defined in section 3(a)(12) of the Act).
    OTC margin stock means any equity security traded over the counter 
that the Board has determined has the degree of national investor 
interest, the depth and breadth of market, the availability of 
information respecting the security and its issuer, and the character 
and permanence of the issuer to warrant being treated like an equity 
security treaded on a national securities exchange. An OTC stock is not 
considered to be an OTC margin stock unless it appears on the Board's 
periodically published list of OTC margin stocks.
    Payment period means the number of business days in the standard 
securities settlement cycle in the United States, as defined in 
paragraph (a) of SEC Rule 15c6-1 (17 CFR 240.15c6-1(a)), plus two 
business days.
    Purpose credit means credit for the purpose of:
    (1) Buying, carrying, or trading in securities; or
    (2) Buying or carrying any part of an investment contract security 
which shall be deemed credit for the purpose of buying or carrying the 
entire security.
    Short call or short put means a call option or a put option that is 
issued, endorsed, or guaranteed in or for an account.
    (1) A short call that is not cash-settled obligates the customer to 
sell the underlying asset at the exercise price upon receipt of a valid 
exercise notice or as otherwise required by the option contract.
    (2) A short put that is not cash-settled obligates the customer to 
purchase the underlying asset at the exercise price upon receipt of a 
valid exercise notice or as otherwise required by the option contract.
    (3) A short call or a short put that is cash-settled obligates the 
customer to pay the holder of an in the money long put or long call who 
has, or has been deemed to have, exercised the option the cash 
difference between the exercise price and the current assigned value of 
the option as established by the option contract.
    Underlying asset means:
    (1) The security or other asset that will be delivered upon exercise 
of an option; or
    (2) In the case of a cash-settled option, the securities or other 
assets which comprise the index or other measure from which the option's 
value is derived.

[Reg. T, 63 FR 2821, Jan. 16, 1998]



Sec. 220.3  General provisions.

    (a) Records. The creditor shall maintain a record for each account 
showing the full details of all transactions.
    (b) Separation of accounts--(1) In general. The requirements of one 
account may not be met by considering items in any other account. If 
withdrawals of cash or securities are permitted under this part, written 
entries shall be made when cash or securities are used for purposes of 
meeting requirements in another account.
    (2) Exceptions. Notwithstanding paragraph (b)(1) of this section:
    (i) For purposes of calculating the required margin for a security 
in a margin account, assets held in the good faith account pursuant to 
Sec. 220.6(e)(1)(i) or (ii) may serve in lieu of margin;
    (ii) Transfers may be effected between the margin account and the 
special memorandum account pursuant to Sec. Sec. 220.4 and 220.5.
    (c) Maintenance of credit. Except as prohibited by this part, any 
credit initially extended in compliance with this part may be maintained 
regardless of:

[[Page 9]]

    (1) Reductions in the customer's equity resulting from changes in 
market prices;
    (2) Any security in an account ceasing to be margin or exempted; or
    (3) Any change in the margin requirements prescribed under this 
part.
    (d) Guarantee of accounts. No guarantee of a customer's account 
shall be given any effect for purposes of this part.
    (e) Receipt of funds or securities. (1) A creditor, acting in good 
faith, may accept as immediate payment:
    (i) Cash or any check, draft, or order payable on presentation; or
    (ii) Any security with sight draft attached.
    (2) A creditor may treat a security, check or draft as received upon 
written notification from another creditor that the specified security, 
check, or draft has been sent.
    (3) Upon notification that a check, draft, or order has been 
dishonored or when securities have not been received within a reasonable 
time, the creditor shall take the action required by this part when 
payment or securities are not received on time.
    (4) To temporarily finance a customer's receipt of securities 
pursuant to an employee benefit plan registered on SEC Form S-8 or the 
withholding taxes for an employee stock award plan, a creditor may 
accept, in lieu of the securities, a properly executed exercise notice, 
where applicable, and instructions to the issuer to deliver the stock to 
the creditor. Prior to acceptance, the creditor must verify that the 
issuer will deliver the securities promptly and the customer must 
designate the account into which the securities are to be deposited.
    (f) Exchange of securities. (1) To enable a customer to participate 
in an offer to exchange securities which is made to all holders of an 
issue of securities, a creditor may submit for exchange any securities 
held in a margin account, without regard to the other provisions of this 
part, provided the consideration received is deposited into the account.
    (2) If a nonmargin, nonexempted security is acquired in exchange for 
a margin security, its retention, withdrawal, or sale within 60 days 
following its acquisition shall be treated as if the security is a 
margin security.
    (g) Arranging for loans by others. A creditor may arrange for the 
extension or maintenance of credit to or for any customer by any person, 
provided the creditor does not willfully arrange credit that violates 
parts 221 or 224 of this chapter.
    (h) Innocent mistakes. If any failure to comply with this part 
results from a mistake made in good faith in executing a transaction or 
calculating the amount of margin, the creditor shall not be deemed in 
violation of this part if, promptly after the discovery of the mistake, 
the creditor takes appropriate corrective action.
    (i) Foreign currency. (1) Freely convertible foreign currency may be 
treated at its U.S. dollar equivalent, provided the currency is marked-
to-market daily.
    (2) A creditor may extend credit denominated in any freely 
convertible foreign currency.
    (j) Exempted borrowers. (1) A member of a national securities 
exchange or a registered broker or dealer that has been in existence for 
less than one year may meet the definition of exempted borrower based on 
a six-month period.
    (2) Once a member of a national securities exchange or registered 
broker or dealer ceases to qualify as an exempted borrower, it shall 
notify its lender of this fact before obtaining additional credit. Any 
new extensions of credit to such a borrower, including rollovers, 
renewals, and additional draws on existing lines of credit, are subject 
to the provisions of this part.

[Reg. T, 63 FR 2822, Jan. 16, 1998]



Sec. 220.4  Margin account.

    (a) Margin transactions. (1) All transactions not specifically 
authorized for inclusion in another account shall be recorded in the 
margin account.
    (2) A creditor may establish separate margin accounts for the same 
person to:
    (i) Clear transactions for other creditors where the transactions 
are introduced to the clearing creditor by separate creditors; or
    (ii) Clear transactions through other creditors if the transactions 
are cleared by separate creditors; or

[[Page 10]]

    (iii) Provide one or more accounts over which the creditor or a 
third party investment adviser has investment discretion.
    (b) Required margin--(1) Applicability. The required margin for each 
long or short position in securities is set forth in Sec. 220.12 (the 
Supplement) and is subject to the following exceptions and special 
provisions.
    (2) Short sale against the box. A short sale ``against the box'' 
shall be treated as a long sale for the purpose of computing the equity 
and the required margin.
    (3) When-issued securities. The required margin on a net long or net 
short commitment in a when-issued security is the margin that would be 
required if the security were an issued margin security, plus any 
unrealized loss on the commitment or less any unrealized gain.
    (4) Stock used as cover. (i) When a short position held in the 
account serves in lieu of the required margin for a short put, the 
amount prescribed by paragraph (b)(1) of this section as the amount to 
be added to the required margin in respect of short sales shall be 
increased by any unrealized loss on the position.
    (ii) When a security held in the account serves in lieu of the 
required margin for a short call, the security shall be valued at no 
greater than the exercise price of the short call.
    (5) Accounts of partners. If a partner of the creditor has a margin 
account with the creditor, the creditor shall disregard the partner's 
financial relations with the firm (as shown in the partner's capital and 
ordinary drawing accounts) in calculating the margin or equity of the 
partner's margin account.
    (6) Contribution to joint venture. If a margin account is the 
account of a joint venture in which the creditor participates, any 
interest of the creditor in the joint account in excess of the interest 
which the creditor would have on the basis of its right to share in the 
profits shall be treated as an extension of credit to the joint account 
and shall be margined as such.
    (7) Transfer of accounts. (i) A margin account that is transferred 
from one creditor to another may be treated as if it had been maintained 
by the transferee from the date of its origin, if the transferee 
accepts, in good faith, a signed statement of the transferor (or, if 
that is not practicable, of the customer), that any margin call issued 
under this part has been satisfied.
    (ii) A margin account that is transferred from one customer to 
another as part of a transaction, not undertaken to avoid the 
requirements of this part, may be treated as if it had been maintained 
for the transferee from the date of its origin, if the creditor accepts 
in good faith and keeps with the transferee account a signed statement 
of the transferor describing the circumstances for the transfer.
    (8) Sound credit judgment. In exercising sound credit judgment to 
determine the margin required in good faith pursuant to Sec. 220.12 
(the Supplement), the creditor shall make its determination for a 
specified security position without regard to the customer's other 
assets or securities positions held in connection with unrelated 
transactions.
    (c) When additional margin is required--(1) Computing deficiency. 
All transactions on the same day shall be combined to determine whether 
additional margin is required by the creditor. For the purpose of 
computing equity in an account, security positions are established or 
eliminated and a credit or debit created on the trade date of a security 
transaction. Additional margin is required on any day when the day's 
transactions create or increase a margin deficiency in the account and 
shall be for the amount of the margin deficiency so created or 
increased.
    (2) Satisfaction of deficiency. The additional required margin may 
be satisfied by a transfer from the special memorandum account or by a 
deposit of cash, margin securities, exempted securities, or any 
combination thereof.
    (3) Time limits. (i) A margin call shall be satisfied within one 
payment period after the margin deficiency was created or increased.
    (ii) The payment period may be extended for one or more limited 
periods upon application by the creditor to its examining authority 
unless the examining authority believes that the creditor is not acting 
in good faith or that

[[Page 11]]

the creditor has not sufficiently determined that exceptional 
circumstances warrant such action. Applications shall be filed and acted 
upon prior to the end of the payment period or the expiration of any 
subsequent extension.
    (4) Satisfaction restriction. Any transaction, position, or deposit 
that is used to satisfy one requirement under this part shall be 
unavailable to satisfy any other requirement.
    (d) Liquidation in lieu of deposit. If any margin call is not met in 
full within the required time, the creditor shall liquidate securities 
sufficient to meet the margin call or to eliminate any margin deficiency 
existing on the day such liquidation is required, whichever is less. If 
the margin deficiency created or increased is $1000 or less, no action 
need be taken by the creditor.
    (e) Withdrawals of cash or securities. (1) Cash or securities may be 
withdrawn from an account, except if:
    (i) Additional cash or securities are required to be deposited into 
the account for a transaction on the same or a previous day; or
    (ii) The withdrawal, together with other transactions, deposits, and 
withdrawals on the same day, would create or increase a margin 
deficiency.
    (2) Margin excess may be withdrawn or may be transferred to the 
special memorandum account (Sec. 220.5) by making a single entry to 
that account which will represent a debit to the margin account and a 
credit to the special memorandum account.
    (3) If a creditor does not receive a distribution of cash or 
securities which is payable with respect to any security in a margin 
account on the day it is payable and withdrawal would not be permitted 
under this paragraph (e), a withdrawal transaction shall be deemed to 
have occurred on the day the distribution is payable.
    (f) Interest, service charges, etc. (1) Without regard to the other 
provisions of this section, the creditor, in its usual practice, may 
debit the following items to a margin account if they are considered in 
calculating the balance of such account:
    (i) Interest charged on credit maintained in the margin account;
    (ii) Premiums on securities borrowed in connection with short sales 
or to effect delivery;
    (iii) Dividends, interest, or other distributions due on borrowed 
securities;
    (iv) Communication or shipping charges with respect to transactions 
in the margin account; and
    (v) Any other service charges which the creditor may impose.
    (2) A creditor may permit interest, dividends, or other 
distributions credited to a margin account to be withdrawn from the 
account if:
    (i) The withdrawal does not create or increase a margin deficiency 
in the account; or
    (ii) The current market value of any securities withdrawn does not 
exceed 10 percent of the current market value of the security with 
respect to which they were distributed.

[Reg. T, 63 FR 2823, Jan. 16, 1998]



Sec. 220.5  Special memorandum account.

    (a) A special memorandum account (SMA) may be maintained in 
conjunction with a margin account. A single entry amount may be used to 
represent both a credit to the SMA and a debit to the margin account. A 
transfer between the two accounts may be effected by an increase or 
reduction in the entry. When computing the equity in a margin account, 
the single entry amount shall be considered as a debit in the margin 
account. A payment to the customer or on the customer's behalf or a 
transfer to any of the customer's other accounts from the SMA reduces 
the single entry amount.
    (b) The SMA may contain the following entries:
    (1) Dividend and interest payments;
    (2) Cash not required by this part, including cash deposited to meet 
a maintenance margin call or to meet any requirement of a self-
regulatory organization that is not imposed by this part;
    (3) Proceeds of a sale of securities or cash no longer required on 
any expired or liquidated security position that may be withdrawn under 
Sec. 220.4(e); and
    (4) Margin excess transferred from the margin account under Sec. 
220.4(e)(2).

[Reg. T, 63 FR 2824, Jan. 16, 1998]

[[Page 12]]



Sec. 220.6  Good faith account.

    In a good faith account, a creditor may effect or finance customer 
transactions in accordance with the following provisions:
    (a) Securities entitled to good faith margin--(1) Permissible 
transactions. A creditor may effect and finance transactions involving 
the buying, carrying, or trading of any security entitled to ``good 
faith'' margin as set forth in Sec. 220.12 (the Supplement).
    (2) Required margin. The required margin is set forth in Sec. 
220.12 (the Supplement).
    (3) Satisfaction of margin. Required margin may be satisfied by a 
transfer from the special memorandum account or by a deposit of cash, 
securities entitled to ``good faith'' margin as set forth in Sec. 
220.12 (the Supplement), any other asset that is not a security, or any 
combination thereof. An asset that is not a security shall have a margin 
value determined by the creditor in good faith.
    (b) Arbitrage. A creditor may effect and finance for any customer 
bona fide arbitrage transactions. For the purpose of this section, the 
term ``bona fide arbitrage'' means:
    (1) A purchase or sale of a security in one market together with an 
offsetting sale or purchase of the same security in a different market 
at as nearly the same time as practicable for the purpose of taking 
advantage of a difference in prices in the two markets; or
    (2) A purchase of a security which is, without restriction other 
than the payment of money, exchangeable or convertible within 90 
calendar days of the purchase into a second security together with an 
offsetting sale of the second security at or about the same time, for 
the purpose of taking advantage of a concurrent disparity in the prices 
of the two securities.
    (c) ``Prime broker'' transactions. A creditor may effect 
transactions for a customer as part of a ``prime broker'' arrangement in 
conformity with SEC guidelines.
    (d) Credit to ESOPs. A creditor may extend and maintain credit to 
employee stock ownership plans without regard to the other provisions of 
this part.
    (e) Nonpurpose credit. (1) A creditor may:
    (i) Effect and carry transactions in commodities;
    (ii) Effect and carry transactions in foreign exchange;
    (iii) Extend and maintain secured or unsecured nonpurpose credit, 
subject to the requirements of paragraph (e)(2) of this section.
    (2) Every extension of credit, except as provided in paragraphs 
(e)(1)(i) and (e)(1)(ii) of this section, shall be deemed to be purpose 
credit unless, prior to extending the credit, the creditor accepts in 
good faith from the customer a written statement that it is not purpose 
credit. The statement shall conform to the requirements established by 
the Board.

[Reg. T, 63 FR 2824, Jan. 16, 1998]



Sec. 220.7  Broker-dealer credit account.

    (a) Requirements. In a broker-dealer credit account, a creditor may 
effect or finance transactions in accordance with the following 
provisions.
    (b) Purchase or sale of security against full payment. A creditor 
may purchase any security from or sell any security to another creditor 
or person regulated by a foreign securities authority under a good faith 
agreement to promptly deliver the security against full payment of the 
purchase price.
    (c) Joint back office. A creditor may effect or finance transactions 
of any of its owners if the creditor is a clearing and servicing broker 
or dealer owned jointly or individually by other creditors.
    (d) Capital contribution. A creditor may extend and maintain credit 
to any partner or stockholder of the creditor for the purpose of making 
a capital contribution to, or purchasing stock of, the creditor, 
affiliated corporation or another creditor.
    (e) Emergency and subordinated credit. A creditor may extend and 
maintain, with the approval of the appropriate examining authority:
    (1) Credit to meet the emergency needs of any creditor; or
    (2) Subordinated credit to another creditor for capital purposes, if 
the other creditor:
    (i) Is an affiliated corporation or would not be considered a 
customer of

[[Page 13]]

the lender apart from the subordinated loan; or
    (ii) Will not use the proceeds of the loan to increase the amount of 
dealing in securities for the account of the creditor, its firm or 
corporation or an affiliated corporation.
    (f) Omnibus credit (1) A creditor may effect and finance 
transactions for a broker or dealer who is registered with the SEC under 
section 15 of the Act and who gives the creditor written notice that:
    (i) All securities will be for the account of customers of the 
broker or dealer; and
    (ii) Any short sales effected will be short sales made on behalf of 
the customers of the broker or dealer other than partners.
    (2) The written notice required by paragraph (f)(1) of this section 
shall conform to any SEC rule on the hypothecation of customers' 
securities by brokers or dealers.
    (g) Special purpose credit. A creditor may extend the following 
types of credit with good faith margin:
    (1) Credit to finance the purchase or sale of securities for prompt 
delivery, if the credit is to be repaid upon completion of the 
transaction.
    (2) Credit to finance securities in transit or surrendered for 
transfer, if the credit is to be repaid upon completion of the 
transaction.
    (3) Credit to enable a broker or dealer to pay for securities, if 
the credit is to be repaid on the same day it is extended.
    (4) Credit to an exempted borrower.
    (5) Credit to a member of a national securities exchange or 
registered broker or dealer to finance its activities as a market maker 
or specialist.
    (6) Credit to a member of a national securities exchange or 
registered broker or dealer to finance its activities as an underwriter.

[Reg. T, 63 FR 2824, Jan. 16, 1998]



Sec. 220.8  Cash account.

    (a) Permissible transactions. In a cash account, a creditor, may:
    (1) Buy for or sell to any customer any security or other asset if:
    (i) There are sufficient funds in the account; or
    (ii) The creditor accepts in good faith the customer's agreement 
that the customer will promptly make full cash payment for the security 
or asset before selling it and does not contemplate selling it prior to 
making such payment;
    (2) Buy from or sell for any customer any security or other asset 
if:
    (i) The security is held in the account; or
    (ii) The creditor accepts in good faith the customer's statement 
that the security is owned by the customer or the customer's principal, 
and that it will be promptly deposited in the account;
    (3) Issue, endorse, or guarantee, or sell an option for any customer 
as part of a covered option transaction; and
    (4) Use an escrow agreement in lieu of the cash, cash equivalents or 
underlying asset position if:
    (i) In the case of a short call or a short put, the creditor is 
advised by the customer that the required securities, assets or cash are 
held by a person authorized to issue an escrow agreement and the 
creditor independently verifies that the appropriate escrow agreement 
will be delivered by the person promptly; or
    (ii) In the case of a call issued, endorsed, guaranteed, or sold on 
the same day the underlying asset is purchased in the account and the 
underlying asset is to be delivered to a person authorized to issue an 
escrow agreement, the creditor verifies that the appropriate escrow 
agreement will be delivered by the person promptly.
    (b) Time periods for payment; cancellation or liquidation. (1) Full 
cash payment. A creditor shall obtain full cash payment for customer 
purchases:
    (i) Within one payment period of the date:
    (A) Any nonexempted security was purchased;
    (B) Any when-issued security was made available by the issuer for 
delivery to purchasers;
    (C) Any ``when distributed'' security was distributed under a 
published plan;
    (D) A security owned by the customer has matured or has been 
redeemed and a new refunding security of the same issuer has been 
purchased by the customer, provided:

[[Page 14]]

    (1) The customer purchased the new security no more than 35 calendar 
days prior to the date of maturity or redemption of the old security;
    (2) The customer is entitled to the proceeds of the redemption; and
    (3) The delayed payment does not exceed 103 percent of the proceeds 
of the old security.
    (ii) In the case of the purchase of a foreign security, within one 
payment period of the trade date or within one day after the date on 
which settlement is required to occur by the rules of the foreign 
securities market, provided this period does not exceed the maximum time 
permitted by this part for delivery against payment transactions.
    (2) Delivery against payment. If a creditor purchases for or sells 
to a customer a security in a delivery against payment transaction, the 
creditor shall have up to 35 calendar days to obtain payment if delivery 
of the security is delayed due to the mechanics of the transaction and 
is not related to the customer's willingness or ability to pay.
    (3) Shipment of securities, extension. If any shipment of securities 
is incidental to consummation of a transaction, a creditor may extend 
the payment period by the number of days required for shipment, but not 
by more than one additional payment period.
    (4) Cancellation; liquidation; minimum amount. A creditor shall 
promptly cancel or otherwise liquidate a transaction or any part of a 
transaction for which the customer has not made full cash payment within 
the required time. A creditor may, at its option, disregard any sum due 
from the customer not exceeding $1000.
    (c) 90 day freeze. (1) If a nonexempted security in the account is 
sold or delivered to another broker or dealer without having been 
previously paid for in full by the customer, the privilege of delaying 
payment beyond the trade date shall be withdrawn for 90 calendar days 
following the date of sale of the security. Cancellation of the 
transaction other than to correct an error shall constitute a sale.
    (2) The 90 day freeze shall not apply if:
    (i) Within the period specified in paragraph (b)(1) of this section, 
full payment is received or any check or draft in payment has cleared 
and the proceeds from the sale are not withdrawn prior to such payment 
or check clearance; or
    (ii) The purchased security was delivered to another broker or 
dealer for deposit in a cash account which holds sufficient funds to pay 
for the security. The creditor may rely on a written statement accepted 
in good faith from the other broker or dealer that sufficient funds are 
held in the other cash account.
    (d) Extension of time periods; transfers. (1) Unless the creditor's 
examining authority believes that the creditor is not acting in good 
faith or that the creditor has not sufficiently determined that 
exceptional circumstances warrant such action, it may upon application 
by the creditor:
    (i) Extend any period specified in paragraph (b) of this section;
    (ii) Authorize transfer to another account of any transaction 
involving the purchase of a margin or exempted security; or
    (iii) Grant a waiver from the 90 day freeze.
    (2) Applications shall be filed and acted upon prior to the end of 
the payment period, or in the case of the purchase of a foreign security 
within the period specified in paragraph (b)(1)(ii) of this section, or 
the expiration of any subsequent extension.

[Reg. T, 63 FR 2825, Jan. 16, 1998]



Sec. 220.9  Clearance of securities, options, and futures.

    (a) Credit for clearance of securities. The provisions of this part 
shall not apply to the extension or maintenance of any credit that is 
not for more than one day if it is incidental to the clearance of 
transactions in securities directly between members of a national 
securities exchange or association or through any clearing agency 
registered with the SEC.
    (b) Deposit of securities with a clearing agency. The provisions of 
this part shall not apply to the deposit of securities with an option or 
futures clearing agency for the purpose of meeting the deposit 
requirements of the agency if:
    (1) The clearing agency:

[[Page 15]]

    (i) Issues, guarantees performance on, or clears transactions in, 
any security (including options on any security, certificate of deposit, 
securities index or foreign currency); or
    (ii) Guarantees performance of contracts for the purchase or sale of 
a commodity for future delivery or options on such contracts;
    (2) The clearing agency is registered with the Securities and 
Exchange Commission or is the clearing agency for a contract market 
regulated by the Commodity Futures Trading Commission; and
    (3) The deposit consists of any margin security and complies with 
the rules of the clearing agency that have been approved by the 
Securities and Exchange Commission or the Commodity Futures Trading 
Commission.

[Reg. T, 63 FR 2826, Jan. 16, 1998]



Sec. 220.10  Borrowing and lending securities.

    (a) Without regard to the other provisions of this part, a creditor 
may borrow or lend securities for the purpose of making delivery of the 
securities in the case of short sales, failure to receive securities 
required to be delivered, or other similar situations. If a creditor 
reasonably anticipates a short sale or fail transaction, such borrowing 
may be made up to one standard settlement cycle in advance of trade 
date.
    (b) A creditor may lend foreign securities to a foreign person (or 
borrow such securities for the purpose of relending them to a foreign 
person) for any purpose lawful in the country in which they are to be 
used.
    (c) A creditor that is an exempted borrower may lend securities 
without regard to the other provisions of this part and a creditor may 
borrow securities from an exempted borrower without regard to the other 
provisions of this part.

[Reg. T, 63 FR 2826, Jan. 16, 1998]



Sec. 220.11  Requirements for the list of marginable OTC stocks and 
the list of foreign margin stocks.

    (a) Requirements for inclusion on the list of marginable OTC stocks. 
Except as provided in paragraph (f) of this section, OTC margin stock 
shall meet the following requirements:
    (1) Four or more dealers stand willing to, and do in fact, make a 
market in such stock and regularly submit bona fide bids and offers to 
an automated quotations system for their own accounts;
    (2) The minimum average bid price of such stock, as determined by 
the Board, is at least $5 per share;
    (3) The stock is registered under section 12 of the Act, is issued 
by an insurance company subject to section 12(g)(2)(G) of the Act, is 
issued by a closed-end investment management company subject to 
registration pursuant to section 8 of the Investment Company Act of 1940 
(15 U.S.C. 80a-8), is an American Depository Receipt (ADR) of a foreign 
issuer whose securities are registered under section 12 of the Act, or 
is a stock of an issuer required to file reports under section 15(d) of 
the Act;
    (4) Daily quotations for both bid and asked prices for the stock are 
continously available to the general public;
    (5) The stock has been publicly traded for at least six months;
    (6) The issuer has at least $4 million of capital, surplus, and 
undivided profits;
    (7) There are 400,000 or more shares of such stock outstanding in 
addition to shares held beneficially by officers, directors or 
beneficial owners of more than 10 percent of the stock;
    (8) There are 1,200 or more holders of record, as defined in SEC 
Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers, 
directors or beneficial owners of 10 percent or more of the stock, or 
the average daily trading volume of such stock as determined by the 
Board, is at least 500 shares; and
    (9) The issuer or a predecessor in interest has been in existence 
for at least three years.
    (b) Requirements for continued inclusion on the list of marginable 
OTC stocks. Except as provided in paragraph (f) of this section, OTC 
margin stock shall meet the following requirements:
    (1) Three or more dealers stand willing to, and do in fact, make a 
market in such stock and regularly submit

[[Page 16]]

bona fide bids and offers to an automated quotations system for their 
own accounts;
    (2) The minimum average bid price of such stocks, as determined by 
the Board, is at least $2 per share;
    (3) The stock is registered as specified in paragraph (a)(3) of this 
section;
    (4) Daily quotations for both bid and asked prices for the stock are 
continuously available to the general public; ;
    (5) The issuer has at least $1 million of capital, surplus, and 
undivided profits;
    (6) There are 300,000 or more shares of such stock outstanding in 
addition to shares held beneficially by officers, directors, or 
beneficial owners of more than 10 percent of the stock; and
    (7) There continue to be 800 or more holders of record, as defined 
in SEC Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not 
officers, directors, or beneficial owners of 10 percent or more of the 
stock, or the average daily trading volume of such stock, as determined 
by the Board, is at least 300 shares.
    (c) Requirements for inclusion on the list of foreign margin stocks. 
Except as provided in paragraph (f) of this section, a foreign security 
shall meet the following requirements before being placed on the List of 
Foreign Margin Stocks:
    (1) The security is an equity security that is listed for trading on 
or through the facilities of a foreign securities exchange or a 
recognized foreign securities market and has been trading on such 
exchange or market for at least six months;
    (2) Daily quotations for both bid and asked or last sale prices for 
the security provided by the foreign securities exchange or foreign 
securities market on which the security is traded are continuously 
available to creditors in the United States pursuant to an electronic 
quotation system;
    (3) The aggregate market value of shares, the ownership of which is 
unrestricted, is not less than $1 billion;
    (4) The average weekly trading volume of such security during the 
preceding six months is either at least 200,000 shares or $1 million; 
and
    (5) The issuer or a predecessor in interest has been in existence 
for at least five years.
    (d) Requirements for continued inclusion on the list of foreign 
margin stocks. Except as provided in paragraph (f) of this section, a 
foreign security shall meet the following requirements to remain on the 
List of Foreign Margin Stocks:
    (1) The security continues to meet the requirements specified in 
paragraphs (c) (1) and (2) of this section;
    (2) The aggregate market value of shares, the ownership of which is 
unrestricted, is not less than $500 million; and
    (3) The average weekly trading volume of such security during the 
preceding six months is either at least 100,000 shares or $500,000.
    (e) Removal from the list. The Board shall periodically remove from 
the lists any stock that:
    (1) Ceases to exist or of which the issuer ceases to exist; or
    (2) No longer substantially meets the provisions of paragraphs (b) 
or (d) of this section or the definition of OTC margin stock.
    (f) Discretionary authority of Board. Without regard to other 
paragraphs of this section, the Board may add to, or omit or remove from 
the list of marginable OTC stocks and the list of foreign margin stocks 
an equity security, if in the judgment of the Board, such action is 
necessary or appropriate in the public interest.
    (g) Unlawful representations. It shall be unlawful for any creditor 
to make, or cause to be made, any representation to the effect that the 
inclusion of a security on the list of marginable OTC stocks or the list 
of foreign margin stocks is evidence that the Board or the SEC has in 
any way passed upon the merits of, or given approval to, such security 
or any transactions therein. Any statement in an advertisement or other 
similar communication containing a reference to the Board in connection 
with the lists or stocks on those lists shall be an unlawful 
representation.

[Reg. T, 63 FR 2826, Jan. 16, 1998]

[[Page 17]]



Sec. 220.12  Supplement: margin requirements.

    The required margin for each security position held in a margin 
account shall be as follows:
    (a) Margin equity security, except for an exempted security, money 
market mutual fund or exempted securities mutual fund, warrant on a 
securities index or foreign currency or a long position in an option: 50 
percent of the current market value of the security or the percentage 
set by the regulatory authority where the trade occurs, whichever is 
greater.
    (b) Exempted security, non-equity security, money market mutual fund 
or exempted securities mutual fund: The margin required by the creditor 
in good faith or the percentage set by the regulatory authority where 
the trade occurs, whichever is greater.
    (c) Short sale of a nonexempted security, except for a non-equity 
security:
    (1) 150 percent of the current market value of the security; or
    (2) 100 percent of the current market value if a security 
exchangeable or convertible within 90 calendar days without restriction 
other than the payment of money into the security sold short is held in 
the account, provided that any long call to be used as margin in 
connection with a short sale of the underlying security is an American-
style option issued by a registered clearing corporation and listed or 
traded on a registered national securities exchange with an exercise 
price that does not exceed the price at which the underlying security 
was sold short.
    (d) Short sale of an exempted security or non-equity security: 100 
percent of the current market value of the security plus the margin 
required by the creditor in good faith.
    (e) Nonmargin, nonexempted equity security: 100 percent of the 
current market value.
    (f) Put or call on a security, certificate of deposit, securities 
index or foreign currency or a warrant on a securities index or foreign 
currency:
    (1) In the case of puts and calls issued by a registered clearing 
corporation and listed or traded on a registered national securities 
exchange or a registered securities association and registered warrants 
on a securities index or foreign currency, the amount, or other position 
specified by the rules of the registered national securities exchange or 
the registered securities association authorized to trade the option or 
warrant, provided that all such rules have been approved or amended by 
the SEC; or
    (2) In the case of all other puts and calls, the amount, or other 
position, specified by the maintenance rules of the creditor's examining 
authority.

[Reg. T, 63 FR 2827, Jan. 16, 1998]

                             Interpretations



Sec. 220.101  Transactions of customers who are brokers or dealers.

    The Board has recently considered certain questions regarding 
transactions of customers who are brokers or dealers.
    (a) The first question was whether delivery and payment under Sec. 
220.4(f)(3) must be exactly simultaneous (such as in sight draft 
shipments), or whether it is sufficient if the broker-dealer customer, 
``as promptly as practicable in accordance with the ordinary usage of 
the trade,'' mails or otherwise delivers to the creditor a check in 
settlement of the transaction, the check being accompanied by 
instructions for transfer or delivery of the security. The Board ruled 
that the latter method of setting the transaction is permissible.
    (b) The second question was, in effect, whether the limitations of 
Sec. 220.4(c)(8) apply to the account of a customer who is himself a 
broker or dealer. The answer is that the provision applies to any 
``special cash account,'' regardless of the type of customer.
    (c) The third question was, in effect, whether a purchase and a sale 
of an unissued security under Sec. 220.4(f)(3) may be offset against 
each other, or whether each must be settled separately by what would 
amount to delivery of the security to settle one transaction and its 
redelivery to settle the other. The answer is that it is permissible to 
offset the transactions against each other without physical delivery and 
redelivery of the security.

[11 FR 14155, Dec. 7, 1946]

[[Page 18]]



Sec. 220.102  [Reserved]



Sec. 220.103  Borrowing of securities.

    (a) The Board of Governors has been asked for a ruling as to whether 
Sec. 220.6(h), which deals with borrowing and lending of securities, 
applies to a borrower of securities if the lender is a private 
individual, as contrasted with a member of a national securities 
exchange or a broker or dealer.
    (b) Section 220.6(h) does not require that the lender of the 
securities in such a case be a member of a national securities exchange 
or a broker or dealer. Therefore, a borrowing of securities may be able 
to qualify under the provision even though the lender is a private 
individual, and this is true whether the security is registered on a 
national securities exchange or is unregistered. In borrowing securities 
from a private individual under Sec. 220.6(h), however, it becomes 
especially important to bear in mind two limitations that are contained 
in the section.
    (c) The first limitation is that the section applies only if the 
broker borrows the securities for the purpose specified in the 
provision, that is, ``for the purpose of making delivery of such 
securities in the case of short sales, failure to receive securities he 
is required to deliver, or other similar cases''. The present language 
of the provision does not require that the delivery for which the 
securities are borrowed must be on a transaction which the borrower has 
himself made, either as agent or as principal; he may borrow under the 
provision in order to relend to someone else for the latter person to 
make such a delivery. However, the borrowing must be related to an 
actual delivery of the type specified--a delivery in connection with a 
specific transaction that has already occurred or is in immediate 
prospect. The provision does not authorize a broker to borrow securities 
(or make the related deposit) merely in order that he or some other 
broker may have the securities ``on hand'' or may anticipate some need 
that may or may not arise in the future.
    (d) The ruling in the 1940 Federal Reserve Bulletin, at page 647, is 
an example of a borrowing which, on the facts as given, did not meet the 
requirement. There, the broker wished to borrow stocks with the 
understanding that he ``would offer to lend this stock in the `loan 
crowd' on a national securities exchange.'' There was no assurance that 
the stocks would be used for the purpose specified in Sec. 220.6(h); 
they might be, or they might merely be held idle while the person 
lending the stocks had the use of the funds deposited against them. The 
ruling held in effect that since the borrowing could not qualify under 
Sec. 220.6(h) it must comply with other applicable provisions of the 
regulation.
    (e) The second requirement is that the deposit of cash against the 
borrowed securities must be ``bona fide.'' This requirement naturally 
cannot be spelled out in detail, but it requires at least that the 
purpose of the broker in making the deposit should be to obtain the 
securities for the specified purpose, and that he should not use the 
arrangement as a means of accommodating a customer who is seeking to 
obtain more funds than he could get in a general account.
    (f) The Board recognizes that even with these requirements there is 
still some possibility that the provision may be misapplied. The Board 
is reluctant to impose additional burdens on legitimate transactions by 
tightening the provision. If there should be evidence of abuses 
developing under the provision, however, it would become necessary to 
consider making it more restricted.

[12 FR 5278, Aug. 2, 1947]



Sec. 220.104  [Reserved]



Sec. 220.105  Ninety-day rule in special cash account.

    (a) Section 220.4(c)(8) places a limitation on a special cash 
account if a security other than an exempted security has been purchased 
in the account and ``without having been previously paid for in full by 
the customer * * * has been * * * delivered out to any broker or 
dealer.'' The limitation is that during the succeeding 90 days the 
customer may not purchase a security in the account other than an 
exempted security unless funds sufficient for the purpose are held in 
the account. In other words, the privilege of delayed

[[Page 19]]

payment in such an account is withdrawn during the 90-day period.
    (b) The Board recently considered a question as to whether the 
following situation makes an account subject to the 90-day 
disqualification: A customer purchases registered security ABC in a 
special cash account. The broker executes the order in good faith as a 
bona fide cash transaction, expecting to obtain full cash payment 
promptly. The next day, the customer sells registered security XYZ in 
the account, promising to deposit it promptly in the account. The 
proceeds of the sale are equal to or greater than the cost of security 
ABC. After both sale and purchase have been made, the customer requests 
the broker to deliver security ABC to a different broker, to receive 
security XYZ from that broker at about the same time, and to settle with 
the other broker--such settlement to be made either by paying the cost 
of security XYZ to the other broker and receiving from him the cost of 
security ABC, or by merely settling any difference between these 
amounts.
    (c) The Board expressed the view that the account becomes subject to 
the 90-day disqualification in Sec. 220.4(c)(8). In the instant case, 
unlike that described at 1940 Federal Reserve Bulletin 772, the security 
sold is not held in the account and is not to be deposited in it 
unconditionally. It is to be obtained only against the delivery to the 
other broker of the security which had been purchased. Hence payment can 
not be said to have been made prior to such delivery; the purchased 
security has been delivered out to a broker without previously having 
been paid for in full, and the account becomes subject to the 90-day 
disqualification.

[13 FR 2368, May 1, 1948]



Sec. Sec. 220.106-220.107  [Reserved]



Sec. 220.108  International Bank Securities.

    (a) Section 2 of the Act of June 29, 1949 (Pub. L. 142--81st 
Congress), amended the Bretton Woods Agreements Act by adding a new 
section numbered 15 providing, in part, that--

    Any securities issued by International Bank for Reconstruction and 
Development (including any guaranty by the bank, whether or not limited 
in scope), and any securities guaranteed by the bank as to both 
principal and interest, shall be deemed to be exempted securities within 
the meaning of * * * paragraph (a)(12) of section 3 of the [Securities 
Exchange] Act of June 6, 1934, as amended (15 U.S.C. 78c). * * *.

    (b) In response to inquiries with respect to the applicability of 
the margin requirements of this part to securities issued or guaranteed 
by the International Bank for Reconstruction and Development, the Board 
has replied that, as a result of this enactment, securities issued by 
the Bank are now classified as exempted securities under Sec. 220.2(e). 
Such securities are now in the same category under this part as are 
United States Government, State and municipal bonds. Accordingly, the 
specific percentage limitations prescribed by this part with respect to 
maximum loan value and margin requirements are no longer applicable 
thereto.

[14 FR 5505, Sept. 7, 1949]



Sec. 220.109  [Reserved]



Sec. 220.110  Assistance by Federal credit union to its members.

    (a) An inquiry was presented recently concerning the application of 
this part or part 221 of this subchapter, to a plan proposed by a 
Federal credit union to aid its members in purchasing stock of a 
corporation whose subsidiary apparently was the employer of all the 
credit union's members.
    (b) From the information submitted, the plan appeared to contemplate 
that the Federal credit union would accept orders from its members for 
registered common stock of the parent corporation in multiples of 5 
shares; that whenever orders had been so received for a total of 100 
shares, the credit union, as agent for such members, would execute the 
orders through a brokerage firm with membership on a national securities 
exchange; that the brokerage firm would deliver certificates for the 
stock, registered in the names of the individual purchasers, to the 
credit union against payment by the credit union; that the credit union 
would prorate the total amount so paid, including the brokerage fee,

[[Page 20]]

among the individual purchasers according to the number of shares 
purchased by them; and that a savings in brokerage fee resulting from 
the 100-lot purchases would be passed on by the credit union to the 
individual purchasers of the stock. However, amounts of the stock less 
than 100 shares would be purchased by the credit union through the 
brokerage firm for any members willing to forego such savings.
    (c) It appeared further that the Federal credit union members for 
whom stock was so purchased would reimburse the credit union (1) by cash 
payment, (2) by the proceeds of withdrawn shares of the credit union, 
(3) by the proceeds of an installment loan from the credit union 
collateraled by the stock purchased, or by (4) by a combination of two 
or more of the above methods. To assist the collection of any such loan, 
the employer of the credit union members would provide payroll 
deductions. Apparently, sales by the credit union of any of the stock 
purchased by one of its members would occur only in satisfaction of a 
delinquent loan balance. In no case did it appear that the credit union 
would make a charge for arranging the execution of transactions in the 
stock for its members.
    (d) The Board was of the view that, from the facts as presented, it 
did not appear that the Federal credit union should be regarded as the 
type of institution to which part 221 of this subchapter, in its present 
form, applied.
    (e) With respect to this part, the question was whether the 
activities of the Federal credit union under the proposal, or otherwise, 
might be such as to bring it within the meaning of the terms ``broker'' 
or ``dealer'' as used in the part and the Securities Exchange Act of 
1934. The Board observed that this, of course, was a question of fact 
that necessarily depended upon the circumstances of the particular case, 
including the manner in which the arrangement in question might be 
carried out in practice.
    (f) On the basis of the information submitted, however, it did not 
appear to the Board that the Federal credit union should be regarded as 
being subject to this part as a ``broker or dealer who transacts a 
business in securities through the medium of'' a member firm solely 
because of its activities as contemplated by the proposal in question. 
The Board stated that the part rather clearly would not apply if there 
appeared to be nothing other than loans by the credit union to its 
members to finance purchases made directly by them of stock of the 
parent corporation of the employer of the member-borrowers. The 
additional fact that the credit union, as agent, would purchase such 
stock for its members (even though all such purchases might not be 
financed by credit union loans) was not viewed by the Board as 
sufficient to make the regulation applicable where, as from the facts 
presented, it did not appear that the credit union in any case was to 
make any charge or receive any compensation for assisting in such 
purchases or that the credit union otherwise was engaged in securities 
activities. However, the Board stated that matters of this kind must be 
examined closely for any variations that might suggest the 
inapplicability of the foregoing.

[18 FR 4592, Aug. 5, 1953]



Sec. 220.111  Arranging for extensions of credit to be made by a bank.

    (a) The Board has recently had occasion to express opinions 
regarding the requirements which apply when a person subject to this 
part (for convenience, called here simply a broker) arranges for a bank 
to extend credit.
    (b) The matter is treated generally in Sec. 220.7(a) and is also 
subject to the general rule of law that any person who aids or abets a 
violation of law by another is himself guilty of a violation. It may be 
stated as a general principle that any person who arranges for credit to 
be extended by someone else has a responsibility so to conduct his 
activities as not to be a participant in a violation of this part, which 
applies to brokers, or part 221 of this subchapter, which applies to 
banks.
    (c) More specifically, in arranging an extension of credit that may 
be subject to part 221 of this subchapter, a broker must act in good 
faith and, therefore, must question the accuracy of any non-purpose 
statement (i.e., a statement that the loan is not for the purpose of

[[Page 21]]

purchasing or carrying registered stocks) given in connection with the 
loan where the circumstances are such that the broker from any source 
knows or has reason to know that the statement is incomplete or 
otherwise inaccurate as to the true purpose of the credit. The 
requirement of ``good faith'' is of vital importance. While the 
application of the requirement will necessarily vary with the facts of 
the particular case, the broker, like the bank for whom the loan is 
arranged to be made, must be alert to the circumstances surrounding the 
loan. Thus, for example, if a broker or dealer is to deliver registered 
stocks to secure the loan or is to receive the proceeds of the loan, the 
broker arranging the loan and the bank making it would be put on notice 
that the loan would probably be subject to part 221 of this subchapter. 
In any such circumstances they could not in good faith accept or rely 
upon a statement to the contrary without obtaining a reliable and 
satisfactory explanation of the situation. The foregoing, of course, 
applies the principles contained in Sec. 221.101 of this subchapter.
    (d) In addition, when a broker is approached by another broker to 
arrange extensions of credit for customers of the approaching broker, 
the broker approached has a responsibility not to arrange any extension 
of credit which the approaching broker could not himself arrange. 
Accordingly, in such cases the statutes and regulations forbid the 
approached broker to arrange extensions of credit on unregistered 
securities for the purpose of purchasing or carrying either registered 
or unregistered securities. The approaching broker would also be 
violating the applicable requirements if he initiated or otherwise 
participated in any such forbidden transactions.
    (e) The expression of views, set forth in this section, to the 
effect that certain specific transactions are forbidden, of course, 
should not in any way be understood to indicate approval of any other 
transactions which are not mentioned.

[18 FR 5505, Sept. 15, 1953]



Sec. 220.112  [Reserved]



Sec. 220.113  Necessity for prompt payment and delivery in special 
cash accounts.

    (a) The Board of Governors recently received an inquiry concerning 
whether purchases of securities by certain municipal employees' 
retirement or pension systems on the basis of arrangements for delayed 
delivery and payment, might properly be effected by a creditor subject 
to this part in a special cash account under Sec. 220.4(c).
    (b) It appears that in a typical case the supervisors of the 
retirement system meet only once or twice each month, at which times 
decisions are made to purchase any securities wished to be acquired for 
the system. Although the securities are available for prompt delivery by 
the broker-dealer firm selected to effect the system's purchase, it is 
arranged in advance with the firm that the system will not accept 
delivery and pay for the securities before some date more than seven 
business days after the date on which the securities are purchased. 
Apparently, such an arrangement is occasioned by the monthly or 
semimonthly meetings of the system's supervisors. It was indicated that 
a retirement system of this kind may be supervised by officials who 
administer it as an incidental part of their regular duties, and that 
meetings requiring joint action by two or more supervisors may be 
necessary under the system's rules and procedures to authorize issuance 
of checks in payment for the securities purchased. It was indicated also 
that the purchases do not involve exempted securities, securities of the 
kind covered by Sec. 220.4(c)(3), or any shipment of securities as 
described in Sec. 220.4(c).
    (c) This part provides that a creditor subject thereto may not 
effect for a customer a purchase in a special cash account under Sec. 
220.4(c) unless the use of the account meets the limitations of Sec. 
220.4(a) and the purchase constitutes a ``bona fide cash transaction'' 
which complies with the eligibility requirements of Sec. 
220.4(c)(1)(i). One such requirement is that the purchase be made ``in 
reliance upon an agreement accepted by the creditor (broker-dealer) in 
good faith'' that the customer

[[Page 22]]

will ``promptly make full cash payment for the security, if funds 
sufficient for the purpose are not already in the account; and, subject 
to certain exceptions, Sec. 220.4(c)(2) provides that the creditor 
shall promptly cancel or liquidate the transaction if payment is not 
made by the customer within seven business days after the date of 
purchase. As indicated in the Board's interpretation at 1940 Federal 
Reserve Bulletin 1172, a necessary part of the customer's undertaking 
pursuant to Sec. 220.4(c)(1)(i) is that he ``should have the necessary 
means of payment readily available when he purchases a security in the 
special cash account. He should expect to pay for it immediately or in 
any event within the period (of not more than a very few days) that is 
as long as is usually required to carry through the ordinary securities 
transaction.''
    (d) The arrangements for delayed delivery and payment in the case 
presented to the Board and outlined above clearly would be inconsistent 
with the requirement of Sec. 220.4(c)(1)(i) that the purchase be made 
in reliance upon an agreement accepted by the creditor in good faith 
that the customer will ``promptly'' make full cash payment for the 
security. Accordingly, the Board said that transactions of the kind in 
question would not qualify as a ``bona fide cash transaction'' and, 
therefore, could not properly be effected in a special cash account, 
unless a contrary conclusion would be justified by the exception in 
Sec. 220.4(c)(5).
    (e) Section 220.4(c)(5) provides that if the creditor, ``acting in 
good faith in accordance with'' Sec. 220.4(c)(1), purchases a security 
for a customer ``with the understanding that he is to deliver the 
security promptly to the customer, and the full cash payment is to be 
made promptly by the customer is to be made against such delivery'', the 
creditor may at his option treat the transaction as one to which the 
period applicable under Sec. 220.4(c)(2) is not the seven days therein 
specified but 35 days after the date of such purchase. It will be 
observed that the application of Sec. 220.4 (c)(5) is specifically 
conditioned on the creditor acting in good faith in accordance with 
Sec. 220.4(c)(1). As noted above, the existence of the arrangements for 
delayed delivery and payment in the case presented would prevent this 
condition from being met, since the customer could not be regarded as 
having agreed to make full cash payment ``promptly''. Furthermore, such 
arrangements clearly would be inconsistent with the requirement of Sec. 
220.4(c)(5) that the creditor ``deliver the security promptly to the 
customer''.
    (f) Section 220.4(c)(5) was discussed in the Board's published 
interpretation, referred to above, which states that ``it is not the 
purpose of (Sec. 220.4 (c)(5)) to allow additional time to customers 
for making payment. The `prompt delivery' described in (Sec. 220.4 
(c)(5)) is delivery which is to be made as soon as the broker or dealer 
can reasonably make it in view of the mechanics of the securities 
business and the bona fide usages of the trade. The provision merely 
recognizes the fact that in certain circumstances it is an established 
bona fide practice in the trade to obtain payment against delivery of 
the security to the customer, and the further fact that the mechanics of 
the trade, unrelated to the customer's readiness to pay, may sometimes 
delay such delivery to the customer''.
    (g) In the case presented, it appears that the only reason for the 
delay is related solely to the customer's readiness to pay and is in no 
way attributable to the mechanics of the securities business. 
Accordingly, it is the Board's view that the exception in Sec. 
220.4(c)(5) should not be regarded as permitting the transactions in 
question to be effected in a special cash account.

[22 FR 5954, July 27, 1957]



Sec. Sec. 220.114-220.116  [Reserved]



Sec. 220.117  Exception to 90-day rule in special cash account.

    (a) The Board of Governors has recently interpreted certain of the 
provisions of Sec. 220.4(c)(8), with respect to the withdrawal of 
proceeds of a sale of stock in a ``special cash account'' when the stock 
has been sold out of the account prior to payment for its purchase.
    (b) The specific factual situation presented may be summarized as 
follows:


[[Page 23]]


    Customer purchased stock in a special cash account with a member 
firm on Day 1. On Day 3 customer sold the same stock at a profit. On Day 
8 customer delivered his check for the cost of the purchase to the 
creditor (member firm). On Day 9 the creditor mailed to the customer a 
check for the proceeds of the sale.

    (c) Section 220.4(c)(8) prohibits a creditor, as a general rule, 
from effecting a purchase of a security in a customer's special cash 
account if any security has been purchased in that account during the 
preceding 90 days and has then been sold in the account or delivered out 
to any broker or dealer without having been previously paid for in full 
by the customer. One exception to this general rule reads as follows:

    * * * The creditor may disregard for the purposes of this 
subparagraph (Sec. 220.4(c) (8)) a sale without prior payment provided 
full cash payment is received within the period described by 
subparagraph (2) of this paragraph (seven days after the date of 
purchase) and the customer has not withdrawn the proceeds of sale on or 
before the day on which such payment (and also final payment of any 
check received in that connection) is received. * * *

    (d) Final payment of customer's check: (1) The first question is: 
When is the creditor to be regarded as having received ``final payment 
of any check received'' in connection with the purchase?
    (2) The clear purpose of Sec. 220.4(c) (8) is to prevent the use of 
the proceeds of sale of a stock by a customer to pay for its purchase--
i.e., to prevent him from trading on the creditor's funds by being able 
to deposit the sale proceeds prior to presentment of his own check to 
the drawee bank. Thus, when a customer undertakes to pay for a purchase 
by check, that check does not constitute payment for the purchase, 
within the language and intent of the above-quoted exception in Sec. 
220.4(c)(8), until it has been honored by the drawee bank, indicating 
the sufficiency of his account to pay the check.
    (3) The phrase ``final payment of any check'' is interpreted as 
above notwithstanding Sec. 220.6(f), which provides that:

    For the purposes of this part (Regulation T), a creditor may, at his 
option (1) treat the receipt in good faith of any check or draft drawn 
on a bank which in the ordinary course of business is payable on 
presentation, * * * as receipt of payment of the amount of such check, 
draft or order; * * *


This is a general provision substantially the same as language found in 
section 4(f) of Regulation T as originally promulgated in 1934. The 
language of the subject exception to the 90-day rule of Sec. 
220.4(c)(8), i.e., the exception based expressly on final ``payment of 
any check,'' was added to the regulation in 1949 by an amendment 
directed at a specific type of situation. Because the exception is a 
special, more recent provision, and because Sec. 220.6(f), if 
controlling, would permit the exception to undermine, to some extent, 
the effectiveness of the 90-day rule, sound principles of construction 
require that the phrase ``final payment of any check'' be given its 
literal and intended effect.
    (4) There is no fixed period of time from the moment of receipt by 
the payee, or of deposit, within which it is certain that any check will 
be paid by the drawee bank. Therefore, in the rare case where the 
operation of the subject exception to Sec. 220.4(c)(8) is necessary to 
avoid application of the 90-day rule, a creditor should ascertain (from 
his bank of deposit or otherwise) the fact of payment of a customer's 
check given for the purchase. Having so determined the day of final 
payment, the creditor can permit withdrawal on any subsequent day.
    (e) Mailing as ``withdrawal'': (1) Also presented is the question 
whether the mailing to the customer of the creditor's check for the sale 
proceeds constitutes a withdrawal of such proceeds by the customer at 
the time of mailing so that, if the check for the sale proceeds is 
mailed on or before the day on which the customer's check for the 
purchase is finally paid, the 90-day rule applies. It may be that a 
check mailed one day will not ordinarily be received by the customer 
until the next. The Board is of the view, however, that when the check 
for sale proceeds is issued and released into the mails, the proceeds 
are to be regarded as withdrawn by the customer; a more liberal 
interpretation would open a way for circumvention. Accordingly, the 
creditor's check should not be mailed nor the sale proceeds otherwise 
released to

[[Page 24]]

the customer ``on or before the day'' on which payment for the purchase, 
including final payment of any check given for such payment, is received 
by the creditor, as determined in accordance with the principles stated 
herein.
    (2) Applying the above principles to the schedule of transactions 
described in the second paragraph of this interpretation, the mailing of 
the creditor's check on ``Day 9'' would be consistent with the subject 
exception to Sec. 220.4(c)(8), as interpreted herein, only if the 
customer's check was paid by the drawee bank on ``Day 8''.

[27 FR 3511, Apr. 12, 1962]



Sec. 220.118  Time of payment for mutual fund shares purchased in 
a special cash account.

    (a) The Board has recently considered the question whether, in 
connection with the purchase of mutual fund shares in a ``special cash 
account'' under the provisions of this part 220, the 7-day period with 
respect to liquidation for nonpayment is that described in Sec. 
220.4(c)(2) or that described in Sec. 220.4(c)(3).
    (b) Section 220.4(c)(2) provides as follows:

    In case a customer purchases a security (other than an exempted 
security) in the special cash account and does not make full cash 
payment for the security within 7 days after the date on which the 
security is so purchased, the creditor shall, except as provided in 
subparagraphs (3)-(7) of this paragraph, promptly cancel or otherwise 
liquidate the transaction or the unsettled portion thereof.


Section 220.4(c)(3), one of the exceptions referred to, provides in 
relevant part as follows:

    If the security when so purchased is an unissued security, the 
period applicable to the transaction under subparagraph (2) of this 
paragraph shall be 7 days after the date on which the security is made 
available by the issuer for delivery to purchasers.

    (c) In the case presented, the shares of the mutual fund (open-end 
investment company) are technically not issued at the time they are sold 
by the underwriter and distributor. Several days may elapse from the 
date of sale before a certificate can be delivered by the transfer 
agent. The specific inquiry to the Board was, in effect, whether the 7-
day period after which a purchase transaction must be liquidated or 
cancelled for nonpayment should run, in the case of mutual fund shares, 
from the time when a certificate for the purchased shares is available 
for delivery to the purchaser, instead of from the date of the purchase.
    (d) Under the general rule of Sec. 220.4 (c)(2) that is applicable 
to purchases of outstanding securities, the 7-day period runs from the 
date of purchase without regard to the time required for the mechanical 
acts of transfer of ownership and delivery of a certificate. This rule 
is based on the principles governing the use of special cash accounts in 
accordance with which, in the absence of special circumstances, payment 
is to be made promptly upon the purchase of securities.
    (e) The purpose of Sec. 220.4(c)(3) is to recognize the fact that, 
when an issue of securities is to be issued at some fixed future date, a 
security that is a part of such issue can be purchased on a ``when-
issued'' basis and that payment may reasonably be delayed until after 
such date of issue, subject to other basic conditions for transactions 
in a special cash account. Thus, unissued securities should be regarded 
as ``made available for delivery to purchasers'' on the date when they 
are substantially as available as outstanding securities are available 
upon purchase, and this would ordinarily be the designated date of 
issuance or, in the case of a stock dividend, the ``payment date''. In 
any case, the time required for the mechanics of transfer and delivery 
of a certificate is not material under Sec. 220.4(c)(3) any more than 
it is under Sec. 220.4(c)(2).
    (f) Mutual fund shares are essentially available upon purchase to 
the same extent as outstanding securities. The mechanics of their 
issuance and of the delivery of certificates are not significantly 
different from the mechanics of transfer and delivery of certificates 
for shares of outstanding securities, and the issuance of mutual fund 
shares is not a future event in a sense that would warrant the extension 
of the time for payment beyond that afforded in the case of outstanding 
securities. Consequently, the Board has concluded that a purchase of 
mutual fund shares

[[Page 25]]

is not a purchase of an ``unissued security'' to which Sec. 220.4(c)(3) 
applies, but is a transaction to which Sec. 220.4(c)(2) applies.

[27 FR 10885, Nov. 8, 1962]



Sec. 220.119  Applicability of margin requirements to credit extended 
to corporation in connection with retirement of stock.

    (a) The Board of Governors has been asked whether part 220 was 
violated when a dealer in securities transferred to a corporation 4,161 
shares of the stock of such corporation for a consideration of $33,288, 
of which only 10 percent was paid in cash.
    (b) If the transaction was of a kind that must be included in the 
corporation's ``general account'' with the dealer (Sec. 220.3), it 
would involve an excessive extension of credit in violation of Sec. 
220.3 (b)(1). However, the transaction would be permissible if the 
transaction came within the scope of Sec. 220.4(f)(8), which permits a 
``creditor'' (such as the dealer) to ``Extend and maintain credit to or 
for any customer without collateral or on any collateral whatever for 
any purpose other than purchasing or carrying or trading in 
securities.'' Accordingly, the crucial question is whether the 
corporation, in this transaction, was ``purchasing'' the 4,161 shares of 
its stock, within the meaning of that term as used in this part.
    (c) Upon first examination, it might seem apparent that the 
transaction was a purchase by the corporation. From the viewpoint of the 
dealer the transaction was a sale, and ordinarily, at least a sale by 
one party connotes a purchase by the other. Furthermore, other indicia 
of a sale/purchase transaction were present, such as a transfer of 
property for a pecuniary consideration. However, when the underlying 
objectives of the margin regulations are considered, it appears that 
they do not encompass a transaction of this nature, where securities are 
transferred on credit to the issuer thereof for the purpose of 
retirement.
    (d) Section 7(a) of the Securities Exchange Act of 1934 requires the 
Board of Governors to prescribe margin regulations ``For the purpose of 
preventing the excessive use of credit for the purchase or carrying of 
securities.'' Accordingly, the provisions of this part are not intended 
to prevent the use of credit where the transaction will not have the 
effect of increasing the volume of credit in the securities markets.
    (e) It appears that the instant transaction would have no such 
effect. When the transaction was completed, the equity interest of the 
dealer was transmuted into a dollar-obligation interest; in lieu of its 
status as a stockholder of the corporation, the dealer became a creditor 
of that corporation. The corporation did not become the owner of any 
securities acquired through the use of credit; its outstanding stock was 
simply reduced by 4,161 shares.
    (f) The meaning of ``sale'' and ``purchase'' in the Securities 
Exchange Act has been considered by the Federal courts in a series of 
decisions dealing with corporate ``insiders'' profits under section 
16(b) of that Act. Although the statutory purpose sought to be 
effectuated in those cases is quite different from the purpose of the 
margin regulations, the decisions in question support the propriety of 
not regarding a transaction as a ``purchase'' where this accords with 
the probable legislative intent, even though, literally, the statutory 
definition seems to include the particular transaction. See Roberts v. 
Eaton (CA 2 1954) 212 F. 2d 82, and cases and other authorities there 
cited. The governing principle, of course, is to effectuate the purpose 
embodied in the statutory or regulatory provision being interpreted, 
even where that purpose may conflict with the literal words. U.S. v. 
Amer. Trucking Ass'ns, 310 U.S. 534, 543 (1940); 2 Sutherland, Statutory 
Construction (3d ed. 1943) ch. 45.
    (g) There can be little doubt that an extension of credit to a 
corporation to enable it to retire debt securities would not be for the 
purpose of ``purchasing * * * securities'' and therefore would come 
within Sec. 220.4(f)(8), regardless of whether the retirement was 
obligatory (e.g., at maturity) or was a voluntary ``call'' by the 
issuer. This is true, it is difficult to see any valid distinction, for 
this purpose, between (1) voluntary retirement of an indebtedness 
security and (2) voluntary retirement of an equity security.

[[Page 26]]

    (h) For the reasons indicated above, it is the opinion of the Board 
of Governors that the extension of credit here involved is not of the 
kind which the margin requirements are intended to regulate and that the 
transaction described does not involve an unlawful extension of credit 
as far as this part is concerned.
    (i) The foregoing interpretation relates, of course, only to cases 
of the type described. It should not be regarded as governing any other 
situations; for example, the interpretation does not deal with cases 
where securities are being transferred to someone other than the issuer, 
or to the issuer for a purpose other than immediate retirement. Whether 
the margin requirements are inapplicable to any such situations would 
depend upon the relevant facts of actual cases presented.

[27 FR 12346, Dec. 13, 1962]



Sec. 220.120  [Reserved]



Sec. 220.121  Applicability of margin requirements to joint account 
between two creditors.

    (a) The Board has recently been asked whether extensions of credit 
in a joint account between two brokerage firms, a member of a national 
securities exchange (``Firm X'') and a member of the National 
Association of Securities Dealers (``Firm Y'') are subject to the margin 
requirements of this part (Regulation T). It is understood that similar 
joint accounts are not uncommon, and it appears that the margin 
requirements of the regulation are not consistently applied to 
extensions of credit in the accounts.
    (b) When the account in question was opened, Firm Y deposited $5,000 
with Firm X and has made no further deposit in the account, except for 
the monthly settlement described below. Both firms have the privilege of 
buying and selling specified securities in the account, but it appears 
that Firm X initiates most of the transactions therein. Trading volume 
may run from half a million to a million dollars a month. Firm X carries 
the ``official'' ledger of the account and sends Firm Y a monthly 
statement with a complete record of all transactions effected during the 
month. Settlement is then made in accordance with the agreement between 
the two firms, which provides that profits and losses shall be shared 
equally on a fifty-fifty basis. However, all transactions are confirmed 
and reconfirmed between the two on a daily basis.
    (c) Section 220.3(a) provides that

    All financial relations between a creditor and a customer, whether 
recorded in one record or in more than one record, shall be included in 
and be deemed to be part of the customer's general account with the 
creditor, * * *.


and Sec. 220.2(c) defines the term ``customer'' to include

    * * * any person, or any group of persons acting jointly, * * * to 
or for whom a creditor is extending or maintaining any credit * * *


In the course of a normal month's operations, both Firm X and Firm Y are 
at one time or another extending credit to the joint account, since both 
make purchases for the account that are not ``settled'' until the 
month's end. Consequently, the account would be a ``customer'' within 
the above definition.
    (d) Section 220.6(b) provides, with respect to the account of a 
joint adventure in which a creditor participates, that

    * * * the adjusted debit balance of the account shall include, in 
addition to the items specified in Sec. 220.3(d), any amount by which 
the creditor's contribution to the joint adventure exceeds the 
contribution which he would have made if he had contributed merely in 
proportion to his right to share in the profits of the joint adventure.


In addition, the final paragraph of Sec. 220.2(c) states that the 
definition of ``customer''

    * * * includes any joint adventure in which a creditor participates 
and which would be considered a customer of the creditor if the creditor 
were not a participant.

    (e) The above provisions clearly evince the Board's intent that the 
regulation shall cover trading accounts in which a creditor 
participates. If additional confirmation were needed, it is supplied by 
the fact that the Board found it needful specifically to exempt from 
ordinary margin requirements

[[Page 27]]

credit extended to certain joint accounts in which a creditor 
participates. These include the account in which transactions of odd-lot 
dealers may be financed under Sec. 220.4(f) (4), and the specialist's 
account under Sec. 220.4(g). Accordingly, the Board concluded that the 
joint account between Firm X and Firm Y is a ``customer'' within the 
meaning of the regulation, and that extensions of credit in the account 
are subject to margin requirements.

[31 FR 7169, May 17, 1966]



Sec. 220.122  ``Deep in the money put and call options'' as extensions 
of credit.

    (a) The Board of Governors has been asked to determine whether the 
business of selling instruments described as ``deep in the money put and 
call options'' would involve an extension of credit for the purposes of 
the Board's regulations governing margin requirements for securities 
transactions. Most of such options would be of the ``call'' type, such 
as the following proposal that was presented to the Board for its 
consideration:

    If X stock is selling at $100 per share, the customer would pay 
about $3,250 for a contract to purchase 100 shares of X at $70 per share 
within a 30-day period. The contract would be guaranteed by an exchange 
member, as are standard ``puts'' and ``calls''. When the contract is 
made with the customer, the seller, who will also be the writer of the 
contract, will immediately purchase 100 shares of X at $100 per share 
through the guarantor member firm in a margin account. If the customer 
exercises the option, the shares will be delivered to him; if the option 
is not exercised, the writer will sell the shares in the margin account 
to close out the transaction. As a practical matter, it is anticipated 
that the customer will exercise the option in almost every case.

    (b) An ordinary ``put'' is an option given to a person to sell to 
the writer of the put a specified amount of securities at a stated price 
within a certain time. A ``call'' is an option given to a person to buy 
from the writer a specified amount of securities at a stated price 
within a certain time. To be freely saleable, options must be indorsed, 
or guaranteed, by a member firm of the exchange on which the security is 
registered. The guarantor charges a fee for this service.
    (c) The option embodied in the normal put or call is exercisable 
either at the market price of the security at the time the option is 
written, or some ``points away'' from the market. The price of a normal 
option is modest by comparison with the margin required to take a 
position. Writers of normal options are persons who are satisfied with 
the current price of a security, and are prepared to purchase or sell at 
that price, with the small profit provided by the fee. Moreover, since a 
large proportion of all options are never exercised, a person who 
customarily writes normal options can anticipate that the fee would be 
clear profit in many cases, and he will not be obligated to buy or sell 
the stock in question.
    (d) The stock exchanges require that the writer of an option deposit 
and maintain in his margin account with the indorser 30 percent of the 
current market price in the case of a call (unless he has a long 
position in the stock) and 25 percent in the case of a put (unless he 
has a short position in the stock). Many indorsing firms in fact require 
larger deposits. Under Sec. 220.3(a) of Regulation T, all financial 
relations between a broker and his customer must be included in the 
customer's general account, unless specifically eligible for one of the 
special accounts authorized by Sec. 220.4. Accordingly, the writer, as 
a customer of the member firm, must make a deposit, which is included in 
his general account.
    (e) In order to prevent the deposit from being available against 
other margin purchases, and in effect counted twice, Sec. 220.3(d)(5) 
requires that in computing the customer's adjusted debit balance, there 
shall be included ``the amount of any margin customarily required by the 
creditor in connection with his endorsement or guarantee of any put, 
call, or other option''. No other margin deposit is required in 
connection with a normal put or call option under Regulation T.
    (f) Turning to the ``deep in the money'' proposed option contract 
described above, the price paid by the buyer can be divided into (1) a 
deposit of 30 percent of the current market

[[Page 28]]

value of the stock, and (2) an additional fixed charge, or fee. To the 
extent that the price of the stock rose during the 30 ensuing days the 
proposed instrument would produce results similar to those in the case 
of an ordinary profitable call, and the contract right would be 
exercised. But even if the price fell, unlike the situation with a 
normal option, the buyer would still be virtually certain to exercise 
his right to purchase before it expired, in order to minimize his loss. 
The result would be that the buyer would not have a genuine choice 
whether or not to buy. Rather, the instrument would have made it 
possible for him, in effect, to purchase stock as of the time the 
contract was written by depositing 30 percent of the stock's current 
market price.
    (g) It was suggested that the proposed contract is not unusual, 
since there are examples of ordinary options selling at up to 28 percent 
of current market value. However, such examples are of options running 
for 12 months, and reflect expectations of changes in the price of the 
stock over that period. The 30-day contracts discussed above are not 
comparable to such 12-month options, because instances of true 
expectations of price changes of this magnitude over a 30-day period 
would be exceedingly rare. And a contract that does not reflect such 
true expectations of price change, plus a reasonable fee for the 
services of the writer, is not an option in the accepted meaning of the 
term.
    (h) Because of the virtual certainty that the contract right would 
be exercised under the proposal described above, the writer would buy 
the stock in a margin account with an indorsing firm immediately on 
writing the contract. The indorsing firm would extend credit in the 
amount of 20 percent of the current market price of the stock, the 
maximum permitted by the current Sec. 220.8 (supplement to Regulation 
T). The writer would deposit the 30 percent supplied by the buyer, and 
furnish the remaining 50 percent out of his own working capital. His 
account with the indorsing firm would thus be appropriately margined.
    (i) As to the buyer, however, the writer would function as a broker. 
In effect, he would purchase the stock for the account, or use, of the 
buyer, on what might be described as a deferred payment arrangement. 
Like an ordinary broker, the writer of the contract described above 
would put up funds to pay for the difference between the price of 
securities the customer wished to purchase and the customer's own 
contribution. His only risk would be that the price of the securities 
would decline in excess of the customer's contribution. True, he would 
be locked in, and could not liquidate the customer's collateral for 30 
days even if the market price should fall in excess of 30 percent, but 
the risk of such a decline is extremely slight.
    (j) Like any other broker who extends credit in a margin account, 
the writer who was in the business of writing and selling such a 
contract would be satisfied with a fixed predetermined amount of return 
on his venture, since he would realize only the fee charged. Unlike a 
writer of ordinary puts and calls, he would not receive a substantial 
part of his income from fees on unexercised contract rights. The 
similarity of his activities to those of a broker, and the dissimilarity 
to a writer of ordinary options, would be underscored by the fact that 
his fee would be a fixed predetermined amount of return similar to an 
interest charge, rather than a fee arrived at individually for each 
transaction according to the volatility of the stock and other 
individual considerations.
    (k) The buyer's general account with the writer would in effect 
reflect a debit for the purchase price of the stock and, on the credit 
side, a deposit of cash in the amount of 30 percent of that price, plus 
an extension of credit for the remaining 70 percent, rather than the 
maximum permissible 20 percent.
    (l) For the reasons stated above, the Board concluded that the 
proposed contracts would involve extensions of credit by the writer as 
broker in an amount exceeding that permitted by the current supplement 
to Regulation T. Accordingly, the writing of such contracts by a 
brokerage firm is presently prohibited by such regulation, and any 
brokerage firm that endorses such a contract would be arranging for

[[Page 29]]

credit in an amount greater than the firm itself could extend, a 
practice that is prohibited by Sec. 220.7(a).

[35 FR 3280, Feb. 21, 1970]



Sec. 220.123  Partial delayed issue contracts covering nonconvertible 
bonds.

    (a) During recent years, it has become customary for portions of new 
issues of nonconvertible bonds and preferred stocks to be sold subject 
to partial delayed issue contracts, which have customarily been referred 
to in the industry as ``delayed delivery'' contracts, and the Board of 
Governors has been asked for its views as to whether such transactions 
involve any violations of the Board's margin regulations.
    (b) The practice of issuing a portion of a debt (or equivalent) 
security issue at a date subsequent to the main underwriting has arisen 
where market conditions made it difficult or impossible, in a number of 
instances, to place an entire issue simultaneously. In instances of this 
kind, institutional investors (e.g., insurance companies or pension 
funds) whose cash flow is such that they expect to have funds available 
some months in the future, have been willing to subscribe to a portion, 
to be issued to them at a future date. The issuer has been willing to 
agree to issue the securities in two or more stages because it did not 
immediately need the proceeds to be realized from the deferred portion, 
because it could not raise funds on better terms, or because it 
preferred to have a certain portion of the issue taken down by an 
investor of this type.
    (c) In the case of such a delayed issue contract, the underwriter is 
authorized to solicit from institutional customers offers to purchase 
from the issuer, pursuant to contracts of the kind described above, and 
the agreement becomes binding at the underwriters' closing, subject to 
specified conditions. When securities are issued pursuant to the 
agreement, the purchase price includes accrued interest or dividends, 
and until they are issued to it, the purchaser does not, in the case of 
bonds, have rights under the trust indenture, or, in the case of 
preferred stocks, voting rights.
    (d) Securities sold pursuant to such arrangements are high quality 
debt issues (or their equivalent). The purchasers buy with a view to 
investment and do not resell or otherwise dispose of the contract prior 
to its completion. Delayed issue arrangements are not acceptable to 
issuers unless a substantial portion of an issue, not less than 10 
percent, is involved.
    (e) Sections 3(a) (13) and (14) of the Securities Exchange Act of 
1934 provide that an agreement to purchase is equivalent to a purchase, 
and an agreement to sell to a sale. The Board has hitherto expressed the 
view that credit is extended at the time when there is a firm agreement 
to extend such credit (1968 Federal Reserve Bulletin 328; 12 CFR 
207.101; ] 6800 Published Interpretations of the Board of Governors). 
Accordingly, in instances of the kind described above, the issuer may be 
regarded as extending credit to the institutional purchaser at the time 
of the underwriters' closing, when the obligations of both become fixed.
    (f) Section 220.7(a) of the Board's Regulation T (12 CFR 220.7(a)), 
with an exception not applicable here, forbids a creditor subject to 
that regulation to arrange for credit on terms on which the creditor 
could not itself extend the credit. Sections 220.4(c) (1) and (2) (12 
CFR 220.4(c) (1) and (2)) provide that a creditor may not sell 
securities to a customer except in good faith reliance upon an agreement 
that the customer will promptly, and in no event in more than 7 full 
business days, make full cash payment for the securities. Since the 
underwriters in question are creditors subject to the regulation, unless 
some specific exception applies, they are forbidden to arrange for the 
credit described above. This result follows because payment is not made 
until more than 7 full business days have passed from the time the 
credit is extended.
    (g) However, Sec. 220.4(c)(3) provides that:

    If the security when so purchased is an unissued security, the 
period applicable to the transaction under subparagraph (2) of this 
paragraph shall be 7 days after the date on which the security is made 
available by the issuer for delivery to purchasers.


[[Page 30]]


    (h) In interpreting Sec. 220.4(c)(3), the Board has stated that the 
purpose of the provision:

    * * * is to recognize the fact that, when an issue of securities is 
to be issued at some future fixed date, a security that is part of such 
issue can be purchased on a ``when-issued'' basis and that payment may 
reasonably be delayed until after such date of issue, subject to other 
basic conditions for transactions in a special cash account. (1962 
Federal Reserve Bulletin 1427; 12 CFR 220.118; ] 5996, Published 
Interpretations of the Board of Governors.)


In that situation, the Board distinguished the case of mutual fund 
shares, which technically are not issued until the certificate can be 
delivered by the transfer agent. The Board held that mutual fund shares 
must be regarded as issued at the time of purchase because they are:

    * * * essentially available upon purchase to the same extent as 
outstanding securities. The mechanics of their issuance and of the 
delivery of certificates are not significantly different from the 
mechanics of transfer and delivery of certificates for shares of 
outstanding securities, and the issuance of mutual fund shares is not a 
future event in the sense that would warrant the extension of the time 
for payment beyond that afforded in the case of outstanding securities. 
(ibid.)


The issuance of debt securities subject to delayed issue contracts, by 
contrast with that of mutual fund shares, which are in a status of 
continual underwriting, is a specific single event taking place at a 
future date fixed by the issuer with a view to its need for funds and 
the availability of those funds under current market conditions.
    (i) For the reasons stated above the Board concluded that the 
nonconvertible debt and preferred stock subject to delayed issue 
contracts of the kind described above should not be regarded as having 
been issued until delivered, pursuant to the agreement, to the 
institutional purchaser. This interpretation does not apply, of course, 
to fact situations different from that described in this section.

[36 FR 2777, Feb. 10, 1971]



Sec. 220.124  Installment sale of tax-shelter programs as ``arranging'' 
for credit.

    (a) The Board has been asked whether the sale by brokers and dealers 
of tax-shelter programs containing a provision that payment for the 
program may be made in installments would constitute ``arranging'' for 
credit in violation of this part 220. For the purposes of this 
interpretation, the term ``tax-shelter program'' means a program which 
is required to be registered pursuant to section 5 of the Securities Act 
of 1933 (15 U.S.C. section 77e), in which tax benefits, such as the 
ability to deduct substantial amounts of depreciation or oil exploration 
expenses, are made available to a person investing in the program. The 
programs may take various legal forms and can relate to a variety of 
industries including, but not limited to, oil and gas exploration 
programs, real estate syndications (except real estate investment 
trusts), citrus grove developments and cattle programs.
    (b) The most common type of tax-shelter program takes the form of a 
limited partnership. In the case of the programs under consideration, 
the investor would commit himself to purchase and the partnership would 
commit itself to sell the interests. The investor would be entitled to 
the benefits, and become subject to the risks of ownership at the time 
the contract is made, although the full purchase price is not then 
required to be paid. The balance of the purchase price after the 
downpayment usually is payable in installments which range from 1 to 10 
years depending on the program. Thus, the partnership would be extending 
credit to the purchaser until the time when the latter's contractual 
obligation has been fulfilled and the final payment made.
    (c) With an exception not applicable here, Sec. 220.7(a) of 
Regulation T provides that:

    A creditor [broker or dealer] may arrange for the extension or 
maintenance of credit to or for any customer of such creditor by any 
person upon the same terms and conditions as those upon which the 
creditor, under the provisions of this part, may himself extend or 
maintain such credit to such customer, but only such terms and 
conditions * * *


[[Page 31]]


    (d) In the case of credit for the purpose of purchasing or carrying 
securities (purpose credit), Sec. 220.8 of the regulation (the 
Supplement to Regulation T) does not permit any loan value to be given 
securities that are not registered on a national securities exchange, 
included on the Board's OTC Margin List, or exempted by statute from the 
regulation.
    (e) The courts have consistently held investment programs such as 
those described above to be ``securities'' for purpose of both the 
Securities Act of 1933 and the Securities Exchange Act of 1934. The 
courts have also held that the two statutes are to be construed 
together. Tax-shelter programs, accordingly, are securities for purposes 
of Regulation T. They also are not registered on a national securities 
exchange, included on the Board's OTC Margin List, or exempted by 
statute from the regulation.
    (f) Accordingly, the Board concludes that the sale by a broker/
dealer of tax-shelter programs containing a provision that payment for 
the program may be made in installments would constitute ``arranging'' 
for the extension of credit to purchase or carry securities in violation 
of the prohibitions of Sec. Sec. 220.7(a) and 220.8 of Regulation T.

[37 FR 6568, Mar. 31, 1972]



Sec. 220.125-220.126  [Reserved]



Sec. 220.127  Independent broker/dealers arranging credit in connection 
with the sale of insurance premium funding programs.

    (a) The Board's September 5, 1972, clarifying amendment to Sec. 
220.4(k) set forth that creditors who arrange credit for the acquisition 
of mutual fund shares and insurance are also permitted to sell mutual 
fund shares without insurance under the provisions of the special cash 
account. It should be understood, of course, that such account provides 
a relatively short credit period of up to 7 business days even with so-
called cash transactions. This amendment was in accordance with the 
Board's understanding in 1969, when the insurance premium funding 
provisions were adopted in Sec. 220.4(k), that firms engaged in a 
general securities business would not also be engaged in the sale and 
arranging of credit in connection with such insurance premium funding 
programs.
    (b) The 1972 amendment eliminated from Sec. 220.4(k) the 
requirement that, to be eligible for the provisions of the section, a 
creditor had to be the issuer, or a subsidiary or affiliate of the 
issuer, of programs which combine the acquisition of both mutual fund 
shares and insurance. Thus the amendment permits an independent broker/
dealer to sell such a program and to arrange for financing in that 
connection. In reaching such decision, the Board again relied upon the 
earlier understanding that independent broker/dealers who would sell 
such programs would not be engaged in transacting a general securities 
business.
    (c) In response to a specific view recently expressed, the Board 
agrees that under Regulation T:

    * * * a broker/dealer dealing in special insurance premium funding 
products can only extend credit in connection with such products or in 
connection with the sale of shares of registered investment companies 
under the cash accounts * * * (and) cannot engage in the general 
securities business or sell any securities other than shares * * * (in) 
registered investment companies through a cash account or any other 
manner involving the extension of credit.

    (d) There is a way, of course, as has been indicated, that an 
independent broker/dealer might be able to sell other than shares of 
registered investment companies without creating any conflict with the 
regulation. Such sales could be executed on a ``funds on hand'' basis 
and in the case of payment by check, would have to include the 
collection of such check. It is understood from industry sources, 
however, that few if any independent broker/dealers engage solely in a 
``fund on hand'' type of operation.

[38 FR 11066, May 4, 1973]



Sec. 220.128  Treatment of simultaneous long and short positions in 

the same margin account when put or call options or combinations 
thereof on such stock are 
          also outstanding in the account.

    (a) The Board was recently asked whether under Regulation T, 
``Credit by Brokers and Dealers'' (12 CFR part

[[Page 32]]

220), if there are simultaneous long and short positions in the same 
security in the same margin account (often referred to as a short sale 
``against the box''), such positions may be used to supply the place of 
the deposit of margin ordinarily required in connection with the 
guarantee by a creditor of a put or call option or combination thereof 
on such stock.
    (b) The applicable provisions of regulation T are Sec. 220.3(d)(3) 
and (5) and Sec. 220.3(g)(4) and (5) which provide as follows:

    (d) * * * the adjusted debit balance of a general account * * * 
shall be calculated by taking the sum of the following items:

                                * * * * *

    (3) The current market value of any securities (other than unissued 
securities) sold short in the general account plus, for each security 
(other than an exempted security), such amount as the board shall 
prescribe from time to time in Sec. 220.8(d) (the supplement to 
regulation T) as the margin required for such short sales, except that 
such amount so prescribed in such Sec. 220.8(d) need not be included 
when there are held in the general account * * * the same securities or 
securities exchangeable or convertible within 90 calendar days, without 
restriction other than the payment of money, into such securities sold 
short;

                                * * * * *

    (5) The amount of any margin customarily required by the creditor in 
connection with his endorsement or guarantee of any put, call, or other 
option;

                                * * * * *

    (g) * * * (4) Any transaction which serves to meet the requirements 
of paragraph (e) of this section or otherwise serves to permit any 
offsetting transaction in an account shall, to that extent, be 
unavailable to permit any other transaction in such account.
    (5) For the purposes of this part (regulation T), if a security has 
maximum loan value under paragraph (c)(1) of this section in a general 
account, or under Sec. 220.4(j) in a special convertible debt security 
account, a sale of the same security (even though not the same 
certificate) in such account shall be deemed to be a long sale and shall 
not be deemed to be or treated as a short sale.

    (c) Rule 431 of the New York Stock Exchange requires that a creditor 
obtain a minimum deposit of 25 percent of the current market value of 
the optioned stock in connection with his issuance or guarantee of a 
put, and at least 30 percent in the case of a call (and that such 
position be ``marked to the market''), but permits a short position in 
the stock to serve in lieu of the required deposit in the case of a put 
and a long position to serve in the case of a call. Thus, where the 
appropriate position is held in an account, that position may serve as 
the margin required by Sec. 220.3(d)(5).
    (d) In a short sale ``against the box,'' however, the customer is 
both long and short the same security. He may have established either 
position, properly margined, prior to taking the other, or he may have 
deposited fully paid securities in his margin account on the same day he 
makes a short sale of such securities. In either case, he will have 
directed his broker to borrow securities elsewhere in order to make 
delivery on the short sale rather than using his long position for this 
purpose (see also 17 CFR 240.3b-3).
    (e) Generally speaking, a customer makes a short sale ``against the 
box'' for tax reasons. Regulation T, however, provides in Sec. 220.3(g) 
that the two positions must be ``netted out'' for the purposes of the 
calculations required by the regulation. Thus, the board concludes that 
neither position would be available to serve as the deposit of margin 
required in connection with the endorsement by the creditor of an 
option.
    (f) A similar conclusion obtains under Sec. 220.3(d)(3). That 
section provides, in essence, that the margin otherwise required in 
connection with a short sale need not be included in the account if the 
customer has in the account a long position in the same security. In 
Sec. 220.3(g) (4), however, it is provided that ``[A]ny transaction 
which * * * serves to permit any offsetting transaction in an account 
shall, to that extent, be unavailable to permit any other transaction in 
such account.'' Thus, if a customer has, for example, a long position in 
a security and that long position has been used to supply the margin 
required in connection with

[[Page 33]]

a short sale of the same security, then the long position is unavailable 
to serve as the margin required in connection with the creditor's 
endorsement of a call option on such security.
    (g) A situation was also described in which a customer has purported 
to establish simultaneous offsetting long and short positions by 
executing a ``cross'' or wash sale of the security on the same day. In 
this situation, no change in the beneficial ownership of stock has taken 
place. Since there is no actual ``contra'' party to either transaction, 
and no stock has been borrowed or delivered to accomplish the short 
sale, such fictitious positions would have no value for purposes of the 
Board's margin regulations. Indeed, the adoption of such a scheme in 
connection with an overall strategy involving the issuance, endorsement, 
or guarantee of put or call options or combinations thereof appears to 
be manipulative and may have been employed for the purpose of 
circumventing the requirements of the regulations.

[38 FR 12098, May 9, 1973]



Sec. Sec. 220.129-220.130  [Reserved]



Sec. 220.131  Application of the arranging section to broker-dealer 
activities under SEC Rule 144A.

    (a) The Board has been asked whether the purchase by a broker-dealer 
of debt securities for resale in reliance on Rule 144A of the Securities 
and Exchange Commission (17 CFR 230.144A) \1\ may be considered an 
arranging of credit permitted as an ``investment banking service'' under 
Sec. 220.13(a) of Regulation T.
---------------------------------------------------------------------------

    \1\ Rule 144A, 17 CFR 230.144A, was originally published in the 
Federal Register at 55 FR 17933, April 30, 1990.
---------------------------------------------------------------------------

    (b) SEC Rule 144A provides a safe harbor exemption from the 
registration requirements of the Securities Act of 1933 for resales of 
restricted securities to qualified institutional buyers, as defined in 
the rule. In general, a qualified institutional buyer is an 
institutional investor that in the aggregate owns and invests on a 
discretionary basis at least $100 million in securities of issuers that 
are not affiliated with the buyer. Registered broker-dealers need only 
own and invest on a discretionary basis at least $10 million of 
securities in order to purchase as principal under the rule. Section 
4(2) of the Securities Act of 1933 provides an exemption from the 
registration requirements for ``transactions by an issuer not involving 
any public offering.'' Securities acquired in a transaction under 
section 4(2) cannot be resold without registration under the Act or an 
exemption therefrom. Rule 144A provides a safe harbor exemption for 
resales of such securities. Accordingly, broker-dealers that previously 
acted only as agents in intermediating between issuers and purchasers of 
privately-placed securities, due to the lack of such a safe harbor, now 
may purchase privately-placed securities from issuers as principal and 
resell such securities to ``qualified institutional buyers'' under Rule 
144A.
    (c) The Board has consistently treated the purchase of a privately-
placed debt security as an extension of credit subject to the margin 
regulations. If the issuer uses the proceeds to buy securities, the 
purchase of the privately-placed debt security by a creditor represents 
an extension of ``purpose credit'' to the issuer. Section 7(c) of the 
Securities Exchange Act of 1934 prohibits the extension of purpose 
credit by a creditor if the credit is unsecured, secured by collateral 
other than securities, or secured by any security (other than an 
exempted security) in contravention of Federal Reserve regulations. If a 
debt security sold pursuant to Rule 144A represents purpose credit and 
is not properly collateralized by securities, the statute and Regulation 
T can be viewed as preventing the broker-dealer from taking the security 
into inventory in spite of the fact that the broker-dealer intends to 
immediately resell the debt security.
    (d) Under Sec. 220.13 of Regulation T, a creditor may arrange 
credit it cannot itself extend if the arrangement is an ``investment 
banking service'' and the credit does not violate Regulations G and U. 
Investment banking services are defined to include, but not be limited 
to, ``underwritings, private placements, and advice and other services 
in connection with exchange offers, mergers, or acquisitions, except for

[[Page 34]]

underwritings that involve the public distribution of an equity security 
with installment or other deferred-payment provisions.'' To comply with 
Regulations G and U where the proceeds of debt securities sold under 
Rule 144A may be used to purchase or carry margin stock and the debt 
securities are secured in whole or in part, directly or indirectly by 
margin stock (see 12 CFR 207.2(f), 207.112, and 221.2(g)), the margin 
requirements of the regulations must be met.
    (e) The SEC's objective in adopting Rule 144A is to achieve ``a more 
liquid and efficient institutional resale market for unregistered 
securities.'' To further this objective, the Board believes it is 
appropriate for Regulation T purposes to characterize the participation 
of broker-dealers in this unique and limited market as an ``investment 
banking service.'' The Board is therefore of the view that the purchase 
by a creditor of debt securities for resale pursuant to SEC Rule 144A 
may be considered an investment banking service under the arranging 
section of Regulation T. The market-making activities of broker-dealers 
who hold themselves out to other institutions as willing to buy and sell 
Rule 144A securities on a regular and continuous basis may also be 
considered an arranging of credit permissible under Sec. 220.13(a) of 
Regulation T.

[Reg. T, 55 FR 29566, July 20, 1990]



Sec. 220.132  Credit to brokers and dealers.

    For text of this interpretation, see Sec. 207.114 of this 
subchapter.

[Reg. T, 61 FR 60167, Nov. 26, 1996]



PART 221_CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR 

THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)
--Table of Contents




Sec.
221.1 Authority, purpose, and scope.
221.2 Definitions.
221.3 General requirements.
221.4 Employee stock option, purchase, and ownership plans.
221.5 Special purpose loans to brokers and dealers.
221.6 Exempted transactions.
221.7 Supplement: Maximum loan value of margin stock and other 
          collateral.

                             Interpretations

221.101 Determination and effect of purpose of loan.
221.102 Application to committed credit where funds are disbursed 
          thereafter.
221.103 Loans to brokers or dealers.
221.104 Federal credit unions.
221.105 Arranging for extensions of credit to be made by a bank.
221.106 Reliance in ``good faith'' on statement of purpose of loan.
221.107 Arranging loan to purchase open-end investment company shares.
221.108 Effect of registration of stock subsequent to making of loan.
221.109 Loan to open-end investment company.
221.110 Questions arising under this part.
221.111 Contribution to joint venture as extension of credit when the 
          contribution is disproportionate to the contributor's share in 
          the venture's profits or losses.
221.112 Loans by bank in capacity as trustee.
221.113 Loan which is secured indirectly by stock.
221.114 Bank loans to purchase stock of American Telephone and Telegraph 
          Company under Employees' Stock Plan.
221.115 Accepting a purpose statement through the mail without benefit 
          of face-to-face interview.
221.116 Bank loans to replenish working capital used to purchase mutual 
          fund shares.
221.117 When bank in ``good faith'' has not relied on stock as 
          collateral.
221.118 Bank arranging for extension of credit by corporation.
221.119 Applicability of plan-lender provisions to financing of stock 
          options and stock purchase rights qualified or restricted 
          under Internal Revenue Code.
221.120 Allocation of stock collateral to purpose and nonpurpose credits 
          to same customer.
221.121 Extension of credit in certain stock option and stock purchase 
          plans.
221.122 Applicability of margin requirements to credit in connection 
          with Insurance Premium Funding Programs.
221.123 Combined credit for exercising employee stock options and paying 
          income taxes incurred as a result of such exercise.
221.124 Purchase of debt securities to finance corporate takeovers.
221.125 Credit to brokers and dealers.

    Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.

[[Page 35]]


    Source: Reg. U, 63 FR 2827, Jan. 16, 1998, unless otherwise noted.



Sec. 221.1  Authority, purpose, and scope.

    (a) Authority. Regulation U (this part) is issued by the Board of 
Governors of the Federal Reserve System (the Board) pursuant to the 
Securities Exchange Act of 1934 (the Act) (15 U.S.C. 78a et seq.).
    (b) Purpose and scope. (1) This part imposes credit restrictions 
upon persons other than brokers or dealers (hereinafter lenders) that 
extend credit for the purpose of buying or carrying margin stock if the 
credit is secured directly or indirectly by margin stock. Lenders 
include ``banks'' (as defined in Sec. 221.2) and other persons who are 
required to register with the Board under Sec. 221.3(b). Lenders may 
not extend more than the maximum loan value of the collateral securing 
such credit, as set by the Board in Sec. 221.7 (the Supplement).
    (2) This part does not apply to clearing agencies regulated by the 
Securities and Exchange Commission or the Commodity Futures Trading 
Commission that accept deposits of margin stock in connection with:
    (i) The issuance of, or guarantee of, or the clearance of 
transactions in, any security (including options on any security, 
certificate of deposit, securities index or foreign currency); or
    (ii) The guarantee of contracts for the purchase or sale of a 
commodity for future delivery or options on such contracts.
    (3) This part does not apply to credit extended to an exempted 
borrower.
    (c) Availability of forms. The forms referenced in this part are 
available from the Federal Reserve Banks.



Sec. 221.2  Definitions.

    The terms used in this part have the meanings given them in section 
3(a) of the Act or as defined in this section as follows:
    Affiliate means:
    (1) For banks:
    (i) Any bank holding company of which a bank is a subsidiary within 
the meaning of the Bank Holding Company Act of 1956, as amended (12 
U.S.C. 1841(d));
    (ii) Any other subsidiary of such bank holding company; and
    (iii) Any other corporation, business trust, association, or other 
similar organization that is an affiliate as defined in section 2(b) of 
the Banking Act of 1933 (12 U.S.C. 221a(c));
    (2) For nonbank lenders, affiliate means any person who, directly or 
indirectly, through one or more intermediaries, controls, or is 
controlled by, or is under common control with the lender.
    Bank. (1) Bank. Has the meaning given to it in section 3(a)(6) of 
the Act (15 U.S.C. 78c(a)(6)) and includes:
    (i) Any subsidiary of a bank;
    (ii) Any corporation organized under section 25(a) of the Federal 
Reserve Act (12 U.S.C. 611); and
    (iii) Any agency or branch of a foreign bank located within the 
United States.
    (2) Bank does not include:
    (i) Any savings and loan association;
    (ii) Any credit union;
    (iii) Any lending institution that is an instrumentality or agency 
of the United States; or
    (iv) Any member of a national securities exchange.
    Carrying credit is credit that enables a customer to maintain, 
reduce, or retire indebtedness originally incurred to purchase a 
security that is currently a margin stock.
    Current market value of:
    (1) A security means:
    (i) If quotations are available, the closing sale price of the 
security on the preceding business day, as appearing on any regularly 
published reporting or quotation service; or
    (ii) If there is no closing sale price, the lender may use any 
reasonable estimate of the market value of the security as of the close 
of business on the preceding business day; or
    (iii) If the credit is used to finance the purchase of the security, 
the total cost of purchase, which may include any commissions charged.
    (2) Any other collateral means a value determined by any reasonable 
method.
    Customer excludes an exempted borrower and includes any person or 
persons acting jointly, to or for whom a lender extends or maintains 
credit.

[[Page 36]]

    Examining authority means:
    (1) The national securities exchange or national securities 
association of which a broker or dealer is a member; or
    (2) If a member of more than one self-regulatory organization, the 
organization designated by the Securities and Exchange Commission as the 
examining authority for the broker or dealer.
    Exempted borrower means a member of a national securities exchange 
or a registered broker or dealer, a substantial portion of whose 
business consists of transactions with persons other than brokers or 
dealers, and includes a borrower who:
    (1) Maintains at least 1000 active accounts on an annual basis for 
persons other than brokers, dealers, and persons associated with a 
broker or dealer;
    (2) Earns at least $10 million in gross revenues on an annual basis 
from transactions with persons other than brokers, dealers, and persons 
associated with a broker or dealer; or
    (3) Earns at least 10 percent of its gross revenues on an annual 
basis from transactions with persons other than brokers, dealers, and 
persons associated with a broker-dealer.
    Good faith with respect to:
    (1) The loan value of collateral means that amount (not exceeding 
100 per cent of the current market value of the collateral) which a 
lender, exercising sound credit judgment, would lend, without regard to 
the customer's other assets held as collateral in connection with 
unrelated transactions.
    (2) Making a determination or accepting a statement concerning a 
borrower means that the lender or its duly authorized representative is 
alert to the circumstances surrounding the credit, and if in possession 
of information that would cause a prudent person not to make the 
determination or accept the notice or certification without inquiry, 
investigates and is satisfied that it is correct;
    In the ordinary course of business means occurring or reasonably 
expected to occur in carrying out or furthering any business purpose, or 
in the case of an individual, in the course of any activity for profit 
or the management or preservation of property.
    Indirectly secured. (1) Includes any arrangement with the customer 
under which:
    (i) The customer's right or ability to sell, pledge, or otherwise 
dispose of margin stock owned by the customer is in any way restricted 
while the credit remains outstanding; or
    (ii) The exercise of such right is or may be cause for accelerating 
the maturity of the credit.
    (2) Does not include such an arrangement if:
    (i) After applying the proceeds of the credit, not more than 25 
percent of the value (as determined by any reasonable method) of the 
assets subject to the arrangement is represented by margin stock;
    (ii) It is a lending arrangement that permits accelerating the 
maturity of the credit as a result of a default or renegotiation of 
another credit to the customer by another lender that is not an 
affiliate of the lender;
    (iii) The lender holds the margin stock only in the capacity of 
custodian, depositary, or trustee, or under similar circumstances, and, 
in good faith, has not relied upon the margin stock as collateral; or
    (iv) The lender, in good faith, has not relied upon the margin stock 
as collateral in extending or maintaining the particular credit.
    Lender means:
    (1) Any bank; or
    (2) Any person subject to the registration requirements of this 
part.
    Margin stock means:
    (1) Any equity security registered or having unlisted trading 
privileges on a national securities exchange;
    (2) Any OTC security designated as qualified for trading in the 
National Market System under a designation plan approved by the 
Securities and Exchange Commission (NMS security);
    (3) Any debt security convertible into a margin stock or carrying a 
warrant or right to subscribe to or purchase a margin stock;
    (4) Any warrant or right to subscribe to or purchase a margin stock; 
or
    (5) Any security issued by an investment company registered under 
section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other 
than:

[[Page 37]]

    (i) A company licensed under the Small Business Investment Company 
Act of 1958, as amended (15 U.S.C. 661); or
    (ii) A company which has at least 95 percent of its assets 
continuously invested in exempted securities (as defined in 15 U.S.C. 
78c(a)(12)); or
    (iii) A company which issues face-amount certificates as defined in 
15 U.S.C. 80a-2(a)(15), but only with respect of such securities; or
    (iv) A company which is considered a money market fund under SEC 
Rule 2a-7 (17 CFR 270.2a-7).
    Maximum loan value is the percentage of current market value 
assigned by the Board under Sec. 221.7 (the Supplement) to specified 
types of collateral. The maximum loan value of margin stock is stated as 
a percentage of its current market value. Puts, calls and combinations 
thereof that do not qualify as margin stock have no loan value. All 
other collateral has good faith loan value.
    Nonbank lender means any person subject to the registration 
requirements of this part.
    Purpose credit is any credit for the purpose, whether immediate, 
incidental, or ultimate, of buying or carrying margin stock.



Sec. 221.3  General requirements.

    (a) Extending, maintaining, and arranging credit--(1) Extending 
credit. No lender, except a plan-lender, as defined in Sec. 221.4(a), 
shall extend any purpose credit, secured directly or indirectly by 
margin stock, in an amount that exceeds the maximum loan value of the 
collateral securing the credit.
    (2) Maintaining credit. A lender may continue to maintain any credit 
initially extended in compliance with this part, regardless of:
    (i) Reduction in the customer's equity resulting from change in 
market prices;
    (ii) Change in the maximum loan value prescribed by this part; or
    (iii) Change in the status of the security (from nonmargin to 
margin) securing an existing purpose credit.
    (3) Arranging credit. No lender may arrange for the extension or 
maintenance of any purpose credit, except upon the same terms and 
conditions under which the lender itself may extend or maintain purpose 
credit under this part.
    (b) Registration of nonbank lenders; termination of registration; 
annual report--(1) Registration. Every person other than a person 
subject to part 220 of this chapter or a bank who, in the ordinary 
course of business, extends or maintains credit secured, directly or 
indirectly, by any margin stock shall register on Federal Reserve Form 
FR G-1 (OMB control number 7100-0011) within 30 days after the end of 
any calendar quarter during which:
    (i) The amount of credit extended equals $200,000 or more; or
    (ii) The amount of credit outstanding at any time during that 
calendar quarter equals $500,000 or more.
    (2) Deregistration. A registered nonbank lender may apply to 
terminate its registration, by filing Federal Reserve Form FR G-2 (OMB 
control number 7100-0011), if the lender has not, during the preceding 
six calendar months, had more than $200,000 of such credit outstanding. 
Registration shall be deemed terminated when the application is approved 
by the Board.
    (3) Annual report. Every registered nonbank lender shall, within 30 
days following June 30 of every year, file Form FR G-4 (OMB control 
number 7100-0011).
    (4) Where to register and file applications and reports. 
Registration statements, applications to terminate registration, and 
annual reports shall be filed with the Federal Reserve Bank of the 
district in which the principal office of the lender is located.
    (c) Purpose statement--(1) General rule--(i) Banks. Except for 
credit extended under paragraph (c)(2) of this section, whenever a bank 
extends credit secured directly or indirectly by any margin stock, in an 
amount exceeding $100,000, the bank shall require its customer to 
execute Form FR U-1 (OMB No. 7100-0115), which shall be signed and 
accepted by a duly authorized officer of the bank acting in good faith.
    (ii) Nonbank lenders. Except for credit extended under paragraph 
(c)(2) of this section or Sec. 221.4, whenever a nonbank lender extends 
credit secured directly or indirectly by any margin stock, the

[[Page 38]]

nonbank lender shall require its customer to execute Form FR G-3 (OMB 
control number 7100-0018), which shall be signed and accepted by a duly 
authorized representative of the nonbank lender acting in good faith.
    (2) Purpose statement for revolving-credit or multiple-draw 
agreements or financing of securities purchases on a payment-against-
delivery basis--(i) Banks. If a bank extends credit, secured directly or 
indirectly by any margin stock, in an amount exceeding $100,000, under a 
revolving-credit or other multiple-draw agreement, Form FR U-1 must be 
executed at the time the credit arrangement is originally established 
and must be amended as described in paragraph (c)(2)(iv) of this section 
for each disbursement if all of the collateral for the agreement is not 
pledged at the time the agreement is originally established.
    (ii) Nonbank lenders. If a nonbank lender extends credit, secured 
directly or indirectly by any margin stock, under a revolving-credit or 
other multiple-draw agreement, Form FR G-3 must be executed at the time 
the credit arrangement is originally established and must be amended as 
described in paragraph (c)(2)(iv) of this section for each disbursement 
if all of the collateral for the agreement is not pledged at the time 
the agreement is originally established.
    (iii) Collateral. If a purpose statement executed at the time the 
credit arrangement is initially made indicates that the purpose is to 
purchase or carry margin stock, the credit will be deemed in compliance 
with this part if:
    (A) The maximum loan value of the collateral at least equals the 
aggregate amount of funds actually disbursed; or
    (B) At the end of any day on which credit is extended under the 
agreement, the lender calls for additional collateral sufficient to 
bring the credit into compliance with Sec. 221.7 (the Supplement).
    (iv) Amendment of purpose statement. For any purpose credit 
disbursed under the agreement, the lender shall obtain and attach to the 
executed Form FR U-1 or FR G-3 a current list of collateral which 
adequately supports all credit extended under the agreement.
    (d) Single credit rule. (1) All purpose credit extended to a 
customer shall be treated as a single credit, and all the collateral 
securing such credit shall be considered in determining whether or not 
the credit complies with this part, except that syndicated loans need 
not be aggregated with other unrelated purpose credit extended by the 
same lender.
    (2) A lender that has extended purpose credit secured by margin 
stock may not subsequently extend unsecured purpose credit to the same 
customer unless the combined credit does not exceed the maximum loan 
value of the collateral securing the prior credit.
    (3) If a lender extended unsecured purpose credit to a customer 
prior to the extension of purpose credit secured by margin stock, the 
credits shall be combined and treated as a single credit solely for the 
purposes of the withdrawal and substitution provision of paragraph (f) 
of this section.
    (4) If a lender extends purpose credit secured by any margin stock 
and non-purpose credit to the same customer, the lender shall treat the 
credits as two separate loans and may not rely upon the required 
collateral securing the purpose credit for the nonpurpose credit.
    (e) Exempted borrowers. (1) An exempted borrower that has been in 
existence for less than one year may meet the definition of exempted 
borrower based on a six-month period.
    (2) Once a member of a national securities exchange or registered 
broker or dealer ceases to qualify as an exempted borrower, it shall 
notify its lenders of this fact. Any new extensions of credit to such a 
borrower, including rollovers, renewals, and additional draws on 
existing lines of credit, are subject to the provisions of this part.
    (f) Withdrawals and substitutions. (1) A lender may permit any 
withdrawal or substitution of cash or collateral by the customer if the 
withdrawal or substitution would not:
    (i) Cause the credit to exceed the maximum loan value of the 
collateral; or
    (ii) Increase the amount by which the credit exceeds the maximum 
loan value of the collateral.

[[Page 39]]

    (2) For purposes of this section, the maximum loan value of the 
collateral on the day of the withdrawal or substitution shall be used.
    (g) Exchange offers. To enable a customer to participate in a 
reorganization, recapitalization or exchange offer that is made to 
holders of an issue of margin stock, a lender may permit substitution of 
the securities received. A nonmargin, nonexempted security acquired in 
exchange for a margin stock shall be treated as if it is margin stock 
for a period of 60 days following the exchange.
    (h) Renewals and extensions of maturity. A renewal or extension of 
maturity of a credit need not be considered a new extension of credit if 
the amount of the credit is increased only by the addition of interest, 
service charges, or taxes with respect to the credit.
    (i) Transfers of credit. (1) A transfer of a credit between 
customers or between lenders shall not be considered a new extension of 
credit if:
    (i) The original credit was extended by a lender in compliance with 
this part or by a lender subject to part 207 of this chapter in effect 
prior to April 1, 1998, (See part 207 appearing in the 12 CFR parts 200 
to 219 edition revised as of January 1, 1997), in a manner that would 
have complied with this part;
    (ii) The transfer is not made to evade this part;
    (iii) The amount of credit is not increased; and
    (iv) The collateral for the credit is not changed.
    (2) Any transfer between customers at the same lender shall be 
accompanied by a statement by the transferor customer describing the 
circumstances giving rise to the transfer and shall be accepted and 
signed by a representative of the lender acting in good faith. The 
lender shall keep such statement with its records of the transferee 
account.
    (3) When a transfer is made between lenders, the transferee shall 
obtain a copy of the Form FR U-1 or Form FR G-3 originally filed with 
the transferor and retain the copy with its records of the transferee 
account. If no form was originally filed with the transferor, the 
transferee may accept in good faith a statement from the transferor 
describing the purpose of the loan and the collateral securing it.
    (j) Action for lender's protection. Nothing in this part shall 
require a bank to waive or forego any lien or prevent a bank from taking 
any action it deems necessary in good faith for its protection.
    (k) Mistakes in good faith. A mistake in good faith in connection 
with the extension or maintenance of credit shall not be a violation of 
this part.



Sec. 221.4  Employee stock option, purchase, and ownership plans.

    (a) Plan-lender; eligible plan. (1) Plan-lender means any 
corporation, (including a wholly-owned subsidiary, or a lender that is a 
thrift organization whose membership is limited to employees and former 
employees of the corporation, its subsidiaries or affiliates) that 
extends or maintains credit to finance the acquisition of margin stock 
of the corporation, its subsidiaries or affiliates under an eligible 
plan.
    (2) Eligible plan. An eligible plan means any employee stock option, 
purchase, or ownership plan adopted by a corporation and approved by its 
stockholders that provides for the purchase of margin stock of the 
corporation, its subsidiaries, or affiliates.
    (b) Credit to exercise rights under or finance an eligible plan. (1) 
If a plan-lender extends or maintains credit under an eligible plan, any 
margin stock that directly or indirectly secured that credit shall have 
good faith loan value.
    (2) Credit extended under this section shall be treated separately 
from credit extended under any other section of this part except Sec. 
221.3(b)(1) and (b)(3).
    (c) Credit to ESOPs. A nonbank lender may extend and maintain 
purpose credit without regard to the provisions of this part, except for 
Sec. 221.3(b)(1) and (b)(3), if such credit is extended to an employee 
stock ownership plan (ESOP) qualified under section 401 of the Internal 
Revenue Code, as amended (26 U.S.C. 401).

[[Page 40]]



Sec. 221.5  Special purpose loans to brokers and dealers.

    (a) Special purpose loans. A lender may extend and maintain purpose 
credit to brokers and dealers without regard to the limitations set 
forth in Sec. Sec. 221.3 and 221.7, if the credit is for any of the 
specific purposes and meets the conditions set forth in paragraph (c) of 
this section.
    (b) Written notice. Prior to extending credit for more than a day 
under this section, the lender shall obtain and accept in good faith a 
written notice or certification from the borrower as to the purposes of 
the loan. The written notice or certification shall be evidence of 
continued eligibility for the special credit provisions until the 
borrower notifies the lender that it is no longer eligible or the lender 
has information that would cause a reasonable person to question whether 
the credit is being used for the purpose specified.
    (c) Types of special purpose credit. The types of credit that may be 
extended and maintained on a good faith basis are as follows:
    (1) Hypothecation loans. Credit secured by hypothecated customer 
securities that, according to written notice received from the broker or 
dealer, may be hypothecated by the broker or dealer under Securities and 
Exchange Commission (SEC) rules.
    (2) Temporary advances in payment-against-delivery transactions. 
Credit to finance the purchase or sale of securities for prompt 
delivery, if the credit is to be repaid upon completion of the 
transaction.
    (3) Loans for securities in transit or transfer. Credit to finance 
securities in transit or surrendered for transfer, if the credit is to 
be repaid upon completion of the transaction.
    (4) Intra-day loans. Credit to enable a broker or dealer to pay for 
securities, if the credit is to be repaid on the same day it is 
extended.
    (5) Arbitrage loans. Credit to finance proprietary or customer bona 
fide arbitrage transactions. For the purpose of this section bona fide 
arbitrage means:
    (i) Purchase or sale of a security in one market, together with an 
offsetting sale or purchase of the same security in a different market 
at nearly the same time as practicable, for the purpose of taking 
advantage of a difference in prices in the two markets; or
    (ii) Purchase of a security that is, without restriction other than 
the payment of money, exchangeable or convertible within 90 calendar 
days of the purchase into a second security, together with an offsetting 
sale of the second security at or about the same time, for the purpose 
of taking advantage of a concurrent disparity in the price of the two 
securities.
    (6) Market maker and specialist loans. Credit to a member of a 
national securities exchange or registered broker or dealer to finance 
its activities as a market maker or specialist.
    (7) Underwriter loans. Credit to a member of a national securities 
exchange or registered broker or dealer to finance its activities as an 
underwriter.
    (8) Emergency loans. Credit that is essential to meet emergency 
needs of the broker-dealer business arising from exceptional 
circumstances.
    (9) Capital contribution loans. Capital contribution loans include:
    (i) Credit that Board has exempted by order upon a finding that the 
exemption is necessary or appropriate in the public interest or for the 
protection of investors, provided the Securities Investor Protection 
Corporation certifies to the Board that the exemption is appropriate; or
    (ii) Credit to a customer for the purpose of making a subordinated 
loan or capital contribution to a broker or dealer in conformity with 
the SEC's net capital rules and the rules of the broker's or dealer's 
examining authority, provided:
    (A) The customer reduces the credit by the amount of any reduction 
in the loan or contribution to the broker or dealer; and
    (B) The credit is not used to purchase securities issued by the 
broker or dealer in a public distribution.
    (10) Credit to clearing brokers or dealers. Credit to a member of a 
national securities exchange or registered broker or dealer whose 
nonproprietary business is limited to financing and carrying the 
accounts of registered market makers.

[[Page 41]]



Sec. 221.6  Exempted transactions.

    A bank may extend and maintain purpose credit without regard to the 
provisions of this part if such credit is extended:
    (a) To any bank;
    (b) To any foreign banking institution;
    (c) Outside the United States;
    (d) To an employee stock ownership plan (ESOP) qualified under 
section 401 of the Internal Revenue Code (26 U.S.C. 401);
    (e) To any plan lender as defined in Sec. 221.4(a) to finance an 
eligible plan as defined in Sec. 221.4(b), provided the bank has no 
recourse to any securities purchased pursuant to the plan;
    (f) To any customer, other than a broker or dealer, to temporarily 
finance the purchase or sale of securities for prompt delivery, if the 
credit is to be repaid in the ordinary course of business upon 
completion of the transaction and is not extended to enable the customer 
to pay for securities purchased in an account subject to part 220 of 
this chapter;
    (g) Against securities in transit, if the credit is not extended to 
enable the customer to pay for securities purchased in an account 
subject to part 220 of this chapter; or
    (h) To enable a customer to meet emergency expenses not reasonably 
foreseeable, and if the extension of credit is supported by a statement 
executed by the customer and accepted and signed by an officer of the 
bank acting in good faith. For this purpose, emergency expenses include 
expenses arising from circumstances such as the death or disability of 
the customer, or some other change in circumstances involving extreme 
hardship, not reasonably foreseeable at the time the credit was 
extended. The opportunity to realize monetary gain or to avoid loss is 
not a ``change in circumstances'' for this purpose.



Sec. 221.7  Supplement: Maximum loan value of margin stock and other 
collateral.

    (a) Maximum loan value of margin stock. The maximum loan value of 
any margin stock is fifty per cent of its current market value.
    (b) Maximum loan value of nonmargin stock and all other collateral. 
The maximum loan value of nonmargin stock and all other collateral 
except puts, calls, or combinations thereof is their good faith loan 
value.
    (c) Maximum loan value of options. Except for options that qualify 
as margin stock, puts, calls, and combinations thereof have no loan 
value.

                             Interpretations



Sec. 221.101  Determination and effect of purpose of loan.

    (a) Under this part the original purpose of a loan is controlling. 
In other words, if a loan originally is not for the purpose of 
purchasing or carrying margin stock, changes in the collateral for the 
loan do not change its exempted character.
    (b) However, a so-called increase in the loan is necessarily on an 
entirely different basis. So far as the purpose of the credit is 
concerned, it is a new loan, and the question of whether or not it is 
subject to this part must be determined accordingly.
    (c) Certain facts should also be mentioned regarding the 
determination of the purpose of a loan. Section 221.3(c) provides in 
that whenever a lender is required to have its customer execute a 
``Statement of Purpose for an Extension of Credit Secured by Margin 
Stock,'' the statement must be accepted by the lender ``acting in good 
faith.'' The requirement of ``good faith'' is of vital importance here. 
Its application will necessarily vary with the facts of the particular 
case, but it is clear that the bank must be alert to the circumstances 
surrounding the loan. For example, if the loan is to be made to a 
customer who is not a broker or dealer in securities, but such a broker 
or dealer is to deliver margin stock to secure the loan or is to receive 
the proceeds of the loan, the bank would be put on notice that the loan 
would probably be subject to this part. It could not accept in good 
faith a statement to the contrary without obtaining a reliable and 
satisfactory explanation of the situation.
    (d) Furthermore, the purpose of a loan means just that. It cannot be 
altered by some temporary application of

[[Page 42]]

the proceeds. For example, if a borrower is to purchase Government 
securities with the proceeds of a loan, but is soon thereafter to sell 
such securities and replace them with margin stock, the loan is clearly 
for the purpose of purchasing or carrying margin stock.



Sec. 221.102  Application to committed credit where funds are disbursed 
thereafter.

    The Board has concluded that the date a commitment to extend credit 
becomes binding should be regarded as the date when the credit is 
extended, since:
    (a) On that date the parties should be aware of law and facts 
surrounding the transaction; and
    (b) Generally, the date of contract is controlling for purposes of 
margin regulations and Federal securities law, regardless of the 
delivery of cash or securities.



Sec. 221.103  Loans to brokers or dealers.

    Questions have arisen as to the adequacy of statements received by 
lending banks under Sec. 221.3(c), ``Purpose Statement,'' in the case 
of loans to brokers or dealers secured by margin stock where the 
proceeds of the loans are to be used to finance customer transactions 
involving the purchasing or carrying of margin stock. While some such 
loans may qualify for exemption under Sec. Sec. 221.1(b)(2), 221.4, 
221.5 or 221.6, unless they do qualify for such an exemption they are 
subject to this part. For example, if a loan so secured is made to a 
broker to furnish cash working capital for the conduct of his brokerage 
business (i.e., for purchasing and carrying securities for the account 
of customers), the maximum loan value prescribed in Sec. 221.7 (the 
Supplement) would be applicable unless the loan should be of a kind 
exempted under this part. This result would not be affected by the fact 
that the margin stock given as security for the loan was or included 
margin stock owned by the brokerage firm. In view of the foregoing, the 
statement referred to in Sec. 221.3(c) which the lending bank must 
accept in good faith in determining the purpose of the loan would be 
inadequate if the form of statement accepted or used by the bank failed 
to call for answers which would indicate whether or not the loan was of 
the kind discussed elsewhere in this section.



Sec. 221.104  Federal credit unions.

    For text of the interpretation on Federal credit unions, see 12 CFR 
220.110.



Sec. 221.105  Arranging for extensions of credit to be made by a bank.

    For text of the interpretation on Arranging for extensions of credit 
to be made by a bank, see 12 CFR 220.111.



Sec. 221.106  Reliance in ``good faith'' on statement of purpose of loan.

    (a) Certain situations have arisen from time to time under this part 
wherein it appeared doubtful that, in the circumstances, the lending 
banks may have been entitled to rely upon the statements accepted by 
them in determining whether the purposes of certain loans were such as 
to cause the loans to be not subject to the part.
    (b) The use by a lending bank of a statement in determining the 
purpose of a particular loan is, of course, provided for by Sec. 
221.3(c). However, under that paragraph a lending bank may accept such 
statement only if it is ``acting in good faith.'' As the Board stated in 
the interpretation contained in Sec. 221.101, the ``requirement of 
`good faith' is of vital importance''; and, to fulfill such requirement, 
``it is clear that the bank must be alert to the circumstances 
surrounding the loan.''
    (c) Obviously, such a statement would not be accepted by the bank in 
``good faith'' if at the time the loan was made the bank had knowledge, 
from any source, of facts or circumstances which were contrary to the 
natural purport of the statement, or which were sufficient reasonably to 
put the bank on notice of the questionable reliability or completeness 
of the statement.
    (d) Furthermore, the same requirement of ``good faith'' is to be 
applied whether the statement accepted by the bank is signed by the 
borrower or by an officer of the bank. In either case, ``good faith'' 
requires the exercise of special diligence in any instance in which the 
borrower is not personally

[[Page 43]]

known to the bank or to the officer who processes the loan.
    (e) The interpretation set forth in Sec. 221.101 contains an 
example of the application of the ``good faith'' test. There it was 
stated that ``if the loan is to be made to a customer who is not a 
broker or dealer in securities, but such a broker or dealer is to 
deliver margin stock to secure the loan or is to receive the proceeds of 
the loan, the bank would be put on notice that the loan would probably 
be subject to this part. It could not accept in good faith a statement 
to the contrary without obtaining a reliable and satisfactory 
explanation of the situation''.
    (f) Moreover, and as also stated by the interpretation contained in 
Sec. 221.101, the purpose of a loan, of course, ``cannot be altered by 
some temporary application of the proceeds. For example, if a borrower 
is to purchase Government securities with the proceeds of a loan, but is 
soon thereafter to sell such securities and replace them with margin 
stock, the loan is clearly for the purpose of purchasing or carrying 
margin stock''. The purpose of a loan therefore, should not be 
determined upon a narrow analysis of the immediate use to which the 
proceeds of the loan are put. Accordingly, a bank acting in ``good 
faith'' should carefully scrutinize cases in which there is any 
indication that the borrower is concealing the true purpose of the loan, 
and there would be reason for special vigilance if margin stock is 
substituted for bonds or nonmargin stock soon after the loan is made, or 
on more than one occasion.
    (g) Similarly, the fact that a loan made on the borrower's signature 
only, for example, becomes secured by margin stock shortly after the 
disbursement of the loan usually would afford reasonable grounds for 
questioning the bank's apparent reliance upon merely a statement that 
the purpose of the loan was not to purchase or carry margin stock.
    (h) The examples in this section are, of course, by no means 
exhaustive. They simply illustrate the fundamental fact that no 
statement accepted by a lender is of any value for the purposes of this 
part unless the lender accepting the statement is ``acting in good 
faith'', and that ``good faith'' requires, among other things, 
reasonable diligence to learn the truth.



Sec. 221.107  Arranging loan to purchase open-end investment company 
shares.

    For text of the interpretation on Arranging loan to purchase open-
end investment company shares, see 12 CFR 220.112.



Sec. 221.108  Effect of registration of stock subsequent to making of loan.

    (a) The Board recently was asked whether a loan by a bank to enable 
the borrower to purchase a newly issued nonmargin stock during the 
initial over-the-counter trading period prior to the stock becoming 
registered (listed) on a national securities exchange would be subject 
to this part. The Board replied that, until such stock qualifies as 
margin stock, this would not be applicable to such a loan.
    (b) The Board has now been asked what the position of the lending 
bank would be under this part if, after the date on which the stock 
should become registered, such bank continued to hold a loan of the kind 
just described. It is assumed that the loan was in an amount greater 
than the maximum loan value for the collateral specified in this part.
    (c) If the stock should become registered, the loan would then be 
for the purpose of purchasing or carrying a margin stock, and, if 
secured directly or indirectly by any margin stock, would be subject to 
this part as from the date the stock was registered. Under this part, 
this does not mean that the bank would have to obtain reduction of the 
loan in order to reduce it to an amount no more than the specified 
maximum loan value. It does mean, however, that so long as the loan 
balance exceeded the specified maximum loan value, the bank could not 
permit any withdrawals or substitutions of collateral that would 
increase such excess; nor could the bank increase the amount of the loan 
balance unless there was provided additional collateral having a maximum 
loan value at least equal to the amount of the increase. In other words, 
as from the date the stock should become a

[[Page 44]]

margin stock, the loan would be subject to this part in exactly the same 
way, for example, as a loan subject to this part that became under-
margined because of a decline in the current market value of the loan 
collateral or because of a decrease by the Board in the maximum loan 
value of the loan collateral.



Sec. 221.109  Loan to open-end investment company.

    In response to a question regarding a possible loan by a bank to an 
open-end investment company that customarily purchases stocks registered 
on a national securities exchange, the Board stated that in view of the 
general nature and operations of such a company, any loan by a bank to 
such a company should be presumed to be subject to this part as a loan 
for the purpose of purchasing or carrying margin stock. This would not 
be altered by the fact that the open-end company had used, or proposed 
to use, its own funds or proceeds of the loan to redeem some of its own 
shares, since mere application of the proceeds of a loan to some other 
use cannot prevent the ultimate purpose of a loan from being to purchase 
or carry registered stocks.



Sec. 221.110  Questions arising under this part.

    (a) This part governs ``any purpose credit'' extended by a lender 
``secured directly or indirectly by margin stock'' and defines ``purpose 
credit'' as ``any credit for the purpose, whether immediate, incidental, 
or ultimate, of buying or carrying margin stock, `` with certain 
exceptions, and provides that the maximum loan value of such margin 
stock shall be a fixed percentage ``of its current market value.''
    (b) The Board of Governors has had occasion to consider the 
application of the language in paragraph (a) of this section to the two 
following questions:
    (1) Loan secured by stock. First, is a loan to purchase or carry 
margin stock subject to this part where made in unsecured form, if 
margin stock is subsequently deposited as security with the lender, and 
surrounding circumstances indicate that the parties originally 
contemplated that the loan should be so secured? The Board answered that 
in a case of this kind, the loan would be subject to this part, for the 
following reasons:
    (i) The Board has long held, in the closely related purpose area, 
that the original purpose of a loan should not be determined upon a 
narrow analysis of the technical circumstances under which a loan is 
made. Instead, the fundamental purpose of the loan is considered to be 
controlling. Indeed, ``the fact that a loan made on the borrower's 
signature only, for example, becomes secured by registered stock shortly 
after the disbursement of the loan'' affords reasonable grounds for 
questioning whether the bank was entitled to rely upon the borrower's 
statement as to the purpose of the loan. 1953 Fed. Res. Bull. 951 (See, 
Sec. 221.106).
    (ii) Where security is involved, standards of interpretation should 
be equally searching. If, for example, the original agreement between 
borrower and lender contemplated that the loan should be secured by 
margin stock, and such stock is in fact delivered to the bank when 
available, the transaction must be regarded as fundamentally a secured 
loan. This view is strengthened by the fact that this part applies to a 
loan ``secured directly or indirectly by margin stock.''
    (2) Loan to acquire controlling shares. (i) The second question is 
whether this part governs a margin stock-secured loan made for the 
business purpose of purchasing a controlling interest in a corporation, 
or whether such a loan would be exempt on the ground that this part is 
directed solely toward purchases of stock for speculative or investment 
purposes. The Board answered that a margin stock-secured loan for the 
purpose of purchasing or carrying margin stock is subject to this part, 
regardless of the reason for which the purchase is made.
    (ii) The answer is required, in the Board's view, since the language 
of this part is explicitly inclusive, covering ``any purpose credit, 
secured directly or indirectly by margin stock.'' Moreover, the 
withdrawal in 1945 of the original section 2(e) of this part, which 
exempted ``any loan for the purpose of purchasing a stock from or 
through a person who is not a member of a national securities exchange . 
. .'' plainly

[[Page 45]]

implies that transactions of the sort described are now subject to the 
general prohibition of Sec. 221.3(a).



Sec. 221.111  Contribution to joint venture as extension of credit 

when the contribution is disproportionate to the contributor's 
share in the venture's 
          profits or losses.

    (a) The Board considered the question whether a joint venture, 
structured so that the amount of capital contribution to the venture 
would be disproportionate to the right of participation in profits or 
losses, constitutes an ``extension of credit'' for the purpose of this 
part.
    (b) An individual and a corporation plan to establish a joint 
venture to engage in the business of buying and selling securities, 
including margin stock. The individual would contribute 20 percent of 
the capital and receive 80 percent of the profits or losses; the 
corporate share would be the reverse. In computing profits or losses, 
each participant would first receive interest at the rate of 8 percent 
on his respective capital contribution. Although purchases and sales 
would be mutually agreed upon, the corporation could liquidate the joint 
portfolio if the individual's share of the losses equaled or exceeded 
his 20 percent contribution to the venture. The corporation would hold 
the securities, and upon termination of the venture, the assets would 
first be applied to repayment of capital contributions.
    (c) In general, the relationship of joint venture is created when 
two or more persons combine their money, property, or time in the 
conduct of some particular line of trade or some particular business and 
agree to share jointly, or in proportion to capital contributed, the 
profits and losses of the undertaking.
    (d) The incidents of the joint venture described in paragraph (b) of 
this section, however, closely parallel those of an extension of margin 
credit, with the corporation as lender and the individual as borrower. 
The corporation supplies 80 percent of the purchase price of securities 
in exchange for a net return of 8 percent of the amount advanced plus 20 
percent of any gain. Like a lender of securities credit, the corporation 
is insulated against loss by retaining the right to liquidate the 
collateral before the securities decline in price below the amount of 
its contribution. Conversely, the individual--like a customer who 
borrows to purchase securities--puts up only 20 percent of their cost, 
is entitled to the principal portion of any appreciation in their value, 
bears the principal risk of loss should that value decline, and does not 
stand to gain or lose except through a change in value of the securities 
purchased.
    (e) The Board is of the opinion that where the right of an 
individual to share in profits and losses of such a joint venture is 
disproportionate to his contribution to the venture:
    (1) The joint venture involves an extension of credit by the 
corporation to the individual;
    (2) The extension of credit is to purchase or carry margin stock, 
and is collateralized by such margin stock; and
    (3) If the corporation is not a broker or dealer subject to 
Regulation T (12 CFR part 220), the credit is of the kind described by 
Sec. 221.3(a).



Sec. 221.112  Loans by bank in capacity as trustee.

    (a) The Board's advice has been requested whether a bank's 
activities in connection with the administration of an employees' 
savings plan are subject to this part.
    (b) Under the plan, any regular, full-time employee may participate 
by authorizing the sponsoring company to deduct a percentage of his 
salary and wages and transmit the same to the bank as trustee. Voluntary 
contributions by the company are allocated among the participants. A 
participant may direct that funds held for him be invested by the 
trustee in insurance, annuity contracts, Series E Bonds, or in one or 
more of three specified securities which are listed on a stock exchange. 
Loans to purchase the stocks may be made to participants from funds of 
the trust, subject to approval of the administrative committee, which is 
composed of five participants, and of the trustee. The bank's right to 
approve is said to be restricted to the

[[Page 46]]

mechanics of making the loan, the purpose being to avoid cumbersome 
procedures.
    (c) Loans are secured by the credit balance of the borrowing 
participants in the savings fund, including stock, but excluding (in 
practice) insurance and annuity contracts and government securities. 
Additional stocks may be, but, in practice, have not been pledged as 
collateral for loans. Loans are not made, under the plan, from bank 
funds, and participants do not borrow from the bank upon assignment of 
the participants' accounts in the trust.
    (d) It is urged that loans under the plan are not subject to this 
part because a loan should not be considered as having been made by a 
bank where the bank acts solely in its capacity of trustee, without 
exercise of any discretion.
    (e) The Board reviewed this question upon at least one other 
occasion, and full consideration has again been given to the matter. 
After considering the arguments on both sides, the Board has reaffirmed 
its earlier view that, in conformity with an interpretation not 
published in the Code of Federal Regulations which was published at page 
874 of the 1946 Federal Reserve Bulletin (See 12 CFR 261.10(f) for 
information on how to obtain Board publications.), this part applies to 
the activities of a bank when it is acting in its capacity as trustee. 
Although the bank in that case had at best a limited discretion with 
respect to loans made by it in its capacity as trustee, the Board 
concluded that this fact did not affect the application of the 
regulation to such loans.



Sec. 221.113  Loan which is secured indirectly by stock.

    (a) A question has been presented to the Board as to whether a loan 
by a bank to a mutual investment fund is ``secured * * * indirectly by 
margin stock'' within the meaning of Sec. 221.(3)(a), so that the loan 
should be treated as subject to this part.
    (b) Briefly, the facts are as follows. Fund X, an open-end 
investment company, entered into a loan agreement with Bank Y, which was 
(and still is) custodian of the securities which comprise the portfolio 
of Fund X. The agreement includes the following terms, which are 
material to the question before the Board:
    (1) Fund X agrees to have an ``asset coverage'' (as defined in the 
agreements) of 400 percent of all its borrowings, including the proposed 
borrowing, at the time when it takes down any part of the loan.
    (2) Fund X agrees to maintain an ``asset coverage'' of at least 300 
percent of its borrowings at all times.
    (3) Fund X agrees not to amend its custody agreement with Bank Y, or 
to substitute another custodian without Bank Y's consent.
    (4) Fund X agrees not to mortgage, pledge, or otherwise encumber any 
of its assets elsewhere than with Bank Y.
    (c) In Sec. 221.109 the Board stated that because of ``the general 
nature and operations of such a company'', any ``loan by a bank to an 
open-end investment company that customarily purchases margin stock * * 
* should be presumed to be subject to this part as a loan for the 
purpose of purchasing or carrying margin stock'' (purpose credit). The 
Board's interpretation went on to say that: ``this would not be altered 
by the fact that the open-end company had used, or proposed to use, its 
own funds or proceeds of the loan to redeem some of its own shares * * 
*.''
    (d) Accordingly, the loan by Bank Y to Fund X was and is a ``purpose 
credit''. However, a loan by a bank is not subject to this part unless: 
it is a purpose credit; and it is ``secured directly or indirectly by 
margin stock''. In the present case, the loan is not ``secured 
directly'' by stock in the ordinary sense, since the portfolio of Fund X 
is not pledged to secure the credit from Bank Y. But the word 
``indirectly'' must signify some form of security arrangement other than 
the ``direct'' security which arises from the ordinary ``transaction 
that gives recourse against a particular chattel or land or against a 
third party on an obligation'' described in the American Law Institute's 
Restatement of the Law of Security, page 1. Otherwise the word 
``indirectly'' would be superfluous, and a regulation, like a statute, 
must be construed if possible to give meaning to every word.

[[Page 47]]

    (e) The Board has indicated its view that any arrangement under 
which margin stock is more readily available as security to the lending 
bank than to other creditors of the borrower may amount to indirect 
security within the meaning of this part. In an interpretation published 
at Sec. 221.110 it stated: ``The Board has long held, in the * * * 
purpose area, that the original purpose of a loan should not be 
determined upon a narrow analysis of the technical circumstances under 
which a loan is made * * * . Where security is involved, standards of 
interpretation should be equally searching.'' In its pamphlet issued for 
the benefit and guidance of banks and bank examiners, entitled 
``Questions and Answers Illustrating Application of Regulation U'', the 
Board said: ``In determining whether a loan is ``indirectly'' secured, 
it should be borne in mind that the reason the Board has thus far 
refrained * * * from regulating loans not secured by stock has been to 
simplify operations under the regulation. This objective of simplifying 
operations does not apply to loans in which arrangements are made to 
retain the substance of stock collateral while sacrificing only the 
form''.
    (f) A wide variety of arrangements as to collateral can be made 
between bank and borrower which will serve, to some extent, to protect 
the interest of the bank in seeing that the loan is repaid, without 
giving the bank a conventional direct ``security'' interest in the 
collateral. Among such arrangements which have come to the Board's 
attention are the following:
    (1) The borrower may deposit margin stock in the custody of the 
bank. An arrangement of this kind may not, it is true, place the bank in 
the position of a secured creditor in case of bankruptcy, or even of 
conflicting claims, but it is likely effectively to strengthen the 
bank's position. The definition of indirectly secured in Sec. 221.2, 
which provides that a loan is not indirectly secured if the lender 
``holds the margin stock only in the capacity of custodian, depositary 
or trustee, or under similar circumstances, and, in good faith has not 
relied upon the margin stock as collateral,'' does not exempt a deposit 
of this kind from the impact of the regulation unless it is clear that 
the bank ``has not relied'' upon the margin stock deposited with it.
    (2) A borrower may not deposit his margin stock with the bank, but 
agree not to pledge or encumber his assets elsewhere while the loan is 
outstanding. Such an agreement may be difficult to police, yet it serves 
to some extent to protect the interest of the bank if only because the 
future credit standing and business reputation of the borrower will 
depend upon his keeping his word. If the assets covered by such an 
agreement include margin stock, then, the credit is ``indirectly 
secured'' by the margin stock within the meaning of this part.
    (3) The borrower may deposit margin stock with a third party who 
agrees to hold the stock until the loan has been paid off. Here, even 
though the parties may purport to provide that the stock is not 
``security'' for the loan (for example, by agreeing that the stock may 
not be sold and the proceeds applied to the debt if the borrower fails 
to pay), the mere fact that the stock is out of the borrower's control 
for the duration of the loan serves to some extent to protect the bank.
    (g) The three instances described in paragraph (f) of this section 
are merely illustrative. Other methods, or combinations of methods, may 
serve a similar purpose. The conclusion that any given arrangement makes 
a credit ``indirectly secured'' by margin stock may, but need not, be 
reinforced by facts such as that the stock in question was purchased 
with proceeds of the loan, that the lender suggests or insists upon the 
arrangement, or that the loan would probably be subject to criticism by 
supervisory authorities were it not for the protective arrangement.
    (h) Accordingly, the Board concludes that the loan by Bank Y to Fund 
X is indirectly secured by the portfolio of the fund and must be treated 
by the bank as a regulated loan.



Sec. 221.114  Bank loans to purchase stock of American Telephone and 
Telegraph Company under Employees' Stock Plan.

    (a) The Board of Governors interpreted this part in connection with 
proposed loans by a bank to persons who are purchasing shares of stock 
of

[[Page 48]]

American Telephone and Telegraph Company pursuant to its Employees' 
Stock Plan.
    (b) According to the current offering under the Plan, an employee of 
the AT&T system may purchase shares through regular deductions from his 
pay over a period of 24 months. At the end of that period, a certificate 
for the appropriate number of shares will be issued to the participating 
employee by AT&T. Each employee is entitled to purchase, as a maximum, 
shares that will cost him approximately three-fourths of his annual base 
pay. Since the program extends over two years, it follows that the 
payroll deductions for this purpose may be in the neighborhood of 38 
percent of base pay and a larger percentage of ``take-home pay.'' 
Deductions of this magnitude are in excess of the saving rate of many 
employees.
    (c) Certain AT&T employees, who wish to take advantage of the 
current offering under the Plan, are the owners of shares of AT&T stock 
that they purchased under previous offerings. A bank proposed to receive 
such stock as collateral for a ``living expenses'' loan that will be 
advanced to the employee in monthly installments over the 24-month 
period, each installment being in the amount of the employee's monthly 
payroll deduction under the Plan. The aggregate amount of the advances 
over the 24-month period would be substantially greater than the maximum 
loan value of the collateral as prescribed in Sec. 221.7 (the 
Supplement).
    (d) In the opinion of the Board of Governors, a loan of the kind 
described would violate this part if it exceeded the maximum loan value 
of the collateral. The regulation applies to any margin stock-secured 
loan for the purpose of purchasing or carrying margin stock (Sec. 
221.3(a)). Although the proposed loan would purport to be for living 
expenses, it seems quite clear, in view of the relationship of the loan 
to the Employees' Stock Plan, that its actual purpose would be to enable 
the borrower to purchase AT&T stock, which is margin stock. At the end 
of the 24-month period the borrower would acquire a certain number of 
shares of that stock and would be indebted to the lending bank in an 
amount approximately equal to the amount he would pay for such shares. 
In these circumstances, the loan by the bank must be regarded as a loan 
``for the purpose of purchasing'' the stock, and therefore it is subject 
to the limitations prescribed by this part. This conclusion follows from 
the provisions of this part, and it may also be observed that a contrary 
conclusion could largely defeat the basic purpose of the margin 
regulations.
    (e) Accordingly, the Board concluded that a loan of the kind 
described may not be made in an amount exceeding the maximum loan value 
of the collateral, as prescribed by the current Sec. 221.7 (the 
Supplement).



Sec. 221.115  Accepting a purpose statement through the mail without 
benefit of face-to-face interview.

    (a) The Board has been asked whether the acceptance of a purpose 
statement submitted through the mail by a lender subject to the 
provisions of this part will meet the good faith requirement of Sec. 
221.3(c). Section 221.3(c) states that in connection with any credit 
secured by collateral which includes any margin stock, a nonbank lender 
must obtain a purpose statement executed by the borrower and accepted by 
the lender in good faith. Such acceptance requires that the lender be 
alert to the circumstances surrounding the credit and if further 
information suggests inquiry, he must investigate and be satisfied that 
the statement is truthful.
    (b) The lender is a subsidiary of a holding company which also has 
another subsidiary which serves as underwriter and investment advisor to 
various mutual funds. The sole business of the lender will be to make 
``non-purpose'' consumer loans to shareholders of the mutual funds, such 
loans to be collateralized by the fund shares. Most mutual funds shares 
are margin stock for purposes of this part. Solicitation and acceptance 
of these consumer loans will be done principally through the mail and 
the lender wishes to obtain the required purpose statement by mail 
rather than by a face-to-face interview. Personal interviews are not 
practicable for the lender because shareholders of the funds are 
scattered throughout the country. In order to

[[Page 49]]

provide the same safeguards inherent in face-to-face interviews, the 
lender has developed certain procedures designed to satisfy the good 
faith acceptance requirement of this part.
    (c) The purpose statement will be supplemented with several 
additional questions relevant to the prospective borrower's investment 
activities such as purchases of any security within the last 6 months, 
dollar amount, and obligations to purchase or pay for previous 
purchases; present plans to purchase securities in the near future, 
participations in securities purchase plans, list of unpaid debts, and 
present income level. Some questions have been modified to facilitate 
understanding but no questions have been deleted. If additional inquiry 
is indicated by the answers on the form, a loan officer of the lender 
will interview the borrower by telephone to make sure the loan is ``non-
purpose''. Whenever the loan exceeds the ``maximum loan value'' of the 
collateral for a regulated loan, a telephone interview will be done as a 
matter of course.
    (d) One of the stated purposes of Regulation X (12 CFR part 224) was 
to prevent the infusion of unregulated credit into the securities 
markets by borrowers falsely certifying the purpose of a loan. The Board 
is of the view that the existence of Regulation X (12 CFR part 224), 
which makes the borrower liable for willful violations of the margin 
regulations, will allow a lender subject to this part to meet the good 
faith acceptance requirement of Sec. 221.3(c) without a face-to-face 
interview if the lender adopts a program, such as the one described in 
paragraph (c) of this section, which requires additional detailed 
information from the borrower and proper procedures are instituted to 
verify the truth of the information received. Lenders intending to 
embark on a similar program should discuss proposed plans with their 
district Federal Reserve Bank. Lenders may have existing or future loans 
with the prospective customers which could complicate the efforts to 
determine the true purpose of the loan.



Sec. 221.116  Bank loans to replenish working capital used to purchase 
mutual fund shares.

    (a) In a situation considered by the Board of Governors, a business 
concern (X) proposed to purchase mutual fund shares, from time to time, 
with proceeds from its accounts receivable, then pledge the shares with 
a bank in order to secure working capital. The bank was prepared to lend 
amounts equal to 70 percent of the current value of the shares as they 
were purchased by X. If the loans were subject to this part, only 50 
percent of the current market value of the shares could be lent.
    (b) The immediate purpose of the loans would be to replenish X's 
working capital. However, as time went on, X would be acquiring mutual 
fund shares at a cost that would exceed the net earnings it would 
normally have accumulated, and would become indebted to the lending bank 
in an amount approximately 70 percent of the prices of said shares.
    (c) The Board held that the loans were for the purpose of purchasing 
the shares, and therefore subject to the limitations prescribed by this 
part. As pointed out in Sec. 221.114 with respect to a similar program 
for putting a high proportion of cash income into stock, the borrowing 
against the margin stock to meet needs for which the cash would 
otherwise have been required, a contrary conclusion could largely defeat 
the basic purpose of the margin regulations.
    (d) Also considered was an alternative proposal under which X would 
deposit proceeds from accounts receivable in a time account for 1 year, 
before using those funds to purchase mutual fund shares. The Board held 
that this procedure would not change the situation in any significant 
way. Once the arrangement was established, the proceeds would be flowing 
into the time account at the same time that similar amounts were 
released to purchase the shares, and over any extended period of time 
the result would be the same. Accordingly, the Board concluded that bank 
loans made under the alternative proposal would similarly be subject to 
this part.

[[Page 50]]



Sec. 221.117  When bank in ``good faith'' has not relied on stock as 
collateral.

    (a) The Board has received questions regarding the circumstances in 
which an extension or maintenance of credit will not be deemed to be 
``indirectly secured'' by stock as indicated by the phrase, ``if the 
lender, in good faith, has not relied upon the margin stock as 
collateral,'' contained in paragraph (2)(iv) of the definition of 
indirectly secured in Sec. 221.2.
    (b) In response, the Board noted that in amending this portion of 
the regulation in 1968 it was indicated that one of the purposes of the 
change was to make clear that the definition of indirectly secured does 
not apply to certain routine negative covenants in loan agreements. 
Also, while the question of whether or not a bank has relied upon 
particular stock as collateral is necessarily a question of fact to be 
determined in each case in the light of all relevant circumstances, some 
indication that the bank had not relied upon stock as collateral would 
seem to be afforded by such circumstances as the fact that:
    (1) The bank had obtained a reasonably current financial statement 
of the borrower and this statement could reasonably support the loan; 
and
    (2) The loan was not payable on demand or because of fluctuations in 
market value of the stock, but instead was payable on one or more fixed 
maturities which were typical of maturities applied by the bank to loans 
otherwise similar except for not involving any possible question of 
stock collateral.



Sec. 221.118  Bank arranging for extension of credit by corporation.

    (a) The Board considered the questions whether:
    (1) The guaranty by a corporation of an ``unsecured'' bank loan to 
exercise an option to purchase stock of the corporation is an 
``extension of credit'' for the purpose of this part;
    (2) Such a guaranty is given ``in the ordinary course of business'' 
of the corporation, as defined in Sec. 221.2; and
    (3) The bank involved took part in arranging for such credit on 
better terms than it could extend under the provisions of this part.
    (b) The Board understood that any officer or employee included under 
the corporation's stock option plan who wished to exercise his option 
could obtain a loan for the purchase price of the stock by executing an 
unsecured note to the bank. The corporation would issue to the bank a 
guaranty of the loan and hold the purchased shares as collateral to 
secure it against loss on the guaranty. Stock of the corporation is 
registered on a national securities exchange and therefore qualifies as 
``margin stock'' under this part.
    (c) A nonbank lender is subject to the registration and other 
requirements of this part if, in the ordinary course of his business, he 
extends credit on collateral that includes any margin stock in the 
amount of $200,000 or more in any calendar quarter, or has such credit 
outstanding in any calendar quarter in the amount of $500,000 or more. 
The Board understood that the corporation in question had sufficient 
guaranties outstanding during the applicable calendar quarter to meet 
the dollar thresholds for registration.
    (d) In the Board's judgment a person who guarantees a loan, and 
thereby becomes liable for the amount of the loan in the event the 
borrower should default, is lending his credit to the borrower. In the 
circumstances described, such a lending of credit must be considered an 
``extension of credit'' under this part in order to prevent 
circumvention of the regulation's limitation on the amount of credit 
that can be extended on the security of margin stock.
    (e) Under Sec. 221.2, the term in the ordinary course of business 
means ``occurring or reasonably expected to occur in carrying out or 
furthering any business purpose. * * *'' In general, stock option plans 
are designed to provide a company's employees with a proprietary 
interest in the company in the form of ownership of the company's stock. 
Such plans increase the company's ability to attract and retain able 
personnel and, accordingly, promote the interest of the company and its 
stockholders, while at the same time providing the company's employees 
with additional incentive to work toward

[[Page 51]]

the company's future success. An arrangement whereby participating 
employees may finance the exercise of their options through an unsecured 
bank loan guaranteed by the company, thereby facilitating the employees' 
acquisition of company stock, is likewise designed to promote the 
company's interest and is, therefore, in furtherance of a business 
purpose.
    (f) For the reasons indicated, the Board concluded that under the 
circumstances described a guaranty by the corporation constitutes credit 
extended in the ordinary course of business under this part, that the 
corporation is required to register pursuant to Sec. 221.3(b), and that 
such guaranties may not be given in excess of the maximum loan value of 
the collateral pledged to secure the guaranty.
    (g) Section 221.3(a)(3) provides that ``no lender may arrange for 
the extension or maintenance of any purpose credit, except upon the same 
terms and conditions on which the lender itself may extend or maintain 
purpose credit under this part''. Since the Board concluded that the 
giving of a guaranty by the corporation to secure the loan described 
above constitutes an extension of credit, and since the use of a 
guaranty in the manner described could not be effectuated without the 
concurrence of the bank involved, the Board further concluded that the 
bank took part in ``arranging'' for the extension of credit in excess of 
the maximum loan value of the margin stock pledged to secure the 
guaranties.



Sec. 221.119  Applicability of plan-lender provisions to financing of 

stock options and stock purchase rights qualified or restricted under 
Internal Revenue Code.

    (a) The Board has been asked whether the plan-lender provisions of 
Sec. 221.4(a) and (b) were intended to apply to the financing of stock 
options restricted or qualified under the Internal Revenue Code where 
such options or the option plan do not provide for such financing.
    (b) It is the Board's experience that in some nonqualified plans, 
particularly stock purchase plans, the credit arrangement is distinct 
from the plan. So long as the credit extended, and particularly, the 
character of the plan-lender, conforms with the requirements of the 
regulation, the fact that option and credit are provided for in separate 
documents is immaterial. It should be emphasized that the Board does not 
express any view on the preferability of qualified as opposed to 
nonqualified options; its role is merely to prevent excessive credit in 
this area.
    (c) Section 221.4(a) provides that a plan-lender may include a 
wholly-owned subsidiary of the issuer of the collateral (taking as a 
whole, corporate groups including subsidiaries and affiliates). This 
clarifies the Board's intent that, to qualify for special treatment 
under that section, the lender must stand in a special employer-employee 
relationship with the borrower, and a special relationship of issuer 
with regard to the collateral. The fact that the Board, for convenience 
and practical reasons, permitted the employing corporation to act 
through a subsidiary or other entity should not be interpreted to mean 
the Board intended the lender to be other than an entity whose 
overriding interests were coextensive with the issuer. An independent 
corporation, with independent interests was never intended, regardless 
of form, to be at the base of exempt stock-plan lending.



Sec. 221.120  Allocation of stock collateral to purpose and nonpurpose 
credits to same customer.

    (a) A bank proposes to extend two credits (Credits A and B) to its 
customer. Although the two credits are proposed to be extended at the 
same time, each would be evidenced by a separate agreement. Credit A 
would be extended for the purpose of providing the customer with working 
capital (nonpurpose credit), collateralized by margin stock. Credit B 
would be extended for the purpose of purchasing or carrying margin stock 
(purpose credit), without collateral or on collateral other than stock.
    (b) This part allows a bank to extend purpose and nonpurpose credits 
simultaneously or successively to the same customer. This rule is 
expressed in Sec. 221.3(d)(4) which provides in substance that for any 
nonpurpose credit to the same customer, the lender shall in good faith 
require as much collateral

[[Page 52]]

not already identified to the customer's purpose credit as the lender 
would require if it held neither the purpose loan nor the identified 
collateral. This rule in Sec. 221.3(d)(4) also takes into account that 
the lender would not necessarily be required to hold collateral for the 
nonpurpose credit if, consistent with good faith banking practices, it 
would normally make this kind of nonpurpose loan without collateral.
    (c) The Board views Sec. 221.3(d)(4), when read in conjunction with 
Sec. 221.3(c) and (f), as requiring that whenever a lender extends two 
credits to the same customer, one a purpose credit and the other 
nonpurpose, any margin stock collateral must first be identified with 
and attributed to the purpose loan by taking into account the maximum 
loan value of such collateral as prescribed in Sec. 221.7 (the 
Supplement).
    (d) The Board is further of the opinion that under the foregoing 
circumstances Credit B would be indirectly secured by stock, despite the 
fact that there would be separate loan agreements for both credits. This 
conclusion flows from the circumstance that the lender would hold in its 
possession stock collateral to which it would have access with respect 
to Credit B, despite any ostensible allocation of such collateral to 
Credit A.



Sec. 221.121  Extension of credit in certain stock option and stock 
purchase plans.

    Questions have been raised as to whether certain stock option and 
stock purchase plans involve extensions of credit subject to this part 
when the participant is free to cancel his participation at any time 
prior to full payment, but in the event of cancellation the participant 
remains liable for damages. It thus appears that the participant has the 
opportunity to gain and bears the risk of loss from the time the 
transaction is executed and payment is deferred. In some cases brought 
to the Board's attention damages are related to the market price of the 
stock, but in others, there may be no such relationship. In either of 
these circumstances, it is the Board's view that such plans involve 
extensions of credit. Accordingly, where the security being purchased is 
a margin security and the credit is secured, directly or indirectly, by 
any margin security, the creditor must register and the credit must 
conform with either the regular margin requirements of Sec. 221.3(a) or 
the special ``plan-lender'' provisions set forth in Sec. 221.4, 
whichever is applicable. This assumes, of course, that the amount of 
credit extended is such that the creditor is subject to the registration 
requirements of Sec. 221.3(b).



Sec. 221.122  Applicability of margin requirements to credit in 
connection with Insurance Premium Funding Programs.

    (a) The Board has been asked numerous questions regarding purpose 
credit in connection with insurance premium funding programs. The 
inquiries are included in a set of guidelines in the format of questions 
and answers. (The guidelines are available pursuant to the Board's Rules 
Regarding Availability of Information, 12 CFR part 261.) A glossary of 
terms customarily used in connection with insurance premium funding 
credit activities is included in the guidelines. Under a typical 
insurance premium funding program, a borrower acquires mutual fund 
shares for cash, or takes fund shares which he already owns, and then 
uses the loan value (currently 50 percent as set by the Board) to buy 
insurance. Usually, a funding company (the issuer) will sell both the 
fund shares and the insurance through either independent broker/dealers 
or subsidiaries or affiliates of the issuer. A typical plan may run for 
10 or 15 years with annual insurance premiums due. To illustrate, 
assuming an annual insurance premium of $300, the participant is 
required to put up mutual fund shares equivalent to 250 percent of the 
premium or $600 ($600 x 50 percent loan value equals $300 the amount of 
the insurance premium which is also the amount of the credit extended).
    (b) The guidelines referenced in paragraph (a) of this section also:
    (1) Clarify an earlier 1969 Board interpretation to show that the 
public offering price of mutual fund shares (which includes the front 
load, or sales commission) may be used as a measure of their current 
market value when the shares serve as collateral on a purpose

[[Page 53]]

credit throughout the day of the purchase of the fund shares; and
    (2) Relax a 1965 Board position in connection with accepting purpose 
statements by mail.
    (c) It is the Board's view that when it is clearly established that 
a purpose statement supports a purpose credit then such statement 
executed by the borrower may be accepted by mail, provided it is 
received and also executed by the lender before the credit is extended.



Sec. 221.123  Combined credit for exercising employee stock options and 
paying income taxes incurred as a result of such exercise.

    (a) Section 221.4(a) and (b), which provides special treatment for 
credit extended under employee stock option plans, was designed to 
encourage their use in recognition of their value in giving an employee 
a proprietary interest in the business. Taking a position that might 
discourage the exercise of options because of tax complications would 
conflict with the purpose of Sec. 221.4(a) and (b).
    (b) Accordingly, the Board has concluded that the combined loans for 
the exercise of the option and the payment of the taxes in connection 
therewith under plans complying with Sec. 221.4(a)(2) may be regarded 
as purpose credit within the meaning of Sec. 221.2.



Sec. 221.124  Purchase of debt securities to finance corporate takeovers.

    (a) Petitions have been filed with the Board raising questions as to 
whether the margin requirements in this part apply to two types of 
corporate acquisitions in which debt securities are issued to finance 
the acquisition of margin stock of a target company.
    (b) In the first situation, the acquiring company, Company A, 
controls a shell corporation that would make a tender offer for the 
stock of Company B, which is margin stock (as defined in Sec. 221.2). 
The shell corporation has virtually no operations, has no significant 
business function other than to acquire and hold the stock of Company B, 
and has substantially no assets other than the margin stock to be 
acquired. To finance the tender offer, the shell corporation would issue 
debt securities which, by their terms, would be unsecured. If the tender 
offer is successful, the shell corporation would seek to merge with 
Company B. However, the tender offer seeks to acquire fewer shares of 
Company B than is necessary under state law to effect a short form 
merger with Company B, which could be consummated without the approval 
of shareholders or the board of directors of Company B.
    (c) The purchase of the debt securities issued by the shell 
corporation to finance the acquisition clearly involves purpose credit 
(as defined in Sec. 221.2). In addition, such debt securities would be 
purchased only by sophisticated investors in very large minimum 
denominations, so that the purchasers may be lenders for purposes of 
this part. See Sec. 221.3(b). Since the debt securities contain no 
direct security agreement involving the margin stock, applicability of 
the lending restrictions of this part turns on whether the arrangement 
constitutes an extension of credit that is secured indirectly by margin 
stock.
    (d) As the Board has recognized, indirect security can encompass a 
wide variety of arrangements between lenders and borrowers with respect 
to margin stock collateral that serve to protect the lenders' interest 
in assuring that a credit is repaid where the lenders do not have a 
conventional direct security interest in the collateral. See Sec. 
221.124. However, credit is not ``indirectly secured'' by margin stock 
if the lender in good faith has not relied on the margin stock as 
collateral extending or maintaining credit. See Sec. 221.2.
    (e) The Board is of the view that, in the situation described in 
paragraph (b) of this section, the debt securities would be presumed to 
be indirectly secured by the margin stock to be acquired by the shell 
acquisition vehicle. The staff has previously expressed the view that 
nominally unsecured credit extended to an investment company, a 
substantial portion of whose assets consist of margin stock, is 
indirectly secured by the margin stock. See Federal Reserve Regulatory 
Service 5-917.12. (See 12 CFR 261.10(f) for information on how to obtain 
Board publications.) This opinion notes that the investment company has 
substantially no assets other than margin stock to

[[Page 54]]

support indebtedness and thus credit could not be extended to such a 
company in good faith without reliance on the margin stock as 
collateral.
    (f) The Board believes that this rationale applies to the debt 
securities issued by the shell corporation described in paragraph (b) of 
this section. At the time the debt securities are issued, the shell 
corporation has substantially no assets to support the credit other than 
the margin stock that it has acquired or intends to acquire and has no 
significant business function other than to hold the stock of the target 
company in order to facilitate the acquisition. Moreover, it is possible 
that the shell may hold the margin stock for a significant and 
indefinite period of time, if defensive measures by the target prevent 
consummation of the acquisition. Because of the difficulty in predicting 
the outcome of a contested takeover at the time that credit is committed 
to the shell corporation, the Board believes that the purchasers of the 
debt securities could not, in good faith, lend without reliance on the 
margin stock as collateral. The presumption that the debt securities are 
indirectly secured by margin stock would not apply if there is specific 
evidence that lenders could in good faith rely on assets other than 
margin stock as collateral, such as a guaranty of the debt securities by 
the shell corporation's parent company or another company that has 
substantial non-margin stock assets or cash flow. This presumption would 
also not apply if there is a merger agreement between the acquiring and 
target companies entered into at the time the commitment is made to 
purchase the debt securities or in any event before loan funds are 
advanced. In addition, the presumption would not apply if the obligation 
of the purchasers of the debt securities to advance funds to the shell 
corporation is contingent on the shell's acquisition of the minimum 
number of shares necessary under applicable state law to effect a merger 
between the acquiring and target companies without the approval of 
either the shareholders or directors of the target company. In these two 
situations where the merger will take place promptly, the Board believes 
the lenders could reasonably be presumed to be relying on the assets of 
the target for repayment.
    (g) In addition, the Board is of the view that the debt securities 
described in paragraph (b) of this section are indirectly secured by 
margin stock because there is a practical restriction on the ability of 
the shell corporation to dispose of the margin stock of the target 
company. Indirectly secured is defined in Sec. 221.2 to include any 
arrangement under which the customer's right or ability to sell, pledge, 
or otherwise dispose of margin stock owned by the customer is in any way 
restricted while the credit remains outstanding. The purchasers of the 
debt securities issued by a shell corporation to finance a takeover 
attempt clearly understand that the shell corporation intends to acquire 
the margin stock of the target company in order to effect the 
acquisition of that company. This understanding represents a practical 
restriction on the ability of the shell corporation to dispose of the 
target's margin stock and to acquire other assets with the proceeds of 
the credit.
    (h) In the second situation, Company C, an operating company with 
substantial assets or cash flow, seeks to acquire Company D, which is 
significantly larger than Company C. Company C establishes a shell 
corporation that together with Company C makes a tender offer for the 
shares of Company D, which is margin stock. To finance the tender offer, 
the shell corporation would obtain a bank loan that complies with the 
margin lending restrictions of this part and Company C would issue debt 
securities that would not be directly secured by any margin stock. The 
Board is of the opinion that these debt securities should not be 
presumed to be indirectly secured by the margin stock of Company D, 
since, as an operating business, Company C has substantial assets or 
cash flow without regard to the margin stock of Company D. Any 
presumption would not be appropriate because the purchasers of the debt 
securities may be relying on assets other than margin stock of Company D 
for repayment of the credit.

[[Page 55]]



Sec. 221.125  Credit to brokers and dealers.

    (a) The National Securities Markets Improvement Act of 1996 (Pub. L. 
104-290, 110 Stat. 3416) restricts the Board's margin authority by 
repealing section 8(a) of the Securities Exchange Act of 1934 (the 
Exchange Act) and amending section 7 of the Exchange Act (15 U.S.C. 78g) 
to exclude the borrowing by a member of a national securities exchange 
or a registered broker or dealer ``a substantial portion of whose 
business consists of transactions with persons other than brokers or 
dealers'' and borrowing by a member of a national securities exchange or 
a registered broker or dealer to finance its activities as a market 
maker or an underwriter. Notwithstanding this exclusion, the Board may 
impose such rules and regulations if it determines they are ``necessary 
or appropriate in the public interest or for the protection of 
investors.''
    (b) The Board has not found that it is necessary or appropriate in 
the public interest or for the protection of investors to impose rules 
and regulations regarding loans to brokers and dealers covered by the 
National Securities Markets Improvement Act of 1996.



PART 222_FAIR CREDIT REPORTING (REGULATION V)--Table of Contents




                      Subpart A_General Provisions

Sec.
222.1 Purpose, scope, and effective dates.

Subparts B-H [Reserved]

 Subpart I_Duties of Users of Consumer Reports Regarding Identity Theft

222.80-82 [Reserved]
222.83 Disposal of consumer information.

Appendix A to Part 222 [Reserved]
Appendix B to Part 222--Model Notices of Furnishing Negative Information

    Authority: 15 U.S.C. 1681s; Secs. 3 and 217, Pub. L. 108-159; 117 
Stat. 1953, 1986-88.

    Effective Date Note: At 69 FR 77618, Dec. 28, 2004, the authority 
for part 222 was revised, effective July 1, 2005. For the convenience of 
the user the revised text is set forth as follows:
    Authority: 15 U.S.C. 1681, 1681b, 1681s, 1681s-2, and 1681w.

    Source: 68 FR 74469, Dec. 24, 2003, unless otherwise noted.



                      Subpart A_General Provisions



Sec. 222.1  Purpose, scope, and effective dates.

    (a) [Reserved]
    (b) Scope. (1) [Reserved] (2) Institutions covered. (i) Except as 
otherwise provided in this paragraph (b)(2), the regulations in this 
part apply to banks that are members of the Federal Reserve System 
(other than national banks), branches and Agencies of foreign banks 
(other than Federal branches, Federal Agencies, and insured State 
branches of foreign banks), commercial lending companies owned or 
controlled by foreign banks, organizations operating under section 25 or 
25A of the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.), 
and bank holding companies and affiliates of such holding companies 
(other than depository institutions and consumer reporting agencies).
    (ii) For purposes of Appendix B to this part, financial institutions 
as defined in section 509 of the Gramm-Leach-Bliley Act (12 U.S.C. 
6809), may use the model notices in Appendix B to this part to comply 
with the notice requirement in section 623(a)(7) of the Fair Credit 
Reporting Act (15 U.S.C. 1681s-2(a)(7)).
    (c) Effective dates. The applicable provisions of the Fair and 
Accurate Credit Transactions Act of 2003 (FACT Act), Pub. L. 108-159, 
117 Stat. 1952, shall be effective in accordance with the following 
schedule:
    (1) Provisions effective December 31, 2003.
    (i) Sections 151(a)(2), 212(e), 214(c), 311(b), and 711, concerning 
the relation to state laws; and
    (ii) Each of the provisions of the FACT Act that authorizes an 
agency to issue a regulation or to take other action to implement the 
applicable provision of the FACT Act or the applicable provision of the 
Fair Credit Reporting Act, as amended by the FACT Act, but only with 
respect to that agency's authority to propose and adopt the implementing 
regulation or to take such other action.
    (2) Provisions effective March 31, 2004.

[[Page 56]]

    (i) Section 111, concerning the definitions;
    (ii) Section 156, concerning the statute of limitations;
    (iii) Sections 312(d), (e), and (f), concerning the furnisher 
liability exception, liability and enforcement, and rule of 
construction, respectively;
    (iv) Section 313(a), concerning action regarding complaints;
    (v) Section 611, concerning communications for certain employee 
investigations; and
    (vi) Section 811, concerning clerical amendments.
    (3) Provisions effective December 1, 2004.
    (i) Section 112, concerning fraud alerts and active duty alerts;
    (ii) Section 114, concerning procedures for the identification of 
possible instances of identity theft;
    (iii) Section 115, concerning truncation of the social security 
number in a consumer report;
    (iv) Section 151(a)(1), concerning the summary of rights of identity 
theft victims;
    (v) Section 152, concerning blocking of information resulting from 
identity theft;
    (vi) Section 153, concerning the coordination of identity theft 
complaint investigations;
    (vii) Section 154, concerning the prevention of repollution of 
consumer reports;
    (viii) Section 155, concerning notice by debt collectors with 
respect to fraudulent information;
    (ix) Section 211(c), concerning a summary of rights of consumers;
    (x) Section 212(a)-(d), concerning the disclosure of credit scores;
    (xi) Section 213(c), concerning enhanced disclosure of the means 
available to opt out of prescreened lists;
    (xii) Section 217(a), concerning the duty to provide notice to a 
consumer;
    (xiii) Section 311(a), concerning the risk-based pricing notice;
    (xiv) Section 312(a)-(c), concerning procedures to enhance the 
accuracy and integrity of information furnished to consumer reporting 
agencies;
    (xv) Section 314, concerning improved disclosure of the results of 
reinvestigation;
    (xvi) Section 315, concerning reconciling addresses;
    (xvii) Section 316, concerning notice of dispute through reseller; 
and
    (xviii) Section 317, concerning the duty to conduct a reasonable 
reinvestigation.

[68 FR 74469, Dec. 24, 2003, as amended at 69 FR 6530, Feb. 11, 2004; 69 
FR 33284, June 15, 2004]

    Effective Date Note: At 69 FR 77618, Dec. 28, 2004, in Sec. 
222.1(b)(2)(i) remove the phrase ``paragraph (b)(2)'' and add in its 
place the word ``part'', effective July 1, 2005.

Subparts B-H [Reserved]



 Subpart I_Duties of Users of Consumer Reports Regarding Identity Theft

    Source: 69 FR 77618, Dec. 28, 2004, unless otherwise noted.

    Effective Date Note: At 69 FR 77618, Dec. 28, 2004, subpart I was 
added, effective July 1, 2005.



Sec. 222.80-82  [Reserved]



Sec. 222.83  Disposal of consumer information.

    (a) Definitions as used in this section. (1) You means member banks 
of the Federal Reserve System (other than national banks) and their 
respective operating subsidiaries, branches and agencies of foreign 
banks (other than Federal branches, Federal agencies and insured State 
branches of foreign banks), commercial lending companies owned or 
controlled by foreign banks, and organizations operating under section 
25 or 25A of the Federal Reserve Act (12 U.S.C. 601 et seq., 611 et 
seq.).
    (b) In general. You must properly dispose of any consumer 
information that you maintain or otherwise possess in accordance with 
the Interagency Guidelines Establishing Information Security Standards, 
as required under sections 208.3(d) (Regulation H), 211.5(l) and 
211.24(i) (Regulation K) of this chapter, to the extent that you are 
covered by the scope of the Guidelines.
    (c) Rule of construction. Nothing in this section shall be construed 
to:
    (1) Require you to maintain or destroy any record pertaining to a 
consumer that is not imposed under any other law; or

[[Page 57]]

    (2) Alter or affect any requirement imposed under any other 
provision of law to maintain or destroy such a record.

                    Appendix A to Part 222 [Reserved]

Appendix B to Part 222--Model Notices of Furnishing Negative Information

    a. Although use of the model notices is not required, a financial 
institution that is subject to section 623(a)(7) of the FCRA shall be 
deemed to be in compliance with the notice requirement in section 
623(a)(7) of the FCRA if the institution properly uses the model notices 
in this appendix (as applicable).
    b. A financial institution may use Model Notice B-1 if the 
institution provides the notice prior to furnishing negative information 
to a nationwide consumer reporting agency.
    c. A financial institution may use Model Notice B-2 if the 
institution provides the notice after furnishing negative information to 
a nationwide consumer reporting agency.
    d. Financial institutions may make certain changes to the language 
or format of the model notices without losing the safe harbor from 
liability provided by the model notices. The changes to the model 
notices may not be so extensive as to affect the substance, clarity, or 
meaningful sequence of the language in the model notices. Financial 
institutions making such extensive revisions will lose the safe harbor 
from liability that this appendix provides. Acceptable changes include, 
for example,
    1. Rearranging the order of the references to ``late payment(s),'' 
or ``missed payment(s)''
    2. Pluralizing the terms ``credit bureau,'' ``credit report,'' and 
``account''
    3. Specifying the particular type of account on which information 
may be furnished, such as ``credit card account''
    4. Rearranging in Model Notice B-1 the phrases ``information about 
your account'' and ``to credit bureaus'' such that it would read ``We 
may report to credit bureaus information about your account.''

                            Model Notice B-1

    We may report information about your account to credit bureaus. Late 
payments, missed payments, or other defaults on your account may be 
reflected in your credit report.

                            Model Notice B-2

    We have told a credit bureau about a late payment, missed payment or 
other default on your account. This information may be reflected in your 
credit report.

[69 FR 33285, June 15, 2004]



PART 223_TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES 
(REGULATION W)--Table of Contents




                 Subpart A_Introduction and Definitions

Sec.
223.1 Authority, purpose, and scope.
223.2 What is an ``affiliate'' for purposes of sections 23A and 23B and 
          this part?
223.3 What are the meanings of the other terms used in sections 23A and 
          23B and this part?

               Subpart B_General Provisions of Section 23A

223.11 What is the maximum amount of covered transactions that a member 
          bank may enter into with any single affiliate?
223.12 What is the maximum amount of covered transactions that a member 
          bank may enter into with all affiliates?
223.13 What safety and soundness requirement applies to covered 
          transactions?
223.14 What are the collateral requirements for a credit transaction 
          with an affiliate?
223.15 May a member bank purchase a low-quality asset from an affiliate?
223.16 What transactions by a member bank with any person are treated as 
          transactions with an affiliate?

       Subpart C_Valuation and Timing Principles Under Section 23A

223.21 What valuation and timing principles apply to credit 
          transactions?
223.22 What valuation and timing principles apply to asset purchases?
223.23 What valuation and timing principles apply to purchases of and 
          investments in securities issued by an affiliate?
223.24 What valuation principles apply to extensions of credit secured 
          by affiliate securities?

             Subpart D_Other Requirements Under Section 23A

223.31 How does section 23A apply to a member bank's acquisition of an 
          affiliate that becomes an operating subsidiary of the member 
          bank after the acquisition?
223.32 What rules apply to financial subsidiaries of a member bank?
223.33 What rules apply to derivative transactions?

         Subpart E_Exemptions from the Provisions of Section 23A

223.41 What covered transactions are exempt from the quantitative limits 
          and collateral requirements?

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223.42 What covered transactions are exempt from the quantitative 
          limits, collateral requirements, and low-quality asset 
          prohibition?
223.43 What are the standards under which the Board may grant additional 
          exemptions from the requirements of section 23A?

               Subpart F_General Provisions of Section 23B

223.51 What is the market terms requirement of section 23B?
223.52 What transactions with affiliates or others must comply with 
          section 23B's market terms requirement?
223.53 What asset purchases are prohibited by section 23B?
223.54 What advertisements and statements are prohibited by section 23B?
223.55 What are the standards under which the Board may grant exemptions 
          from the requirements of section 23B?

   Subpart G_Application of Sections 23A and 23B to U.S. Branches and 
                        Agencies of Foreign Banks

223.61 How do sections 23A and 23B apply to U.S. branches and agencies 
          of foreign banks?

                 Subpart H_Miscellaneous Interpretations

223.71 How do sections 23A and 23B apply to transactions in which a 
          member bank purchases from one affiliate an asset relating to 
          another affiliate?

    Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e), 
1828(j), and 1468(a).

    Source: 67 FR 76604, Dec. 12, 2002, unless otherwise noted.



                 Subpart A_Introduction and Definitions



Sec. 223.1  Authority, purpose, and scope.

    (a) Authority. The Board of Governors of the Federal Reserve System 
(Board) has issued this part (Regulation W) under the authority of 
sections 23A(f) and 23B(e) of the Federal Reserve Act (12 U.S.C. 
371c(f), 371c-1(e)).
    (b) Purpose. Sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1) establish certain quantitative limits and other 
prudential requirements for loans, purchases of assets, and certain 
other transactions between a member bank and its affiliates. This 
regulation implements sections 23A and 23B by defining terms used in the 
statute, explaining the statute's requirements, and exempting certain 
transactions.
    (c) Scope. Sections 23A and 23B and this regulation apply by their 
terms to ``member banks''--that is, any national bank, State bank, trust 
company, or other institution that is a member of the Federal Reserve 
System. In addition, the Federal Deposit Insurance Act (12 U.S.C. 
1828(j)) applies sections 23A and 23B to insured State nonmember banks 
in the same manner and to the same extent as if they were member banks. 
The Home Owners' Loan Act (12 U.S.C. 1468(a)) also applies sections 23A 
and 23B to insured savings associations in the same manner and to the 
same extent as if they were member banks (and imposes two additional 
restrictions).



Sec. 223.2  What is an ``affiliate'' for purposes of sections 23A and 
23B and this part?

    (a) For purposes of this part and except as provided in paragraphs 
(b) and (c) of this section, ``affiliate'' with respect to a member bank 
means:
    (1) Parent companies. Any company that controls the member bank;
    (2) Companies under common control by a parent company. Any company, 
including any subsidiary of the member bank, that is controlled by a 
company that controls the member bank;
    (3) Companies under other common control. Any company, including any 
subsidiary of the member bank, that is controlled, directly or 
indirectly, by trust or otherwise, by or for the benefit of shareholders 
who beneficially or otherwise control, directly or indirectly, by trust 
or otherwise, the member bank or any company that controls the member 
bank;
    (4) Companies with interlocking directorates. Any company in which a 
majority of its directors, trustees, or general partners (or individuals 
exercising similar functions) constitute a majority of the persons 
holding any such office with the member bank or any company that 
controls the member bank;
    (5) Sponsored and advised companies. Any company, including a real 
estate investment trust, that is sponsored and advised on a contractual 
basis by the

[[Page 59]]

member bank or an affiliate of the member bank;
    (6) Investment companies. (i) Any investment company for which the 
member bank or any affiliate of the member bank serves as an investment 
adviser, as defined in section 2(a)(20) of the Investment Company Act of 
1940 (15 U.S.C. 80a-2(a)(20)); and
    (ii) Any other investment fund for which the member bank or any 
affiliate of the member bank serves as an investment advisor, if the 
member bank and its affiliates own or control in the aggregate more than 
5 percent of any class of voting securities or of the equity capital of 
the fund;
    (7) Depository institution subsidiaries. A depository institution 
that is a subsidiary of the member bank;
    (8) Financial subsidiaries. A financial subsidiary of the member 
bank;
    (9) Companies held under merchant banking or insurance company 
investment authority--(i) In general. Any company in which a holding 
company of the member bank owns or controls, directly or indirectly, or 
acting through one or more other persons, 15 percent or more of the 
equity capital pursuant to section 4(k)(4)(H) or (I) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(4)(H) or (I)).
    (ii) General exemption. A company will not be an affiliate under 
paragraph (a)(9)(i) of this section if the holding company presents 
information to the Board that demonstrates, to the Board's satisfaction, 
that the holding company does not control the company.
    (iii) Specific exemptions. A company also will not be an affiliate 
under paragraph (a)(9)(i) of this section if:
    (A) No director, officer, or employee of the holding company serves 
as a director, trustee, or general partner (or individual exercising 
similar functions) of the company;
    (B) A person that is not affiliated or associated with the holding 
company owns or controls a greater percentage of the equity capital of 
the company than is owned or controlled by the holding company, and no 
more than one officer or employee of the holding company serves as a 
director or trustee (or individual exercising similar functions) of the 
company; or
    (C) A person that is not affiliated or associated with the holding 
company owns or controls more than 50 percent of the voting shares of 
the company, and officers and employees of the holding company do not 
constitute a majority of the directors or trustees (or individuals 
exercising similar functions) of the company.
    (iv) Application of rule to private equity funds. A holding company 
will not be deemed to own or control the equity capital of a company for 
purposes of paragraph (a)(9)(i) of this section solely by virtue of an 
investment made by the holding company in a private equity fund (as 
defined in the merchant banking subpart of the Board's Regulation Y (12 
CFR 225.173(a))) that owns or controls the equity capital of the company 
unless the holding company controls the private equity fund under 12 CFR 
225.173(d)(4).
    (v) Definition. For purposes of this paragraph (a)(9), ``holding 
company'' with respect to a member bank means a company that controls 
the member bank, or a company that is controlled by shareholders that 
control the member bank, and all subsidiaries of the company (including 
any depository institution that is a subsidiary of the company).
    (10) Partnerships associated with the member bank or an affiliate. 
Any partnership for which the member bank or any affiliate of the member 
bank serves as a general partner or for which the member bank or any 
affiliate of the member bank causes any director, officer, or employee 
of the member bank or affiliate to serve as a general partner;
    (11) Subsidiaries of affiliates. Any subsidiary of a company 
described in paragraphs (a)(1) through (10) of this section; and
    (12) Other companies. Any company that the Board determines by 
regulation or order, or that the appropriate Federal banking agency for 
the member bank determines by order, to have a relationship with the 
member bank, or any affiliate of the member bank, such that covered 
transactions by the member bank with that company may be affected by the 
relationship to the detriment of the member bank.

[[Page 60]]

    (b) ``Affiliate'' with respect to a member bank does not include:
    (1) Subsidiaries. Any company that is a subsidiary of the member 
bank, unless the company is:
    (i) A depository institution;
    (ii) A financial subsidiary;
    (iii) Directly controlled by:
    (A) One or more affiliates (other than depository institution 
affiliates) of the member bank; or
    (B) A shareholder that controls the member bank or a group of 
shareholders that together control the member bank;
    (iv) An employee stock option plan, trust, or similar organization 
that exists for the benefit of the shareholders, partners, members, or 
employees of the member bank or any of its affiliates; or
    (v) Any other company determined to be an affiliate under paragraph 
(a)(12) of this section;
    (2) Bank premises. Any company engaged solely in holding the 
premises of the member bank;
    (3) Safe deposit. Any company engaged solely in conducting a safe 
deposit business;
    (4) Government securities. Any company engaged solely in holding 
obligations of the United States or its agencies or obligations fully 
guaranteed by the United States or its agencies as to principal and 
interest; and
    (5) Companies held DPC. Any company where control results from the 
exercise of rights arising out of a bona fide debt previously 
contracted. This exclusion from the definition of ``affiliate'' applies 
only for the period of time specifically authorized under applicable 
State or Federal law or regulation or, in the absence of such law or 
regulation, for a period of two years from the date of the exercise of 
such rights. The Board may authorize, upon application and for good 
cause shown, extensions of time for not more than one year at a time, 
but such extensions in the aggregate will not exceed three years.
    (c) For purposes of subpart F (implementing section 23B), 
``affiliate'' with respect to a member bank also does not include any 
depository institution.



Sec. 223.3  What are the meanings of the other terms used in sections 
23A and 23B and this part?

    For purposes of this part:
    (a) Aggregate amount of covered transactions means the amount of the 
covered transaction about to be engaged in added to the current amount 
of all outstanding covered transactions.
    (b) Appropriate Federal banking agency with respect to a member bank 
or other depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (c) ``Bank holding company'' has the same meaning as in 12 CFR 
225.2.
    (d) ``Capital stock and surplus'' means the sum of:
    (1) A member bank's tier 1 and tier 2 capital under the risk-based 
capital guidelines of the appropriate Federal banking agency, based on 
the member bank's most recent consolidated Report of Condition and 
Income filed under 12 U.S.C. 1817(a)(3);
    (2) The balance of a member bank's allowance for loan and lease 
losses not included in its tier 2 capital under the risk-based capital 
guidelines of the appropriate Federal banking agency, based on the 
member bank's most recent consolidated Report of Condition and Income 
filed under 12 U.S.C. 1817(a)(3); and
    (3) The amount of any investment by a member bank in a financial 
subsidiary that counts as a covered transaction and is required to be 
deducted from the member bank's capital for regulatory capital purposes.
    (e) Carrying value with respect to a security means (unless 
otherwise provided) the value of the security on the financial 
statements of the member bank, determined in accordance with GAAP.
    (f) Company means a corporation, partnership, limited liability 
company, business trust, association, or similar organization and, 
unless specifically excluded, includes a member bank and a depository 
institution.
    (g) Control. (1) In general. ``Control'' by a company or shareholder 
over another company means that:
    (i) The company or shareholder, directly or indirectly, or acting 
through

[[Page 61]]

one or more other persons, owns, controls, or has power to vote 25 
percent or more of any class of voting securities of the other company;
    (ii) The company or shareholder controls in any manner the election 
of a majority of the directors, trustees, or general partners (or 
individuals exercising similar functions) of the other company; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company or shareholder, directly or indirectly, 
exercises a controlling influence over the management or policies of the 
other company.
    (2) Ownership or control of shares as fiduciary. Notwithstanding any 
other provision of this regulation, no company will be deemed to control 
another company by virtue of its ownership or control of shares in a 
fiduciary capacity, except as provided in paragraph (a)(3) of Sec. 
223.2 or if the company owning or controlling the shares is a business 
trust.
    (3) Ownership or control of securities by subsidiary. A company 
controls securities, assets, or other ownership interests owned or 
controlled, directly or indirectly, by any subsidiary (including a 
subsidiary depository institution) of the company.
    (4) Ownership or control of convertible instruments. A company or 
shareholder that owns or controls instruments (including options or 
warrants) that are convertible or exercisable, at the option of the 
holder or owner, into securities, controls the securities, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder should not be deemed to control the securities.
    (5) Ownership or control of nonvoting securities. A company or 
shareholder that owns or controls 25 percent or more of the equity 
capital of another company controls the other company, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder does not control the other company.
    (h) Covered transaction with respect to an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) A purchase of, or an investment in, a security issued by the 
affiliate;
    (3) A purchase of an asset from the affiliate, including an asset 
subject to recourse or an agreement to repurchase, except such purchases 
of real and personal property as may be specifically exempted by the 
Board by order or regulation;
    (4) The acceptance of a security issued by the affiliate as 
collateral for an extension of credit to any person or company; and
    (5) The issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of credit, on behalf of the 
affiliate, a confirmation of a letter of credit issued by the affiliate, 
and a cross-affiliate netting arrangement.
    (i) Credit transaction with an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) An issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of credit, on behalf of the 
affiliate and a confirmation of a letter of credit issued by the 
affiliate; and
    (3) A cross-affiliate netting arrangement.
    (j) Cross-affiliate netting arrangement means an arrangement among a 
member bank, one or more affiliates of the member bank, and one or more 
nonaffiliates of the member bank in which:
    (1) A nonaffiliate is permitted to deduct any obligations of an 
affiliate of the member bank to the nonaffiliate when settling the 
nonaffiliate's obligations to the member bank; or
    (2) The member bank is permitted or required to add any obligations 
of its affiliate to a nonaffiliate when determining the member bank's 
obligations to the nonaffiliate.
    (k) ``Depository institution'' means, unless otherwise noted, an 
insured depository institution (as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813)), but does not include any branch 
of a foreign bank. For purposes of this definition, an operating 
subsidiary of a depository institution is treated as part of the 
depository institution.

[[Page 62]]

    (l) ``Derivative transaction'' means any derivative contract listed 
in sections III.E.1.a. through d. of Appendix A to 12 CFR part 225 and 
any similar derivative contract, including a credit derivative contract.
    (m) ``Eligible affiliated mutual fund securities'' has the meaning 
specified in paragraph (c)(2) of Sec. 223.24.
    (n) ``Equity capital'' means:
    (1) With respect to a corporation, preferred stock, common stock, 
capital surplus, retained earnings, and accumulated other comprehensive 
income, less treasury stock, plus any other account that constitutes 
equity of the corporation; and
    (2) With respect to a partnership, limited liability company, or 
other company, equity accounts similar to those described in paragraph 
(n)(1) of this section.
    (o) ``Extension of credit'' to an affiliate means the making or 
renewal of a loan, the granting of a line of credit, or the extending of 
credit in any manner whatsoever, including on an intraday basis, to an 
affiliate. An extension of credit to an affiliate includes, without 
limitation:
    (1) An advance to an affiliate by means of an overdraft, cash item, 
or otherwise;
    (2) A sale of Federal funds to an affiliate;
    (3) A lease that is the functional equivalent of an extension of 
credit to an affiliate;
    (4) An acquisition by purchase, discount, exchange, or otherwise of 
a note or other obligation, including commercial paper or other debt 
securities, of an affiliate;
    (5) Any increase in the amount of, extension of the maturity of, or 
adjustment to the interest rate term or other material term of, an 
extension of credit to an affiliate; and
    (6) Any other similar transaction as a result of which an affiliate 
becomes obligated to pay money (or its equivalent).
    (p) ``Financial subsidiary''
    (1) In general. Except as provided in paragraph (p)(2) of this 
section, the term ``financial subsidiary'' means any subsidiary of a 
member bank that:
    (i) Engages, directly or indirectly, in any activity that national 
banks are not permitted to engage in directly or that is conducted under 
terms and conditions that differ from those that govern the conduct of 
such activity by national banks; and
    (ii) Is not a subsidiary that a national bank is specifically 
authorized to own or control by the express terms of a Federal statute 
(other than 12 U.S.C. 24a), and not by implication or interpretation.
    (2) Exceptions. ``Financial subsidiary'' does not include:
    (i) A subsidiary of a member bank that is considered a financial 
subsidiary under paragraph (p)(1) of this section solely because the 
subsidiary engages in the sale of insurance as agent or broker in a 
manner that is not permitted for national banks; and
    (ii) A subsidiary of a State bank (other than a subsidiary described 
in section 46(a) of the Federal Deposit Insurance Act (12 U.S.C. 
1831w(a))) that is considered a financial subsidiary under paragraph 
(p)(1) of this section solely because the subsidiary engages in one or 
more of the following activities:
    (A) An activity that the State bank may engage in directly under 
applicable Federal and State law and that is conducted under the same 
terms and conditions that govern the conduct of the activity by the 
State bank; and
    (B) An activity that the subsidiary was authorized by applicable 
Federal and State law to engage in prior to December 12, 2002, and that 
was lawfully engaged in by the subsidiary on that date.
    (3) Subsidiaries of financial subsidiaries. If a company is a 
financial subsidiary under paragraphs (p)(1) and (p)(2) of this section, 
any subsidiary of such a company is also a financial subsidiary.
    (q) ``Foreign bank'' and an ``agency,'' ``branch,'' or ``commercial 
lending company'' of a foreign bank have the same meanings as in section 
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
    (r) ``GAAP'' means U.S. generally accepted accounting principles.
    (s) ``General purpose credit card'' has the meaning specified in 
paragraph (c)(4)(ii) of Sec. 223.16.

[[Page 63]]

    (t) In contemplation. A transaction between a member bank and a 
nonaffiliate is presumed to be ``in contemplation'' of the nonaffiliate 
becoming an affiliate of the member bank if the member bank enters into 
the transaction with the nonaffiliate after the execution of, or 
commencement of negotiations designed to result in, an agreement under 
the terms of which the nonaffiliate would become an affiliate.
    (u) ``Intraday extension of credit'' has the meaning specified in 
paragraph (l)(2) of Sec. 223.42.
    (v) ``Low-quality asset'' means:
    (1) An asset (including a security) classified as ``substandard,'' 
``doubtful,'' or ``loss,'' or treated as ``special mention'' or ``other 
transfer risk problems,'' either in the most recent report of 
examination or inspection of an affiliate prepared by either a Federal 
or State supervisory agency or in any internal classification system 
used by the member bank or the affiliate (including an asset that 
receives a rating that is substantially equivalent to ``classified'' or 
``special mention'' in the internal system of the member bank or 
affiliate);
    (2) An asset in a nonaccrual status;
    (3) An asset on which principal or interest payments are more than 
thirty days past due;
    (4) An asset whose terms have been renegotiated or compromised due 
to the deteriorating financial condition of the obligor; and
    (5) An asset acquired through foreclosure, repossession, or 
otherwise in satisfaction of a debt previously contracted, if the asset 
has not yet been reviewed in an examination or inspection.
    (w) ``Member bank'' means any national bank, State bank, banking 
association, or trust company that is a member of the Federal Reserve 
System. For purposes of this definition, an operating subsidiary of a 
member bank is treated as part of the member bank.
    (x) ``Municipal securities'' has the same meaning as in section 
3(a)(29) of the Securities Exchange Act of 1934 (17 U.S.C. 78c(a)(29)).
    (y) ``Nonaffiliate'' with respect to a member bank means any person 
that is not an affiliate of the member bank.
    (z) ``Obligations of, or fully guaranteed as to principal and 
interest by, the United States or its agencies'' includes those 
obligations listed in 12 CFR 201.108(b) and any additional obligations 
as determined by the Board. The term does not include Federal Housing 
Administration or Veterans Administration loans.
    (aa) ``Operating subsidiary'' with respect to a member bank or other 
depository institution means any subsidiary of the member bank or 
depository institution other than a subsidiary described in paragraphs 
(b)(1)(i) through (v) of Sec. 223.2.
    (bb) ``Person'' means an individual, company, trust, joint venture, 
pool, syndicate, sole proprietorship, unincorporated organization, or 
any other form of entity.
    (cc) ``Principal underwriter'' has the meaning specified in 
paragraph (c)(1) of Sec. 223.53.
    (dd) ``Purchase of an asset'' by a member bank from an affiliate 
means the acquisition by a member bank of an asset from an affiliate in 
exchange for cash or any other consideration, including an assumption of 
liabilities. The merger of an affiliate into a member bank is a purchase 
of assets by the member bank from an affiliate if the member bank 
assumes any liabilities of the affiliate or pays any other form of 
consideration in the transaction.
    (ee) Riskless principal. A company is ``acting exclusively as a 
riskless principal'' if, after receiving an order to buy (or sell) a 
security from a customer, the company purchases (or sells) the security 
in the secondary market for its own account to offset a contemporaneous 
sale to (or purchase from) the customer.
    (ff) ``Securities'' means stocks, bonds, debentures, notes, or 
similar obligations (including commercial paper).
    (gg) ``Securities affiliate'' with respect to a member bank means:
    (1) An affiliate of the member bank that is registered with the 
Securities and Exchange Commission as a broker or dealer; or
    (2) Any other securities broker or dealer affiliate of a member bank 
that is approved by the Board.
    (hh) ``State bank'' has the same meaning as in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813).

[[Page 64]]

    (ii) ``Subsidiary'' with respect to a specified company means a 
company that is controlled by the specified company.
    (jj) ``Voting securities'' has the same meaning as in 12 CFR 225.2.
    (kk) ``Well capitalized'' has the same meaning as in 12 CFR 225.2 
and, in the case of any holding company that is not a bank holding 
company, ``well capitalized'' means that the holding company has and 
maintains at least the capital levels required for a bank holding 
company to be well capitalized under 12 CFR 225.2.
    (ll) ``Well managed'' has the same meaning as in 12 CFR 225.2.



               Subpart B_General Provisions of Section 23A



Sec. 223.11  What is the maximum amount of covered transactions that 
a member bank may enter into with any single affiliate?

    A member bank may not engage in a covered transaction with an 
affiliate (other than a financial subsidiary of the member bank) if the 
aggregate amount of the member bank's covered transactions with such 
affiliate would exceed 10 percent of the capital stock and surplus of 
the member bank.



Sec. 223.12  What is the maximum amount of covered transactions that 
a member bank may enter into with all affiliates?

    A member bank may not engage in a covered transaction with any 
affiliate if the aggregate amount of the member bank's covered 
transactions with all affiliates would exceed 20 percent of the capital 
stock and surplus of the member bank.



Sec. 223.13  What safety and soundness requirement applies to covered 
transactions?

    A member bank may not engage in any covered transaction, including 
any transaction exempt under this regulation, unless the transaction is 
on terms and conditions that are consistent with safe and sound banking 
practices.



Sec. 223.14  What are the collateral requirements for a credit transaction 
with an affiliate?

    (a) Collateral required for extensions of credit and certain other 
covered transactions. A member bank must ensure that each of its credit 
transactions with an affiliate is secured by the amount of collateral 
required by paragraph (b) of this section at the time of the 
transaction.
    (b) Amount of collateral required. (1) The rule. A credit 
transaction described in paragraph (a) of this section must be secured 
by collateral having a market value equal to at least:
    (i) 100 percent of the amount of the transaction, if the collateral 
is:
    (A) Obligations of the United States or its agencies;
    (B) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest;
    (C) Notes, drafts, bills of exchange, or bankers' acceptances that 
are eligible for rediscount or purchase by a Federal Reserve Bank; or
    (D) A segregated, earmarked deposit account with the member bank 
that is for the sole purpose of securing credit transactions between the 
member bank and its affiliates and is identified as such;
    (ii) 110 percent of the amount of the transaction, if the collateral 
is obligations of any State or political subdivision of any State;
    (iii) 120 percent of the amount of the transaction, if the 
collateral is other debt instruments, including loans and other 
receivables; or
    (iv) 130 percent of the amount of the transaction, if the collateral 
is stock, leases, or other real or personal property.
    (2) Example. A member bank makes a $1,000 loan to an affiliate. The 
affiliate posts as collateral for the loan $500 in U.S. Treasury 
securities, $480 in corporate debt securities, and $130 in real estate. 
The loan satisfies the collateral requirements of this section because 
$500 of the loan is 100 percent secured by obligations of the United 
States, $400 of the loan is 120 percent secured by debt instruments, and 
$100 of the loan is 130 percent secured by real estate.

[[Page 65]]

    (c) Ineligible collateral. The following items are not eligible 
collateral for purposes of this section:
    (1) Low-quality assets;
    (2) Securities issued by any affiliate;
    (3) Equity securities issued by the member bank, and debt securities 
issued by the member bank that represent regulatory capital of the 
member bank;
    (4) Intangible assets (including servicing assets), unless 
specifically approved by the Board; and
    (5) Guarantees, letters of credit, and other similar instruments.
    (d) Perfection and priority requirements for collateral. (1) 
Perfection. A member bank must maintain a security interest in 
collateral required by this section that is perfected and enforceable 
under applicable law, including in the event of default resulting from 
bankruptcy, insolvency, liquidation, or similar circumstances.
    (2) Priority. A member bank either must obtain a first priority 
security interest in collateral required by this section or must deduct 
from the value of collateral obtained by the member bank the lesser of:
    (i) The amount of any security interest in the collateral that is 
senior to that of the member bank; or
    (ii) The amount of any credit secured by the collateral that is 
senior to that of the member bank.
    (3) Example. A member bank makes a $2,000 loan to an affiliate. The 
affiliate grants the member bank a second priority security interest in 
a piece of real estate valued at $3,000. Another institution that 
previously lent $1,000 to the affiliate has a first priority security 
interest in the entire parcel of real estate. This transaction is not in 
compliance with the collateral requirements of this section. Due to the 
existence of the prior third-party lien on the real estate, the 
effective value of the real estate collateral for the member bank for 
purposes of this section is only $2,000--$600 less than the amount of 
real estate collateral required by this section for the transaction 
($2,000 x 130 percent = $2,600).
    (e) Replacement requirement for retired or amortized collateral. A 
member bank must ensure that any required collateral that subsequently 
is retired or amortized is replaced with additional eligible collateral 
as needed to keep the percentage of the collateral value relative to the 
amount of the outstanding credit transaction equal to the minimum 
percentage required at the inception of the transaction.
    (f) Inapplicability of the collateral requirements to certain 
transactions. The collateral requirements of this section do not apply 
to the following transactions.
    (1) Acceptances. An acceptance that already is fully secured either 
by attached documents or by other property that is involved in the 
transaction and has an ascertainable market value.
    (2) The unused portion of certain extensions of credit. The unused 
portion of an extension of credit to an affiliate as long as the member 
bank does not have any legal obligation to advance additional funds 
under the extension of credit until the affiliate provides the amount of 
collateral required by paragraph (b) of this section with respect to the 
entire used portion (including the amount of the requested advance) of 
the extension of credit.
    (3) Purchases of affiliate debt securities in the secondary market. 
The purchase of a debt security issued by an affiliate as long as the 
member bank purchases the debt security from a nonaffiliate in a bona 
fide secondary market transaction.



Sec. 223.15  May a member bank purchase a low-quality asset from an 
affiliate?

    (a) In general. A member bank may not purchase a low-quality asset 
from an affiliate unless, pursuant to an independent credit evaluation, 
the member bank had committed itself to purchase the asset before the 
time the asset was acquired by the affiliate.
    (b) Exemption for renewals of loan participations involving problem 
loans. The prohibition contained in paragraph (a) of this section does 
not apply to the renewal of, or extension of additional credit with 
respect to, a member bank's participation in a loan to a nonaffiliate 
that was originated by an affiliate if:
    (1) The loan was not a low-quality asset at the time the member bank 
purchased its participation;

[[Page 66]]

    (2) The renewal or extension of additional credit is approved, as 
necessary to protect the participating member bank's investment by 
enhancing the ultimate collection of the original indebtedness, by the 
board of directors of the participating member bank or, if the 
originating affiliate is a depository institution, by:
    (i) An executive committee of the board of directors of the 
participating member bank; or
    (ii) One or more senior management officials of the participating 
member bank, if:
    (A) The board of directors of the member bank approves standards for 
the member bank's renewals or extensions of additional credit described 
in this paragraph (b), based on the determination set forth in paragraph 
(b)(2) of this section;
    (B) Each renewal or extension of additional credit described in this 
paragraph (b) meets the standards; and
    (C) The board of directors of the member bank periodically reviews 
renewals and extensions of additional credit described in this paragraph 
(b) to ensure that they meet the standards and periodically reviews the 
standards to ensure that they continue to meet the criterion set forth 
in paragraph (b)(2) of this section;
    (3) The participating member bank's share of the renewal or 
extension of additional credit does not exceed its proportional share of 
the original transaction by more than 5 percent, unless the member bank 
obtains the prior written approval of its appropriate Federal banking 
agency; and
    (4) The participating member bank provides its appropriate Federal 
banking agency with written notice of the renewal or extension of 
additional credit not later than 20 days after consummation.



Sec. 223.16  What transactions by a member bank with any person are 
treated as transactions with an affiliate?

    (a) In general. A member bank must treat any of its transactions 
with any person as a transaction with an affiliate to the extent that 
the proceeds of the transaction are used for the benefit of, or 
transferred to, an affiliate.
    (b) Certain agency transactions. (1) Except to the extent described 
in paragraph (b)(2) of this section, an extension of credit by a member 
bank to a nonaffiliate is not treated as an extension of credit to an 
affiliate under paragraph (a) of this section if:
    (i) The proceeds of the extension of credit are used to purchase an 
asset through an affiliate of the member bank, and the affiliate is 
acting exclusively as an agent or broker in the transaction; and
    (ii) The asset purchased by the nonaffiliate is not issued, 
underwritten, or sold as principal by any affiliate of the member bank.
    (2) The interpretation set forth in paragraph (b)(1) of this section 
does not apply to the extent of any agency fee, brokerage commission, or 
other compensation received by an affiliate from the proceeds of the 
extension of credit. The receipt of such compensation may qualify, 
however, for the exemption contained in paragraph (c)(2) of this 
section.
    (c) Exemptions. Notwithstanding paragraph (a) of this section, the 
following transactions are not subject to the quantitative limits of 
Sec. Sec. 223.11 and 223.12 or the collateral requirements of Sec. 
223.14. The transactions are, however, subject to the safety and 
soundness requirement of Sec. 223.13 and the market terms requirement 
and other provisions of subpart F (implementing section 23B).
    (1) Certain riskless principal transactions. An extension of credit 
by a member bank to a nonaffiliate, if:
    (i) The proceeds of the extension of credit are used to purchase a 
security through a securities affiliate of the member bank, and the 
securities affiliate is acting exclusively as a riskless principal in 
the transaction;
    (ii) The security purchased by the nonaffiliate is not issued, 
underwritten, or sold as principal (other than as riskless principal) by 
any affiliate of the member bank; and
    (iii) Any riskless principal mark-up or other compensation received 
by the securities affiliate from the proceeds of the extension of credit 
meets the market terms standard set forth in paragraph (c)(2) of this 
section.

[[Page 67]]

    (2) Brokerage commissions, agency fees, and riskless principal mark-
ups. An affiliate's retention of a portion of the proceeds of an 
extension of credit described in paragraph (b) or (c)(1) of this section 
as a brokerage commission, agency fee, or riskless principal mark-up, if 
that commission, fee, or mark-up is substantially the same as, or lower 
than, those prevailing at the same time for comparable transactions with 
or involving other nonaffiliates, in accordance with the market terms 
requirement of Sec. 223.51.
    (3) Preexisting lines of credit. An extension of credit by a member 
bank to a nonaffiliate, if:
    (i) The proceeds of the extension of credit are used to purchase a 
security from or through a securities affiliate of the member bank; and
    (ii) The extension of credit is made pursuant to, and consistent 
with any conditions imposed in, a preexisting line of credit that was 
not established in contemplation of the purchase of securities from or 
through an affiliate of the member bank.
    (4) General purpose credit card transactions.
    (i) In general. An extension of credit by a member bank to a 
nonaffiliate, if:
    (A) The proceeds of the extension of credit are used by the 
nonaffiliate to purchase a product or service from an affiliate of the 
member bank; and
    (B) The extension of credit is made pursuant to, and consistent with 
any conditions imposed in, a general purpose credit card issued by the 
member bank to the nonaffiliate.
    (ii) Definition. ``General purpose credit card'' means a credit card 
issued by a member bank that is widely accepted by merchants that are 
not affiliates of the member bank for the purchase of products or 
services, if:
    (A) Less than 25 percent of the total value of products and services 
purchased with the card by all cardholders are purchases of products and 
services from one or more affiliates of the member bank;
    (B) All affiliates of the member bank would be permissible for a 
financial holding company (as defined in 12 U.S.C. 1841) under section 4 
of the Bank Holding Company Act (12 U.S.C. 1843), and the member bank 
has no reason to believe that 25 percent or more of the total value of 
products and services purchased with the card by all cardholders are or 
would be purchases of products and services from one or more affiliates 
of the member bank; or
    (C) The member bank presents information to the Board that 
demonstrates, to the Board's satisfaction, that less than 25 percent of 
the total value of products and services purchased with the card by all 
cardholders are and would be purchases of products and services from one 
or more affiliates of the member bank.
    (iii) Calculating compliance. To determine whether a credit card 
qualifies as a general purpose credit card under the standard set forth 
in paragraph (c)(4)(ii)(A) of this section, a member bank must compute 
compliance on a monthly basis, based on cardholder purchases that were 
financed by the credit card during the preceding 12 calendar months. If 
a credit card has qualified as a general purpose credit card for 3 
consecutive months but then ceases to qualify in the following month, 
the member bank may continue to treat the credit card as a general 
purpose credit card for such month and three additional months (or such 
longer period as may be permitted by the Board).
    (iv) Example of calculating compliance with the 25 percent test. A 
member bank seeks to qualify a credit card as a general purpose credit 
card under paragraph (c)(4)(ii)(A) of this section. The member bank 
assesses its compliance under paragraph (c)(4)(iii) of this section on 
the 15th day of every month (for the preceding 12 calendar months). The 
credit card qualifies as a general purpose credit card for at least 
three consecutive months. On June 15, 2005, however, the member bank 
determines that, for the 12-calendar-month period from June 1, 2004, 
through May 31, 2005, 27 percent of the total value of products and 
services purchased with the card by all cardholders were purchases of 
products and services from an affiliate of the member bank. Unless the 
credit card returns to compliance with the 25 percent limit by the 12-
calendar-month period ending August 31, 2005,

[[Page 68]]

the card will cease to qualify as a general purpose credit card as of 
September 1, 2005. Any outstanding extensions of credit under the credit 
card that were used to purchase products or services from an affiliate 
of the member bank would become covered transactions at such time.



       Subpart C_Valuation and Timing Principles Under Section 23A



Sec. 223.21  What valuation and timing principles apply to credit 
transactions?

    (a) Valuation. (1) Initial valuation. Except as provided in 
paragraph (a)(2) or (3) of this section, a credit transaction with an 
affiliate initially must be valued at the greater of:
    (i) The principal amount of the transaction;
    (ii) The amount owed by the affiliate to the member bank under the 
transaction; or
    (iii) The sum of:
    (A) The amount provided to, or on behalf of, the affiliate in the 
transaction; and
    (B) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (2) Initial valuation of certain acquisitions of a credit 
transaction. If a member bank acquires from a nonaffiliate a credit 
transaction with an affiliate, the covered transaction initially must be 
valued at the sum of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the credit transaction; and
    (ii) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (3) Debt securities. The valuation principles of paragraphs (a)(1) 
and (2) of this section do not apply to a member bank's purchase of or 
investment in a debt security issued by an affiliate, which is governed 
by Sec. 223.23.
    (4) Examples. The following are examples of how to value a member 
bank's credit transactions with an affiliate.
    (i) Term loan. A member bank makes a loan to an affiliate that has a 
principal amount of $100. The affiliate pays $2 in up-front fees to the 
member bank, and the affiliate receives net loan proceeds of $98. The 
member bank must initially value the covered transaction at $100.
    (ii) Revolving credit. A member bank establishes a $300 revolving 
credit facility for an affiliate. The affiliate has drawn down $100 
under the facility. The member bank must value the covered transaction 
at $300 throughout the life of the facility.
    (iii) Guarantee. A member bank has issued a guarantee to a 
nonaffiliate on behalf of an affiliate under which the member bank would 
be obligated to pay the nonaffiliate $500 if the affiliate defaults on 
an issuance of debt securities. The member bank must value the guarantee 
at $500 throughout the life of the guarantee.
    (iv) Acquisition of a loan to an affiliate. A member bank purchases 
from a nonaffiliate a fixed-rate loan to an affiliate. The loan has an 
outstanding principal amount of $100 but, due to movements in the 
general level of interest rates since the time of the loan's 
origination, the member bank is able to purchase the loan for $90. The 
member bank initially must value the credit transaction at $90 (and must 
ensure that the credit transaction complies with the collateral 
requirements of Sec. 223.14 at the time of its acquisition of the 
loan).
    (b) Timing. (1) In general. A member bank engages in a credit 
transaction with an affiliate at the time during the day that:
    (i) The member bank becomes legally obligated to make an extension 
of credit to, issue a guarantee, acceptance, or letter of credit on 
behalf of, or confirm a letter of credit issued by, an affiliate;
    (ii) The member bank enters into a cross-affiliate netting 
arrangement; or
    (iii) The member bank acquires an extension of credit to, or 
guarantee, acceptance, or letter of credit issued on behalf of, an 
affiliate.
    (2) Credit transactions by a member bank with a nonaffiliate that 
becomes an affiliate of the member bank.
    (i) In general. A credit transaction with a nonaffiliate becomes a 
covered transaction at the time that the nonaffiliate becomes an 
affiliate of the member bank. The member bank must

[[Page 69]]

treat the amount of any such credit transaction as part of the aggregate 
amount of the member bank's covered transactions for purposes of 
determining compliance with the quantitative limits of Sec. Sec. 223.11 
and 223.12 in connection with any future covered transactions. Except as 
described in paragraph (b)(2)(ii) of this section, the member bank is 
not required to reduce the amount of its covered transactions with any 
affiliate because the nonaffiliate has become an affiliate. If the 
nonaffiliate becomes an affiliate less than one year after the member 
bank enters into the credit transaction with the nonaffiliate, the 
member bank also must ensure that the credit transaction complies with 
the collateral requirements of Sec. 223.14 promptly after the 
nonaffiliate becomes an affiliate.
    (ii) Credit transactions by a member bank with a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. Notwithstanding the provisions of paragraph (b)(2)(i) of this 
section, if a member bank engages in a credit transaction with a 
nonaffiliate in contemplation of the nonaffiliate becoming an affiliate 
of the member bank, the member bank must ensure that:
    (A) The aggregate amount of the member bank's covered transactions 
(including any such credit transaction with the nonaffiliate) would not 
exceed the quantitative limits of Sec. 223.11 or 223.12 at the time the 
nonaffiliate becomes an affiliate; and
    (B) The credit transaction complies with the collateral requirements 
of Sec. 223.14 at the time the nonaffiliate becomes an affiliate.
    (iii) Example. A member bank with capital stock and surplus of 
$1,000 and no outstanding covered transactions makes a $120 unsecured 
loan to a nonaffiliate. The member bank does not make the loan in 
contemplation of the nonaffiliate becoming an affiliate. Nine months 
later, the member bank's holding company purchases all the stock of the 
nonaffiliate, thereby making the nonaffiliate an affiliate of the member 
bank. The member bank is not in violation of the quantitative limits of 
Sec. 223.11 or 223.12 at the time of the stock acquisition. The member 
bank is, however, prohibited from engaging in any additional covered 
transactions with the new affiliate at least until such time as the 
value of the loan transaction falls below 10 percent of the member 
bank's capital stock and surplus. In addition, the member bank must 
bring the loan into compliance with the collateral requirements of Sec. 
223.14 promptly after the stock acquisition.



Sec. 223.22  What valuation and timing principles apply to asset 
purchases?

    (a) Valuation. (1) In general. Except as provided in paragraph 
(a)(2) of this section, a purchase of an asset by a member bank from an 
affiliate must be valued initially at the total amount of consideration 
given (including liabilities assumed) by the member bank in exchange for 
the asset. The value of the covered transaction after the purchase may 
be reduced to reflect amortization or depreciation of the asset, to the 
extent that such reductions are consistent with GAAP.
    (2) Exceptions. (i) Purchase of an extension of credit to an 
affiliate. A purchase from an affiliate of an extension of credit to an 
affiliate must be valued in accordance with Sec. 223.21, unless the 
note or obligation evidencing the extension of credit is a security 
issued by an affiliate (in which case the transaction must be valued in 
accordance with Sec. 223.23).
    (ii) Purchase of a security issued by an affiliate. A purchase from 
an affiliate of a security issued by an affiliate must be valued in 
accordance with Sec. 223.23.
    (iii) Transfer of a subsidiary. A transfer to a member bank of 
securities issued by an affiliate that is treated as a purchase of 
assets from an affiliate under Sec. 223.31 must be valued in accordance 
with paragraph (b) of Sec. 223.31.
    (iv) Purchase of a line of credit. A purchase from an affiliate of a 
line of credit, revolving credit facility, or other similar credit 
arrangement for a nonaffiliate must be valued initially at the total 
amount of consideration given by the member bank in exchange for the 
asset plus any additional amount that the member bank could be required 
to provide to the borrower under the terms of the credit arrangement.
    (b) Timing. (1) In general. A purchase of an asset from an affiliate 
remains a

[[Page 70]]

covered transaction for a member bank for as long as the member bank 
holds the asset.
    (2) Asset purchases by a member bank from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. If a member bank purchases an asset from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank, the asset purchase becomes a covered transaction at the time that 
the nonaffiliate becomes an affiliate of the member bank. In addition, 
the member bank must ensure that the aggregate amount of the member 
bank's covered transactions (including any such transaction with the 
nonaffiliate) would not exceed the quantitative limits of Sec. 223.11 
or 223.12 at the time the nonaffiliate becomes an affiliate.
    (c) Examples. The following are examples of how to value a member 
bank's purchase of an asset from an affiliate.
    (1) Cash purchase of assets. A member bank purchases a pool of loans 
from an affiliate for $10 million. The member bank initially must value 
the covered transaction at $10 million. Going forward, if the borrowers 
repay $6 million of the principal amount of the loans, the member bank 
may value the covered transaction at $4 million.
    (2) Purchase of assets through an assumption of liabilities. An 
affiliate of a member bank contributes real property with a fair market 
value of $200,000 to the member bank. The member bank pays the affiliate 
no cash for the property, but assumes a $50,000 mortgage on the 
property. The member bank has engaged in a covered transaction with the 
affiliate and initially must value the transaction at $50,000. Going 
forward, if the member bank retains the real property but pays off the 
mortgage, the member bank must continue to value the covered transaction 
at $50,000. If the member bank, however, sells the real property, the 
transaction ceases to be a covered transaction at the time of the sale 
(regardless of the status of the mortgage).



Sec. 223.23  What valuation and timing principles apply to purchases of 
and investments in securities issued by an affiliate?

    (a) Valuation. (1) In general. Except as provided in paragraph (b) 
of Sec. 223.32 with respect to financial subsidiaries, a member bank's 
purchase of or investment in a security issued by an affiliate must be 
valued at the greater of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the security, reduced to 
reflect amortization of the security to the extent consistent with GAAP; 
or
    (ii) The carrying value of the security.
    (2) Examples. The following are examples of how to value a member 
bank's purchase of or investment in securities issued by an affiliate 
(other than a financial subsidiary of the member bank).
    (i) Purchase of the debt securities of an affiliate. The parent 
holding company of a member bank owns 100 percent of the shares of a 
mortgage company. The member bank purchases debt securities issued by 
the mortgage company for $600. The initial carrying value of the 
securities is $600. The member bank initially must value the investment 
at $600.
    (ii) Purchase of the shares of an affiliate. The parent holding 
company of a member bank owns 51 percent of the shares of a mortgage 
company. The member bank purchases an additional 30 percent of the 
shares of the mortgage company from a third party for $100. The initial 
carrying value of the shares is $100. The member bank initially must 
value the investment at $100. Going forward, if the member bank's 
carrying value of the shares declines to $40, the member bank must 
continue to value the investment at $100.
    (iii) Contribution of the shares of an affiliate. The parent holding 
company of a member bank owns 100 percent of the shares of a mortgage 
company and contributes 30 percent of the shares to the member bank. The 
member bank gives no consideration in exchange for the shares. If the 
initial carrying value of the shares is $300, then the member

[[Page 71]]

bank initially must value the investment at $300. Going forward, if the 
member bank's carrying value of the shares increases to $500, the member 
bank must value the investment at $500.
    (b) Timing. (1) In general. A purchase of or investment in a 
security issued by an affiliate remains a covered transaction for a 
member bank for as long as the member bank holds the security.
    (2) A member bank's purchase of or investment in a security issued 
by a nonaffiliate that becomes an affiliate of the member bank. A member 
bank's purchase of or investment in a security issued by a nonaffiliate 
that becomes an affiliate of the member bank must be treated according 
to the same transition rules that apply to credit transactions described 
in paragraph (b)(2) of Sec. 223.21.



Sec. 223.24  What valuation principles apply to extensions of credit 
secured by affiliate securities?

    (a) Valuation of extensions of credit secured exclusively by 
affiliate securities. An extension of credit by a member bank to a 
nonaffiliate secured exclusively by securities issued by an affiliate of 
the member bank must be valued at the lesser of:
    (1) The total value of the extension of credit; or
    (2) The fair market value of the securities issued by an affiliate 
that are pledged as collateral, if the member bank verifies that such 
securities meet the market quotation standard contained in paragraph (e) 
of Sec. 223.42 or the standards set forth in paragraphs (f)(1) and (5) 
of Sec. 223.42.
    (b) Valuation of extensions of credit secured by affiliate 
securities and other collateral. An extension of credit by a member bank 
to a nonaffiliate secured in part by securities issued by an affiliate 
of the member bank and in part by nonaffiliate collateral must be valued 
at the lesser of:
    (1) The total value of the extension of credit less the fair market 
value of the nonaffiliate collateral; or
    (2) The fair market value of the securities issued by an affiliate 
that are pledged as collateral, if the member bank verifies that such 
securities meet the market quotation standard contained in paragraph (e) 
of Sec. 223.42 or the standards set forth in paragraphs (f)(1) and (5) 
of Sec. 223.42.
    (c) Exclusion of eligible affiliated mutual fund securities. (1) The 
exclusion. Eligible affiliated mutual fund securities are not considered 
to be securities issued by an affiliate, and are instead considered to 
be nonaffiliate collateral, for purposes of paragraphs (a) and (b) of 
this section, unless the member bank knows or has reason to know that 
the proceeds of the extension of credit will be used to purchase the 
eligible affiliated mutual fund securities collateral or will otherwise 
be used for the benefit of or transferred to an affiliate of the member 
bank.
    (2) Definition. ``Eligible affiliated mutual fund securities'' with 
respect to a member bank are securities issued by an affiliate of the 
member bank that is an open-end investment company registered with the 
Securities and Exchange Commission under the Investment Company Act of 
1940 (15 U.S.C. 80a-1 et seq.), if:
    (i) The securities issued by the investment company:
    (A) Meet the market quotation standard contained in paragraph (e) of 
Sec. 223.42;
    (B) Meet the standards set forth in paragraphs (f)(1) and (5) of 
Sec. 223.42; or
    (C) Have closing prices that are made public through a mutual fund 
``supermarket'' website maintained by an unaffiliated securities broker-
dealer or mutual fund distributor; and
    (ii) The member bank and its affiliates do not own or control in the 
aggregate more than 5 percent of any class of voting securities or of 
the equity capital of the investment company (excluding securities held 
by the member bank or an affiliate in good faith in a fiduciary 
capacity, unless the member bank or affiliate holds the securities for 
the benefit of the member bank or affiliate, or the shareholders, 
employees, or subsidiaries of the member bank or affiliate).
    (3) Example. A member bank proposes to lend $100 to a nonaffiliate 
secured exclusively by eligible affiliated mutual fund securities. The 
member bank knows that the nonaffiliate intends to use all the loan 
proceeds to purchase

[[Page 72]]

the eligible affiliated mutual fund securities that would serve as 
collateral for the loan. Under the attribution rule in Sec. 223.16, the 
member bank must treat the loan to the nonaffiliate as a loan to an 
affiliate, and, because securities issued by an affiliate are ineligible 
collateral under Sec. 223.14, the loan would not be in compliance with 
Sec. 223.14.



             Subpart D_Other Requirements Under Section 23A



Sec. 223.31  How does section 23A apply to a member bank's acquisition 

of an affiliate that becomes an operating subsidiary of the member bank 
after the 
          acquisition?

    (a) Certain acquisitions by a member bank of securities issued by an 
affiliate are treated as a purchase of assets from an affiliate. A 
member bank's acquisition of a security issued by a company that was an 
affiliate of the member bank before the acquisition is treated as a 
purchase of assets from an affiliate, if:
    (1) As a result of the transaction, the company becomes an operating 
subsidiary of the member bank; and
    (2) The company has liabilities, or the member bank gives cash or 
any other consideration in exchange for the security.
    (b) Valuation. (1) Initial valuation. A transaction described in 
paragraph (a) of this section must be valued initially at the greater 
of:
    (i) The sum of:
    (A) The total amount of consideration given by the member bank in 
exchange for the security; and
    (B) The total liabilities of the company whose security has been 
acquired by the member bank, as of the time of the acquisition; or
    (ii) The total value of all covered transactions (as computed under 
this part) acquired by the member bank as a result of the security 
acquisition.
    (2) Ongoing valuation. The value of a transaction described in 
paragraph (a) of this section may be reduced after the initial transfer 
to reflect:
    (i) Amortization or depreciation of the assets of the transferred 
company, to the extent that such reductions are consistent with GAAP; 
and
    (ii) Sales of the assets of the transferred company.
    (c) Valuation example. The parent holding company of a member bank 
contributes between 25 and 100 percent of the voting shares of a 
mortgage company to the member bank. The parent holding company retains 
no shares of the mortgage company. The member bank gives no 
consideration in exchange for the transferred shares. The mortgage 
company has total assets of $300,000 and total liabilities of $100,000. 
The mortgage company's assets do not include any loans to an affiliate 
of the member bank or any other asset that would represent a separate 
covered transaction for the member bank upon consummation of the share 
transfer. As a result of the transaction, the mortgage company becomes 
an operating subsidiary of the member bank. The transaction is treated 
as a purchase of the assets of the mortgage company by the member bank 
from an affiliate under paragraph (a) of this section. The member bank 
initially must value the transaction at $100,000, the total amount of 
the liabilities of the mortgage company. Going forward, if the member 
bank pays off the liabilities, the member bank must continue to value 
the covered transaction at $100,000. If the member bank, however, sells 
$15,000 of the transferred assets of the mortgage company or if $15,000 
of the transferred assets amortize, the member bank may value the 
covered transaction at $85,000.
    (d) Exemption for step transactions. A transaction described in 
paragraph (a) of this section is exempt from the requirements of this 
regulation (other than the safety and soundness requirement of Sec. 
223.13 and the market terms requirement of Sec. 223.51) if:
    (1) The member bank acquires the securities issued by the 
transferred company within one business day (or such longer period, up 
to three months, as may be permitted by the member bank's appropriate 
Federal banking agency) after the company becomes an affiliate of the 
member bank;
    (2) The member bank acquires all the securities of the transferred 
company that were transferred in connection with the transaction that 
made the

[[Page 73]]

company an affiliate of the member bank;
    (3) The business and financial condition (including the asset 
quality and liabilities) of the transferred company does not materially 
change from the time the company becomes an affiliate of the member bank 
and the time the member bank acquires the securities issued by the 
company; and
    (4) At or before the time that the transferred company becomes an 
affiliate of the member bank, the member bank notifies its appropriate 
Federal banking agency and the Board of the member bank's intent to 
acquire the company.
    (e) Example of step transaction. A bank holding company acquires 100 
percent of the shares of an unaffiliated leasing company. At that time, 
the subsidiary member bank of the holding company notifies its 
appropriate Federal banking agency and the Board of its intent to 
acquire the leasing company from its holding company. On the day after 
consummation of the acquisition, the holding company transfers all of 
the shares of the leasing company to the member bank. No material change 
in the business or financial condition of the leasing company occurs 
between the time of the holding company's acquisition and the member 
bank's acquisition. The leasing company has liabilities. The leasing 
company becomes an operating subsidiary of the member bank at the time 
of the transfer. This transfer by the holding company to the member 
bank, although deemed an asset purchase by the member bank from an 
affiliate under paragraph (a) of this section, would qualify for the 
exemption in paragraph (d) of this section.



Sec. 223.32  What rules apply to financial subsidiaries of a member 
bank?

    (a) Exemption from the 10 percent limit for covered transactions 
between a member bank and a single financial subsidiary. The 10 percent 
quantitative limit contained in Sec. 223.11 does not apply with respect 
to covered transactions between a member bank and a financial subsidiary 
of the member bank. The 20 percent quantitative limit contained in Sec. 
223.12 does apply to such transactions.
    (b) Valuation of purchases of or investments in the securities of a 
financial subsidiary. (1) General rule. A member bank's purchase of or 
investment in a security issued by a financial subsidiary of the member 
bank must be valued at the greater of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the security, reduced to 
reflect amortization of the security to the extent consistent with GAAP; 
and
    (ii) The carrying value of the security (adjusted so as not to 
reflect the member bank's pro rata portion of any earnings retained or 
losses incurred by the financial subsidiary after the member bank's 
acquisition of the security).
    (2) Carrying value of an investment in a consolidated financial 
subsidiary. If a financial subsidiary is consolidated with its parent 
member bank under GAAP, the carrying value of the member bank's 
investment in securities issued by the financial subsidiary shall be 
equal to the carrying value of the securities on parent-only financial 
statements of the member bank, determined in accordance with GAAP 
(adjusted so as not to reflect the member bank's pro rata portion of any 
earnings retained or losses incurred by the financial subsidiary after 
the member bank's acquisition of the securities).
    (3) Examples of the valuation of purchases of and investments in the 
securities of a financial subsidiary. The following are examples of how 
a member bank must value its purchase of or investment in securities 
issued by a financial subsidiary of the member bank. Each example 
involves a securities underwriter that becomes a financial subsidiary of 
the member bank after the transactions described below.
    (i) Initial valuation. (A) Direct acquisition by a member bank. A 
member bank pays $500 to acquire 100 percent of the shares of a 
securities underwriter. The initial carrying value of the shares on the 
member bank's parent-only GAAP financial statements is $500. The member 
bank initially must value the investment at $500.
    (B) Contribution of a financial subsidiary to a member bank. The 
parent

[[Page 74]]

holding company of a member bank acquires 100 percent of the shares of a 
securities underwriter in a transaction valued at $500, and immediately 
contributes the shares to the member bank. The member bank gives no 
consideration in exchange for the shares. The member bank initially must 
value the investment at the carrying value of the shares on the member 
bank's parent-only GAAP financial statements. Under GAAP, the member 
bank's initial carrying value of the shares would be $500.
    (ii) Carrying value not adjusted for earnings and losses of the 
financial subsidiary. A member bank and its parent holding company 
engage in the transaction described in paragraph (b)(3)(i)(B) of this 
section, and the member bank initially values the investment at $500. In 
the following year, the securities underwriter earns $25 in profit, 
which is added to its retained earnings. The member bank's carrying 
value of the shares of the underwriter is not adjusted for purposes of 
this part, and the member bank must continue to value the investment at 
$500. If, however, the member bank contributes $100 of additional 
capital to the securities underwriter, the member bank must value the 
aggregate investment at $600.
    (c) Treatment of an affiliate's investments in, and extensions of 
credit to, a financial subsidiary of a member bank. (1) Investments. Any 
purchase of, or investment in, the securities of a financial subsidiary 
of a member bank by an affiliate of the member bank is treated as a 
purchase of or investment in such securities by the member bank.
    (2) Extensions of credit that are treated as regulatory capital of 
the financial subsidiary. Any extension of credit to a financial 
subsidiary of a member bank by an affiliate of the member bank is 
treated as an extension of credit by the member bank to the financial 
subsidiary if the extension of credit is treated as capital of the 
financial subsidiary under any Federal or State law, regulation, or 
interpretation applicable to the subsidiary.
    (3) Other extensions of credit. Any other extension of credit to a 
financial subsidiary of a member bank by an affiliate of the member bank 
will be treated as an extension of credit by the member bank to the 
financial subsidiary, if the Board determines, by regulation or order, 
that such treatment is necessary or appropriate to prevent evasions of 
the Federal Reserve Act or the Gramm-Leach-Bliley Act.



Sec. 223.33  What rules apply to derivative transactions?

    (a) Market terms requirement. Derivative transactions between a 
member bank and its affiliates (other than depository institutions) are 
subject to the market terms requirement of Sec. 223.51.
    (b) Policies and procedures. A member bank must establish and 
maintain policies and procedures reasonably designed to manage the 
credit exposure arising from its derivative transactions with affiliates 
in a safe and sound manner. The policies and procedures must at a 
minimum provide for:
    (1) Monitoring and controlling the credit exposure arising at any 
one time from the member bank's derivative transactions with each 
affiliate and all affiliates in the aggregate (through, among other 
things, imposing appropriate credit limits, mark-to-market requirements, 
and collateral requirements); and
    (2) Ensuring that the member bank's derivative transactions with 
affiliates comply with the market terms requirement of Sec. 223.51.
    (c) Credit derivatives. A credit derivative between a member bank 
and a nonaffiliate in which the member bank provides credit protection 
to the nonaffiliate with respect to an obligation of an affiliate of the 
member bank is a guarantee by a member bank on behalf of an affiliate 
for purposes of this regulation. Such derivatives would include:
    (1) An agreement under which the member bank, in exchange for a fee, 
agrees to compensate the nonaffiliate for any default of the underlying 
obligation of the affiliate; and
    (2) An agreement under which the member bank, in exchange for 
payments based on the total return of the underlying obligation of the 
affiliate, agrees to pay the nonaffiliate a spread

[[Page 75]]

over funding costs plus any depreciation in the value of the underlying 
obligation of the affiliate.



         Subpart E_Exemptions from the Provisions of Section 23A



Sec. 223.41  What covered transactions are exempt from the quantitative 
limits and collateral requirements?

    The following transactions are not subject to the quantitative 
limits of Sec. Sec. 223.11 and 223.12 or the collateral requirements of 
Sec. 223.14. The transactions are, however, subject to the safety and 
soundness requirement of Sec. 223.13 and the prohibition on the 
purchase of a low-quality asset of Sec. 223.15.
    (a) Parent institution/subsidiary institution transactions. 
Transactions with a depository institution if the member bank controls 
80 percent or more of the voting securities of the depository 
institution or the depository institution controls 80 percent or more of 
the voting securities of the member bank.
    (b) Transactions between a member bank and a depository institution 
owned by the same holding company. Transactions with a depository 
institution if the same company controls 80 percent or more of the 
voting securities of the member bank and the depository institution.
    (c) Certain loan purchases from an affiliated depository 
institution. Purchasing a loan on a nonrecourse basis from an affiliated 
depository institution.
    (d) Internal corporate reorganization transactions. Purchasing 
assets from an affiliate (including in connection with a transfer of 
securities issued by an affiliate to a member bank described in 
paragraph (a) of Sec. 223.31), if:
    (1) The asset purchase is part of an internal corporate 
reorganization of a holding company and involves the transfer of all or 
substantially all of the shares or assets of an affiliate or of a 
division or department of an affiliate;
    (2) The member bank provides its appropriate Federal banking agency 
and the Board with written notice of the transaction before 
consummation, including a description of the primary business activities 
of the affiliate and an indication of the proposed date of the asset 
purchase;
    (3) The member bank's top-tier holding company commits to its 
appropriate Federal banking agency and the Board before consummation 
either:
    (i) To make quarterly cash contributions to the member bank, for a 
two-year period following the member bank's purchase, equal to the book 
value plus any write-downs taken by the member bank, of any transferred 
assets that have become low-quality assets during the quarter; or
    (ii) To repurchase, on a quarterly basis for a two-year period 
following the member bank's purchase, at a price equal to the book value 
plus any write-downs taken by the member bank, any transferred assets 
that have become low-quality assets during the quarter;
    (4) The member bank's top-tier holding company complies with the 
commitment made under paragraph (d)(3) of this section;
    (5) A majority of the member bank's directors reviews and approves 
the transaction before consummation;
    (6) The value of the covered transaction (as computed under this 
part), when aggregated with the value of any other covered transactions 
(as computed under this part) engaged in by the member bank under this 
exemption during the preceding 12 calendar months, represents less than 
10 percent of the member bank's capital stock and surplus (or such 
higher amount, up to 25 percent of the member bank's capital stock and 
surplus, as may be permitted by the member bank's appropriate Federal 
banking agency after conducting a review of the member bank's financial 
condition and the quality of the assets transferred to the member bank); 
and
    (7) The holding company and all its subsidiary member banks and 
other subsidiary depository institutions are well capitalized and well 
managed and would remain well capitalized upon consummation of the 
transaction.



Sec. 223.42  What covered transactions are exempt from the quantitative 
limits, collateral requirements, and low-quality asset prohibition?

    The following transactions are not subject to the quantitative 
limits of

[[Page 76]]

Sec. Sec. 223.11 and 223.12, the collateral requirements of Sec. 
223.14, or the prohibition on the purchase of a low-quality asset of 
Sec. 223.15. The transactions are, however, subject to the safety and 
soundness requirement of Sec. 223.13.
    (a) Making correspondent banking deposits. Making a deposit in an 
affiliated depository institution (as defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813)) or affiliated foreign 
bank that represents an ongoing, working balance maintained in the 
ordinary course of correspondent business.
    (b) Giving credit for uncollected items. Giving immediate credit to 
an affiliate for uncollected items received in the ordinary course of 
business.
    (c) Transactions secured by cash or U.S. government securities.
    (1) In general. Engaging in a credit transaction with an affiliate 
to the extent that the transaction is and remains secured by:
    (i) Obligations of the United States or its agencies;
    (ii) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest; or
    (iii) A segregated, earmarked deposit account with the member bank 
that is for the sole purpose of securing credit transactions between the 
member bank and its affiliates and is identified as such.
    (2) Example. A member bank makes a $100 non-amortizing term loan to 
an affiliate secured by U.S. Treasury securities with a market value of 
$50 and real estate with a market value of $75. The value of the covered 
transaction is $50. If the market value of the U.S. Treasury securities 
falls to $45 during the life of the loan, the value of the covered 
transaction would increase to $55.
    (d) Purchasing securities of a servicing affiliate. Purchasing a 
security issued by any company engaged solely in providing services 
described in section 4(c)(1) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(1)).
    (e) Purchasing certain liquid assets. Purchasing an asset having a 
readily identifiable and publicly available market quotation and 
purchased at or below the asset's current market quotation. An asset has 
a readily identifiable and publicly available market quotation if the 
asset's price is quoted routinely in a widely disseminated publication 
that is readily available to the general public.
    (f) Purchasing certain marketable securities. Purchasing a security 
from a securities affiliate, if:
    (1) The security has a ``ready market,'' as defined in 17 CFR 
240.15c3-1(c)(11)(i);
    (2) The security is eligible for a State member bank to purchase 
directly, subject to the same terms and conditions that govern the 
investment activities of a State member bank, and the member bank 
records the transaction as a purchase of a security for purposes of its 
Call Report, consistent with the requirements for a State member bank;
    (3) The security is not a low-quality asset;
    (4) The member bank does not purchase the security during an 
underwriting, or within 30 days of an underwriting, if an affiliate is 
an underwriter of the security, unless the security is purchased as part 
of an issue of obligations of, or obligations fully guaranteed as to 
principal and interest by, the United States or its agencies;
    (5) The security's price is quoted routinely on an unaffiliated 
electronic service that provides indicative data from real-time 
financial networks, provided that:
    (i) The price paid by the member bank is at or below the current 
market quotation for the security; and
    (ii) The size of the transaction executed by the member bank does 
not cast material doubt on the appropriateness of relying on the current 
market quotation for the security; and
    (6) The member bank maintains, for a period of two years, records 
and supporting information that are sufficient to enable the appropriate 
Federal banking agency to ensure the member bank's compliance with the 
terms of this exemption.
    (g) Purchasing municipal securities. Purchasing a municipal security 
from a securities affiliate if:
    (1) The security is rated by a nationally recognized statistical 
rating organization or is part of an issue of securities that does not 
exceed $25 million;

[[Page 77]]

    (2) The security is eligible for purchase by a State member bank, 
subject to the same terms and conditions that govern the investment 
activities of a State member bank, and the member bank records the 
transaction as a purchase of a security for purposes of its Call Report, 
consistent with the requirements for a State member bank; and
    (3)(i) The security's price is quoted routinely on an unaffiliated 
electronic service that provides indicative data from real-time 
financial networks, provided that:
    (A) The price paid by the member bank is at or below the current 
market quotation for the security; and
    (B) The size of the transaction executed by the member bank does not 
cast material doubt on the appropriateness of relying on the current 
market quotation for the security; or
    (ii) The price paid for the security can be verified by reference to 
two or more actual, current price quotes from unaffiliated broker-
dealers on the exact security to be purchased or a security comparable 
to the security to be purchased, where:
    (A) The price quotes obtained from the unaffiliated broker-dealers 
are based on a transaction similar in size to the transaction that is 
actually executed; and
    (B) The price paid is no higher than the average of the price 
quotes; or
    (iii) The price paid for the security can be verified by reference 
to the written summary provided by the syndicate manager to syndicate 
members that discloses the aggregate par values and prices of all bonds 
sold from the syndicate account, if the member bank:
    (A) Purchases the municipal security during the underwriting period 
at a price that is at or below that indicated in the summary; and
    (B) Obtains a copy of the summary from its securities affiliate and 
retains the summary for three years.
    (h) Purchasing an extension of credit subject to a repurchase 
agreement. Purchasing from an affiliate an extension of credit that was 
originated by the member bank and sold to the affiliate subject to a 
repurchase agreement or with recourse.
    (i) Asset purchases by a newly formed member bank. The purchase of 
an asset from an affiliate by a newly formed member bank, if the 
appropriate Federal banking agency for the member bank has approved the 
asset purchase in writing in connection with its review of the formation 
of the member bank.
    (j) Transactions approved under the Bank Merger Act. Any merger or 
consolidation between a member bank and an affiliated depository 
institution or U.S. branch or agency of a foreign bank, or any 
acquisition of assets or assumption of deposit liabilities by a member 
bank from an affiliated depository institution or U.S. branch or agency 
of a foreign bank, if the transaction has been approved by the 
responsible Federal banking agency pursuant to the Bank Merger Act (12 
U.S.C. 1828(c)).
    (k) Purchasing an extension of credit from an affiliate. Purchasing 
from an affiliate, on a nonrecourse basis, an extension of credit, if:
    (1) The extension of credit was originated by the affiliate;
    (2) The member bank makes an independent evaluation of the 
creditworthiness of the borrower before the affiliate makes or commits 
to make the extension of credit;
    (3) The member bank commits to purchase the extension of credit 
before the affiliate makes or commits to make the extension of credit;
    (4) The member bank does not make a blanket advance commitment to 
purchase extensions of credit from the affiliate; and
    (5) The dollar amount of the extension of credit, when aggregated 
with the dollar amount of all other extensions of credit purchased from 
the affiliate during the preceding 12 calendar months by the member bank 
and its depository institution affiliates, does not represent more than 
50 percent (or such lower percent as is imposed by the member bank's 
appropriate Federal banking agency) of the dollar amount of extensions 
of credit originated by the affiliate during the preceding 12 calendar 
months.
    (l) Intraday extensions of credit.
    (1) In general. An intraday extension of credit to an affiliate, if 
the member bank:

[[Page 78]]

    (i) Has established and maintains policies and procedures reasonably 
designed to manage the credit exposure arising from the member bank's 
intraday extensions of credit to affiliates in a safe and sound manner, 
including policies and procedures for:
    (A) Monitoring and controlling the credit exposure arising at any 
one time from the member bank's intraday extensions of credit to each 
affiliate and all affiliates in the aggregate; and
    (B) Ensuring that any intraday extension of credit by the member 
bank to an affiliate complies with the market terms requirement of Sec. 
223.51;
    (ii) Has no reason to believe that the affiliate will have 
difficulty repaying the extension of credit in accordance with its 
terms; and
    (iii) Ceases to treat any such extension of credit (regardless of 
jurisdiction) as an intraday extension of credit at the end of the 
member bank's business day in the United States.
    (2) Definition. Intraday extension of credit by a member bank to an 
affiliate means an extension of credit by a member bank to an affiliate 
that the member bank expects to be repaid, sold, or terminated, or to 
qualify for a complete exemption under this regulation, by the end of 
its business day in the United States.
    (m) Riskless principal transactions. Purchasing a security from a 
securities affiliate of the member bank if:
    (1) The member bank or the securities affiliate is acting 
exclusively as a riskless principal in the transaction; and
    (2) The security purchased is not issued, underwritten, or sold as 
principal (other than as riskless principal) by any affiliate of the 
member bank.



Sec. 223.43  What are the standards under which the Board may grant 
additional exemptions from the requirements of section 23A?

    (a) The standards. The Board may, at its discretion, by regulation 
or order, exempt transactions or relationships from the requirements of 
section 23A and subparts B, C, and D of this part if it finds such 
exemptions to be in the public interest and consistent with the purposes 
of section 23A.
    (b) Procedure. A member bank may request an exemption from the 
requirements of section 23A and subparts B, C, and D of this part by 
submitting a written request to the General Counsel of the Board. Such a 
request must:
    (1) Describe in detail the transaction or relationship for which the 
member bank seeks exemption;
    (2) Explain why the Board should exempt the transaction or 
relationship; and
    (3) Explain how the exemption would be in the public interest and 
consistent with the purposes of section 23A.



               Subpart F_General Provisions of Section 23B



Sec. 223.51  What is the market terms requirement of section 23B?

    A member bank may not engage in a transaction described in Sec. 
223.52 unless the transaction is:
    (a) On terms and under circumstances, including credit standards, 
that are substantially the same, or at least as favorable to the member 
bank, as those prevailing at the time for comparable transactions with 
or involving nonaffiliates; or
    (b) In the absence of comparable transactions, on terms and under 
circumstances, including credit standards, that in good faith would be 
offered to, or would apply to, nonaffiliates.



Sec. 223.52  What transactions with affiliates or others must comply 
with section 23B's market terms requirement?

    (a) The market terms requirement of Sec. 223.51 applies to the 
following transactions:
    (1) Any covered transaction with an affiliate, unless the 
transaction is exempt under paragraphs (a) through (c) of Sec. 223.41 
or paragraphs (a) through (e) or (h) through (j) of Sec. 223.42;
    (2) The sale of a security or other asset to an affiliate, including 
an asset subject to an agreement to repurchase;
    (3) The payment of money or the furnishing of a service to an 
affiliate under contract, lease, or otherwise;

[[Page 79]]

    (4) Any transaction in which an affiliate acts as an agent or broker 
or receives a fee for its services to the member bank or to any other 
person; and
    (5) Any transaction or series of transactions with a nonaffiliate, 
if an affiliate:
    (i) Has a financial interest in the nonaffiliate; or
    (ii) Is a participant in the transaction or series of transactions.
    (b) For the purpose of this section, any transaction by a member 
bank with any person will be deemed to be a transaction with an 
affiliate of the member bank if any of the proceeds of the transaction 
are used for the benefit of, or transferred to, the affiliate.



Sec. 223.53  What asset purchases are prohibited by section 23B?

    (a) Fiduciary purchases of assets from an affiliate. A member bank 
may not purchase as fiduciary any security or other asset from any 
affiliate unless the purchase is permitted:
    (1) Under the instrument creating the fiduciary relationship;
    (2) By court order; or
    (3) By law of the jurisdiction governing the fiduciary relationship.
    (b) Purchase of a security underwritten by an affiliate. (1) A 
member bank, whether acting as principal or fiduciary, may not knowingly 
purchase or otherwise acquire, during the existence of any underwriting 
or selling syndicate, any security if a principal underwriter of that 
security is an affiliate of the member bank.
    (2) Paragraph (b)(1) of this section does not apply if the purchase 
or acquisition of the security has been approved, before the security is 
initially offered for sale to the public, by a majority of the directors 
of the member bank based on a determination that the purchase is a sound 
investment for the member bank, or for the person on whose behalf the 
member bank is acting as fiduciary, as the case may be, irrespective of 
the fact that an affiliate of the member bank is a principal underwriter 
of the security.
    (3) The approval requirement of paragraph (b)(2) of this section may 
be met if:
    (i) A majority of the directors of the member bank approves 
standards for the member bank's acquisitions of securities described in 
paragraph (b)(1) of this section, based on the determination set forth 
in paragraph (b)(2) of this section;
    (ii) Each acquisition described in paragraph (b)(1) of this section 
meets the standards; and
    (iii) A majority of the directors of the member bank periodically 
reviews acquisitions described in paragraph (b)(1) of this section to 
ensure that they meet the standards and periodically reviews the 
standards to ensure that they continue to meet the criterion set forth 
in paragraph (b)(2) of this section.
    (4) A U.S. branch, agency, or commercial lending company of a 
foreign bank may comply with paragraphs (b)(2) and (b)(3) of this 
section by obtaining the approvals and reviews required by paragraphs 
(b)(2) and (b)(3) from either:
    (i) A majority of the directors of the foreign bank; or
    (ii) A majority of the senior executive officers of the foreign 
bank.
    (c) Special definitions. For purposes of this section:
    (1) ``Principal underwriter'' means any underwriter who, in 
connection with a primary distribution of securities:
    (i) Is in privity of contract with the issuer or an affiliated 
person of the issuer;
    (ii) Acting alone or in concert with one or more other persons, 
initiates or directs the formation of an underwriting syndicate; or
    (iii) Is allowed a rate of gross commission, spread, or other profit 
greater than the rate allowed another underwriter participating in the 
distribution.
    (2) ``Security'' has the same meaning as in section 3(a)(10) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(10)).



Sec. 223.54  What advertisements and statements are prohibited by section 
23B?

    (a) In general. A member bank and its affiliates may not publish any 
advertisement or enter into any agreement stating or suggesting that the 
member bank will in any way be responsible for the obligations of its 
affiliates.

[[Page 80]]

    (b) Guarantees, acceptances, letters of credit, and cross-affiliate 
netting arrangements subject to section 23A. Paragraph (a) of this 
section does not prohibit a member bank from:
    (1) Issuing a guarantee, acceptance, or letter of credit on behalf 
of an affiliate, confirming a letter of credit issued by an affiliate, 
or entering into a cross-affiliate netting arrangement, to the extent 
such transaction satisfies the quantitative limits of Sec. Sec. 223.11 
and 223.12 and the collateral requirements of Sec. 223.14, and is 
otherwise permitted under this regulation; or
    (2) Making reference to such a guarantee, acceptance, letter of 
credit, or cross-affiliate netting arrangement if otherwise required by 
law.



Sec. 223.55  What are the standards under which the Board may grant 
exemptions from the requirements of section 23B?

    The Board may prescribe regulations to exempt transactions or 
relationships from the requirements of section 23B and subpart F of this 
part if it finds such exemptions to be in the public interest and 
consistent with the purposes of section 23B.



   Subpart G_Application of Sections 23A and 23B to U.S. Branches and 
                        Agencies of Foreign Banks



Sec. 223.61  How do sections 23A and 23B apply to U.S. branches and 
agencies of foreign banks?

    (a) Applicability of sections 23A and 23B to foreign banks engaged 
in underwriting insurance, underwriting or dealing in securities, 
merchant banking, or insurance company investment in the United States. 
Except as provided in this subpart, sections 23A and 23B of the Federal 
Reserve Act and the provisions of this regulation apply to each U.S. 
branch, agency, or commercial lending company of a foreign bank in the 
same manner and to the same extent as if the branch, agency, or 
commercial lending company were a member bank.
    (b) Affiliate defined. For purposes of this subpart, any company 
that would be an affiliate of a U.S. branch, agency, or commercial 
lending company of a foreign bank if such branch, agency, or commercial 
lending company were a member bank is an affiliate of the branch, 
agency, or commercial lending company if the company also is:
    (1) Directly engaged in the United States in any of the following 
activities:
    (i) Insurance underwriting pursuant to section 4(k)(4)(B) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(B));
    (ii) Securities underwriting, dealing, or market making pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E));
    (iii) Merchant banking activities pursuant to section 4(k)(4)(H) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) (but only to the 
extent that the proceeds of the transaction are used for the purpose of 
funding the affiliate's merchant banking activities);
    (iv) Insurance company investment activities pursuant to section 
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I)); or
    (v) Any other activity designated by the Board;
    (2) A portfolio company (as defined in the merchant banking subpart 
of Regulation Y (12 CFR 225.177(c))) controlled by the foreign bank or 
an affiliate of the foreign bank or a company that would be an affiliate 
of the branch, agency, or commercial lending company of the foreign bank 
under paragraph (a)(9) of Sec. 223.2 if such branch, agency, or 
commercial lending company were a member bank; or
    (3) A subsidiary of an affiliate described in paragraph (b)(1) or 
(2) of this section.
    (c) Capital stock and surplus. For purposes of this subpart, the 
``capital stock and surplus'' of a U.S. branch, agency, or commercial 
lending company of a foreign bank will be determined by reference to the 
capital of the foreign bank as calculated under its home country capital 
standards.

[[Page 81]]



                 Subpart H_Miscellaneous Interpretations



Sec. 223.71  How do sections 23A and 23B apply to transactions in which 

a member bank purchases from one affiliate an asset relating to another 
affiliate?

    (a) In general. In some situations in which a member bank purchases 
an asset from an affiliate, the asset purchase qualifies for an 
exemption under this regulation, but the member bank's resulting 
ownership of the purchased asset also represents a covered transaction 
(which may or may not qualify for an exemption under this part). In 
these situations, the transaction engaged in by the member bank would 
qualify as two different types of covered transaction. Although an asset 
purchase exemption may suffice to exempt the member bank's asset 
purchase from the first affiliate, the asset purchase exemption does not 
exempt the member bank's resulting covered transaction with the second 
affiliate. The exemptions subject to this interpretation include 
Sec. Sec. 223.31(e), 223.41(a) through (d), and 223.42(e), (f), (i), 
(j), (k), and (m).
    (b) Examples. (1) The (d)(6) exemption. A member bank purchases from 
Affiliate A securities issued by Affiliate B in a purchase that 
qualifies for the (d)(6) exemption in section 23A. The member bank's 
asset purchase from Affiliate A would be an exempt covered transaction 
under Sec. 223.42(e); but the member bank also would have acquired an 
investment in securities issued by Affiliate B, which would be a covered 
transaction between the member bank and Affiliate B under Sec. 
223.3(h)(2) that does not qualify for the (d)(6) exemption. The (d)(6) 
exemption, by its terms, only exempts asset purchases by a member bank 
from an affiliate; hence, the (d)(6) exemption cannot exempt a member 
bank's investment in securities issued by an affiliate (even if the 
securities would qualify for the (d)(6) exemption).
    (2) The sister-bank exemption. A member bank purchases from Sister-
Bank Affiliate A a loan to Affiliate B in a purchase that qualifies for 
the sister-bank exemption in section 23A. The member bank's asset 
purchase from Sister-Bank Affiliate A would be an exempt covered 
transaction under Sec. 223.41(b); but the member bank also would have 
acquired an extension of credit to Affiliate B, which would be a covered 
transaction between the member bank and Affiliate B under Sec. 
223.3(h)(1) that does not qualify for the sister-bank exemption. The 
sister-bank exemption, by its terms, only exempts transactions by a 
member bank with a sister-bank affiliate; hence, the sister-bank 
exemption cannot exempt a member bank's extension of credit to an 
affiliate that is not a sister bank (even if the extension of credit was 
purchased from a sister bank).



PART 224_BORROWERS OF SECURITIES CREDIT (REGULATION X)--Table of Contents




Sec.
224.1 Authority, purpose, and scope.
224.2 Definitions.
224.3 Margin regulations to be applied by nonexempted borrowers.

    Authority: 15 U.S.C. 78g.

    Source: Reg. X, 48 FR 56572, Dec. 22, 1983, unless otherwise noted.

    Editorial Note: See the List of CFR Sections Affected, which appears 
in the Finding Aids section of the printed volume and on GPO Access, for 
FR citations to Part 224 OTC Margin Stocks changes.



Sec. 224.1  Authority, purpose, and scope.

    (a) Authority and purpose. Regulation X (this part) is issued by the 
Board of Governors of the Federal Reserve System (the Board) under the 
Securities Exchange Act of 1934, as amended (the Act) (15 U.S.C. 78a et 
seq.). This part implements section 7(f) of the Act (15 U.S.C. 78g(f)), 
the purpose of which is to require that credit obtained within or 
outside the United States complies with the limitations of the Board's 
Margin Regulations T and U (12 CFR parts 220 and 221, respectively).
    (b) Scope and exemptions. The Act and this part apply the Board's 
margin regulations to United States persons and foreign persons 
controlled by or acting on behalf of or in conjunction with United 
States persons (hereinafter borrowers), who obtain credit outside the 
United States to purchase or carry United States securities, or within 
the United States to purchase or carry any

[[Page 82]]

securities (both types of credit are hereinafter referred to as purpose 
credit). The following borrowers are exempt from the Act and this part:
    (1) Any borrower who obtains purpose credit within the United 
States, unless the borrower willfully causes the credit to be extended 
in contravention of Regulations T or U.
    (2) Any borrower whose permanent residence is outside the United 
States and who does not obtain or have outstanding, during any calendar 
year, a total of more than $100,000 in purpose credit obtained outside 
the United States; and
    (3) Any borrower who is exempt by Order upon terms and conditions 
set by the Board.

[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839, 
Jan. 16, 1998]



Sec. 224.2  Definitions.

    The terms used in this part have the meanings given to them in 
sections 3(a) and 7(f) of the Act, and in Regulations T and U. Section 
7(f) of the Act contains the following definitions:
    (a) United States person includes a person which is organized or 
exists under the laws of any State or, in the case of a natural person, 
a citizen or resident of the United States; a domestic estate; or a 
trust in which one or more of the foregoing persons has a cumulative 
direct or indirect beneficial interest in excess of 50 per centum of the 
valve of the trust.
    (b) United States security means a security (other than an exempted 
security) issued by a person incorporated under the laws of any State, 
or whose principal place of business is within a State.
    (c) Foreign person controlled by a United States person includes any 
noncorporate entity in which United States persons directly or 
indirectly have more than a 50 per centum beneficial interest, and any 
corporation in which one or more United States persons, directly or 
indirectly, own stock possessing more than 50 per centum of the total 
combined voting power of all classes of stock entitled to vote, or more 
than 50 per centum of the total value of shares of all classes of stock.

[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839, 
Jan. 16, 1998]



Sec. 224.3  Margin regulations to be applied by nonexempted borrowers.

    (a) Credit transactions outside the United States. No borrower shall 
obtain purpose credit from outside the United States unless it conforms 
to the following margin regulations:
    (1) Regulation T (12 CFR part 220) if the credit is obtained from a 
foreign branch of a broker-dealer;
    (2) Regulation U (12 CFR part 221), as it applies to banks, if the 
credit is obtained from a foreign branch of a bank, except for the 
requirement of a purpose statement (12 CFR 221.3(c)(1)(i) and 
(c)(2)(i)); and
    (3) Regulation U (12 CFR part 221), as it applies to nonbank 
lenders, if the credit is obtained from any other lender outside the 
United States, except for the requirement of a purpose statement (12 CFR 
221.3(c)(1)(ii) and (c)(2)(ii)).
    (b) Credit transactions within the United States. Any borrower who 
willfully causes credit to be extended in contravention of Regulations T 
and U (12 CFR parts 220 and 221), and who, therefore, is not exempted by 
Sec. 224.1(b)(1), must conform the credit to the margin regulation that 
applies to the lender.

[Reg. X, 63 FR 2839, Jan. 16, 1998]



PART 225_BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION 
Y)--Table of Contents




                               Regulations

                      Subpart A_General Provisions

Sec.
225.1 Authority, purpose, and scope.
225.2 Definitions.
225.3 Administration.
225.4 Corporate practices.
225.5 Registration, reports, and inspections.
225.6 Penalties for violations.
225.7 Exceptions to tying restrictions.

[[Page 83]]

           Subpart B_Acquisition of Bank Securities or Assets

225.11 Transactions requiring Board approval.
225.12 Transactions not requiring Board approval.
225.13 Factors considered in acting on bank acquisition proposals.
225.14 Expedited action for certain bank acquisitions by well-run bank 
          holding companies.
225.15 Procedures for other bank acquisition proposals.
225.16 Public notice, comments, hearings, and other provisions governing 
          applications and notices.
225.17 Notice procedure for one-bank holding company formations.

    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 
                                Companies

225.21 Prohibited nonbanking activities and acquisitions; exempt bank 
          holding companies.
225.22 Exempt nonbanking activities and acquisitions.
225.23 Expedited action for certain nonbanking proposals by well-run 
          bank holding companies.
225.24 Procedures for other nonbanking proposals.
225.25 Hearings, alteration of activities, and other matters.
225.26 Factors considered in acting on nonbanking proposals.
225.27 Procedures for determining scope of nonbanking activities.
225.28 List of permissible nonbanking activities.

              Subpart D_Control and Divestiture Proceedings

225.31 Control proceedings.

                    Subpart E_Change in Bank Control

225.41 Transactions requiring prior notice.
225.42 Transactions not requiring prior notice.
225.43 Procedures for filing, processing, publishing, and acting on 
          notices.
225.44 Reporting of stock loans.

                 Subpart F_Limitations on Nonbank Banks

225.52 Limitation on overdrafts.

    Subpart G_Appraisal Standards for Federally Related Transactions

225.61 Authority, purpose, and scope.
225.62 Definitions.
225.63 Appraisals required; transactions requiring a State certified or 
          licensed appraiser.
225.64 Minimum appraisal standards.
225.65 Appraiser independence.
225.66 Professional association membership; competency.
225.67 Enforcement.

Subpart H_Notice of Addition or Change of Directors and Senior Executive 
                                Officers

225.71 Definitions.
225.72 Director and officer appointments; prior notice requirement.
225.73 Procedures for filing, processing, and acting on notices; 
          standards for disapproval; waiver of notice.

                  Subpart I_Financial Holding Companies

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?

                             Interpretations

225.101 Bank holding company's subsidiary banks owning shares of 
          nonbanking companies.
225.102 Bank holding company indirectly owning nonbanking company 
          through subsidiaries.

[[Page 84]]

225.103 Bank holding company acquiring stock by dividends, stock splits 
          or exercise of rights.
225.104 ``Services'' under section 4(c)(1) of Bank Holding Company Act.
225.107 Acquisition of stock in small business investment company.
225.109 ``Services'' under section 4(c)(1) of Bank Holding Company Act.
225.111 Limit on investment by bank holding company system in stock of 
          small business investment companies.
225.112 Indirect control of small business concern through convertible 
          debentures held by small business investment company.
225.113 Services under section 4(a) of Bank Holding Company Act.
225.115 Applicability of Bank Service Corporation Act in certain bank 
          holding company situations.
225.118 Computer services for customers of subsidiary banks.
225.121 Acquisition of Edge corporation affiliate by State member banks 
          of registered bank holding company.
225.122 Bank holding company ownership of mortgage companies.
225.123 Activities closely related to banking.
225.124 Foreign bank holding companies.
225.125 Investment adviser activities.
225.126 Activities not closely related to banking.
225.127 Investment in corporations or projects designed primarily to 
          promote community welfare.
225.129 Activities closely related to banking.
225.130 Issuance and sale of short-term debt obligations by bank holding 
          companies.
225.131 Activities closely related to banking.
225.132 Acquisition of assets.
225.133 Computation of amount invested in foreign corporations under 
          general consent procedures.
225.134 Escrow arrangements involving bank stock resulting in a 
          violation of the Bank Holding Company Act.
225.136 Utilization of foreign subsidiaries to sell long-term debt 
          obligations in foreign markets and to transfer the proceeds to 
          their United States parent(s) for domestic purposes.
225.137 Acquisitions of shares pursuant to section 4(c)(6) of the Bank 
          Holding Company Act.
225.138 Statement of policy concerning divestitures by bank holding 
          companies.
225.139 Presumption of continued control under section (2)(g)(3) of the 
          Bank Holding Company Act.
225.140 Disposition of property acquired in satisfaction of debts 
          previously contracted.
225.141 Operations subsidiaries of a bank holding company.
225.142 Statement of policy concerning bank holding companies engaging 
          in futures, forward and options contracts on U.S. Government 
          and agency securities and money market instruments.
225.143 Policy statement on nonvoting equity investments by bank holding 
          companies.
225.145 Limitations established by the Competitive Equality Banking Act 
          of 1987 on the activities and growth of nonbank banks.

                 Subpart J_Merchant Banking Investments

225.170 What type of investments are permitted by this subpart, and 
          under what conditions may they be made?
225.171 What are the limitations on managing or operating a portfolio 
          company held as a merchant banking investment?
225.172 What are the holding periods permitted for merchant banking 
          investments?
225.173 How are investments in private equity funds treated under this 
          subpart?
225.174 What aggregate thresholds apply to merchant banking investments?
225.175 What risk management, record keeping and reporting policies are 
          required to make merchant banking investments?
225.176 How do the statutory cross marketing and sections 23A and B 
          limitations apply to merchant banking investments?
225.177 Definitions.

                          Conditions to Orders

225.200 Conditions to Board's section 20 orders.

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Risk-Based Measure
Appendix B to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies and State Member Banks: Leverage Measure
Appendix C to Part 225--Small Bank Holding Company Policy Statement
Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Tier 1 Leverage Measure
Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Market Risk Measure
Appendix F to Part 225--Interagency Guidelines Establishing Standards 
          For Safeguarding Customer Information

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 
3909; 15 U.S.C. 6801 and 6805.

[[Page 85]]


    Source: Reg. Y, 49 FR 818, Jan. 5, 1984, unless otherwise noted.

                               Regulations



                      Subpart A_General Provisions

    Source: Reg. Y, 62 FR 9319, Feb. 28, 1997, unless otherwise noted.



Sec. 225.1  Authority, purpose, and scope.

    (a) Authority. This part \1\ (Regulation Y) is issued by the Board 
of Governors of the Federal Reserve System (Board) under section 5(b) of 
the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(b)) 
(BHC Act); sections 8 and 13(a) of the International Banking Act of 1978 
(12 U.S.C. 3106 and 3108); section 7(j)(13) of the Federal Deposit 
Insurance Act, as amended by the Change in Bank Control Act of 1978 (12 
U.S.C. 1817(j)(13)) (Bank Control Act); section 8(b) of the Federal 
Deposit Insurance Act (12 U.S.C. 1818(b)); section 914 of the Financial 
Institutions Reform, Recovery and Enforcement Act of 1989 (12 U.S.C. 
1831i); section 106 of the Bank Holding Company Act Amendments of 1970 
(12 U.S.C. 1972); and the International Lending Supervision Act of 1983 
(Pub. L. 98-181, title IX). The BHC Act is codified at 12 U.S.C. 1841, 
et seq.
---------------------------------------------------------------------------

    \1\ Code of Federal Regulations, title 12, chapter II, part 225.
---------------------------------------------------------------------------

    (b) Purpose. The principal purposes of this part are to:
    (1) Regulate the acquisition of control of banks by companies and 
individuals;
    (2) Define and regulate the nonbanking activities in which bank 
holding companies and foreign banking organizations with United States 
operations may engage; and
    (3) Set forth the procedures for securing approval for these 
transactions and activities.
    (c) Scope--(1) Subpart A contains general provisions and definitions 
of terms used in this regulation.
    (2) Subpart B governs acquisitions of bank or bank holding company 
securities and assets by bank holding companies or by any company that 
will become a bank holding company as a result of the acquisition.
    (3) Subpart C defines and regulates the nonbanking activities in 
which bank holding companies and foreign banking organizations may 
engage directly or through a subsidiary. The Board's Regulation K 
governs certain nonbanking activities conducted by foreign banking 
organizations and certain foreign activities conducted by bank holding 
companies (12 CFR part 211, International Banking Operations).
    (4) Subpart D specifies situations in which a company is presumed to 
control voting securities or to have the power to exercise a controlling 
influence over the management or policies of a bank or other company; 
sets forth the procedures for making a control determination; and 
provides rules governing the effectiveness of divestitures by bank 
holding companies.
    (5) Subpart E governs changes in bank control resulting from the 
acquisition by individuals or companies (other than bank holding 
companies) of voting securities of a bank holding company or state 
member bank of the Federal Reserve System.
    (6) Subpart F specifies the limitations that govern companies that 
control so-called nonbank banks and the activities of nonbank banks.
    (7) Subpart G prescribes minimum standards that apply to the 
performance of real estate appraisals and identifies transactions that 
require state certified appraisers.
    (8) Subpart H identifies the circumstances when written notice must 
be provided to the Board prior to the appointment of a director or 
senior officer of a bank holding company and establishes procedures for 
obtaining the required Board approval.
    (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

[[Page 86]]

approval to engage in an activity that is complementary to a financial 
activity.
    (10) Subpart J governs the conduct of merchant banking investment 
activities by financial holding companies as permitted under section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)).
    (11) Appendix A to the regulation contains the Board's Risk-Based 
Capital Adequacy Guidelines for bank holding companies.
    (12) Appendix B contains the Board's Capital Adequacy Guidelines for 
measuring leverage for bank holding companies and state member banks.
    (13) Appendix C contains the Board's policy statement governing 
small bank holding companies.
    (14) Appendix D contains the Board's Capital Adequacy Guidelines for 
measuring tier 1 leverage for bank holding companies.
    (15) Appendix E contains the Board's Capital Adequacy Guidelines for 
measuring market risk of bank holding companies.
    (16) Appendix F contains the Interagency Guidelines Establishing 
Standards for Safeguarding Customer Information.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 16472, Mar. 28, 
2000; 66 FR 414, Jan. 3, 2001; 66 FR 8484, Jan. 31, 2001; 66 FR 8636, 
Feb. 1, 2001]



Sec. 225.2  Definitions.

    Except as modified in this regulation or unless the context 
otherwise requires, the terms used in this regulation have the same 
meaning as set forth in the relevant statutes.
    (a) Affiliate means any company that controls, is controlled by, or 
is under common control with, another company.
    (b)(1) Bank means:
    (i) An insured bank as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h)); or
    (ii) An institution organized under the laws of the United States 
which both:
    (A) Accepts demand deposits or deposits that the depositor may 
withdraw by check or similar means for payment to third parties or 
others; and
    (B) Is engaged in the business of making commercial loans.
    (2) Bank does not include those institutions qualifying under the 
exceptions listed in section 2(c)(2) of the BHC Act (12 U.S.C. 
1841(c)(2)).
    (c)(1) Bank holding company means any company (including a bank) 
that has direct or indirect control of a bank, other than control that 
results from the ownership or control of:
    (i) Voting securities held in good faith in a fiduciary capacity 
(other than as provided in paragraphs (e)(2)(ii) and (iii) of this 
section) without sole discretionary voting authority, or as otherwise 
exempted under section 2(a)(5)(A) of the BHC Act;
    (ii) Voting securities acquired and held only for a reasonable 
period of time in connection with the underwriting of securities, as 
provided in section 2(a)(5)(B) of the BHC Act;
    (iii) Voting rights to voting securities acquired for the sole 
purpose and in the course of participating in a proxy solicitation, as 
provided in section 2(a)(5)(C) of the BHC Act;
    (iv) Voting securities acquired in satisfaction of debts previously 
contracted in good faith, as provided in section 2(a)(5)(D) of the BHC 
Act, if the securities are divested within two years of acquisition (or 
such later period as the Board may permit by order); or
    (v) Voting securities of certain institutions owned by a thrift 
institution or a trust company, as provided in sections 2(a)(5)(E) and 
(F) of the BHC Act.
    (2) Except for the purposes of Sec. 225.4(b) of this subpart and 
subpart E of this part, or as otherwise provided in this regulation, 
bank holding company includes a foreign banking organization. For the 
purposes of subpart B of this part, bank holding company includes a 
foreign banking organization only if it owns or controls a bank in the 
United States.
    (d)(1) Company includes any bank, corporation, general or limited 
partnership, association or similar organization, business trust, or any 
other trust unless by its terms it must terminate either within 25 
years, or within 21 years and 10 months after the death of individuals 
living on the effective date of the trust.

[[Page 87]]

    (2) Company does not include any organization, the majority of the 
voting securities of which are owned by the United States or any state.
    (3) Testamentary trusts exempt. Unless the Board finds that the 
trust is being operated as a business trust or company, a trust is 
presumed not to be a company if the trust:
    (i) Terminates within 21 years and 10 months after the death of 
grantors or beneficiaries of the trust living on the effective date of 
the trust or within 25 years;
    (ii) Is a testamentary or inter vivos trust established by an 
individual or individuals for the benefit of natural persons (or trusts 
for the benefit of natural persons) who are related by blood, marriage 
or adoption;
    (iii) Contains only assets previously owned by the individual or 
individuals who established the trust;
    (iv) Is not a Massachusetts business trust; and
    (v) Does not issue shares, certificates, or any other evidence of 
ownership.
    (4) Qualified limited partnerships exempt. Company does not include 
a qualified limited partnership, as defined in section 2(o)(10) of the 
BHC Act.
    (e)(1) Control of a bank or other company means (except for the 
purposes of subpart E of this part):
    (i) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting securities of the bank or 
other company, directly or indirectly or acting through one or more 
other persons;
    (ii) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of the bank or other company;
    (iii) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of the bank or other company, 
as determined by the Board after notice and opportunity for hearing in 
accordance with Sec. 225.31 of subpart D of this part; or
    (iv) Conditioning in any manner the transfer of 25 percent or more 
of the outstanding shares of any class of voting securities of a bank or 
other company upon the transfer of 25 percent or more of the outstanding 
shares of any class of voting securities of another bank or other 
company.
    (2) A bank or other company is deemed to control voting securities 
or assets owned, controlled, or held, directly or indirectly:
    (i) By any subsidiary of the bank or other company;
    (ii) In a fiduciary capacity (including by pension and profit-
sharing trusts) for the benefit of the shareholders, members, or 
employees (or individuals serving in similar capacities) of the bank or 
other company or any of its subsidiaries; or
    (iii) In a fiduciary capacity for the benefit of the bank or other 
company or any of its subsidiaries.
    (f) Foreign banking organization and qualifying foreign banking 
organization have the same meanings as provided in Sec. 211.21(n) and 
Sec. 211.23 of the Board's Regulation K (12 CFR 211.21(n) and 211.23).
    (g) Insured depository institution includes an insured bank as 
defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(h)) and a savings association.
    (h) Lead insured depository institution means the largest insured 
depository institution controlled by the bank holding company as of the 
quarter ending immediately prior to the proposed filing, based on a 
comparison of the average total risk-weighted assets controlled during 
the previous 12-month period by each insured depository institution 
subsidiary of the holding company.
    (i) Management official means any officer, director (including 
honorary or advisory directors), partner, or trustee of a bank or other 
company, or any employee of the bank or other company with policy-making 
functions.
    (j) Nonbank bank means any institution that:
    (1) Became a bank as a result of enactment of the Competitive 
Equality Amendments of 1987 (Pub. L. 100-86), on the date of enactment 
(August 10, 1987); and
    (2) Was not controlled by a bank holding company on the day before 
the enactment of the Competitive Equality Amendments of 1987 (August 9, 
1987).

[[Page 88]]

    (k) Outstanding shares means any voting securities, but does not 
include securities owned by the United States or by a company wholly 
owned by the United States.
    (l) Person includes an individual, bank, corporation, partnership, 
trust, association, joint venture, pool, syndicate, sole proprietorship, 
unincorporated organization, or any other form of entity.
    (m) Savings association means:
    (1) Any federal savings association or federal savings bank;
    (2) Any building and loan association, savings and loan association, 
homestead association, or cooperative bank if such association or 
cooperative bank is a member of the Savings Association Insurance Fund; 
and
    (3) Any savings bank or cooperative that is deemed by the director 
of the Office of Thrift Supervision to be a savings association under 
section 10(l) of the Home Owners Loan Act.
    (n) Shareholder--(1) Controlling shareholder means a person that 
owns or controls, directly or indirectly, 25 percent or more of any 
class of voting securities of a bank or other company.
    (2) Principal shareholder means a person that owns or controls, 
directly or indirectly, 10 percent or more of any class of voting 
securities of a bank or other company, or any person that the Board 
determines has the power, directly or indirectly, to exercise a 
controlling influence over the management or policies of a bank or other 
company.
    (o) Subsidiary means a bank or other company that is controlled by 
another company, and refers to a direct or indirect subsidiary of a bank 
holding company. An indirect subsidiary is a bank or other company that 
is controlled by a subsidiary of the bank holding company.
    (p) United States means the United States and includes any state of 
the United States, the District of Columbia, any territory of the United 
States, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
    (q)(1) Voting securities means shares of common or preferred stock, 
general or limited partnership shares or interests, or similar interests 
if the shares or interest, by statute, charter, or in any manner, 
entitle the holder:
    (i) To vote for or to select directors, trustees, or partners (or 
persons exercising similar functions of the issuing company); or
    (ii) To vote on or to direct the conduct of the operations or other 
significant policies of the issuing company.
    (2) Nonvoting shares. Preferred shares, limited partnership shares 
or interests, or similar interests are not voting securities if:
    (i) Any voting rights associated with the shares or interest are 
limited solely to the type customarily provided by statute with regard 
to matters that would significantly and adversely affect the rights or 
preference of the security or other interest, such as the issuance of 
additional amounts or classes of senior securities, the modification of 
the terms of the security or interest, the dissolution of the issuing 
company, or the payment of dividends by the issuing company when 
preferred dividends are in arrears;
    (ii) The shares or interest represent an essentially passive 
investment or financing device and do not otherwise provide the holder 
with control over the issuing company; and
    (iii) The shares or interest do not entitle the holder, by statute, 
charter, or in any manner, to select or to vote for the selection of 
directors, trustees, or partners (or persons exercising similar 
functions) of the issuing company.
    (3) Class of voting shares. Shares of stock issued by a single 
issuer are deemed to be the same class of voting shares, regardless of 
differences in dividend rights or liquidation preference, if the shares 
are voted together as a single class on all matters for which the shares 
have voting rights other than matters described in paragraph (o)(2)(i) 
of this section that affect solely the rights or preferences of the 
shares.
    (r) Well-capitalized--(1) Bank holding company. In the case of a 
bank holding company,\2\ well-capitalized means that:
---------------------------------------------------------------------------

    \2\ For purposes of this subpart and subparts B and C of this part, 
a bank holding company with consolidated assets under $150 million that 
is subject to the Small Bank Holding Company Policy Statement in 
Appendix C of this part will be deemed to be ``well-capitalized'' if the 
bank holding company meets the requirements for expedited/waived 
processing in Appendix C.

---------------------------------------------------------------------------

[[Page 89]]

    (i) On a consolidated basis, the bank holding company maintains a 
total risk-based capital ratio of 10.0 percent or greater, as defined in 
Appendix A of this part;
    (ii) On a consolidated basis, the bank holding company maintains a 
Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined in 
Appendix A of this part; and
    (iii) The bank holding company is not subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific capital 
level for any capital measure.
    (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.
    (3) Foreign banks--(i) Standards applied. For purposes of 
determining whether a foreign banking organization qualifies under 
paragraph (r)(1) of this section:
    (A) A foreign banking organization whose home country supervisor, as 
defined in Sec. 211.21 of the Board's Regulation K (12 CFR 211.21), has 
adopted capital standards consistent in all respects with the Capital 
Accord of the Basle Committee on Banking Supervision (Basle Accord) may 
calculate its capital ratios under the home country standard; and
    (B) A foreign banking organization whose home country supervisor has 
not adopted capital standards consistent in all respects with the Basle 
Accord shall obtain a determination from the Board that its capital is 
equivalent to the capital that would be required of a U.S. banking 
organization under paragraph (r)(1) of this section.
    (ii) Branches and agencies. For purposes of determining, under 
paragraph (r)(1) of this section, whether a branch or agency of a 
foreign banking organization is well-capitalized, the branch or agency 
shall be deemed to have the same capital ratios as the foreign banking 
organization.
    (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

[[Page 90]]

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 
``depository institution'' has the same meaning as in section 3(c) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 3791, Jan. 25, 
2000; 65 FR 15055, Mar. 21, 2000; 66 FR 414, Jan. 3, 2001]



Sec. 225.3  Administration.

    (a) Delegation of authority. Designated Board members and officers 
and the Federal Reserve Banks are authorized by the Board to exercise 
various functions prescribed in this regulation and in the Board's Rules 
Regarding Delegation of Authority (12 CFR part 265) and the Board's 
Rules of Procedure (12 CFR part 262).
    (b) Appropriate Federal Reserve Bank. In administering this 
regulation, unless a different Federal Reserve Bank is designated by the 
Board, the appropriate Federal Reserve Bank is as follows:
    (1) For a bank holding company (or a company applying to become a 
bank holding company): the Reserve Bank of the Federal Reserve district 
in which the company's banking operations are principally conducted, as 
measured by total domestic deposits in its subsidiary banks on the date 
it became (or will become) a bank holding company;
    (2) For a foreign banking organization that has no subsidiary bank 
and is not subject to paragraph (b)(1) of this section: the Reserve Bank 
of the Federal Reserve district in which the total assets of the 
organization's United States branches, agencies, and commercial lending 
companies are the largest as of the later of January 1, 1980, or the 
date it becomes a foreign banking organization;
    (3) For an individual or company submitting a notice under subpart E 
of this part: The Reserve Bank of the Federal Reserve district in which 
the banking operations of the bank holding company or state member bank 
to be acquired are principally conducted, as measured by total domestic 
deposits on the date the notice is filed.



Sec. 225.4  Corporate practices.

    (a) Bank holding company policy and operations. (1) A bank holding 
company shall serve as a source of financial and managerial strength to 
its subsidiary banks and shall not conduct its operations in an unsafe 
or unsound manner.
    (2) Whenever the Board believes an activity of a bank holding 
company or control of a nonbank subsidiary (other than a nonbank 
subsidiary of a bank) constitutes a serious risk to the financial 
safety, soundness, or stability of a subsidiary bank of the bank holding 
company and is inconsistent with sound banking principles or the 
purposes of the BHC Act or the Financial Institutions Supervisory Act of 
1966, as amended (12 U.S.C. 1818(b) et seq.), the Board may require the 
bank holding company to terminate the activity or to terminate control 
of the subsidiary, as provided in section 5(e) of the BHC Act.
    (b) Purchase or redemption by bank holding company of its own 
securities--(1) Filing notice. Except as provided in paragraph (b)(6) of 
this section, a bank holding company shall give the Board prior written 
notice before purchasing or redeeming its equity securities if the gross 
consideration for the purchase or redemption, when aggregated with the 
net consideration paid by the company for all such purchases or 
redemptions during the preceding 12 months, is equal to 10 percent or 
more of the company's consolidated net worth. For the purposes of this 
section, ``net consideration'' is the gross consideration paid by the 
company for all of its equity securities purchased or redeemed during 
the period minus the

[[Page 91]]

gross consideration received for all of its equity securities sold 
during the period.
    (2) Contents of notice. Any notice under this section shall be filed 
with the appropriate Reserve Bank and shall contain the following 
information:
    (i) The purpose of the transaction, a description of the securities 
to be purchased or redeemed, the total number of each class outstanding, 
the gross consideration to be paid, and the terms and sources of funding 
for the transaction;
    (ii) A description of all equity securities redeemed within the 
preceding 12 months, the net consideration paid, and the terms of any 
debt incurred in connection with those transactions; and
    (iii) (A) If the bank holding company has consolidated assets of 
$150 million or more, consolidated pro forma risk-based capital and 
leverage ratio calculations for the bank holding company as of the most 
recent quarter, and, if the redemption is to be debt funded, a parent-
only pro forma balance sheet as of the most recent quarter; or
    (B) If the bank holding company has consolidated assets of less than 
$150 million, a pro forma parent-only balance sheet as of the most 
recent quarter, and, if the redemption is to be debt funded, one-year 
income statement and cash flow projections.
    (3) Acting on notice. Within 15 calendar days of receipt of a notice 
under this section, the appropriate Reserve Bank shall either approve 
the transaction proposed in the notice or refer the notice to the Board 
for decision. If the notice is referred to the Board for decision, the 
Board shall act on the notice within 30 calendar days after the Reserve 
Bank receives the notice.
    (4) Factors considered in acting on notice. (i) The Board may 
disapprove a proposed purchase or redemption if it finds that the 
proposal would constitute an unsafe or unsound practice, or would 
violate any law, regulation, Board order, directive, or any condition 
imposed by, or written agreement with, the Board.
    (ii) In determining whether a proposal constitutes an unsafe or 
unsound practice, the Board shall consider whether the bank holding 
company's financial condition, after giving effect to the proposed 
purchase or redemption, meets the financial standards applied by the 
Board under section 3 of the BHC Act, including the Board's Capital 
Adequacy Guidelines (Appendix A of this part) and the Board's Policy 
Statement for Small Bank Holding Companies (Appendix C of this part).
    (5) Disapproval and hearing. (i) The Board shall notify the bank 
holding company in writing of the reasons for a decision to disapprove 
any proposed purchase or redemption. Within 10 calendar days of receipt 
of a notice of disapproval by the Board, the bank holding company may 
submit a written request for a hearing.
    (ii) The Board shall order a hearing within 10 calendar days of 
receipt of the request if it finds that material facts are in dispute, 
or if it otherwise appears appropriate. Any hearing conducted under this 
paragraph shall be held in accordance with the Board's Rules of Practice 
for Formal Hearings (12 CFR part 263).
    (iii) At the conclusion of the hearing, the Board shall by order 
approve or disapprove the proposed purchase or redemption on the basis 
of the record of the hearing.
    (6) Exception for well-capitalized bank holding companies. A bank 
holding company is not required to obtain prior Board approval for the 
redemption or purchase of its equity securities under this section 
provided:
    (i) Both before and immediately after the redemption, the bank 
holding company is well-capitalized;
    (ii) The bank holding company is well-managed; and
    (iii) The bank holding company is not the subject of any unresolved 
supervisory issues.
    (c) Deposit insurance. Every bank that is a bank holding company or 
a subsidiary of a bank holding company shall obtain Federal Deposit 
Insurance and shall remain an insured bank as defined in section 3(h) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
    (d) Acting as transfer agent or clearing agent. A bank holding 
company or any nonbanking subsidiary that is a ``bank,'' as defined in 
section 3(a)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(6)), and that is a transfer

[[Page 92]]

agent of securities, a clearing agency, or a participant in a clearing 
agency (as those terms are defined in section 3(a) of the Securities 
Exchange Act (15 U.S.C. 78c(a)), shall be subject to Sec. Sec. 208.31-
208.33 of the Board's Regulation H (12 CFR 208.31-208.33) as if it were 
a state member bank.
    (e) Reporting requirement for credit secured by certain bank holding 
company stock. Each executive officer or director of a bank holding 
company the shares of which are not publicly traded shall report 
annually to the board of directors of the bank holding company the 
outstanding amount of any credit that was extended to the executive 
officer or director and that is secured by shares of the bank holding 
company. For purposes of this paragraph, the terms ``executive officer'' 
and ``director'' shall have the meaning given in Sec. 215.2 of 
Regulation O (12 CFR 215.2).
    (f) Suspicious activity report. A bank holding company or any 
nonbank subsidiary thereof, or a foreign bank that is subject to the BHC 
Act or any nonbank subsidiary of such foreign bank operating in the 
United States, shall file a suspicious activity report in accordance 
with the provisions of Sec. 208.62 of the Board's Regulation H (12 CFR 
208.62).
    (g) Requirements for financial holding companies engaged in 
securities underwriting, dealing, or market-making activities. (1) Any 
intra-day extension of credit by a bank or thrift, or U.S. branch or 
agency of a foreign bank to an affiliated company engaged in 
underwriting, dealing in, or making a market in securities pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E)) must be on market terms consistent with section 23B of 
the Federal Reserve Act. (12 U.S.C. 371c-1).
    (2) A foreign bank that is or is treated as a financial holding 
company under this part shall ensure that:
    (i) Any extension of credit by any U.S. branch or agency of such 
foreign bank to an affiliated company engaged in underwriting, dealing 
in, or making a market in securities pursuant to section 4(k)(4)(E) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(E)), conforms to 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
371c-1) as if the branch or agency were a member bank;
    (ii) Any purchase by any U.S. branch or agency of such foreign bank, 
as principal or fiduciary, of securities for which a securities 
affiliate described in paragraph (g)(2)(i) of this section is a 
principal underwriter conforms to sections 23A and 23B of the Federal 
Reserve Act (12 U.S.C. 371c and 371c-1) as if the branch or agency were 
a member bank; and
    (iii) Its U.S. branches and agencies not advertise or suggest that 
they are responsible for the obligations of a securities affiliate 
described in paragraph (g)(2)(i) of this section, consistent with 
section 23B(c) of the Federal Reserve Act (12 U.S.C. 371c-1(c)) as if 
the branches or agencies were member banks.
    (h) Protection of nonpublic personal information. A bank holding 
company, including a bank holding company that is a financial holding 
company, shall comply with the Interagency Guidelines Establishing 
Standards for Safeguarding Customer Information, as set forth in 
appendix F of this part, prescribed pursuant to sections 501 and 505 of 
the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805).

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 63 FR 58621, Nov. 2, 
1998; 65 FR 14442, Mar. 17, 2000; 66 FR 8636, Feb. 1, 2001]

    Effective Date Note: At 69 FR 77618, Dec. 28, 2004, Sec. 225.4 was 
amended by revising paragraph (h), effective July 1, 2005. For the 
convenience of the user the revised text is set forth as follows:

Sec. 225.4  Corporate practices.

                                * * * * *

    (h) Protection of customer information and consumer information. A 
bank holding company shall comply with the Interagency Guidelines 
Establishing Information Security Standards, as set forth in appendix F 
of this part, prescribed pursuant to sections 501 and 505 of the Gramm-
Leach-Bliley Act (15 U.S.C. 6801 and 6805). A bank holding company shall 
properly dispose of consumer information in accordance with the rules 
set forth at 16 CFR part 682.

                                * * * * *

[[Page 93]]



Sec. 225.5  Registration, reports, and inspections.

    (a) Registration of bank holding companies. Each company shall 
register within 180 days after becoming a bank holding company by 
furnishing information in the manner and form prescribed by the Board. A 
company that receives the Board's prior approval under subpart B of this 
part to become a bank holding company may complete this registration 
requirement through submission of its first annual report to the Board 
as required by paragraph (b) of this section.
    (b) Reports of bank holding companies. Each bank holding company 
shall furnish, in the manner and form prescribed by the Board, an annual 
report of the company's operations for the fiscal year in which it 
becomes a bank holding company, and for each fiscal year during which it 
remains a bank holding company. Additional information and reports shall 
be furnished as the Board may require.
    (c) Examinations and inspections. The Board may examine or inspect 
any bank holding company and each of its subsidiaries and prepare a 
report of their operations and activities. With respect to a foreign 
banking organization, the Board may also examine any branch or agency of 
a foreign bank in any state of the United States and may examine or 
inspect each of the organization's subsidiaries in the United States and 
prepare reports of their operations and activities. The Board shall 
rely, as far as possible, on the reports of examination made by the 
primary federal or state supervisor of the subsidiary bank of the bank 
holding company or of the branch or agency of the foreign bank.



Sec. 225.6  Penalties for violations.

    (a) Criminal and civil penalties. (1) Section 8 of the BHC Act 
provides criminal penalties for willful violation, and civil penalties 
for violation, by any company or individual, of the BHC Act or any 
regulation or order issued under it, or for making a false entry in any 
book, report, or statement of a bank holding company.
    (2) Civil money penalty assessments for violations of the BHC Act 
shall be made in accordance with subpart C of the Board's Rules of 
Practice for Hearings (12 CFR part 263, subpart C). For any willful 
violation of the Bank Control Act or any regulation or order issued 
under it, the Board may assess a civil penalty as provided in 12 U.S.C. 
1817(j)(15).
    (b) Cease-and-desist proceedings. For any violation of the BHC Act, 
the Bank Control Act, this regulation, or any order or notice issued 
thereunder, the Board may institute a cease-and-desist proceeding in 
accordance with the Financial Institutions Supervisory Act of 1966, as 
amended (12 U.S.C. 1818(b) et seq.).



Sec. 225.7  Exceptions to tying restrictions.

    (a) Purpose. This section establishes exceptions to the anti-tying 
restrictions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971, 1972(1)). These exceptions are in addition to 
those in section 106. The section also restricts tying of electronic 
benefit transfer services by bank holding companies and their nonbank 
subsidiaries.
    (b) Exceptions to statute. Subject to the limitations of paragraph 
(c) of this section, a bank may:
    (1) Extension to affiliates of statutory exceptions preserving 
traditional banking relationships. Extend credit, lease or sell property 
of any kind, or furnish any service, or fix or vary the consideration 
for any of the foregoing, on the condition or requirement that a 
customer:
    (i) Obtain a loan, discount, deposit, or trust service from an 
affiliate of the bank; or
    (ii) Provide to an affiliate of the bank some additional credit, 
property, or service that the bank could require to be provided to 
itself pursuant to section 106(b)(1)(C) of the Bank Holding Company Act 
Amendments of 1970 (12 U.S.C. 1972(1)(C)).
    (2) Safe harbor for combined-balance discounts. Vary the 
consideration for any product or package of products based on a 
customer's maintaining a combined minimum balance in certain products 
specified by the bank (eligible products), if:
    (i) The bank offers deposits, and all such deposits are eligible 
products; and

[[Page 94]]

    (ii) Balances in deposits count at least as much as nondeposit 
products toward the minimum balance.
    (3) Safe harbor for foreign transactions. Engage in any transaction 
with a customer if that customer is:
    (i) A corporation, business, or other person (other than an 
individual) that:
    (A) Is incorporated, chartered, or otherwise organized outside the 
United States; and
    (B) Has its principal place of business outside the United States; 
or
    (ii) An individual who is a citizen of a foreign country and is not 
resident in the United States.
    (c) Limitations on exceptions. Any exception granted pursuant to 
this section shall terminate upon a finding by the Board that the 
arrangement is resulting in anti-competitive practices. The eligibility 
of a bank to operate under any exception granted pursuant to this 
section shall terminate upon a finding by the Board that its exercise of 
this authority is resulting in anti-competitive practices.
    (d) Extension of statute to electronic benefit transfer services. A 
bank holding company or nonbank subsidiary of a bank holding company 
that provides electronic benefit transfer services shall be subject to 
the anti-tying restrictions applicable to such services set forth in 
section 7(i)(11) of the Food Stamp Act of 1977 (7 U.S.C. 2016(i)(11)).
    (e) For purposes of this section, bank has the meaning given that 
term in section 106(a) of the Bank Holding Company Act Amendments of 
1970 (12 U.S.C. 1971), but shall also include a United States branch, 
agency, or commercial lending company subsidiary of a foreign bank that 
is subject to section 106 pursuant to section 8(d) of the International 
Banking Act of 1978 (12 U.S.C. 3106(d)), and any company made subject to 
section 106 by section 4(f)(9) or 4(h) of the BHC Act.



           Subpart B_Acquisition of Bank Securities or Assets

    Source: Reg. Y, 62 FR 9324, Feb. 28, 1997, unless otherwise noted.



Sec. 225.11  Transactions requiring Board approval.

    The following transactions require the Board's prior approval under 
section 3 of the Bank Holding Company Act except as exempted under Sec. 
225.12 or as otherwise covered by Sec. 225.17 of this subpart:
    (a) Formation of bank holding company. Any action that causes a bank 
or other company to become a bank holding company.
    (b) Acquisition of subsidiary bank. Any action that causes a bank to 
become a subsidiary of a bank holding company.
    (c) Acquisition of control of bank or bank holding company 
securities.
    (1) The acquisition by a bank holding company of direct or indirect 
ownership or control of any voting securities of a bank or bank holding 
company, if the acquisition results in the company's control of more 
than 5 percent of the outstanding shares of any class of voting 
securities of the bank or bank holding company.
    (2) An acquisition includes the purchase of additional securities 
through the exercise of preemptive rights, but does not include 
securities received in a stock dividend or stock split that does not 
alter the bank holding company's proportional share of any class of 
voting securities.
    (d) Acquisition of bank assets. The acquisition by a bank holding 
company or by a subsidiary thereof (other than a bank) of all or 
substantially all of the assets of a bank.
    (e) Merger of bank holding companies. The merger or consolidation of 
bank holding companies, including a merger through the purchase of 
assets and assumption of liabilities.
    (f) Transactions by foreign banking organization. Any transaction 
described in paragraphs (a) through (e) of this section by a foreign 
banking organization that involves the acquisition of an interest in a 
U.S. bank or in a bank holding company for which application would be 
required if the foreign banking organization were a bank holding 
company.

[[Page 95]]



Sec. 225.12  Transactions not requiring Board approval.

    The following transactions do not require the Board's approval under 
Sec. 225.11 of this subpart:
    (a) Acquisition of securities in fiduciary capacity. The acquisition 
by a bank or other company (other than a trust that is a company) of 
control of voting securities of a bank or bank holding company in good 
faith in a fiduciary capacity, unless:
    (1) The acquiring bank or other company has sole discretionary 
authority to vote the securities and retains this authority for more 
than two years; or
    (2) The acquisition is for the benefit of the acquiring bank or 
other company, or its shareholders, employees, or subsidiaries.
    (b) Acquisition of securities in satisfaction of debts previously 
contracted. The acquisition by a bank or other company of control of 
voting securities of a bank or bank holding company in the regular 
course of securing or collecting a debt previously contracted in good 
faith, if the acquiring bank or other company divests the securities 
within two years of acquisition. The Board or Reserve Bank may grant 
requests for up to three one-year extensions.
    (c) Acquisition of securities by bank holding company with majority 
control. The acquisition by a bank holding company of additional voting 
securities of a bank or bank holding company if more than 50 percent of 
the outstanding voting securities of the bank or bank holding company is 
lawfully controlled by the acquiring bank holding company prior to the 
acquisition.
    (d) Acquisitions involving bank mergers and internal corporate 
reorganizations--(1) Transactions subject to Bank Merger Act. The merger 
or consolidation of a subsidiary bank of a bank holding company with 
another bank, or the purchase of assets by the subsidiary bank, or a 
similar transaction involving subsidiary banks of a bank holding 
company, if the transaction requires the prior approval of a federal 
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)) and 
does not involve the acquisition of shares of a bank. This exception 
does not include:
    (i) The merger of a nonsubsidiary bank and a nonoperating subsidiary 
bank formed by a company for the purpose of acquiring the nonsubsidiary 
bank; or
    (ii) Any transaction requiring the Board's prior approval under 
Sec. 225.11(e) of this subpart.
    The Board may require an application under this subpart if it 
determines that the merger or consolidation would have a significant 
adverse impact on the financial condition of the bank holding company, 
or otherwise requires approval under section 3 of the BHC Act.
    (2) Certain acquisitions subject to Bank Merger Act. The acquisition 
by a bank holding company of shares of a bank or company controlling a 
bank or the merger of a company controlling a bank with the bank holding 
company, if the transaction is part of the merger or consolidation of 
the bank with a subsidiary bank (other than a nonoperating subsidiary 
bank) of the acquiring bank holding company, or is part of the purchase 
of substantially all of the assets of the bank by a subsidiary bank 
(other than a nonoperating subsidiary bank) of the acquiring bank 
holding company, and if:
    (i) The bank merger, consolidation, or asset purchase occurs 
simultaneously with the acquisition of the shares of the bank or bank 
holding company or the merger of holding companies, and the bank is not 
operated by the acquiring bank holding company as a separate entity 
other than as the survivor of the merger, consolidation, or asset 
purchase;
    (ii) The transaction requires the prior approval of a federal 
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));
    (iii) The transaction does not involve the acquisition of any 
nonbank company that would require prior approval under section 4 of the 
BHC Act (12 U.S.C. 1843);
    (iv) Both before and after the transaction, the acquiring bank 
holding company meets the Board's Capital Adequacy Guidelines 
(Appendixes A, B, C, D, and E of this part);
    (v) At least 10 days prior to the transaction, the acquiring bank 
holding company has provided to the Reserve Bank written notice of the 
transaction that contains:

[[Page 96]]

    (A) A copy of the filing made to the appropriate federal banking 
agency under the Bank Merger Act; and
    (B) A description of the holding company's involvement in the 
transaction, the purchase price, and the source of funding for the 
purchase price; and
    (vi) Prior to expiration of the period provided in paragraph 
(d)(2)(v) of this section, the Reserve Bank has not informed the bank 
holding company that an application under Sec. 225.11 is required.
    (3) Internal corporate reorganizations. (i) Subject to paragraph 
(d)(3)(ii) of this section, any of the following transactions performed 
in the United States by a bank holding company:
    (A) The merger of holding companies that are subsidiaries of the 
bank holding company;
    (B) The formation of a subsidiary holding company; \1\
---------------------------------------------------------------------------

    \1\ In the case of a transaction that results in the formation or 
designation of a new bank holding company, the new bank holding company 
must complete the registration requirements described in Sec. 225.5.
---------------------------------------------------------------------------

    (C) The transfer of control or ownership of a subsidiary bank or a 
subsidiary holding company between one subsidiary holding company and 
another subsidiary holding company or the bank holding company.
    (ii) A transaction described in paragraph (d)(3)(i) of this section 
qualifies for this exception if:
    (A) The transaction represents solely a corporate reorganization 
involving companies and insured depository institutions that, both 
preceding and following the transaction, are lawfully controlled and 
operated by the bank holding company;
    (B) The transaction does not involve the acquisition of additional 
voting shares of an insured depository institution that, prior to the 
transaction, was less than majority owned by the bank holding company;
    (C) The bank holding company is not organized in mutual form; and
    (D) Both before and after the transaction, the bank holding company 
meets the Board's Capital Adequacy Guidelines (Appendixes A, B, C, D, 
and E of this part).
    (e) Holding securities in escrow. The holding of any voting 
securities of a bank or bank holding company in an escrow arrangement 
for the benefit of an applicant pending the Board's action on an 
application for approval of the proposed acquisition, if title to the 
securities and the voting rights remain with the seller and payment for 
the securities has not been made to the seller.
    (f) Acquisition of foreign banking organization. The acquisition of 
a foreign banking organization where the foreign banking organization 
does not directly or indirectly own or control a bank in the United 
States, unless the acquisition is also by a foreign banking organization 
and otherwise subject to Sec. 225.11(f) of this subpart.



Sec. 225.13  Factors considered in acting on bank acquisition proposals.

    (a) Factors requiring denial. As specified in section 3(c) of the 
BHC Act, the Board may not approve any application under this subpart 
if:
    (1) The transaction would result in a monopoly or would further any 
combination or conspiracy to monopolize, or to attempt to monopolize, 
the business of banking in any part of the United States;
    (2) The effect of the transaction may be substantially to lessen 
competition in any section of the country, tend to create a monopoly, or 
in any other manner be in restraint of trade, unless the Board finds 
that the transaction's anti-competitive effects are clearly outweighed 
by its probable effect in meeting the convenience and needs of the 
community;
    (3) The applicant has failed to provide the Board with adequate 
assurances that it will make available such information on its 
operations or activities, and the operations or activities of any 
affiliate of the applicant, that the Board deems appropriate to 
determine and enforce compliance with the BHC Act and other applicable 
federal banking statutes, and any regulations thereunder; or
    (4) In the case of an application involving a foreign banking 
organization, the foreign banking organization is not subject to 
comprehensive supervision or regulation on a consolidated basis by the 
appropriate authorities in its home country, as provided in

[[Page 97]]

Sec. 211.24(c)(1)(ii) of the Board's Regulation K (12 CFR 
211.24(c)(1)(ii)).
    (b) Other factors. In deciding applications under this subpart, the 
Board also considers the following factors with respect to the 
applicant, its subsidiaries, any banks related to the applicant through 
common ownership or management, and the bank or banks to be acquired:
    (1) Financial condition. Their financial condition and future 
prospects, including whether current and projected capital positions and 
levels of indebtedness conform to standards and policies established by 
the Board.
    (2) Managerial resources. The competence, experience, and integrity 
of the officers, directors, and principal shareholders of the applicant, 
its subsidiaries, and the banks and bank holding companies concerned; 
their record of compliance with laws and regulations; and the record of 
the applicant and its affiliates of fulfilling any commitments to, and 
any conditions imposed by, the Board in connection with prior 
applications.
    (3) Convenience and needs of community. The convenience and needs of 
the communities to be served, including the record of performance under 
the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.) and 
regulations issued thereunder, including the Board's Regulation BB (12 
CFR part 228).
    (c) Interstate transactions. The Board may approve any application 
or notice under this subpart by a bank holding company to acquire 
control of all or substantially all of the assets of a bank located in a 
state other than the home state of the bank holding company, without 
regard to whether the transaction is prohibited under the law of any 
state, if the transaction complies with the requirements of section 3(d) 
of the BHC Act (12 U.S.C. 1842(d)).
    (d) Conditional approvals. The Board may impose conditions on any 
approval, including conditions to address competitive, financial, 
managerial, safety and soundness, convenience and needs, compliance or 
other concerns, to ensure that approval is consistent with the relevant 
statutory factors and other provisions of the BHC Act.



Sec. 225.14  Expedited action for certain bank acquisitions by well-run 
bank holding companies.

    (a) Filing of notice--(1) Information required and public notice. As 
an alternative to the procedure provided in Sec. 225.15, a bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the prior approval requirements of Sec. 225.11 in connection 
with the acquisition of shares, assets or control of a bank, or a merger 
or consolidation between bank holding companies, by providing the 
appropriate Reserve Bank with a written notice containing the following:
    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies and insured depository institutions involved in the 
transaction \2\ and identification of each banking market affected by 
the transaction;
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    \2\ If, in connection with a transaction under this subpart, any 
person or group of persons proposes to acquire control of the acquiring 
bank holding company for purposes of the Bank Control Act or Sec. 
225.41, the person or group of persons may fulfill the notice 
requirements of the Bank Control Act and Sec. 225.43 by providing, as 
part of the submission by the acquiring bank holding company under this 
subpart, identifying and biographical information required in paragraph 
(6)(A) of the Bank Control Act (12 U.S.C. 1817(j)(6)(A)), as well as any 
financial or other information requested by the Reserve Bank under Sec. 
225.43.
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    (iii) A description of the effect of the transaction on the 
convenience and needs of the communities to be served and of the actions 
being taken by the bank holding company to improve the CRA performance 
of any insured depository institution subsidiary that does not have at 
least a satisfactory CRA performance rating at the time of the 
transaction;
    (iv) Evidence that notice of the proposal has been published in 
accordance with Sec. 225.16(b)(1);
    (v)(A) If the bank holding company has consolidated assets of $150 
million or more, an abbreviated consolidated pro forma balance sheet as 
of the most recent quarter showing credit and debit adjustments that 
reflect the proposed

[[Page 98]]

transaction, consolidated pro forma risk-based capital ratios for the 
acquiring bank holding company as of the most recent quarter, and a 
description of the purchase price and the terms and sources of funding 
for the transaction;
    (B) If the bank holding company has consolidated assets of less than 
$150 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, and a description of the purchase price, the terms 
and sources of funding for the transaction, and the sources and schedule 
for retiring any debt incurred in the transaction;
    (vi) If the bank holding company has consolidated assets of less 
than $300 million, a list of and biographical information regarding any 
directors or senior executive officers of the resulting bank holding 
company that are not directors or senior executive officers of the 
acquiring bank holding company or of a company or institution to be 
acquired;
    (vii) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (viii) The market indexes for each relevant banking market 
reflecting the pro forma effect of the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraph (a)(1)(v) through (viii) of 
this section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section or notify the bank holding company that the transaction is 
subject to the procedure in Sec. 225.15 within 5 business days after 
the close of the public comment period. The Board and the Reserve Bank 
shall not approve any proposal under this section prior to the third 
business day following the close of the public comment period, unless an 
emergency exists that requires expedited or immediate action. The Board 
may extend the period for action under this section for up to 5 business 
days.
    (2) Acceptance of notice in event expedited procedure not available. 
In the event that the Board or the Reserve Bank determines after the 
filing of a notice under this section that a bank holding company may 
not use the procedure in this section and must file an application under 
Sec. 225.15, the application shall be deemed accepted for purposes of 
Sec. 225.15 as of the date that the notice was filed under this 
section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the proposed transaction:
    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (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 risk-weighted 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;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution;

[[Page 99]]

    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if :
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Convenience and needs criteria--(i) Effect on the community. The 
record indicates that the proposed transaction would meet the 
convenience and needs of the community standard in the BHC Act; and
    (ii) Established CRA performance record. At the time of the 
transaction, the lead insured depository institution of the acquiring 
bank holding company and insured depository institutions that control at 
least 80 percent of the total risk-weighted assets of insured 
institutions controlled by the holding company have received a 
satisfactory or better composite rating at the most recent examination 
under the Community Reinvestment Act;
    (4) Public comment. No comment that is timely and substantive as 
provided in Sec. 225.16 is received by the Board or the appropriate 
Reserve Bank other than a comment that supports approval of the 
proposal;
    (5) Competitive criteria--(i) Competitive screen. Without regard to 
any divestitures proposed by the acquiring bank holding company, the 
acquisition does not cause:
    (A) Insured depository institutions controlled by the acquiring bank 
holding company to control in excess of 35 percent of market deposits in 
any relevant banking market; or
    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant banking market with a post-acquisition index of 
at least 1800; and
    (ii) Department of Justice. The Department of Justice has not 
indicated to the Board that consummation of the transaction is likely to 
have a significantly adverse effect on competition in any relevant 
banking market;
    (6) Size of acquisition--(i) In general--(A) Limited Growth. Except 
as provided in paragraph (c)(6)(ii) of this section, the sum of the 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk- weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph other qualifying transactions 
means any transaction approved under this section or Sec. 225.23 during 
the 12 months prior to filing the notice under this section; and
    (B) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(6)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;
    (7) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement action, is or was outstanding against the bank 
holding company or any insured depository institution subsidiary of the 
holding company, and no formal administrative enforcement proceeding 
involving any such enforcement action, order, or directive is or was 
pending;
    (8) Interstate acquisitions. Board-approval of the transaction is 
not prohibited under section 3(d) of the BHC Act;
    (9) Other supervisory considerations. Board approval of the 
transaction is not prohibited under the informational

[[Page 100]]

sufficiency or comprehensive home country supervision standards set 
forth in section 3(c)(3) of the BHC Act; and
    (10) Notification. The acquiring bank holding company has not been 
notified by the Board, in its discretion, prior to the expiration of the 
period in paragraph (b)(1) of this section that an application under 
Sec. 225.15 is required in order to permit closer review of any 
financial, managerial, competitive, convenience and needs or other 
matter related to the factors that must be considered under this part.
    (d) Comment by primary banking supervisor--(1) Notice. Upon receipt 
of a notice under this section, the appropriate Reserve Bank shall 
promptly furnish notice of the proposal and a copy of the information 
filed pursuant to paragraph (a) of this section to the primary banking 
supervisor of the insured depository institutions to be acquired.
    (2) Comment period. The primary banking supervisor shall have 30 
calendar days (or such shorter time as agreed to by the primary banking 
supervisor) from the date of the letter giving notice in which to submit 
its views and recommendations to the Board.
    (3) Action subject to supervisor's comment. Action by the Board or 
the Reserve Bank on a proposal under this section is subject to the 
condition that the primary banking supervisor not recommend in writing 
to the Board disapproval of the proposal prior to the expiration of the 
comment period described in paragraph (d)(2) of this section. In such 
event, any approval given under this section shall be revoked and, if 
required by section 3(b) of the BHC Act, the Board shall order a hearing 
on the proposal.
    (4) Emergencies. Notwithstanding paragraphs (d)(2) and (d)(3) of 
this section, the Board may provide the primary banking supervisor with 
10 calendar days' notice of a proposal under this section if the Board 
finds that an emergency exists requiring expeditious action, and may act 
during the notice period or without providing notice to the primary 
banking supervisor if the Board finds that it must act immediately to 
prevent probable failure.
    (5) Primary banking supervisor. For purposes of this section and 
Sec. 225.15(b), the primary banking supervisor for an institution is:
    (i) The Office of the Comptroller of the Currency, in the case of a 
national banking association or District bank;
    (ii) The appropriate supervisory authority for the State in which 
the bank is chartered, in the case of a State bank;
    (iii) The Director of the Office of Thrift Supervision, in the case 
of a savings association.
    (e) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution. A U.S. branch or agency of a foreign banking organization 
shall be subject to paragraph (c)(3)(ii) of this section only to the 
extent it is insured by the Federal Deposit Insurance Corporation in 
accordance with section 6 of the International Banking Act of 1978 (12 
U.S.C. 3104).

[Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001]



Sec. 225.15  Procedures for other bank acquisition proposals.

    (a) Filing application. Except as provided in Sec. 225.14, an 
application for the Board's prior approval under this subpart shall be 
governed by the provisions of this section and shall be filed with the 
appropriate Reserve Bank on the designated form.
    (b) Notice to primary banking supervisor. Upon receipt of an 
application under this subpart, the Reserve Bank shall promptly furnish 
notice and a copy of the application to the primary banking supervisor 
of each bank to be acquired. The primary supervisor shall have 30 
calendar days from the date of the letter giving notice in which to 
submit its views and recommendations to the Board.
    (c) Accepting application for processing. Within 7 calendar days 
after the Reserve Bank receives an application under this section, the 
Reserve Bank shall accept it for processing as of the date the 
application was filed or return the application if it is substantially 
incomplete. Upon accepting an application, the Reserve Bank shall 
immediately send copies to the Board. The

[[Page 101]]

Reserve Bank or the Board may request additional information necessary 
to complete the record of an application at any time after accepting the 
application for processing.
    (d) Action on applications--(1) Action under delegated authority. 
The Reserve Bank shall approve an application under this section within 
30 calendar days after the acceptance date for the application, unless 
the Reserve Bank, upon notice to the applicant, refers the application 
to the Board for decision because action under delegated authority is 
not appropriate.
    (2) Board action. The Board shall act on an application under this 
subpart that is referred to it for decision within 60 calendar days 
after the acceptance date for the application, unless the Board notifies 
the applicant that the 60-day period is being extended for a specified 
period and states the reasons for the extension. In no event may the 
extension exceed the 91-day period provided in Sec. 225.16(f). The 
Board may, at any time, request additional information that it believes 
is necessary for its decision.



Sec. 225.16  Public notice, comments, hearings, and other provisions 
governing applications and notices.

    (a) In general. The provisions of this section apply to all notices 
and applications filed under Sec. 225.14 and Sec. 225.15.
    (b) Public notice--(1) Newspaper publication--(i) Location of 
publication. In the case of each notice or application submitted under 
Sec. 225.14 or Sec. 225.15, the applicant shall publish a notice in a 
newspaper of general circulation, in the form and at the locations 
specified in Sec. 262.3 of the Rules of Procedure (12 CFR 262.3);
    (ii) Contents of notice. A newspaper notice under this paragraph 
shall provide an opportunity for interested persons to comment on the 
proposal for a period of at least 30 calendar days;
    (iii) Timing of publication. Each newspaper notice published in 
connection with a proposal under this paragraph shall be published no 
more than 15 calendar days before and no later than 7 calendar days 
following the date that a notice or application is filed with the 
appropriate Reserve Bank.
    (2) Federal Register notice. (i) Publication by Board. Upon receipt 
of a notice or application under Sec. 225.14 or Sec. 225.15, the Board 
shall promptly publish notice of the proposal in the Federal Register 
and shall provide an opportunity for interested persons to comment on 
the proposal for a period of no more than 30 days;
    (ii) Request for advance publication. A bank holding company may 
request that, during the 15-day period prior to filing a notice or 
application under Sec. 225.14 or Sec. 225.15, the Board publish notice 
of a proposal in the Federal Register. A request for advance Federal 
Register publication shall be made in writing to the appropriate Reserve 
Bank and shall contain the identifying information prescribed by the 
Board for Federal Register publication;
    (3) Waiver or shortening of notice. The Board may waive or shorten 
the required notice periods under this section if the Board determines 
that an emergency exists requiring expeditious action on the proposal, 
or if the Board finds that immediate action is necessary to prevent the 
probable failure of an insured depository institution.
    (c) Public comment--(1) Timely comments. Interested persons may 
submit information and comments regarding a proposal filed under this 
subpart. A comment shall be considered timely for purposes of this 
subpart if the comment, together with all supplemental information, is 
submitted in writing in accordance with the Board's Rules of Procedure 
and received by the Board or the appropriate Reserve Bank prior to the 
expiration of the latest public comment period provided in paragraph (b) 
of this section.
    (2) Extension of comment period--(i) In general. The Board may, in 
its discretion, extend the public comment period regarding any proposal 
submitted under this subpart.
    (ii) Requests in connection with obtaining application or notice. In 
the event that an interested person has requested a copy of a notice or 
application submitted under this subpart, the Board may, in its 
discretion and based on the facts and circumstances, grant such person 
an extension of the comment period for up to 15 calendar days.

[[Page 102]]

    (iii) Joint requests by interested person and acquiring company. The 
Board will grant a joint request by an interested person and the 
acquiring bank holding company for an extension of the comment period 
for a reasonable period for a purpose related to the statutory factors 
the Board must consider under this subpart.
    (3) Substantive comment. A comment will be considered substantive 
for purposes of this subpart unless it involves individual complaints, 
or raises frivolous, previously-considered or wholly unsubstantiated 
claims or irrelevant issues.
    (d) Notice to Attorney General. The Board or Reserve Bank shall 
immediately notify the United States Attorney General of approval of any 
notice or application under Sec. 225.14 or Sec. 225.15.
    (e) Hearings. As provided in section 3(b) of the BHC Act, the Board 
shall order a hearing on any application or notice under Sec. 225.15 if 
the Board receives from the primary supervisor of the bank to be 
acquired, within the 30-day period specified in Sec. 225.15(b), a 
written recommendation of disapproval of an application. The Board may 
order a formal or informal hearing or other proceeding on the 
application or notice, as provided in Sec. 262.3(i)(2) of the Board's 
Rules of Procedure. Any request for a hearing (other than from the 
primary supervisor) shall comply with Sec. 262.3(e) of the Rules of 
Procedure (12 CFR 262.3(e)).
    (f) Approval through failure to act--(1) Ninety-one day rule. An 
application or notice under Sec. 225.14 or Sec. 225.15 shall be deemed 
approved if the Board fails to act on the application or notice within 
91 calendar days after the date of submission to the Board of the 
complete record on the application. For this purpose, the Board acts 
when it issues an order stating that the Board has approved or denied 
the application or notice, reflecting the votes of the members of the 
Board, and indicating that a statement of the reasons for the decision 
will follow promptly.
    (2) Complete record. For the purpose of computing the commencement 
of the 91-day period, the record is complete on the latest of:
    (i) The date of receipt by the Board of an application or notice 
that has been accepted by the Reserve Bank;
    (ii) The last day provided in any notice for receipt of comments and 
hearing requests on the application or notice;
    (iii) The date of receipt by the Board of the last relevant material 
regarding the application or notice that is needed for the Board's 
decision, if the material is received from a source outside of the 
Federal Reserve System; or
    (iv) The date of completion of any hearing or other proceeding.
    (g) Exceptions to notice and hearing requirements--(1) Probable bank 
failure. If the Board finds it must act immediately on an application or 
notice in order to prevent the probable failure of a bank or bank 
holding company, the Board may modify or dispense with the notice and 
hearing requirements of this section.
    (2) Emergency. If the Board finds that, although immediate action on 
an application or notice is not necessary, an emergency exists requiring 
expeditious action, the Board shall provide the primary supervisor 10 
days to submit its recommendation. The Board may act on such an 
application or notice without a hearing and may modify or dispense with 
the other notice and hearing requirements of this section.
    (h) Waiting period. A transaction approved under Sec. 225.14 or 
Sec. 225.15 shall not be consummated until 30 days after the date of 
approval of the application, except that a transaction may be 
consummated:
    (1) Immediately upon approval, if the Board has determined under 
paragraph (g) of this section that the application or notice involves a 
probable bank failure;
    (2) On or after the 5th calendar day following the date of approval, 
if the Board has determined under paragraph (g) of this section that an 
emergency exists requiring expeditious action; or
    (3) On or after the 15th calendar day following the date of 
approval, if the Board has not received any adverse comments from the 
United States Attorney General relating to the competitive factors and 
the Attorney General has consented to the shorter waiting period.

[[Page 103]]



Sec. 225.17  Notice procedure for one-bank holding company formations.

    (a) Transactions that qualify under this section. An acquisition by 
a company of control of a bank may be consummated 30 days after 
providing notice to the appropriate Reserve Bank in accordance with 
paragraph (b) of this section, provided that all of the following 
conditions are met:
    (1) The shareholder or shareholders who control at least 67 percent 
of the shares of the bank will control, immediately after the 
reorganization, at least 67 percent of the shares of the holding company 
in substantially the same proportion, except for changes in 
shareholders' interests resulting from the exercise of dissenting 
shareholders' rights under state or federal law; \3\
---------------------------------------------------------------------------

    \3\ A shareholder of a bank in reorganization will be considered to 
have the same proportional interest in the holding company if the 
shareholder interest increases, on a pro rata basis, as a result of 
either the redemption of shares from dissenting shareholders by the bank 
or bank holding company, or the acquisition of shares of dissenting 
shareholders by the remaining shareholders.
---------------------------------------------------------------------------

    (2) No shareholder, or group of shareholders acting in concert, 
will, following the reorganization, own or control 10 percent or more of 
any class of voting shares of the bank holding company, unless that 
shareholder or group of shareholders was authorized, after review under 
the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the 
appropriate federal banking agency for the bank, to own or control 10 
percent or more of any class of voting shares of the bank; \4\
---------------------------------------------------------------------------

    \4\ This procedure is not available in cases in which the exercise 
of dissenting shareholders' rights would cause a company that is not a 
bank holding company (other than the company in formation) to be 
required to register as a bank holding company. This procedure also is 
not available for the formation of a bank holding company organized in 
mutual form.
---------------------------------------------------------------------------

    (3) The bank is adequately capitalized (as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o));
    (4) The bank received at least a composite ``satisfactory'' rating 
at its most recent examination, in the event that the bank was examined;
    (5) At the time of the reorganization, neither the bank nor any of 
its officers, directors, or principal shareholders is involved in any 
unresolved supervisory or enforcement matters with any appropriate 
federal banking agency;
    (6) The company demonstrates that any debt that it incurs at the 
time of the reorganization, and the proposed means of retiring this 
debt, will not place undue burden on the holding company or its 
subsidiary on a pro forma basis; \5\
---------------------------------------------------------------------------

    \5\ For a banking organization with consolidated assets, on a pro 
forma basis, of less than $150 million (other than a banking 
organization that will control a de novo bank), this requirement is 
satisfied if the proposal complies with the Board's policy statement on 
small bank holding companies (Appendix C of this part).
---------------------------------------------------------------------------

    (7) The holding company will not, as a result of the reorganization, 
acquire control of any additional bank or engage in any activities other 
than those of managing and controlling banks; and
    (8) During this period, neither the appropriate Reserve Bank nor the 
Board objected to the proposal or required the filing of an application 
under Sec. 225.15 of this subpart.
    (b) Contents of notice. A notice filed under this paragraph shall 
include:
    (1) Certification by the notificant's board of directors that the 
requirements of 12 U.S.C. 1842(a)(C) and this section are met by the 
proposal;
    (2) A list identifying all principal shareholders of the bank prior 
to the reorganization and of the holding company following the 
reorganization, and specifying the percentage of shares held by each 
principal shareholder in the bank and proposed to be held in the new 
holding company;
    (3) A description of the resulting management of the proposed bank 
holding company and its subsidiary bank, including:
    (i) Biographical information regarding any senior officers and 
directors of the resulting bank holding company who were not senior 
officers or directors of the bank prior to the reorganization; and
    (ii) A detailed history of the involvement of any officer, director, 
or principal shareholder of the resulting bank

[[Page 104]]

holding company in any administrative or criminal proceeding; and
    (4) Pro forma financial statements for the holding company, and a 
description of the amount, source, and terms of debt, if any, that the 
bank holding company proposes to incur, and information regarding the 
sources and timing for debt service and retirement.
    (c) Acknowledgment of notice. Within 7 calendar days following 
receipt of a notice under this section, the Reserve Bank shall provide 
the notificant with a written acknowledgment of receipt of the notice. 
This written acknowledgment shall indicate that the transaction 
described in the notice may be consummated on the 30th calendar day 
after the date of receipt of the notice if the Reserve Bank or the Board 
has not objected to the proposal during that time.
    (d) Application required upon objection. The Reserve Bank or the 
Board may object to a proposal during the notice period by providing the 
bank holding company with a written explanation of the reasons for the 
objection. In such case, the bank holding company may file an 
application for prior approval of the proposal pursuant to Sec. 225.15 
of this subpart.



    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 
                                Companies

    Source: Reg. Y, 62 FR 9329, Feb. 28, 1997, unless otherwise noted.



Sec. 225.21  Prohibited nonbanking activities and acquisitions; exempt 
bank holding companies.

    (a) Prohibited nonbanking activities and acquisitions. Except as 
provided in Sec. 225.22 of this subpart, a bank holding company or a 
subsidiary may not engage in, or acquire or control, directly or 
indirectly, voting securities or assets of a company engaged in, any 
activity other than:
    (1) Banking or managing or controlling banks and other subsidiaries 
authorized under the BHC Act; and
    (2) An activity that the Board determines to be so closely related 
to banking, or managing or controlling banks as to be a proper incident 
thereto, including any incidental activities that are necessary to carry 
on such an activity, if the bank holding company has obtained the prior 
approval of the Board for that activity in accordance with the 
requirements of this regulation.
    (b) Exempt bank holding companies. The following bank holding 
companies are exempt from the provisions of this subpart:
    (1) Family-owned companies. Any company that is a ``company covered 
in 1970'' (as defined in section 2(b) of the BHC Act), more than 85 
percent of the voting securities of which was collectively owned on June 
30, 1968, and continuously thereafter, by members of the same family (or 
their spouses) who are lineal descendants of common ancestors.
    (2) Labor, agricultural, and horticultural organizations. Any 
company that was on January 4, 1977, both a bank holding company and a 
labor, agricultural, or horticultural organization exempt from taxation 
under section 501 of the Internal Revenue Code (26 U.S.C. 501(c)).
    (3) Companies granted hardship exemption. Any bank holding company 
that has controlled only one bank since before July 1, 1968, and that 
has been granted an exemption by the Board under section 4(d) of the BHC 
Act, subject to any conditions imposed by the Board.
    (4) Companies granted exemption on other grounds. Any company that 
acquired control of a bank before December 10, 1982, without the Board's 
prior approval under section 3 of the BHC Act, on the basis of a narrow 
interpretation of the term demand deposit or commercial loan, if the 
Board has determined that:
    (i) Coverage of the company as a bank holding company under this 
subpart would be unfair or represent an unreasonable hardship; and
    (ii) Exclusion of the company from coverage under this part is 
consistent with the purposes of the BHC Act and section 106 of the Bank 
Holding Company Act Amendments of 1970 (12 U.S.C. 1971, 1972(1)). The 
provisions of Sec. 225.4 of subpart A of this part do not apply to a 
company exempt under this paragraph.

[[Page 105]]



Sec. 225.22  Exempt nonbanking activities and acquisitions.

    (a) Certain de novo activities. A bank holding company may, either 
directly or indirectly, engage de novo in any nonbanking activity listed 
in Sec. 225.28(b) (other than operation of an insured depository 
institution) without obtaining the Board's prior approval if the bank 
holding company:
    (1) Meets the requirements of paragraphs (c) (1), (2), and (6) of 
Sec. 225.23;
    (2) Conducts the activity in compliance with all Board orders and 
regulations governing the activity; and
    (3) Within 10 business days after commencing the activity, provides 
written notice to the appropriate Reserve Bank describing the activity, 
identifying the company or companies engaged in the activity, and 
certifying that the activity will be conducted in accordance with the 
Board's orders and regulations and that the bank holding company meets 
the requirements of paragraphs (c) (1), (2), and (6) of Sec. 225.23.
    (b) Servicing activities. A bank holding company may, without the 
Board's prior approval under this subpart, furnish services to or 
perform services for, or establish or acquire a company that engages 
solely in servicing activities for:
    (1) The bank holding company or its subsidiaries in connection with 
their activities as authorized by law, including services that are 
necessary to fulfill commitments entered into by the subsidiaries with 
third parties, if the bank holding company or servicing company complies 
with the Board's published interpretations and does not act as principal 
in dealing with third parties; and
    (2) The internal operations of the bank holding company or its 
subsidiaries. Services for the internal operations of the bank holding 
company or its subsidiaries include, but are not limited to:
    (i) Accounting, auditing, and appraising;
    (ii) Advertising and public relations;
    (iii) Data processing and data transmission services, data bases, or 
facilities;
    (iv) Personnel services;
    (v) Courier services;
    (vi) Holding or operating property used wholly or substantially by a 
subsidiary in its operations or for its future use;
    (vii) Liquidating property acquired from a subsidiary;
    (viii) Liquidating property acquired from any sources either prior 
to May 9, 1956, or the date on which the company became a bank holding 
company, whichever is later; and
    (ix) Selling, purchasing, or underwriting insurance, such as blanket 
bond insurance, group insurance for employees, and property and casualty 
insurance.
    (c) Safe deposit business. A bank holding company or nonbank 
subsidiary may, without the Board's prior approval, conduct a safe 
deposit business, or acquire voting securities of a company that 
conducts such a business.
    (d) Nonbanking acquisitions not requiring prior Board approval. The 
Board's prior approval is not required under this subpart for the 
following acquisitions:
    (1) DPC acquisitions. (i) Voting securities or assets, acquired by 
foreclosure or otherwise, in the ordinary course of collecting a debt 
previously contracted (DPC property) in good faith, if the DPC property 
is divested within two years of acquisition.
    (ii) The Board may, upon request, extend this two-year period for up 
to three additional years. The Board may permit additional extensions 
for up to 5 years (for a total of 10 years), for shares, real estate or 
other assets where the holding company demonstrates that each extension 
would not be detrimental to the public interest and either the bank 
holding company has made good faith attempts to dispose of such shares, 
real estate or other assets or disposal of the shares, real estate or 
other assets during the initial period would have been detrimental to 
the company.
    (iii) Transfers of DPC property within the bank holding company 
system do not extend any period for divestiture of the property.
    (2) Securities or assets required to be divested by subsidiary. 
Voting securities or assets required to be divested by a subsidiary at 
the request of an examining federal or state authority (except

[[Page 106]]

by the Board under the BHC Act or this regulation), if the bank holding 
company divests the securities or assets within two years from the date 
acquired from the subsidiary.
    (3) Fiduciary investments. Voting securities or assets acquired by a 
bank or other company (other than a trust that is a company) in good 
faith in a fiduciary capacity, if the voting securities or assets are:
    (i) Held in the ordinary course of business; and
    (ii) Not acquired for the benefit of the company or its 
shareholders, employees, or subsidiaries.
    (4) Securities eligible for investment by national bank. Voting 
securities of the kinds and amounts explicitly eligible by federal 
statute (other than section 4 of the Bank Service Corporation Act, 12 
U.S.C. 1864) for investment by a national bank, and voting securities 
acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the 
BHC Act and interpretations of the Comptroller of the Currency under 
section 5136 of the Revised Statutes (12 U.S.C. 24(7)).
    (5) Securities or property representing 5 percent or less of a 
company. Voting securities of a company or property that, in the 
aggregate, represent 5 percent or less of the outstanding shares of any 
class of voting securities of a company, or that represent a 5 percent 
interest or less in the property, subject to the provisions of 12 CFR 
225.137.
    (6) Securities of investment company. Voting securities of an 
investment company that is solely engaged in investing in securities and 
that does not own or control more than 5 percent of the outstanding 
shares of any class of voting securities of any company.
    (7) Assets acquired in ordinary course of business. Assets of a 
company acquired in the ordinary course of business, subject to the 
provisions of 12 CFR 225.132, if the assets relate to activities in 
which the acquiring company has previously received Board approval under 
this regulation to engage.
    (8) Asset acquisitions by lending company or industrial bank. Assets 
of an office(s) of a company, all or substantially all of which relate 
to making, acquiring, or servicing loans if:
    (i) The acquiring company has previously received Board approval 
under this regulation or is not required to obtain prior Board approval 
under this regulation to engage in lending activities or industrial 
banking activities;
    (ii) The assets acquired during any 12-month period do not represent 
more than 50 percent of the risk-weighted assets (on a consolidated 
basis) of the acquiring lending company or industrial bank, or more than 
$100 million, whichever amount is less;
    (iii) The assets acquired do not represent more than 50 percent of 
the selling company's consolidated assets that are devoted to lending 
activities or industrial banking business;
    (iv) The acquiring company notifies the Reserve Bank of the 
acquisition within 30 days after the acquisition; and
    (v) The acquiring company, after giving effect to the transaction, 
meets the Board's Capital Adequacy Guidelines (Appendix A of this part), 
and the Board has not previously notified the acquiring company that it 
may not acquire assets under the exemption in this paragraph.
    (e) Acquisition of securities by subsidiary banks--(1) National 
bank. A national bank or its subsidiary may, without the Board's 
approval under this subpart, acquire or retain securities on the basis 
of section 4(c)(5) of the BHC Act in accordance with the regulations of 
the Comptroller of the Currency.
    (2) State bank. A state-chartered bank or its subsidiary may, 
insofar as federal law is concerned, and without the Board's prior 
approval under this subpart:
    (i) Acquire or retain securities, on the basis of section 4(c)(5) of 
the BHC Act, of the kinds and amounts explicitly eligible by federal 
statute for investment by a national bank; or
    (ii) Acquire or retain all (but, except for directors' qualifying 
shares, not less than all) of the securities of a company that engages 
solely in activities in which the parent bank may engage, at locations 
at which the bank may engage in the activity, and subject to the same 
limitations as if the bank were engaging in the activity directly.
    (f) Activities and securities of new bank holding companies. A 
company that becomes a bank holding company may,

[[Page 107]]

for a period of two years, engage in nonbanking activities and control 
voting securities or assets of a nonbank subsidiary, if the bank holding 
company engaged in such activities or controlled such voting securities 
or assets on the date it became a bank holding company. The Board may 
grant requests for up to three one-year extensions of the two-year 
period.
    (g) Grandfathered activities and securities. Unless the Board orders 
divestiture or termination under section 4(a)(2) of the BHC Act, a 
``company covered in 1970,'' as defined in section 2(b) of the BHC Act, 
may:
    (1) Retain voting securities or assets and engage in activities that 
it has lawfully held or engaged in continuously since June 30, 1968; and
    (2) Acquire voting securities of any newly formed company to engage 
in such activities.
    (h) Securities or activities exempt under Regulation K. A bank 
holding company may acquire voting securities or assets and engage in 
activities as authorized in Regulation K (12 CFR part 211).



Sec. 225.23  Expedited action for certain nonbanking proposals by 
well-run bank holding companies.

    (a) Filing of notice--(1) Information required. A bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the notice requirement of this subpart in connection with the 
acquisition of voting securities or assets of a company engaged in 
nonbanking activities that the Board has permitted by order or 
regulation (other than an insured depository institution),\1\ or a 
proposal to engage de novo, either directly or indirectly, in a 
nonbanking activity that the Board has permitted by order or by 
regulation, by providing the appropriate Reserve Bank with a written 
notice containing the following:
---------------------------------------------------------------------------

    \1\ A bank holding company may acquire voting securities or assets 
of a savings association or other insured depository institution that is 
not a bank by using the procedures in Sec. 225.14 of subpart B if the 
bank holding company and the proposal qualify under that section as if 
the savings association or other institution were a bank for purposes of 
that section.
---------------------------------------------------------------------------

    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies involved in the transaction, the activities to be 
conducted, and a commitment to conduct the proposed activities in 
conformity with the Board's regulations and orders governing the conduct 
of the proposed activity;
    (iii) If the proposal involves an acquisition of a going concern:
    (A) If the bank holding company has consolidated assets of $150 
million or more, an abbreviated consolidated pro forma balance sheet for 
the acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction, 
consolidated pro forma risk-based capital ratios for the acquiring bank 
holding company as of the most recent quarter, a description of the 
purchase price and the terms and sources of funding for the transaction, 
and the total revenue and net income of the company to be acquired;
    (B) If the bank holding company has consolidated assets of less than 
$150 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, a description of the purchase price and the terms 
and sources of funding for the transaction and the sources and schedule 
for retiring any debt incurred in the transaction, and the total assets, 
off-balance sheet items, revenue and net income of the company to be 
acquired;
    (C) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis;
    (iv) Identification of the geographic markets in which competition 
would be affected by the proposal, a description of the effect of the 
proposal on competition in the relevant markets, a list of the major 
competitors in that market in the proposed activity if the affected 
market is local in nature, and, if

[[Page 108]]

requested, the market indexes for the relevant market; and
    (v) A description of the public benefits that can reasonably be 
expected to result from the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraphs (a)(1) (iii) and (iv) of this 
section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section, or notify the bank holding company that the transaction is 
subject to the procedure in Sec. 225.24, within 12 business days 
following the filing of all of the information required in paragraph (a) 
of this section.
    (2) Acceptance of notice if expedited procedure not available. If 
the Board or the Reserve Bank determines, after the filing of a notice 
under this section, that a bank holding company may not use the 
procedure in this section and must file a notice under Sec. 225.24, the 
notice shall be deemed accepted for purposes of Sec. 225.24 as of the 
date that the notice was filed under this section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the transaction:
    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (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 risk-weighted 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;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution.
    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if:
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Permissible activity. (i) The Board has determined by regulation 
or order that each activity proposed to be conducted is so closely 
related to banking, or managing or controlling banks, as to be a proper 
incident thereto; and
    (ii) The Board has not indicated that proposals to engage in the 
activity are subject to the notice procedure provided in Sec. 225.24;
    (4) Competitive criteria--(i) Competitive screen. In the case of the 
acquisition of a going concern, the acquisition, without regard to any 
divestitures proposed by the acquiring bank holding company, does not 
cause:
    (A) The acquiring bank holding company to control in excess of 35 
percent of the market share in any relevant market; or

[[Page 109]]

    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant market with a post-acquisition index of at least 
1800; and
    (ii) Other competitive factors. The Board has not indicated that the 
transaction is subject to close scrutiny on competitive grounds;
    (5) Size of acquisition--(i) In general--(A) Limited growth. Except 
as provided in paragraph (c)(5)(ii) of this section, the sum of 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk-weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph, ``other qualifying 
transactions'' means any transaction approved under this section or 
Sec. 225.14 during the 12 months prior to filing the notice under this 
section;
    (B) Consideration paid. The gross consideration to be paid by the 
acquiring bank holding company in the proposal does not exceed 15 
percent of the consolidated Tier 1 capital of the acquiring bank holding 
company; and
    (C) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(5)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;
    (6) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement order is or was outstanding against the bank holding 
company or any insured depository institution subsidiary of the holding 
company, and no formal administrative enforcement proceeding involving 
any such enforcement action, order, or directive is or was pending; and
    (7) Notification. The bank holding company has not been notified by 
the Board, in its discretion, prior to the expiration of the period in 
paragraph (b) of this section that a notice under Sec. 225.24 is 
required in order to permit closer review of any potential adverse 
effect or other matter related to the factors that must be considered 
under this part.
    (d) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution.

[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001]



Sec. 225.24  Procedures for other nonbanking proposals.

    (a) Notice required for nonbanking activities. Except as provided in 
Sec. 225.22 and Sec. 225.23, a notice for the Board's prior approval 
under Sec. 225.21(a) to engage in or acquire a company engaged in a 
nonbanking activity shall be filed by a bank holding company (including 
a company seeking to become a bank holding company) with the appropriate 
Reserve Bank in accordance with this section and the Board's Rules of 
Procedure (12 CFR 262.3).
    (1) Engaging de novo in listed activities. A bank holding company 
seeking to commence or to engage de novo, either directly or through a 
subsidiary, in a nonbanking activity listed in Sec. 225.28 shall file a 
notice containing a description of the activities to be conducted and 
the identity of the company that will conduct the activity.
    (2) Acquiring company engaged in listed activities. A bank holding 
company seeking to acquire or control voting securities or assets of a 
company engaged in a nonbanking activity listed in Sec. 225.28 shall 
file a notice containing the following:
    (i) A description of the proposal, including a description of each 
proposed activity, and the effect of the proposal on competition among 
entities engaging in each proposed activity in each relevant market with 
relevant market indexes;
    (ii) The identity of any entity involved in the proposal, and, if 
the

[[Page 110]]

notificant proposes to conduct the activity through an existing 
subsidiary, a description of the existing activities of the subsidiary;
    (iii) A statement of the public benefits that can reasonably be 
expected to result from the proposal;
    (iv) If the bank holding company has consolidated assets of $150 
million or more:
    (A) Parent company and consolidated pro forma balance sheets for the 
acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction;
    (B) Consolidated pro forma risk-based capital and leverage ratio 
calculations for the acquiring bank holding company as of the most 
recent quarter; and
    (C) A description of the purchase price and the terms and sources of 
funding for the transaction;
    (v) If the bank holding company has consolidated assets of less than 
$150 million:
    (A) A pro forma parent-only balance sheet as of the most recent 
quarter showing credit and debit adjustments that reflect the proposed 
transaction; and
    (B) A description of the purchase price and the terms and sources of 
funding for the transaction and, if the transaction is debt funded, one-
year income statement and cash flow projections for the parent company, 
and the sources and schedule for retiring any debt incurred in the 
transaction;
    (vi) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (vii) A description of the management expertise, internal controls 
and risk management systems that will be utilized in the conduct of the 
proposed activities; and
    (viii) A copy of the purchase agreements, and balance sheet and 
income statements for the most recent quarter and year-end for any 
company to be acquired.
    (b) Notice provided to Board. The Reserve Bank shall immediately 
send to the Board a copy of any notice received under paragraphs (a)(2) 
or (a)(3) of this section.
    (c) Notice to public--(1) Listed activities and activities approved 
by order--(i) In a case involving an activity listed in Sec. 225.28 or 
previously approved by the Board by order, the Reserve Bank shall notify 
the Board for publication in the Federal Register immediately upon 
receipt by the Reserve Bank of:
    (A) A notice under this section; or
    (B) A written request that notice of a proposal under this section 
or Sec. 225.23 be published in the Federal Register. Such a request may 
request that Federal Register publication occur up to 15 calendar days 
prior to submission of a notice under this subpart.
    (ii) The Federal Register notice published under this paragraph 
shall invite public comment on the proposal, generally for a period of 
15 days.
    (2) New activities--(i) In general. In the case of a notice under 
this subpart involving an activity that is not listed in Sec. 225.28 
and that has not been previously approved by the Board by order, the 
Board shall send notice of the proposal to the Federal Register for 
publication, unless the Board determines that the notificant has not 
demonstrated that the activity is so closely related to banking or to 
managing or controlling banks as to be a proper incident thereto. The 
Federal Register notice shall invite public comment on the proposal for 
a reasonable period of time, generally for 30 days.
    (ii) Time for publication. The Board shall send the notice required 
under this paragraph to the Federal Register within 10 business days of 
acceptance by the Reserve Bank. The Board may extend the 10-day period 
for an additional 30 calendar days upon notice to the notificant. In the 
event notice of a proposal is not published for comment, the Board shall 
inform the notificant of the reasons for the decision.
    (d) Action on notices--(1) Reserve Bank action--(i) In general. 
Within 30 calendar days after receipt by the Reserve Bank of a notice 
filed pursuant to paragraphs (a)(1) or (a)(2) of this section, the 
Reserve Banks shall:
    (A) Approve the notice; or

[[Page 111]]

    (B) Refer the notice to the Board for decision because action under 
delegated authority is not appropriate.
    (ii) Return of incomplete notice. Within 7 calendar days of receipt, 
the Reserve Bank may return any notice as informationally incomplete 
that does not contain all of the information required by this subpart. 
The return of such a notice shall be deemed action on the notice.
    (iii) Notice of action. The Reserve Bank shall promptly notify the 
bank holding company of any action or referral under this paragraph.
    (iv) Close of public comment period. The Reserve Bank shall not 
approve any notice under this paragraph (d)(1) of this section prior to 
the third business day after the close of the public comment period, 
unless an emergency exists that requires expedited or immediate action.
    (2) Board action; internal schedule. The Board seeks to act on every 
notice referred to it for decision within 60 days of the date that the 
notice is filed with the Reserve Bank. If the Board is unable to act 
within this period, the Board shall notify the notificant and explain 
the reasons and the date by which the Board expects to act.
    (3)(i) Required time limit for System action. The Board or the 
Reserve Bank shall act on any notice under this section within 60 days 
after the submission of a complete notice.
    (ii) Extension of required period for action (A) In general.--The 
Board may extend the 60-day period required for Board action under 
paragraph (d)(3)(i) of this section for an additional 30 days upon 
notice to the notificant.
    (B) Unlisted activities. If a notice involves a proposal to engage 
in an activity that is not listed in Sec. 225.28, the Board may extend 
the period required for Board action under paragraph (d)(3)(i) of this 
section for an additional 90 days. This 90-day extension is in addition 
to the 30-day extension period provided in paragraph (d)(3)(ii)(A) of 
this section. The Board shall notify the notificant that the notice 
period has been extended and explain the reasons for the extension.
    (4) Requests for additional information. The Board or the Reserve 
Bank may modify the information requirements under this section or at 
any time request any additional information that either believes is 
needed for a decision on any notice under this section.
    (5) Tolling of period. The Board or the Reserve Bank may at any time 
extend or toll the time period for action on a notice for any period 
with the consent of the notificant.

[Reg. Y, 62 FR 9332, Feb. 28, 1997, as amended at 62 FR 60640, Nov. 12, 
1997; 65 FR 14438, Mar. 17, 2000]



Sec. 225.25  Hearings, alteration of activities, and other matters.

    (a) Hearings--(1) Procedure to request hearing. Any request for a 
hearing on a notice under this subpart shall comply with the provisions 
of 12 CFR 262.3(e).
    (2) Determination to hold hearing. The Board may order a formal or 
informal hearing or other proceeding on a notice as provided in 12 CFR 
262.3(i)(2). The Board shall order a hearing only if there are disputed 
issues of material fact that cannot be resolved in some other manner.
    (3) Extension of period for hearing. The Board may extend the time 
for action on any notice for such time as is reasonably necessary to 
conduct a hearing and evaluate the hearing record. Such extension shall 
not exceed 91 calendar days after the date of submission to the Board of 
the complete record on the notice. The procedures for computation of the 
91-day rule as set forth in Sec. 225.16(f) apply to notices under this 
subpart that involve hearings.
    (b) Approval through failure to act. (1) Except as provided in 
paragraph (a) of this section or Sec. 225.24(d)(5), a notice under this 
subpart shall be deemed to be approved at the conclusion of the period 
that begins on the date the complete notice is received by the Reserve 
Bank or the Board and that ends 60 calendar days plus any applicable 
extension and tolling period thereafter.
    (2) Complete notice. For purposes of paragraph (b)(1) of this 
section, a notice shall be deemed complete at such time as it contains 
all information required by this subpart and all other information 
requested by the Board or the Reserve Bank.

[[Page 112]]

    (c) Notice to expand or alter nonbanking activities--(1) De novo 
expansion. A notice under this subpart is required to open a new office 
or to form a subsidiary to engage in, or to relocate an existing office 
engaged in, a nonbanking activity that the Board has previously approved 
for the bank holding company under this regulation, only if:
    (i) The Board's prior approval was limited geographically;
    (ii) The activity is to be conducted in a country outside of the 
United States and the bank holding company has not previously received 
prior Board approval under this regulation to engage in the activity in 
that country; or
    (iii) The Board or appropriate Reserve Bank has notified the company 
that a notice under this subpart is required.
    (2) Activities outside United States. With respect to activities to 
be engaged in outside the United States that require approval under this 
subpart, the procedures of this section apply only to activities to be 
engaged in directly by a bank holding company that is not a qualifying 
foreign banking organization, or by a nonbank subsidiary of a bank 
holding company approved under this subpart. Regulation K (12 CFR part 
211) governs other international operations of bank holding companies.
    (3) Alteration of nonbanking activity. Unless otherwise permitted by 
the Board, a notice under this subpart is required to alter a nonbanking 
activity in any material respect from that considered by the Board in 
acting on the application or notice to engage in the activity.
    (d) Emergency savings association acquisitions. In the case of a 
notice to acquire a savings association, the Board may modify or 
dispense with the public notice and hearing requirements of this subpart 
if the Board finds that an emergency exists that requires the Board to 
act immediately and the primary federal regulator of the institution 
concurs.

[Reg. Y, 62 FR 9333, Feb. 28, 1997, as amended by Reg. Y, 62 FR 60640, 
Nov. 12, 1997]



Sec. 225.26  Factors considered in acting on nonbanking proposals.

    (a) In general. In evaluating a notice under Sec. 225.23 or Sec. 
225.24, the Board shall consider whether the notificant's performance of 
the activities can reasonably be expected to produce benefits to the 
public (such as greater convenience, increased competition, and gains in 
efficiency) that outweigh possible adverse effects (such as undue 
concentration of resources, decreased or unfair competition, conflicts 
of interest, and unsound banking practices).
    (b) Financial and managerial resources. Consideration of the factors 
in paragraph (a) of this section includes an evaluation of the financial 
and managerial resources of the notificant, including its subsidiaries 
and any company to be acquired, the effect of the proposed transaction 
on those resources, and the management expertise, internal control and 
risk-management systems, and capital of the entity conducting the 
activity.
    (c) Competitive effect of de novo proposals. Unless the record 
demonstrates otherwise, the commencement or expansion of a nonbanking 
activity de novo is presumed to result in benefits to the public through 
increased competition.
    (d) Denial for lack of information. The Board may deny any notice 
submitted under this subpart if the notificant neglects, fails, or 
refuses to furnish all information required by the Board.
    (e) Conditional approvals. The Board may impose conditions on any 
approval, including conditions to address permissibility, financial, 
managerial, safety and soundness, competitive, compliance, conflicts of 
interest, or other concerns to ensure that approval is consistent with 
the relevant statutory factors and other provisions of the BHC Act.



Sec. 225.27  Procedures for determining scope of nonbanking activities.

    (a) Advisory opinions regarding scope of previously approved 
nonbanking activities--(1) Request for advisory opinion. Any person may 
submit a request to the Board for an advisory opinion regarding the 
scope of any permissible nonbanking activity. The request shall be 
submitted in writing to the Board

[[Page 113]]

and shall identify the proposed parameters of the activity, or describe 
the service or product that will be provided, and contain an explanation 
supporting an interpretation regarding the scope of the permissible 
nonbanking activity.
    (2) Response to request. The Board shall provide an advisory opinion 
within 45 days of receiving a written request under this paragraph.
    (b) Procedure for consideration of new activities--(1) Initiation of 
proceeding. The Board may, at any time, on its own initiative or in 
response to a written request from any person, initiate a proceeding to 
determine whether any activity is so closely related to banking or 
managing or controlling banks as to be a proper incident thereto.
    (2) Requests for determination. Any request for a Board 
determination that an activity is so closely related to banking or 
managing or controlling banks as to be a proper incident thereto, shall 
be submitted to the Board in writing, and shall contain evidence that 
the proposed activity is so closely related to banking or managing or 
controlling banks as to be a proper incident thereto.
    (3) Publication. The Board shall publish in the Federal Register 
notice that it is considering the permissibility of a new activity and 
invite public comment for a period of at least 30 calendar days. In the 
case of a request submitted under paragraph (b) of this section, the 
Board may determine not to publish notice of the request if the Board 
determines that the requester has provided no reasonable basis for a 
determination that the activity is so closely related to banking, or 
managing or controlling banks as to be a proper incident thereto, and 
notifies the requester of the determination.
    (4) Comments and hearing requests. Any comment and any request for a 
hearing regarding a proposal under this section shall comply with the 
provisions of Sec. 262.3(e) of the Board's Rules of Procedure (12 CFR 
262.3(e)).



Sec. 225.28  List of permissible nonbanking activities.

    (a) Closely related nonbanking activities. The activities listed in 
paragraph (b) of this section are so closely related to banking or 
managing or controlling banks as to be a proper incident thereto, and 
may be engaged in by a bank holding company or its subsidiary in 
accordance with the requirements of this regulation.
    (b) Activities determined by regulation to be permissible--(1) 
Extending credit and servicing loans. Making, acquiring, brokering, or 
servicing loans or other extensions of credit (including factoring, 
issuing letters of credit and accepting drafts) for the company's 
account or for the account of others.
    (2) Activities related to extending credit. Any activity usual in 
connection with making, acquiring, brokering or servicing loans or other 
extensions of credit, as determined by the Board. The Board has 
determined that the following activities are usual in connection with 
making, acquiring, brokering or servicing loans or other extensions of 
credit:
    (i) Real estate and personal property appraising. Performing 
appraisals of real estate and tangible and intangible personal property, 
including securities.
    (ii) Arranging commercial real estate equity financing. Acting as 
intermediary for the financing of commercial or industrial income-
producing real estate by arranging for the transfer of the title, 
control, and risk of such a real estate project to one or more 
investors, if the bank holding company and its affiliates do not have an 
interest in, or participate in managing or developing, a real estate 
project for which it arranges equity financing, and do not promote or 
sponsor the development of the property.
    (iii) Check-guaranty services. Authorizing a subscribing merchant to 
accept personal checks tendered by the merchant's customers in payment 
for goods and services, and purchasing from the merchant validly 
authorized checks that are subsequently dishonored.
    (iv) Collection agency services. Collecting overdue accounts 
receivable, either retail or commercial.
    (v) Credit bureau services. Maintaining information related to the 
credit history of consumers and providing the information to a credit 
grantor who is considering a borrower's application

[[Page 114]]

for credit or who has extended credit to the borrower.
    (vi) Asset management, servicing, and collection activities. 
Engaging under contract with a third party in asset management, 
servicing, and collection \2\ of assets of a type that an insured 
depository institution may originate and own, if the company does not 
engage in real property management or real estate brokerage services as 
part of these services.
---------------------------------------------------------------------------

    \2\ Asset management services include acting as agent in the 
liquidation or sale of loans and collateral for loans, including real 
estate and other assets acquired through foreclosure or in satisfaction 
of debts previously contracted.
---------------------------------------------------------------------------

    (vii) Acquiring debt in default. Acquiring debt that is in default 
at the time of acquisition, if the company:
    (A) Divests shares or assets securing debt in default that are not 
permissible investments for bank holding companies, within the time 
period required for divestiture of property acquired in satisfaction of 
a debt previously contracted under Sec. 225.12(b); \3\
---------------------------------------------------------------------------

    \3\ For this purpose, the divestiture period for property begins on 
the date that the debt is acquired, regardless of when legal title to 
the property is acquired.
---------------------------------------------------------------------------

    (B) Stands only in the position of a creditor and does not purchase 
equity of obligors of debt in default (other than equity that may be 
collateral for such debt); and
    (C) Does not acquire debt in default secured by shares of a bank or 
bank holding company.
    (viii) Real estate settlement servicing. Providing real estate 
settlement services.\4\
---------------------------------------------------------------------------

    \4\ For purposes of this section, real estate settlement services do 
not include providing title insurance as principal, agent, or broker.
---------------------------------------------------------------------------

    (3) Leasing personal or real property. Leasing personal or real 
property or acting as agent, broker, or adviser in leasing such property 
if:
    (i) The lease is on a nonoperating basis; \5\
---------------------------------------------------------------------------

    \5\ The requirement that the lease be on a nonoperating basis means 
that the bank holding company may not, directly or indirectly, engage in 
operating, servicing, maintaining, or repairing leased property during 
the lease term. For purposes of the leasing of automobiles, the 
requirement that the lease be on a nonoperating basis means that the 
bank holding company may not, directly or indirectly: (1) Provide 
servicing, repair, or maintenance of the leased vehicle during the lease 
term; (2) purchase parts and accessories in bulk or for an individual 
vehicle after the lessee has taken delivery of the vehicle; (3) provide 
the loan of an automobile during servicing of the leased vehicle; (4) 
purchase insurance for the lessee; or (5) provide for the renewal of the 
vehicle's license merely as a service to the lessee where the lessee 
could renew the license without authorization from the lessor. The bank 
holding company may arrange for a third party to provide these services 
or products.
---------------------------------------------------------------------------

    (ii) The initial term of the lease is at least 90 days;
    (iii) In the case of leases involving real property:
    (A) At the inception of the initial lease, the effect of the 
transaction will yield a return that will compensate the lessor for not 
less than the lessor's full investment in the property plus the 
estimated total cost of financing the property over the term of the 
lease from rental payments, estimated tax benefits, and the estimated 
residual value of the property at the expiration of the initial lease; 
and
    (B) The estimated residual value of property for purposes of 
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of 
the acquisition cost of the property to the lessor.
    (4) Operating nonbank depository institutions--(i) Industrial 
banking. Owning, controlling, or operating an industrial bank, Morris 
Plan bank, or industrial loan company, so long as the institution is not 
a bank.
    (ii) Operating savings association. Owning, controlling, or 
operating a savings association, if the savings association engages only 
in deposit-taking activities, lending, and other activities that are 
permissible for bank holding companies under this subpart C.
    (5) Trust company functions. Performing functions or activities that 
may be performed by a trust company (including activities of a 
fiduciary, agency, or custodial nature), in the manner authorized by 
federal or state law, so long as the company is not a bank for purposes 
of section 2(c) of the Bank Holding Company Act.

[[Page 115]]

    (6) Financial and investment advisory activities. Acting as 
investment or financial advisor to any person, including (without, in 
any way, limiting the foregoing):
    (i) Serving as investment adviser (as defined in section 2(a)(20) of 
the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an 
investment company registered under that act, including sponsoring, 
organizing, and managing a closed-end investment company;
    (ii) Furnishing general economic information and advice, general 
economic statistical forecasting services, and industry studies;
    (iii) Providing advice in connection with mergers, acquisitions, 
divestitures, investments, joint ventures, leveraged buyouts, 
recapitalizations, capital structurings, financing transactions and 
similar transactions, and conducting financial feasibility studies;\6\
---------------------------------------------------------------------------

    \6\ Feasibility studies do not include assisting management with the 
planning or marketing for a given project or providing general 
operational or management advice.
---------------------------------------------------------------------------

    (iv) Providing information, statistical forecasting, and advice with 
respect to any transaction in foreign exchange, swaps, and similar 
transactions, commodities, and any forward contract, option, future, 
option on a future, and similar instruments;
    (v) Providing educational courses, and instructional materials to 
consumers on individual financial management matters; and
    (vi) Providing tax-planning and tax-preparation services to any 
person.
    (7) Agency transactional services for customer investments--(i) 
Securities brokerage. Providing securities brokerage services (including 
securities clearing and/or securities execution services on an 
exchange), whether alone or in combination with investment advisory 
services, and incidental activities (including related securities credit 
activities and custodial services), if the securities brokerage services 
are restricted to buying and selling securities solely as agent for the 
account of customers and do not include securities underwriting or 
dealing.
    (ii) Riskless principal transactions. Buying and selling in the 
secondary market all types of securities on the order of customers as a 
``riskless principal'' to the extent of engaging in a transaction in 
which the company, after receiving an order to buy (or sell) a security 
from a customer, purchases (or sells) the security for its own account 
to offset a contemporaneous sale to (or purchase from) the customer. 
This does not include:
    (A) Selling bank-ineligible securities \7\ at the order of a 
customer that is the issuer of the securities, or selling bank-
ineligible securities in any transaction where the company has a 
contractual agreement to place the securities as agent of the issuer; or
---------------------------------------------------------------------------

    \7\ A bank-ineligible security is any security that a State member 
bank is not permitted to underwrite or deal in under 12 U.S.C. 24 and 
335.
---------------------------------------------------------------------------

    (B) Acting as a riskless principal in any transaction involving a 
bank-ineligible security for which the company or any of its affiliates 
acts as underwriter (during the period of the underwriting or for 30 
days thereafter) or dealer.\8\
---------------------------------------------------------------------------

    \8\ A company or its affiliates may not enter quotes for specific 
bank-ineligible securities in any dealer quotation system in connection 
with the company's riskless principal transactions; except that the 
company or its affiliates may enter ``bid'' or ``ask'' quotations, or 
publish ``offering wanted'' or ``bid wanted'' notices on trading systems 
other than NASDAQ or an exchange, if the company or its affiliate does 
not enter price quotations on different sides of the market for a 
particular security during any two-day period.
---------------------------------------------------------------------------

    (iii) Private placement services. Acting as agent for the private 
placement of securities in accordance with the requirements of the 
Securities Act of 1933 (1933 Act) and the rules of the Securities and 
Exchange Commission, if the company engaged in the activity does not 
purchase or repurchase for its own account the securities being placed, 
or hold in inventory unsold portions of issues of these securities.
    (iv) Futures commission merchant. Acting as a futures commission 
merchant (FCM) for unaffiliated persons in the execution, clearance, or 
execution and clearance of any futures contract and option on a futures 
contract traded on an exchange in the United States or abroad if:

[[Page 116]]

    (A) The activity is conducted through a separately incorporated 
subsidiary of the bank holding company, which may engage in activities 
other than FCM activities (including, but not limited to, permissible 
advisory and trading activities); and
    (B) The parent bank holding company does not provide a guarantee or 
otherwise become liable to the exchange or clearing association other 
than for those trades conducted by the subsidiary for its own account or 
for the account of any affiliate.
    (v) Other transactional services. Providing to customers as agent 
transactional services with respect to swaps and similar transactions, 
any transaction described in paragraph (b)(8) of this section, any 
transaction that is permissible for a state member bank, and any other 
transaction involving a forward contract, option, futures, option on a 
futures or similar contract (whether traded on an exchange or not) 
relating to a commodity that is traded on an exchange.
    (8) Investment transactions as principal--(i) Underwriting and 
dealing in government obligations and money market instruments. 
Underwriting and dealing in obligations of the United States, general 
obligations of states and their political subdivisions, and other 
obligations that state member banks of the Federal Reserve System may be 
authorized to underwrite and deal in under 12 U.S.C. 24 and 335, 
including banker's acceptances and certificates of deposit, under the 
same limitations as would be applicable if the activity were performed 
by the bank holding company's subsidiary member banks or its subsidiary 
nonmember banks as if they were member banks.
    (ii) Investing and trading activities. Engaging as principal in:
    (A) Foreign exchange;
    (B) Forward contracts, options, futures, options on futures, swaps, 
and similar contracts, whether traded on exchanges or not, based on any 
rate, price, financial asset (including gold, silver, platinum, 
palladium, copper, or any other metal approved by the Board), 
nonfinancial asset, or group of assets, other than a bank-ineligible 
security,\9\ if:
---------------------------------------------------------------------------

    \9\ A bank-ineligible security is any security that a state member 
bank is not permitted to underwrite or deal in under 12 U.S.C. 24 and 
335.
---------------------------------------------------------------------------

    (1) A state member bank is authorized to invest in the asset 
underlying the contract;
    (2) The contract requires cash settlement;
    (3) The contract allows for assignment, termination, or offset prior 
to delivery or expiration, and the company--
    (i) Makes every reasonable effort to avoid taking or making delivery 
of the asset underlying the contract; or
    (ii) Receives and instantaneously transfers title to the underlying 
asset, by operation of contract and without taking or making physical 
delivery of the asset; or
    (4) The contract does not allow for assignment, termination, or 
offset prior to delivery or expiration and is based on an asset for 
which futures contracts or options on futures contracts have been 
approved for trading on a U.S. contract market by the Commodity Futures 
Trading Commission, and the company--
    (i) Makes every reasonable effort to avoid taking or making delivery 
of the asset underlying the contract; or
    (ii) Receives and instantaneously transfers title to the underlying 
asset, by operation of contract and without taking or making physical 
delivery of the asset.
    (C) Forward contracts, options,\10\ futures, options on futures, 
swaps, and similar contracts, whether traded on exchanges or not, based 
on an index of a rate, a price, or the value of any financial asset, 
nonfinancial asset, or

[[Page 117]]

group of assets, if the contract requires cash settlement.
---------------------------------------------------------------------------

    \10\ This reference does not include acting as a dealer in options 
based on indices of bank-ineligible securities when the options are 
traded on securities exchanges. These options are securities for 
purposes of the federal securities laws and bank-ineligible securities 
for purposes of section 20 of the Glass-Steagall Act, 12 U.S.C. 337. 
Similarly, this reference does not include acting as a dealer in any 
other instrument that is a bank-ineligible security for purposes of 
section 20. A bank holding company may deal in these instruments in 
accordance with the Board's orders on dealing in bank-ineligible 
securities.
---------------------------------------------------------------------------

    (iii) Buying and selling bullion, and related activities. Buying, 
selling and storing bars, rounds, bullion, and coins of gold, silver, 
platinum, palladium, copper, and any other metal approved by the Board, 
for the company's own account and the account of others, and providing 
incidental services such as arranging for storage, safe custody, 
assaying, and shipment.
    (9) Management consulting and counseling activities--(i) Management 
consulting. (A) Providing management consulting advice: \11\
---------------------------------------------------------------------------

    \11\ In performing this activity, bank holding companies are not 
authorized to perform tasks or operations or provide services to client 
institutions either on a daily or continuing basis, except as necessary 
to instruct the client institution on how to perform such services for 
itself. See also the Board's interpretation of bank management 
consulting advice (12 CFR 225.131).
---------------------------------------------------------------------------

    (1) On any matter to unaffiliated depository institutions, including 
commercial banks, savings and loan associations, savings banks, credit 
unions, industrial banks, Morris Plan banks, cooperative banks, 
industrial loan companies, trust companies, and branches or agencies of 
foreign banks;
    (2) On any financial, economic, accounting, or audit matter to any 
other company.
    (B) A company conducting management consulting activities under this 
subparagraph and any affiliate of such company may not:
    (1) Own or control, directly or indirectly, more than 5 percent of 
the voting securities of the client institution; and
    (2) Allow a management official, as defined in 12 CFR 212.2(h), of 
the company or any of its affiliates to serve as a management official 
of the client institution, except where such interlocking relationship 
is permitted pursuant to an exemption granted under 12 CFR 212.4(b) or 
otherwise permitted by the Board.
    (C) A company conducting management consulting activities may 
provide management consulting services to customers not described in 
paragraph (b)(9)(i)(A)(1) of this section or regarding matters not 
described in paragraph (b)(9)(i)(A)(2) of this section, if the total 
annual revenue derived from those management consulting services does 
not exceed 30 percent of the company's total annual revenue derived from 
management consulting activities.
    (ii) Employee benefits consulting services. Providing consulting 
services to employee benefit, compensation and insurance plans, 
including designing plans, assisting in the implementation of plans, 
providing administrative services to plans, and developing employee 
communication programs for plans.
    (iii) Career counseling services. Providing career counseling 
services to:
    (A) A financial organization \12\ and individuals currently employed 
by, or recently displaced from, a financial organization;
---------------------------------------------------------------------------

    \12\ Financial organization refers to insured depository institution 
holding companies and their subsidiaries, other than nonbanking 
affiliates of diversified savings and loan holding companies that engage 
in activities not permissible under section 4(c)(8) of the Bank Holding 
Company Act (12 U.S.C. 1842(c)(8)).
---------------------------------------------------------------------------

    (B) Individuals who are seeking employment at a financial 
organization; and
    (C) Individuals who are currently employed in or who seek positions 
in the finance, accounting, and audit departments of any company.
    (10) Support services--(i) Courier services. Providing courier 
services for:
    (A) Checks, commercial papers, documents, and written instruments 
(excluding currency or bearer-type negotiable instruments) that are 
exchanged among banks and financial institutions; and
    (B) Audit and accounting media of a banking or financial nature and 
other business records and documents used in processing such media.\13\
---------------------------------------------------------------------------

    \13\ See also the Board's interpretation on courier activities (12 
CFR 225.129), which sets forth conditions for bank holding company entry 
into the activity.
---------------------------------------------------------------------------

    (ii) Printing and selling MICR-encoded items. Printing and selling 
checks and related documents, including corporate image checks, cash 
tickets, voucher checks, deposit slips, savings withdrawal packages, and 
other forms that

[[Page 118]]

require Magnetic Ink Character Recognition (MICR) encoding.
    (11) Insurance agency and underwriting--(i) Credit insurance. Acting 
as principal, agent, or broker for insurance (including home mortgage 
redemption insurance) that is:
    (A) Directly related to an extension of credit by the bank holding 
company or any of its subsidiaries; and
    (B) Limited to ensuring the repayment of the outstanding balance due 
on the extension of credit \14\ in the event of the death, disability, 
or involuntary unemployment of the debtor.
---------------------------------------------------------------------------

    \14\ Extension of credit includes direct loans to borrowers, loans 
purchased from other lenders, and leases of real or personal property so 
long as the leases are nonoperating and full-payout leases that meet the 
requirements of paragraph (b)(3) of this section.
---------------------------------------------------------------------------

    (ii) Finance company subsidiary. Acting as agent or broker for 
insurance directly related to an extension of credit by a finance 
company \15\ that is a subsidiary of a bank holding company, if:
---------------------------------------------------------------------------

    \15\ Finance company includes all non-deposit-taking financial 
institutions that engage in a significant degree of consumer lending 
(excluding lending secured by first mortgages) and all financial 
institutions specifically defined by individual states as finance 
companies and that engage in a significant degree of consumer lending.
---------------------------------------------------------------------------

    (A) The insurance is limited to ensuring repayment of the 
outstanding balance on such extension of credit in the event of loss or 
damage to any property used as collateral for the extension of credit; 
and
    (B) The extension of credit is not more than $10,000, or $25,000 if 
it is to finance the purchase of a residential manufactured home \16\ 
and the credit is secured by the home; and
---------------------------------------------------------------------------

    \16\ These limitations increase at the end of each calendar year, 
beginning with 1982, by the percentage increase in the Consumer Price 
Index for Urban Wage Earners and Clerical Workers published by the 
Bureau of Labor Statistics.
---------------------------------------------------------------------------

    (C) The applicant commits to notify borrowers in writing that:
    (1) They are not required to purchase such insurance from the 
applicant;
    (2) Such insurance does not insure any interest of the borrower in 
the collateral; and
    (3) The applicant will accept more comprehensive property insurance 
in place of such single-interest insurance.
    (iii) Insurance in small towns. Engaging in any insurance agency 
activity in a place where the bank holding company or a subsidiary of 
the bank holding company has a lending office and that:
    (A) Has a population not exceeding 5,000 (as shown in the preceding 
decennial census); or
    (B) Has inadequate insurance agency facilities, as determined by the 
Board, after notice and opportunity for hearing.
    (iv) Insurance-agency activities conducted on May 1, 1982. Engaging 
in any specific insurance-agency activity \17\ if the bank holding 
company, or subsidiary conducting the specific activity, conducted such 
activity on May 1, 1982, or received Board approval to conduct such 
activity on or before May 1, 1982.\18\ A bank holding company or 
subsidiary engaging in a specific insurance agency activity under this 
clause may:
---------------------------------------------------------------------------

    \17\ Nothing contained in this provision shall preclude a bank 
holding company subsidiary that is authorized to engage in a specific 
insurance-agency activity under this clause from continuing to engage in 
the particular activity after merger with an affiliate, if the merger is 
for legitimate business purposes and prior notice has been provided to 
the Board.
    \18\ For the purposes of this paragraph, activities engaged in on 
May 1, 1982, include activities carried on subsequently as the result of 
an application to engage in such activities pending before the Board on 
May 1, 1982, and approved subsequently by the Board or as the result of 
the acquisition by such company pursuant to a binding written contract 
entered into on or before May 1, 1982, of another company engaged in 
such activities at the time of the acquisition.
---------------------------------------------------------------------------

    (A) Engage in such specific insurance agency activity only at 
locations:
    (1) In the state in which the bank holding company has its principal 
place of business (as defined in 12 U.S.C. 1842(d));
    (2) In any state or states immediately adjacent to such state; and
    (3) In any state in which the specific insurance-agency activity was 
conducted (or was approved to be conducted) by such bank holding company 
or subsidiary thereof or by any other

[[Page 119]]

subsidiary of such bank holding company on May 1, 1982; and
    (B) Provide other insurance coverages that may become available 
after May 1, 1982, so long as those coverages insure against the types 
of risks as (or are otherwise functionally equivalent to) coverages sold 
or approved to be sold on May 1, 1982, by the bank holding company or 
subsidiary.
    (v) Supervision of retail insurance agents. Supervising on behalf of 
insurance underwriters the activities of retail insurance agents who 
sell:
    (A) Fidelity insurance and property and casualty insurance on the 
real and personal property used in the operations of the bank holding 
company or its subsidiaries; and
    (B) Group insurance that protects the employees of the bank holding 
company or its subsidiaries.
    (vi) Small bank holding companies. Engaging in any insurance-agency 
activity if the bank holding company has total consolidated assets of 
$50 million or less. A bank holding company performing insurance-agency 
activities under this paragraph may not engage in the sale of life 
insurance or annuities except as provided in paragraphs (b)(11) (i) and 
(iii) of this section, and it may not continue to engage in insurance-
agency activities pursuant to this provision more than 90 days after the 
end of the quarterly reporting period in which total assets of the 
holding company and its subsidiaries exceed $50 million.
    (vii) Insurance-agency activities conducted before 1971. Engaging in 
any insurance-agency activity performed at any location in the United 
States directly or indirectly by a bank holding company that was engaged 
in insurance-agency activities prior to January 1, 1971, as a 
consequence of approval by the Board prior to January 1, 1971.
    (12) Community development activities--(i) Financing and investment 
activities. Making equity and debt investments in corporations or 
projects designed primarily to promote community welfare, such as the 
economic rehabilitation and development of low-income areas by providing 
housing, services, or jobs for residents.
    (ii) Advisory activities. Providing advisory and related services 
for programs designed primarily to promote community welfare.
    (13) Money orders, savings bonds, and traveler's checks. The 
issuance and sale at retail of money orders and similar consumer-type 
payment instruments; the sale of U.S. savings bonds; and the issuance 
and sale of traveler's checks.
    (14) Data processing. (i) Providing data processing, data storage 
and data transmission services, facilities (including data processing, 
data storage and data transmission hardware, software, documentation, or 
operating personnel), databases, advice, and access to such services, 
facilities, or data-bases by any technological means, if:
    (A) The data to be processed, stored or furnished are financial, 
banking or economic; and
    (B) The hardware provided in connection therewith is offered only in 
conjunction with software designed and marketed for the processing, 
storage and transmission of financial, banking, or economic data, and 
where the general purpose hardware does not constitute more than 30 
percent of the cost of any packaged offering.
    (ii) A company conducting data processing, data storage, and data 
transmission activities may conduct data processing, data storage, and 
data transmission activities not described in paragraph (b)(14)(i) of 
this section if the total annual revenue derived from those activities 
does not exceed 49 percent of the company's total annual revenues 
derived from data processing, data storage and data transmission 
activities.

[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 68 FR 39810, July 3, 
2003; 68 FR 41901, July 16, 2003; 68 FR 68499, Dec. 9, 2003]



              Subpart D_Control and Divestiture Proceedings



Sec. 225.31  Control proceedings.

    (a) Preliminary determination of control. (1) The Board may issue a 
preliminary determination of control under the procedures set forth in 
this section in any case in which:
    (i) Any of the presumptions of control set forth in paragraph (d) of 
this section is present; or

[[Page 120]]

    (ii) It otherwise appears that a company has the power to exercise a 
controlling influence over the management or policies of a bank or other 
company.
    (2) If the Board makes a preliminary determination of control under 
this section, the Board shall send notice to the controlling company 
containing a statement of the facts upon which the preliminary 
determination is based.
    (b) Response to preliminary determination of control. Within 30 
calendar days of issuance by the Board of a preliminary determination of 
control or such longer period permitted by the Board, the company 
against whom the determination has been made shall:
    (1) Submit for the Board's approval a specific plan for the prompt 
termination of the control relationship;
    (2) File an application under subpart B or C of this regulation to 
retain the control relationship; or
    (3) Contest the preliminary determination by filing a response, 
setting forth the facts and circumstances in support of its position 
that no control exists, and, if desired, requesting a hearing or other 
proceeding.
    (c) Hearing and final determination. (1) The Board shall order a 
formal hearing or other appropriate proceeding upon the request of a 
company that contests a preliminary determination that the company has 
the power to exercise a controlling influence over the management or 
policies of a bank or other company, if the Board finds that material 
facts are in dispute. The Board may also in its discretion order a 
formal hearing or other proceeding with respect to a preliminary 
determination that the company controls voting securities of the bank or 
other company under the presumptions in paragraph (d)(1) of this 
section.
    (2) At a hearing or other proceeding, any applicable presumptions 
established by paragraph (d) of this section shall be considered in 
accordance with the Federal Rules of Evidence and the Board's Rules of 
Practice for Formal Hearings (12 CFR part 263).
    (3) After considering the submissions of the company and other 
evidence, including the record of any hearing or other proceeding, the 
Board shall issue a final order determining whether the company controls 
voting securities, or has the power to exercise a controlling influence 
over the management or policies, of the bank or other company. If a 
control relationship is found, the Board may direct the company to 
terminate the control relationship or to file an application for the 
Board's approval to retain the control relationship under subpart B or C 
of this regulation.
    (d) Rebuttable presumptions of control. The following rebuttable 
presumptions shall be used in any proceeding under this section:
    (1) Control of voting securities--(i) Securities convertible into 
voting securities. A company that owns, controls, or holds securities 
that are immediately convertible, at the option of the holder or owner, 
into voting securities of a bank or other company, controls the voting 
securities.
    (ii) Option or restriction on voting securities. A company that 
enters into an agreement or understanding under which the rights of a 
holder of voting securities of a bank or other company are restricted in 
any manner controls the securities. This presumption does not apply 
where the agreement or understanding:
    (A) Is a mutual agreement among shareholders granting to each other 
a right of first refusal with respect to their shares;
    (B) Is incident to a bona fide loan transaction; or
    (C) Relates to restrictions on transferability and continues only 
for the time necessary to obtain approval from the appropriate Federal 
supervisory authority with respect to acquisition by the company of the 
securities.
    (2) Control over company--(i) Management agreement. A company that 
enters into any agreement or understanding with a bank or other company 
(other than an investment advisory agreement), such as a management 
contract, under which the first company or any of its subsidiaries 
directs or exercises significant influence over the general management 
or overall operations of the bank or other company controls the bank or 
other company.
    (ii) Shares controlled by company and associated individuals. A 
company that, together with its management officials

[[Page 121]]

or controlling shareholders (including members of the immediate families 
of either), owns, controls, or holds with power to vote 25 percent or 
more of the outstanding shares of any class of voting securities of a 
bank or other company controls the bank or other company, if the first 
company owns, controls, or holds with power to vote more than 5 percent 
of the outstanding shares of any class of voting securities of the bank 
or other company.
    (iii) Common management officials. A company that has one or more 
management officials in common with a bank or other company controls the 
bank or other company, if the first company owns, controls or holds with 
power to vote more than 5 percent of the outstanding shares of any class 
of voting securities of the bank or other company, and no other person 
controls as much as 5 percent of the outstanding shares of any class of 
voting securities of the bank or other company.
    (iv) Shares held as fiduciary. The presumptions in paragraphs (d)(2) 
(ii) and (iii) of this section do not apply if the securities are held 
by the company in a fiduciary capacity without sole discretionary 
authority to exercise the voting rights.
    (e) Presumption of non-control--(1) In any proceeding under this 
section, there is a presumption that any company that directly or 
indirectly owns, controls, or has power to vote less than 5 percent of 
the outstanding shares of any class of voting securities of a bank or 
other company does not have control over that bank or other company.
    (2) In any proceeding under this section, or judicial proceeding 
under the BHC Act, other than a proceeding in which the Board has made a 
preliminary determination that a company has the power to exercise a 
controlling influence over the management or policies of the bank or 
other company, a company may not be held to have had control over the 
bank or other company at any given time, unless that company, at the 
time in question, directly or indirectly owned, controlled, or had power 
to vote 5 percent or more of the outstanding shares of any class of 
voting securities of the bank or other company, or had already been 
found to have control on the basis of the existence of a controlling 
influence relationship.

[Reg. Y, 49 FR 818, Jan. 5, 1984, as amended at 58 FR 474, Jan. 6, 1993; 
Reg. Y, 62 FR 9338, Feb. 28, 1997]



                    Subpart E_Change in Bank Control

    Source: Reg. Y, 62 FR 9338, Feb. 28, 1997, unless otherwise noted.



Sec. 225.41  Transactions requiring prior notice.

    (a) Prior notice requirement. Any person acting directly or 
indirectly, or through or in concert with one or more persons, shall 
give the Board 60 days' written notice, as specified in Sec. 225.43 of 
this subpart, before acquiring control of a state member bank or bank 
holding company, unless the acquisition is exempt under Sec. 225.42.
    (b) Definitions. For purposes of this subpart:
    (1) Acquisition includes a purchase, assignment, transfer, or pledge 
of voting securities, or an increase in percentage ownership of a state 
member bank or a bank holding company resulting from a redemption of 
voting securities.
    (2) Acting in concert includes knowing participation in a joint 
activity or parallel action towards a common goal of acquiring control 
of a state member bank or bank holding company whether or not pursuant 
to an express agreement.
    (3) Immediate family includes a person's father, mother, stepfather, 
stepmother, brother, sister, stepbrother, stepsister, son, daughter, 
stepson, stepdaughter, grandparent, grandson, granddaughter, father-in-
law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-
in-law, the spouse of any of the foregoing, and the person's spouse.
    (c) Acquisitions requiring prior notice--(1) Acquisition of control. 
The acquisition of voting securities of a state member bank or bank 
holding company constitutes the acquisition of control under the Bank 
Control Act, requiring prior notice to the Board, if, immediately after 
the transaction, the acquiring person (or persons acting in concert) 
will own, control, or hold with

[[Page 122]]

power to vote 25 percent or more of any class of voting securities of 
the institution.
    (2) Rebuttable presumption of control. The Board presumes that an 
acquisition of voting securities of a state member bank or bank holding 
company constitutes the acquisition of control under the Bank Control 
Act, requiring prior notice to the Board, if, immediately after the 
transaction, the acquiring person (or persons acting in concert) will 
own, control, or hold with power to vote 10 percent or more of any class 
of voting securities of the institution, and if:
    (i) The institution has registered securities under section 12 of 
the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
    (ii) No other person will own, control, or hold the power to vote a 
greater percentage of that class of voting securities immediately after 
the transaction.\1\
---------------------------------------------------------------------------

    \1\ If two or more persons, not acting in concert, each propose to 
acquire simultaneously equal percentages of 10 percent or more of a 
class of voting securities of the state member bank or bank holding 
company, each person must file prior notice to the Board.
---------------------------------------------------------------------------

    (d) Rebuttable presumption of concerted action. The following 
persons shall be presumed to be acting in concert for purposes of this 
subpart:
    (1) A company and any controlling shareholder, partner, trustee, or 
management official of the company, if both the company and the person 
own voting securities of the state member bank or bank holding company;
    (2) An individual and the individual's immediate family;
    (3) Companies under common control;
    (4) Persons that are parties to any agreement, contract, 
understanding, relationship, or other arrangement, whether written or 
otherwise, regarding the acquisition, voting, or transfer of control of 
voting securities of a state member bank or bank holding company, other 
than through a revocable proxy as described in Sec. 225.42(a)(5) of 
this subpart;
    (5) Persons that have made, or propose to make, a joint filing under 
sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m 
or 78n), and the rules promulgated thereunder by the Securities and 
Exchange Commission; and
    (6) A person and any trust for which the person serves as trustee.
    (e) Acquisitions of loans in default. The Board presumes an 
acquisition of a loan in default that is secured by voting securities of 
a state member bank or bank holding company to be an acquisition of the 
underlying securities for purposes of this section.
    (f) Other transactions. Transactions other than those set forth in 
paragraph (c) of this section resulting in a person's control of less 
than 25 percent of a class of voting securities of a state member bank 
or bank holding company are not deemed by the Board to constitute 
control for purposes of the Bank Control Act.
    (g) Rebuttal of presumptions. Prior notice to the Board is not 
required for any acquisition of voting securities under the presumption 
of control set forth in this section, if the Board finds that the 
acquisition will not result in control. The Board shall afford any 
person seeking to rebut a presumption in this section an opportunity to 
present views in writing or, if appropriate, orally before its 
designated representatives at an informal conference.



Sec. 225.42  Transactions not requiring prior notice.

    (a) Exempt transactions. The following transactions do not require 
notice to the Board under this subpart:
    (1) Existing control relationships. The acquisition of additional 
voting securities of a state member bank or bank holding company by a 
person who:
    (i) Continuously since March 9, 1979 (or since the institution 
commenced business, if later), held power to vote 25 percent or more of 
any class of voting securities of the institution; or
    (ii) Is presumed, under Sec. 225.41(c)(2) of this subpart, to have 
controlled the institution continuously since March 9, 1979, if the 
aggregate amount of voting securities held does not exceed 25 percent or 
more of any class of voting securities of the institution or, in other 
cases, where the Board determines that the person has controlled the 
bank continuously since March 9, 1979;

[[Page 123]]

    (2) Increase of previously authorized acquisitions. Unless the Board 
or the Reserve Bank otherwise provides in writing, the acquisition of 
additional shares of a class of voting securities of a state member bank 
or bank holding company by any person (or persons acting in concert) who 
has lawfully acquired and maintained control of the institution (for 
purposes of Sec. 225.41(c) of this subpart), after complying with the 
procedures and receiving approval to acquire voting securities of the 
institution under this subpart, or in connection with an application 
approved under section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of 
subpart B of this part) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
    (3) Acquisitions subject to approval under BHC Act or Bank Merger 
Act. Any acquisition of voting securities subject to approval under 
section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of subpart B of 
this part), or section 18(c) of the Federal Deposit Insurance Act (Bank 
Merger Act, 12 U.S.C. 1828(c));
    (4) Transactions exempt under BHC Act. Any transaction described in 
sections 2(a)(5), 3(a)(A), or 3(a)(B) of the BHC Act (12 U.S.C. 
1841(a)(5), 1842(a)(A), and 1842(a)(B)), by a person described in those 
provisions;
    (5) Proxy solicitation. The acquisition of the power to vote 
securities of a state member bank or bank holding company through 
receipt of a revocable proxy in connection with a proxy solicitation for 
the purposes of conducting business at a regular or special meeting of 
the institution, if the proxy terminates within a reasonable period 
after the meeting;
    (6) Stock dividends. The receipt of voting securities of a state 
member bank or bank holding company through a stock dividend or stock 
split if the proportional interest of the recipient in the institution 
remains substantially the same; and
    (7) Acquisition of foreign banking organization. The acquisition of 
voting securities of a qualifying foreign banking organization. (This 
exemption does not extend to the reports and information required under 
paragraphs 9, 10, and 12 of the Bank Control Act (12 U.S.C. 1817(j) (9), 
(10), and (12)) and Sec. 225.44 of this subpart.)
    (b) Prior notice exemption. (1) The following acquisitions of voting 
securities of a state member bank or bank holding company, which would 
otherwise require prior notice under this subpart, are not subject to 
the prior notice requirements if the acquiring person notifies the 
appropriate Reserve Bank within 90 calendar days after the acquisition 
and provides any relevant information requested by the Reserve Bank:
    (i) Acquisition of voting securities through inheritance;
    (ii) Acquisition of voting securities as a bona fide gift; and
    (iii) Acquisition of voting securities in satisfaction of a debt 
previously contracted (DPC) in good faith.
    (2) The following acquisitions of voting securities of a state 
member bank or bank holding company, which would otherwise require prior 
notice under this subpart, are not subject to the prior notice 
requirements if the acquiring person does not reasonably have advance 
knowledge of the transaction, and provides the written notice required 
under section 225.43 to the appropriate Reserve Bank within 90 calendar 
days after the transaction occurs:
    (i) Acquisition of voting securities resulting from a redemption of 
voting securities by the issuing bank or bank holding company; and
    (ii) Acquisition of voting securities as a result of actions 
(including the sale of securities) by any third party that is not within 
the control of the acquiror.
    (3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits 
the authority of the Board to disapprove a notice pursuant to Sec. 
225.43(h) of this subpart.



Sec. 225.43  Procedures for filing, processing, publishing, and acting 
on notices.

    (a) Filing notice. (1) A notice required under this subpart shall be 
filed with the appropriate Reserve Bank and shall contain all the 
information required by paragraph 6 of the Bank Control Act (12 U.S.C. 
1817(j)(6)), or prescribed in the designated Board form.

[[Page 124]]

    (2) The Board may waive any of the informational requirements of the 
notice if the Board determines that it is in the public interest.
    (3) A notificant shall notify the appropriate Reserve Bank or the 
Board immediately of any material changes in a notice submitted to the 
Reserve Bank, including changes in financial or other conditions.
    (4) When the acquiring person is an individual, or group of 
individuals acting in concert, the requirement to provide personal 
financial data may be satisfied by a current statement of assets and 
liabilities and an income summary, as required in the designated Board 
form, together with a statement of any material changes since the date 
of the statement or summary. The Reserve Bank or the Board, 
nevertheless, may request additional information, if appropriate.
    (b) Acceptance of notice. The 60-day notice period specified in 
Sec. 225.41 of this subpart begins on the date of receipt of a complete 
notice. The Reserve Bank shall notify the person or persons submitting a 
notice under this subpart in writing of the date the notice is or was 
complete and thereby accepted for processing. The Reserve Bank or the 
Board may request additional relevant information at any time after the 
date of acceptance.
    (c) Publication--(1) Newspaper Announcement. Any person(s) filing a 
notice under this subpart shall publish, in a form prescribed by the 
Board, an announcement soliciting public comment on the proposed 
acquisition. The announcement shall be published in a newspaper of 
general circulation in the community in which the head office of the 
state member bank to be acquired is located or, in the case of a 
proposed acquisition of a bank holding company, in the community in 
which its head office is located and in the community in which the head 
office of each of its subsidiary banks is located. The announcement 
shall be published no earlier than 15 calendar days before the filing of 
the notice with the appropriate Reserve Bank and no later than 10 
calendar days after the filing date; and the publisher's affidavit of a 
publication shall be provided to the appropriate Reserve Bank.
    (2) Contents of newspaper announcement. The newspaper announcement 
shall state:
    (i) The name of each person identified in the notice as a proposed 
acquiror of the bank or bank holding company;
    (ii) The name of the bank or bank holding company to be acquired, 
including the name of each of the bank holding company's subsidiary 
banks; and
    (iii) A statement that interested persons may submit comments on the 
notice to the Board or the appropriate Reserve Bank for a period of 20 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section.
    (3) Federal Register announcement. The Board shall, upon filing of a 
notice under this subpart, publish announcement in the Federal Register 
of receipt of the notice. The Federal Register announcement shall 
contain the information required under paragraphs (c)(2)(i) and 
(c)(2)(ii) of this section and a statement that interested persons may 
submit comments on the proposed acquisition for a period of 15 calendar 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section. The Board may waive publication in the Federal 
Register, if the Board determines that such action is appropriate.
    (4) Delay of publication. The Board may permit delay in the 
publication required under paragraphs (c)(1) and (c)(3) of this section 
if the Board determines, for good cause shown, that it is in the public 
interest to grant such delay. Requests for delay of publication may be 
submitted to the appropriate Reserve Bank.
    (5) Shortening or waiving notice. The Board may shorten or waive the 
public comment or newspaper publication requirements of this paragraph, 
or act on a notice before the expiration of a public comment period, if 
it determines in writing that an emergency exists, or that disclosure of 
the notice, solicitation of public comment, or delay until expiration of 
the public comment period would seriously threaten the safety or 
soundness of the bank or bank holding company to be acquired.

[[Page 125]]

    (6) Consideration of public comments. In acting upon a notice filed 
under this subpart, the Board shall consider all public comments 
received in writing within the period specified in the newspaper or 
Federal Register announcement, whichever is later. At the Board's 
option, comments received after this period may, but need not, be 
considered.
    (7) Standing. No person (other than the acquiring person) who 
submits comments or information on a notice filed under this subpart 
shall thereby become a party to the proceeding or acquire any standing 
or right to participate in the Board's consideration of the notice or to 
appeal or otherwise contest the notice or the Board's action regarding 
the notice.
    (d) Time period for Board action--(1) Consummation of acquisition --
(i) The notificant(s) may consummate the proposed acquisition 60 days 
after submission to the Reserve Bank of a complete notice under 
paragraph (a) of this section, unless within that period the Board 
disapproves the proposed acquisition or extends the 60-day period, as 
provided under paragraph (d)(2) of this section.
    (ii) The notificant(s) may consummate the proposed transaction 
before the expiration of the 60-day period if the Board notifies the 
notificant(s) in writing of the Board's intention not to disapprove the 
acquisition.
    (2) Extensions of time period. (i) The Board may extend the 60-day 
period in paragraph (d)(1) of this section for an additional 30 days by 
notifying the acquiring person(s).
    (ii) The Board may further extend the period during which it may 
disapprove a notice for two additional periods of not more than 45 days 
each, if the Board determines that:
    (A) Any acquiring person has not furnished all the information 
required under paragraph (a) of this section;
    (B) Any material information submitted is substantially inaccurate;
    (C) The Board is unable to complete the investigation of an 
acquiring person because of inadequate cooperation or delay by that 
person; or
    (D) Additional time is needed to investigate and determine that no 
acquiring person has a record of failing to comply with the requirements 
of the Bank Secrecy Act, subchapter II of Chapter 53 of Title 31, United 
States Code.
    (iii) If the Board extends the time period under this paragraph, it 
shall notify the acquiring person(s) of the reasons therefor and shall 
include a statement of the information, if any, deemed incomplete or 
inaccurate.
    (e) Advice to bank supervisory agencies. (1) Upon accepting a notice 
relating to acquisition of securities of a state member bank, the 
Reserve Bank shall send a copy of the notice to the appropriate state 
bank supervisor, which shall have 30 calendar days from the date the 
notice is sent in which to submit its views and recommendations to the 
Board. The Reserve Bank also shall send a copy of any notice to the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
and the Office of Thrift Supervision.
    (2) If the Board finds that it must act immediately in order to 
prevent the probable failure of the bank or bank holding company 
involved, the Board may dispense with or modify the requirements for 
notice to the state supervisor.
    (f) Investigation and report. (1) After receiving a notice under 
this subpart, the Board or the appropriate Reserve Bank shall conduct an 
investigation of the competence, experience, integrity, and financial 
ability of each person by and for whom an acquisition is to be made. The 
Board shall also make an independent determination of the accuracy and 
completeness of any information required to be contained in a notice 
under paragraph (a) of this section. In investigating any notice 
accepted under this subpart, the Board or Reserve Bank may solicit 
information or views from any person, including any bank or bank holding 
company involved in the notice, and any appropriate state, federal, or 
foreign governmental authority.
    (2) The Board or the appropriate Reserve Bank shall prepare a 
written report of its investigation, which shall contain, at a minimum, 
a summary of the results of the investigation.
    (g) Factors considered in acting on notices. In reviewing a notice 
filed under this subpart, the Board shall consider

[[Page 126]]

the information in the record, the views and recommendations of the 
appropriate bank supervisor, and any other relevant information obtained 
during any investigation of the notice.
    (h) Disapproval and hearing--(1) Disapproval of notice. The Board 
may disapprove an acquisition if it finds adverse effects with respect 
to any of the factors set forth in paragraph 7 of the Bank Control Act 
(12 U.S.C. 1817(j)(7)) (i.e., competitive, financial, managerial, 
banking, or incompleteness of information).
    (2) Disapproval notification. Within three days after its decision 
to issue a notice of intent to disapprove any proposed acquisition, the 
Board shall notify the acquiring person in writing of the reasons for 
the action.
    (3) Hearing. Within 10 calendar days of receipt of the notice of the 
Board's intent to disapprove, the acquiring person may submit a written 
request for a hearing. Any hearing conducted under this paragraph shall 
be in accordance with the Rules of Practice for Formal Hearings (12 CFR 
part 263). At the conclusion of the hearing, the Board shall, by order, 
approve or disapprove the proposed acquisition on the basis of the 
record of the hearing. If the acquiring person does not request a 
hearing, the notice of intent to disapprove becomes final and 
unappealable.



Sec. 225.44  Reporting of stock loans.

    (a) Requirements. (1) Any foreign bank or affiliate of a foreign 
bank that has credit outstanding to any person or group of persons, in 
the aggregate, which is secured, directly or indirectly, by 25 percent 
or more of any class of voting securities of a state member bank, shall 
file a consolidated report with the appropriate Reserve Bank for the 
state member bank.
    (2) The foreign bank or its affiliate also shall file a copy of the 
report with its appropriate Federal banking agency.
    (3) Any shares of the state member bank held by the foreign bank or 
any affiliate of the foreign bank as principal must be included in the 
calculation of the number of shares in which the foreign bank or its 
affiliate has a security interest for purposes of paragraph (a) of this 
section.
    (b) Definitions. For purposes of paragraph (a) of this section:
    (1) Foreign bank shall have the same meaning as in section 1(b) of 
the International Banking Act of 1978 (12 U.S.C. 3101).
    (2) Credit outstanding includes any loan or extension of credit; the 
issuance of a guarantee, acceptance, or letter of credit, including an 
endorsement or standby letter of credit; and any other type of 
transaction that extends credit or financing to the person or group of 
persons.
    (3) Group of persons includes any number of persons that the foreign 
bank or any affiliate of a foreign bank has reason to believe:
    (i) Are acting together, in concert, or with one another to acquire 
or control shares of the same insured depository institution, including 
an acquisition of shares of the same depository institution at 
approximately the same time under substantially the same terms; or
    (ii) Have made, or propose to make, a joint filing under section 13 
or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and 
the rules promulgated thereunder by the Securities and Exchange 
Commission regarding ownership of the shares of the same insured 
depository institution.
    (c) Exceptions. Compliance with paragraph (a) of this section is not 
required if:
    (1) The person or group of persons referred to in that paragraph has 
disclosed the amount borrowed and the security interest therein to the 
Board or appropriate Reserve Bank in connection with a notice filed 
under Sec. 225.41 of this subpart, or another application filed with 
the Board or Reserve Bank as a substitute for a notice under Sec. 
225.41 of this subpart, including an application filed under section 3 
of the BHC Act (12 U.S.C. 1842) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)), or an application 
for membership in the Federal Reserve System; or
    (2) The transaction involves a person or group of persons that has 
been the owner or owners of record of the stock for a period of one year 
or more; or, if the transaction involves stock issued by a newly 
chartered bank, before the bank is opened for business.

[[Page 127]]

    (d) Report requirements. (1) The consolidated report shall indicate 
the number and percentage of shares securing each applicable extension 
of credit, the identity of the borrower, and the number of shares held 
as principal by the foreign bank and any affiliate thereof.
    (2) A foreign bank, or any affiliate of a foreign bank, shall file 
the consolidated report in writing within 30 days of the date on which 
the foreign bank or affiliate first believes that the security for any 
outstanding credit consists of 25 percent or more of any class of voting 
securities of a state member bank.
    (e) Other reporting requirements. A foreign bank, or any affiliate 
thereof, that is supervised by the System and is required to report 
credit outstanding that is secured by the shares of an insured 
depository institution to another Federal banking agency also shall file 
a copy of the report with the appropriate Reserve Bank.



                 Subpart F_Limitations on Nonbank Banks



Sec. 225.52  Limitation on overdrafts.

    (a) Definitions. For purposes of this section--
    (1) Account means a reserve account, clearing account, or deposit 
account as defined in the Board's Regulation D (12 CFR 204.2(a)(1)(i)), 
that is maintained at a Federal Reserve Bank or nonbank bank.
    (2) Cash item means (i) a check other than a check classified as a 
noncash item; or (ii) any other item payable on demand and collectible 
at par that the Federal Reserve Bank of the district in which the item 
is payable is willing to accept as a cash item.
    (3) Discount window loan means any credit extended by a Federal 
Reserve Bank to a nonbank bank or industrial bank pursuant to the 
provisions of the Board's Regulation A (12 CFR part 201).
    (4) Industrial bank means an institution as defined in section 
2(c)(2)(H) of the BHC Act (12 U.S.C. 1841(c)(2)(H)).
    (5) Noncash item means an item handled by a Reserve Bank as a 
noncash item under the Reserve Bank's ``Collection of Noncash Items 
Operating Circular'' (e.g., a maturing bankers' acceptance or a maturing 
security, or a demand item, such as a check, with special instructions 
or an item that has not been preprinted or post-encoded).
    (6) Other nonelectronic transactions include all other transactions 
not included as funds transfers, book-entry securities transfers, cash 
items, noncash items, automated clearing house transactions, net 
settlement entries, and discount window loans (e.g., original issue of 
securities or redemption of securities).
    (7) An overdraft in an account occurs whenever the Federal Reserve 
Bank, nonbank bank, or industrial bank holding an account posts a 
transaction to the account of the nonbank bank, industrial bank, or 
affiliate that exceeds the aggregate balance of the accounts of the 
nonbank bank, industrial bank, or affiliate, as determined by the 
posting rules set forth in paragraphs (d) and (e) of this section and 
continues until the aggregate balance of the account is zero or greater.
    (8) Transfer item means an item as defined in subpart B of 
Regulation J (12 CFR 210.25 et seq).
    (b) Restriction on overdrafts--(1) Affiliates. Neither a nonbank 
bank nor an industrial bank shall permit any affiliate to incur any 
overdraft in its account with the nonbank bank or industrial bank.
    (2) Nonbank banks or industrial banks. (i) No nonbank bank or 
industrial bank shall incur any overdraft in its account at a Federal 
Reserve Bank on behalf of an affiliate.
    (ii) An overdraft by a nonbank bank or industrial bank in its 
account at a Federal Reserve Bank shall be deemed to be on behalf of an 
affiliate whenever:
    (A) A nonbank bank or industrial bank holds an account for an 
affiliate from which third-party payments can be made; and
    (B) When the posting of an affiliate's transaction to the nonbank 
bank's or industrial bank's account at a Reserve Bank creates an 
overdraft in its account at a Federal Reserve Bank or increases the 
amount of an existing overdraft in its account at a Federal Reserve 
Bank.

[[Page 128]]

    (c) Permissible overdrafts. The following are permissible overdrafts 
not subject to paragraph (b) of this section:
    (1) Inadvertent error. An overdraft in its account by a nonbank bank 
or its affiliate, or an industrial bank or its affiliate, that results 
from an inadvertent computer error or inadvertent accounting error, that 
was not reasonably forseeable or could not have been prevented through 
the maintenance of procedures reasonably adopted by the nonbank bank or 
affiliate to avoid such overdraft; and
    (2) Fully secured primary dealer affiliate overdrafts. (i) An 
overdraft incurred by an affiliate of a nonbank bank, which affiliate is 
recognized as a primary dealer by the Federal Reserve Bank of New York, 
in the affiliate's account at the nonbank bank, or an overdraft incurred 
by a nonbank bank on behalf of its primary dealer affiliate in the 
nonbank bank's account at a Federal Reserve Bank; provided: the 
overdraft is fully secured by bonds, notes, or other obligations which 
are direct obligations of the United States or on which the principal 
and interest are fully guaranteed by the United States or by securities 
and obligations eligible for settlement on the Federal Reserve book-
entry system.
    (ii) An overdraft by a nonbank bank in its account at a Federal 
Reserve Bank that is on behalf of a primary dealer affiliate is fully 
secured when that portion of its overdraft at the Federal Reserve Bank 
that corresponds to the transaction posted for an affiliate that caused 
or increased the nonbank bank's overdraft is fully secured in accordance 
with paragraph (c)(2)(iii) of this section.
    (iii) An overdraft is fully secured under paragraph (c)(2)(i) when 
the nonbank bank can demonstrate that the overdraft is secured, at all 
times, by a perfected security interest in specific, identified 
obligations described in paragraph (c)(2)(i) with a market value that, 
in the judgment of the Reserve Bank holding the nonbank bank's account, 
is sufficiently in excess of the amount of the overdraft to provide a 
margin of protection in a volatile market or in the event the securities 
need to be liquidated quickly.
    (d) Posting by Federal Reserve Banks. For purposes of determining 
the balance of an account under this section, payments and transfers by 
nonbank banks and industrial banks processed by the Federal Reserve 
Banks shall be considered posted to their accounts at Federal Reserve 
Banks as follows:
    (1) Funds transfers. Transfer items shall be posted:
    (i) To the transferor's account at the time the transfer is actually 
made by the transferor's Federal Reserve Bank; and
    (ii) To the transferee's account at the time the transferee's 
Reserve Bank sends the transfer item or sends or telephones the advice 
of credit for the item to the transferee, whichever occurs first.
    (2) Book-entry securities transfers against payment. A book-entry 
securities transfer against payment shall be posted: (i) to the 
transferor's account at the time the entry is made by the transferor's 
Reserve Bank; and (ii) to the transferee's account at the time the entry 
is made by the transferee's Reserve Bank.
    (3) Discount window loans. Credit for a discount window loan shall 
be posted to the account of a nonbank bank or industrial bank at the 
close of business on the day that it is made or such earlier time as may 
be specifically agreed to by the Federal Reserve Bank and the nonbank 
bank under the terms of the loan. Debit for repayment of a discount 
window loan shall be posted to the account of the nonbank bank or 
industrial bank as of the close of business on the day of maturity of 
the loan or such earlier time as may be agreed to by the Federal Reserve 
Bank and the nonbank bank or required by the Federal Reserve Bank under 
the terms of the loan.
    (4) Other transactions. Total aggregate credits for automated 
clearing house transfers, cash items, noncash items, net settlement 
entries, and other nonelectronic transactions shall be posted to the 
account of a nonbank bank or industrial bank as of the opening of 
business on settlement day. Total aggregate debits for these 
transactions and entries shall be posted to the account of a nonbank 
bank or industrial

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bank as of the close of business on settlement day.
    (e) Posting by nonbank banks and industrial banks. For purposes of 
determining the balance of an affiliate's account under this section, 
payments and transfers through an affiliate's account at a nonbank bank 
or industrial bank shall be posted as follows:
    (1) Funds transfers. (i) Fedwire transfer items shall be posted:
    (A) To the transferor affiliate's account no later than the time the 
transfer is actually made by the transferor's Federal Reserve Bank; and
    (B) To the transferee affiliate's account no earlier than the time 
the transferee's Reserve Bank sends the transfer item, or sends or 
telephones the advice of credit for the item to the transferee, 
whichever occurs first.
    (ii) For funds transfers not sent or received through Federal 
Reserve Banks, debits shall be posted to the transferor affiliate's 
account not later than the time the nonbank bank or industrial bank 
becomes obligated on the transfer. Credits shall not be posted to the 
transferee affiliate's account before the nonbank bank or industrial 
bank has received actually and finally collected funds for the transfer.
    (2) Book-entry securities transfers against payment. (i) A book-
entry securities transfer against payment shall be posted:
    (A) To the transferor affiliate's account not earlier than the time 
the entry is made by the transferor's Reserve Bank; and
    (B) To the transferee affiliate's account not later than the time 
the entry is made by the transferee's Reserve Bank.
    (ii) For book-entry securities transfers against payment that are 
not sent or received through Federal Reserve Banks, entries shall be 
posted:
    (A) To the buyer-affiliate's account not later than the time the 
nonbank bank or industrial bank becomes obligated on the transfer; and
    (B) To the seller-affiliate's account not before the nonbank bank or 
industrial bank has received actually and finally collected funds for 
the transfer.
    (3) Other transactions--(i) Credits. Except as otherwise provided in 
this paragraph, credits for cash items, noncash items, ACH transfers, 
net settlement entries, and all other nonelectronic transactions shall 
be posted to an affiliate's account on the day of the transaction (i.e., 
settlement day for ACH transactions or the day of credit for check 
transactions), but no earlier than the Federal Reserve Bank's opening of 
business on that day. Credit for cash items that are required by federal 
or state statute or regulation to be made available to the depositor for 
withdrawal prior to the posting time set forth in the preceding 
paragraph shall be posted as of the required availability time.
    (ii) Debits. Debits for cash items, noncash items, ACH transfers, 
net settlement entries, and all other nonelectronic transactions shall 
be posted to an affiliate's account on the day of the transaction (e.g., 
settlement day for ACH transactions or the day of presentment for check 
transactions), but no later than the Federal Reserve Bank's close of 
business on that day. If a check drawn on an affiliate's account or an 
ACH debit transfer received by an affiliate is returned timely by the 
nonbank bank or industrial bank in accordance with applicable law and 
agreements, no entry need to be posted to the affiliate's account for 
such item.

[Reg. Y, 53 FR 37744, Sept. 28, 1988]



    Subpart G_Appraisal Standards for Federally Related Transactions

    Source: Reg. Y, 55 FR 27771, July 5, 1990, unless otherwise noted.



Sec. 225.61  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (the Board) under title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FlRREA) 
(Pub. L. No. 101-73, 103 Stat. 183 (1989)), 12 U.S.C. 3310, 3331-3351, 
and section 5(b) of the Bank Holding Company Act, 12 U.S.C. 1844(b).
    (b) Purpose and scope. (1) Title XI provides protection for federal 
financial and public policy interests in real estate related 
transactions by requiring real estate appraisals used in connection with 
federally related transactions

[[Page 130]]

to be performed in writing, in accordance with uniform standards, by 
appraisers whose competency has been demonstrated and whose professional 
conduct will be subject to effective supervision. This subpart 
implements the requirements of title XI, and applies to all federally 
related transactions entered into by the Board or by institutions 
regulated by the Board (regulated institutions).
    (2) This subpart:
    (i) Identifies which real estate-related financial transactions 
require the services of an appraiser;
    (ii) Prescribes which categories of federally related transactions 
shall be appraised by a State certified appraiser and which by a State 
licensed appraiser; and
    (iii) Prescribes minimum standards for the performance of real 
estate appraisals in connection with federally related transactions 
under the jurisdiction of the Board.



Sec. 225.62  Definitions.

    (a) Appraisal means a written statement independently and 
impartially prepared by a qualified appraiser setting forth an opinion 
as to the market value of an adequately described property as of a 
specific date(s), supported by the presentation and analysis of relevant 
market information.
    (b) Appraisal Foundation means the Appraisal Foundation established 
on November 30, 1987, as a not-for-profit corporation under the laws of 
Illinois.
    (c) Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business entity.
    (e) Complex 1-to-4 family residential property appraisal means one 
in which the property to be appraised, the form of ownership, or market 
conditions are atypical.
    (f) Federally related transaction means any real estate-related 
financial transaction entered into on or after August 9, 1990, that:
    (1) The Board or any regulated institution engages in or contracts 
for; and
    (2) Requires the services of an appraiser.
    (g) Market value means the most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently and 
knowledgeably, and assuming the price is not affected by undue stimulus. 
Implicit in this definition is the consummation of a sale as of a 
specified date and the passing of title from seller to buyer under 
conditions whereby:
    (1) Buyer and seller are typically motivated;
    (2) Both parties are well informed or well advised, and acting in 
what they consider their own best interests;
    (3) A reasonable time is allowed for exposure in the open market;
    (4) Payment is made in terms of cash in U.S. dollars or in terms of 
financial arrangements comparable thereto; and
    (5) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (h) Real estate or real property means an identified parcel or tract 
of land, with improvements, and includes easements, rights of way, 
undivided or future interests, or similar rights in a tract of land, but 
does not include mineral rights, timber rights, growing crops, water 
rights, or similar interests severable from the land when the 
transaction does not involve the associated parcel or tract of land.
    (i) Real estate-related financial transaction means any transaction 
involving:
    (1) The sale, lease, purchase, investment in or exchange of real 
property, including interests in property, or the financing thereof; or
    (2) The refinancing of real property or interests in real property; 
or
    (3) The use of real property or interests in property as security 
for a loan or investment, including mortgage-backed securities.
    (j) State certified appraiser means any individual who has satisfied 
the requirements for certification in a State

[[Page 131]]

or territory whose criteria for certification as a real estate appraiser 
currently meet or exceed the minimum criteria for certification issued 
by the Appraiser Qualifications Board of the Appraisal Foundation. No 
individual shall be a State certified appraiser unless such individual 
has achieved a passing grade upon a suitable examination administered by 
a State or territory that is consistent with and equivalent to the 
Uniform State Certification Examination issued or endorsed by the 
Appraiser Qualifications Board of the Appraisal Foundation. In addition, 
the Appraisal Subcommittee must not have issued a finding that the 
policies, practices, or procedures of the State or territory are 
inconsistent with title XI of FIRREA. The Board may, from time to time, 
impose additional qualification criteria for certified appraisers 
performing appraisals in connection with federally related transactions 
within its jurisdiction.
    (k) State licensed appraiser means any individual who has satisfied 
the requirements for licensing in a State or territory where the 
licensing procedures comply with title XI of FIRREA and where the 
Appraisal Subcommittee has not issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI. The Board may, from time to time, impose additional 
qualification criteria for licensed appraisers performing appraisals in 
connection with federally related transactions within the Board's 
jurisdiction.
    (l) Tract development means a project of five units or more that is 
constructed or is to be constructed as a single development.
    (m) Transaction value means:
    (1) For loans or other extensions of credit, the amount of the loan 
or extension of credit;
    (2) For sales, leases, purchases, and investments in or exchanges of 
real property, the market value of the real property interest involved; 
and
    (3) For the pooling of loans or interests in real property for 
resale or purchase, the amount of the loan or the market value of the 
real property calculated with respect to each such loan or interest in 
real property.

[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29500, June 7, 
1994]



Sec. 225.63  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State certified 
or licensed appraiser is required for all real estate-related financial 
transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than the 
real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived from, 
real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met Board regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a

[[Page 132]]

United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable to 
that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity and 
is not required to obtain an appraisal under other law;
    (12) The transaction involves underwriting or dealing in mortgage-
backed securities; or
    (13) The Board determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is consistent 
with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The Board 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
    (d) Transactions requiring a State certified appraiser--(1) All 
transactions of $1,000,000 or more. All federally related transactions 
having a transaction value of $1,000,000 or more shall require an 
appraisal prepared by a State certified appraiser.
    (2) Nonresidential transactions of $250,000 or more. All federally 
related transactions having a transaction value of $250,000 or more, 
other than those involving appraisals of 1-to-4 family residential 
properties, shall require an appraisal prepared by a State certified 
appraiser.
    (3) Complex residential transactions of $250,000 or more. All 
complex 1-to-4 family residential property appraisals rendered in 
connection with federally related transactions shall require a State 
certified appraiser if the transaction value is $250,000 or more. A 
regulated institution may presume that appraisals of 1-to-4 family 
residential properties are not complex, unless the institution has 
readily available information that a given appraisal will be complex. 
The regulated institution shall be responsible for making the final 
determination of whether the appraisal is complex. If during the course 
of the appraisal a licensed appraiser identifies factors that would 
result in the property, form of ownership, or market conditions being 
considered atypical, then either:
    (i) The regulated institution may ask the licensed appraiser to 
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
    (ii) The institution may engage a certified appraiser to complete 
the appraisal.
    (e) Transactions requiring either a State certified or licensed 
appraiser. All appraisals for federally related transactions not 
requiring the services of a State certified appraiser shall be prepared 
by either a State certified appraiser or a State licensed appraiser.

[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 58 FR 15077, Mar. 19, 
1993; 59 FR 29500, June 7, 1994; 63 FR 65532, Nov. 27, 1998]



Sec. 225.64  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice promulgated 
by the Appraisal Standards Board of the Appraisal Foundation, 1029 
Vermont Ave., NW., Washington, DC 20005, unless principles of safe and 
sound banking require compliance with stricter standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially

[[Page 133]]

leased buildings, non-market lease terms, and tract developments with 
unsold units;
    (d) Be based upon the definition of market value as set forth in 
this subpart; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.

[Reg. Y, 59 FR 29501, June 7, 1994]



Sec. 225.65  Appraiser independence.

    (a) Staff appraisers. If an appraisal is prepared by a staff 
appraiser, that appraiser must be independent of the lending, 
investment, and collection functions and not involved, except as an 
appraiser, in the federally related transaction, and have no direct or 
indirect interest, financial or otherwise, in the property. If the only 
qualified persons available to perform an appraisal are involved in the 
lending, investment, or collection functions of the regulated 
institution, the regulated institution shall take appropriate steps to 
ensure that the appraisers exercise independent judgment and that the 
appraisal is adequate. Such steps include, but are not limited to, 
prohibiting an individual from performing appraisals in connection with 
federally related transactions in which the appraiser is otherwise 
involved and prohibiting directors and officers from participating in 
any vote or approval involving assets on which they performed an 
appraisal.
    (b) Fee appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the regulated 
institution or its agent, and have no direct or indirect interest, 
financial or otherwise, in the property or the transaction.
    (2) A regulated institution also may accept an appraisal that was 
prepared by an appraiser engaged directly by another financial services 
institution, if:
    (i) The appraiser has no direct or indirect interest, financial or 
otherwise, in the property or the transaction; and
    (ii) The regulated institution determines that the appraisal 
conforms to the requirements of this subpart and is otherwise 
acceptable.

[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29501, June 7, 
1994]



Sec. 225.66  Professional association membership; competency.

    (a) Membership in appraisal organizations. A State certified 
appraiser or a State licensed appraiser may not be excluded from 
consideration for an assignment for a federally related transaction 
solely by virtue of membership or lack of membership in any particular 
appraisal organization.
    (b) Competency. All staff and fee appraisers performing appraisals 
in connection with federally related transactions must be State 
certified or licensed, as appropriate. However, a State certified or 
licensed appraiser may not be considered competent solely by virtue of 
being certified or licensed. Any determination of competency shall be 
based upon the individual's experience and educational background as 
they relate to the particular appraisal assignment for which he or she 
is being considered.



Sec. 225.67  Enforcement.

    Institutions and institution-affiliated parties, including staff 
appraisers and fee appraisers, may be subject to removal and/or 
prohibition orders, cease and desist orders, and the imposition of civil 
money penalties pursuant to the Federal Deposit Insurance Act, 12 U.S.C 
1811 et seq., as amended, or other applicable law.



Subpart H_Notice of Addition or Change of Directors and Senior Executive 
                                Officers

    Source: Reg. Y, 62 FR 9341, Feb. 28, 1997, unless otherwise noted.



Sec. 225.71  Definitions.

    (a) Director means a person who serves on the board of directors of 
a regulated institution, except that this term does not include an 
advisory director who:
    (1) Is not elected by the shareholders of the regulated institution;
    (2) Is not authorized to vote on any matters before the board of 
directors or any committee thereof;
    (3) Solely provides general policy advice to the board of directors 
and any committee thereof; and

[[Page 134]]

    (4) Has not been identified by the Board or Reserve Bank as a person 
who performs the functions of a director for purposes of this subpart.
    (b) Regulated institution means a state member bank or a bank 
holding company.
    (c) Senior executive officer means a person who holds the title or, 
without regard to title, salary, or compensation, performs the function 
of one or more of the following positions: president, chief executive 
officer, chief operating officer, chief financial officer, chief lending 
officer, or chief investment officer. Senior executive officer also 
includes any other person identified by the Board or Reserve Bank, 
whether or not hired as an employee, with significant influence over, or 
who participates in, major policymaking decisions of the regulated 
institution.
    (d) Troubled condition for a regulated institution means an 
institution that:
    (1) Has a composite rating, as determined in its most recent report 
of examination or inspection, of 4 or 5 under the Uniform Financial 
Institutions Rating System or under the Federal Reserve Bank Holding 
Company Rating System;
    (2) Is subject to a cease-and-desist order or formal written 
agreement that requires action to improve the financial condition of the 
institution, unless otherwise informed in writing by the Board or 
Reserve Bank; or
    (3) Is informed in writing by the Board or Reserve Bank that it is 
in troubled condition for purposes of the requirements of this subpart 
on the basis of the institution's most recent report of condition or 
report of examination or inspection, or other information available to 
the Board or Reserve Bank.



Sec. 225.72  Director and officer appointments; prior notice requirement.

    (a) Prior notice by regulated institution. A regulated institution 
shall give the Board 30 days' written notice, as specified in Sec. 
225.73, before adding or replacing any member of its board of directors, 
employing any person as a senior executive officer of the institution, 
or changing the responsibilities of any senior executive officer so that 
the person would assume a different senior executive officer position, 
if:
    (1) The regulated institution is not in compliance with all minimum 
capital requirements applicable to the institution as determined on the 
basis of the institution's most recent report of condition or report of 
examination or inspection;
    (2) The regulated institution is in troubled condition; or
    (3) The Board determines, in connection with its review of a capital 
restoration plan required under section 38 of the Federal Deposit 
Insurance Act or subpart B of the Board's Regulation H, or otherwise, 
that such notice is appropriate.
    (b) Prior notice by individual. The prior notice required by 
paragraph (a) of this section may be provided by an individual seeking 
election to the board of directors of a regulated institution.



Sec. 225.73  Procedures for filing, processing, and acting on notices; 
standards for disapproval; waiver of notice.

    (a) Filing notice--(1) Content. The notice required in Sec. 225.72 
shall be filed with the appropriate Reserve Bank and shall contain:
    (i) The information required by paragraph 6(A) of the Change in Bank 
Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the 
designated Board form;
    (ii) Additional information consistent with the Federal Financial 
Institutions Examination Council's Joint Statement of Guidelines on 
Conducting Background Checks and Change in Control Investigations, as 
set forth in the designated Board form; and
    (iii) Such other information as may be required by the Board or 
Reserve Bank.
    (2) Modification. The Reserve Bank may modify or accept other 
information in place of the requirements of Sec. 225.73(a)(1) for a 
notice filed under this subpart.
    (3) Acceptance and processing of notice. The 30-day notice period 
specified in Sec. 225.72 shall begin on the date all information 
required to be submitted by the notificant pursuant to Sec. 
225.73(a)(1) is received by the appropriate Reserve

[[Page 135]]

Bank. The Reserve Bank shall notify the regulated institution or 
individual submitting the notice of the date on which all required 
information is received and the notice is accepted for processing, and 
of the date on which the 30-day notice period will expire. The Board or 
Reserve Bank may extend the 30-day notice period for an additional 
period of not more than 60 days by notifying the regulated institution 
or individual filing the notice that the period has been extended and 
stating the reason for not processing the notice within the 30-day 
notice period.
    (b) Commencement of service--(1) At expiration of period. A proposed 
director or senior executive officer may begin service after the end of 
the 30-day period and any extension as provided under paragraph (a)(3) 
of this section, unless the Board or Reserve Bank disapproves the notice 
before the end of the period.
    (2) Prior to expiration of period. A proposed director or senior 
executive officer may begin service before the end of the 30-day period 
and any extension as provided under paragraph (a)(3) of this section, if 
the Board or the Reserve Bank notifies in writing the regulated 
institution or individual submitting the notice of the Board's or 
Reserve Bank's intention not to disapprove the notice.
    (c) Notice of disapproval. The Board or Reserve Bank shall 
disapprove a notice under Sec. 225.72 if the Board or Reserve Bank 
finds that the competence, experience, character, or integrity of the 
individual with respect to whom the notice is submitted indicates that 
it would not be in the best interests of the depositors of the regulated 
institution or in the best interests of the public to permit the 
individual to be employed by, or associated with, the regulated 
institution. The notice of disapproval shall contain a statement of the 
basis for disapproval and shall be sent to the regulated institution and 
the disapproved individual.
    (d) Appeal of a notice of disapproval. (1) A disapproved individual 
or a regulated institution that has submitted a notice that is 
disapproved under this section may appeal the disapproval to the Board 
within 15 days of the effective date of the notice of disapproval. An 
appeal shall be in writing and explain the reasons for the appeal and 
include all facts, documents, and arguments that the appealing party 
wishes to be considered in the appeal, and state whether the appealing 
party is requesting an informal hearing.
    (2) Written notice of the final decision of the Board shall be sent 
to the appealing party within 60 days of the receipt of an appeal, 
unless the appealing party's request for an informal hearing is granted.
    (3) The disapproved individual may not serve as a director or senior 
executive officer of the state member bank or bank holding company while 
the appeal is pending.
    (e) Informal hearing. (1) An individual or regulated institution 
whose notice under this section has been disapproved may request an 
informal hearing on the notice. A request for an informal hearing shall 
be in writing and shall be submitted within 15 days of a notice of 
disapproval. The Board may, in its sole discretion, order an informal 
hearing if the Board finds that oral argument is appropriate or 
necessary to resolve disputes regarding material issues of fact.
    (2) An informal hearing shall be held within 30 days of a request, 
if granted, unless the requesting party agrees to a later date.
    (3) Written notice of the final decision of the Board shall be given 
to the individual and the regulated institution within 60 days of the 
conclusion of any informal hearing ordered by the Board, unless the 
requesting party agrees to a later date.
    (f) Waiver of notice--(1) Waiver requests. The Board or Reserve Bank 
may permit an individual to serve as a senior executive officer or 
director before the notice required under this subpart is provided, if 
the Board or Reserve Bank finds that:
    (i) Delay would threaten the safety or soundness of the regulated 
institution or a bank controlled by a bank holding company;
    (ii) Delay would not be in the public interest; or
    (iii) Other extraordinary circumstances exist that justify waiver of 
prior notice.
    (2) Automatic waiver. An individual may serve as a director upon 
election

[[Page 136]]

to the board of directors of a regulated institution before the notice 
required under this subpart is provided if the individual:
    (i) Is not proposed by the management of the regulated institution;
    (ii) Is elected as a new member of the board of directors at a 
meeting of the regulated institution; and
    (iii) Provides to the appropriate Reserve Bank all the information 
required in Sec. 225.73(a) within two (2) business days after the 
individual's election.
    (3) Effect on disapproval authority. A waiver shall not affect the 
authority of the Board or Reserve Bank to disapprove a notice within 30 
days after a waiver is granted under paragraph (f)(1) of this section or 
the election of an individual who has filed a notice and is serving 
pursuant to an automatic waiver under paragraph (f)(2) of this section.



                  Subpart I_Financial Holding Companies

    Source: Reg. Y, 66 FR 415, Jan. 3, 2001, unless otherwise noted.



Sec. 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, Sec. 225.82, and Sec. Sec. 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 Sec. Sec. 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, Sec. 225.82, and Sec. Sec. 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 Sec. Sec. 225.83, 225.84, 225.93, and 
225.94.



Sec. 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

[[Page 137]]

    (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 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 Sec. 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

[[Page 138]]

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.



Sec. 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) 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.

[[Page 139]]

    (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.



Sec. 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.

[[Page 140]]

    (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.



Sec. 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 Sec. 225.86, or 
acquire shares or control of a company engaged exclusively in activities 
listed in Sec. 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 
Sec. 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 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 Sec. 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 Sec. 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))

[[Page 141]]

and either Sec. 225.14 or Sec. 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 Sec. 
225.82(g) or Sec. 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.



Sec. 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 Sec. 
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 Sec. 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.

[[Page 142]]

    (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)).
    (d) Activities determined to be financial in nature or incidental to 
financial activities by the Board--(1) Acting as a finder--Acting as a 
finder in bringing together one or more buyers and sellers of any 
product or service for transactions that the parties themselves 
negotiate and consummate.
    (i) What is the scope of finder activities? Acting as a finder 
includes providing any or all of the following services through any 
means--
    (A) Identifying potential parties, making inquiries as to interest, 
introducing and referring potential parties to each other, and arranging 
contacts between and meetings of interested parties;
    (B) Conveying between interested parties expressions of interest, 
bids, offers, orders and confirmations relating to a transaction; and
    (C) Transmitting information concerning products and services to 
potential parties in connection with the activities described in 
paragraphs (d)(1)(i)(A) and (B) of this section.
    (ii) What are some examples of finder services? The following are 
examples of the services that may be provided by a finder when done in 
accordance with paragraphs (d)(1)(iii) and (iv) of this section. These 
examples are not exclusive.
    (A) Hosting an electronic marketplace on the financial holding 
company's Internet web site by providing hypertext or similar links to 
the web sites of third party buyers or sellers.
    (B) Hosting on the financial holding company's servers the Internet 
web site of--
    (1) A buyer (or seller) that provides information concerning the 
buyer (or seller) and the products or services it seeks to buy (or sell) 
and allows sellers (or buyers) to submit expressions of interest, bids, 
offers, orders and confirmations relating to such products or services; 
or
    (2) A government or government agency that provides information 
concerning the services or benefits made available by the government or 
government agency, assists persons in completing applications to receive 
such services or benefits from the government or agency, and allows 
persons to transmit their applications for services or benefits to the 
government or agency.
    (C) Operating an Internet web site that allows multiple buyers and 
sellers to exchange information concerning the products and services 
that they are willing to purchase or sell, locate potential 
counterparties for transactions, aggregate orders for goods or services 
with those made by other parties, and enter into transactions between 
themselves.
    (D) Operating a telephone call center that provides permissible 
finder services.
    (iii) What limitations are applicable to a financial holding company 
acting as a finder?
    (A) A finder may act only as an intermediary between a buyer and a 
seller.
    (B) A finder may not bind any buyer or seller to the terms of a 
specific transaction or negotiate the terms of a specific transaction on 
behalf of a buyer or seller, except that a finder may--
    (1) Arrange for buyers to receive preferred terms from sellers so 
long as the terms are not negotiated as part of any individual 
transaction, are provided generally to customers or broad categories of 
customers, and are made available by the seller (and not by the 
financial holding company); and
    (2) Establish rules of general applicability governing the use and 
operation of the finder service, including rules that--
    (i) Govern the submission of bids and offers by buyers and sellers 
that use the finder service and the circumstances under which the finder 
service will match bids and offers submitted by buyers and sellers; and
    (ii) Govern the manner in which buyers and sellers may bind 
themselves to the terms of a specific transaction.
    (C) A finder may not--
    (1) Take title to or acquire or hold an ownership interest in any 
product or service offered or sold through the finder service;

[[Page 143]]

    (2) Provide distribution services for physical products or services 
offered or sold through the finder service;
    (3) Own or operate any real or personal property that is used for 
the purpose of manufacturing, storing, transporting, or assembling 
physical products offered or sold by third parties; or
    (4) Own or operate any real or personal property that serves as a 
physical location for the physical purchase, sale or distribution of 
products or services offered or sold by third parties.
    (D) A finder may not engage in any activity that would require the 
company to register or obtain a license as a real estate agent or broker 
under applicable law.
    (iv) What disclosures are required? A finder must distinguish the 
products and services offered by the financial holding company from 
those offered by a third party through the finder service.
    (2) [Reserved]
    (e) Activities permitted under section 4(k)(5) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(5)).
    (1) The following types of activities are financial in nature or 
incidental to a financial activity when conducted pursuant to a 
determination by the Board under paragraph (e)(2) of this section:
    (i) Lending, exchanging, transferring, investing for others, or 
safeguarding financial assets other than money or securities;
    (ii) Providing any device or other instrumentality for transferring 
money or other financial assets; and
    (iii) Arranging, effecting, or facilitating financial transactions 
for the account of third parties.
    (2) Review of specific activities.
    (i) Is a specific request required? A financial holding company that 
wishes to engage on the basis of paragraph (e)(1) of this section in an 
activity that is not otherwise permissible for a financial holding 
company must obtain a determination from the Board that the activity is 
permitted under paragraph (e)(1).
    (ii) Consultation with the Secretary of the Treasury. After 
receiving a request under this section, the Board will provide the 
Secretary of the Treasury with a copy of the request and consult with 
the Secretary in accordance with section 4(k)(2)(A) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(2)(A)).
    (iii) Board action on requests. After consultation with the 
Secretary, the Board will promptly make a written determination 
regarding whether the specific activity described in the request is 
included in an activity category listed in paragraph (e)(1) of this 
section and is therefore either financial in nature or incidental to a 
financial activity.
    (3) What factors will the Board consider? In evaluating a request 
made under this section, the Board will take into account the factors 
listed in section 4(k)(3) of the BHC Act (12 U.S.C. 1843(k)(3)) that it 
must consider when determining whether an activity is financial in 
nature or incidental to a financial activity.
    (4) What information must the request contain? Any request by a 
financial holding company under this section must be in writing and 
must:
    (i) 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; and
    (ii) Provide information supporting the requested determination, 
including information regarding how the proposed activity falls into one 
of the categories listed in paragraph (e)(1) of this section, and any 
other information required by the Board concerning the proposed 
activity.

[Reg. Y, 66 FR 415, Jan. 3, 2001, as amended at 66 FR 19081, Apr. 13, 
2001]



Sec. 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 Sec. 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

[[Page 144]]

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 Sec. 
225.86, a financial 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.



Sec. 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 Sec. 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

[[Page 145]]

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 Sec. 
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.



Sec. 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 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)).

[[Page 146]]



Sec. 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 Sec. 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 Sec. 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.



Sec. 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 Sec. 225.90(b)(1)(i) and (ii) or Sec. 
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 
Sec. 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

[[Page 147]]

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.



Sec. 225.92  How does an election by a foreign bank become effective?

    (a) In general. An election described in Sec. 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 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 Sec. 
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 
anti-money laundering procedures, whether the foreign bank is subject to 
comprehensive supervision or regulation on a consolidated basis,

[[Page 148]]

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.



Sec. 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:

[[Page 149]]

    (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.
    (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.



Sec. 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 Sec. 225.84.
    (b) Applicability. The provisions of Sec. 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 Sec. 225.92 in the same manner and to the same 
extent as they apply to a financial holding company.

                             Interpretations



Sec. 225.101  Bank holding company's subsidiary banks owning shares of 
nonbanking companies.

    (a) The Board's opinion has been requested on the following related 
matters under the Bank Holding Company Act of 1956.
    (b) The question is raised as to whether shares in a nonbanking 
company which were acquired by a banking subsidiary of the bank holding 
company many years ago when their acquisition was lawful and are now 
held as investments, and which do not include more than 5 percent of the 
outstanding voting securities of such nonbanking company and do not have 
a value greater than 5 percent of the value of the bank holding 
company's total assets, are exempted from the divestment requirements of 
the Act by the provisions of section 4(c)(5) of the Act.
    (c) In the Board's opinion, this exemption is as applicable to such 
shares when held by a banking subsidiary of a bank holding company as 
when held directly by the bank holding company itself. While the 
exemption specifically refers only to shares held or acquired by the 
bank holding company, the prohibition of the Act against retention of

[[Page 150]]

nonbanking interests applies to indirect as well as direct ownership of 
shares of a nonbanking company, and, in the absence of a clear mandate 
to the contrary, any exception to this prohibition should be given equal 
breadth with the prohibition. Any other interpretation would lead to 
unwarranted results.
    (d) Although certain of the other exemptions in section 4(c) of the 
Act specifically refer to shares held or acquired by banking 
subsidiaries, an analysis of those exemptions suggests that such 
specific reference to banking subsidiaries was for the purpose of 
excluding nonbanking subsidiaries from such exemptions, rather than for 
the purpose of providing an inclusionary emphasis on banking 
subsidiaries.
    (e) It should be noted that the Board's view as to this question 
should not be interpreted as meaning that each banking subsidiary could 
own up to 5 percent of the stock of the same nonbanking organization. In 
the Board's opinion the limitations set forth in section 4(c)(5) apply 
to the aggregate amount of stock held in a particular organization by 
the bank holding company itself and by all of its subsidiaries.
    (f) Secondly, question is raised as to whether shares in a 
nonbanking company acquired in satisfaction of debts previously 
contracted (d.p.c.) by a banking subsidiary of the bank holding company 
may be retained if such shares meet the conditions contained in section 
4(c)(5) as to value and amount, notwithstanding the requirement of 
section 4(c)(2) that shares acquired d.p.c. be disposed of within two 
years after the date of their acquisition or the date of the Act, 
whichever is later. In the Board's opinion, the 5 percent exemption 
provided by section 4(c)(5) covers any shares, including shares acquired 
d.p.c., that meet the conditions set forth in that exemption, and, 
consequently, d.p.c. shares held by a banking subsidiary of a bank 
holding company which meet such conditions are not subject to the two-
year disposition requirement prescribed by section 4(c)(2), although any 
such shares would, of course, continue to be subject to such requirement 
for disposition as may be prescribed by provisions of any applicable 
banking laws or by the appropriate bank supervisory authorities.
    (g) Finally, question is raised as to whether shares held by banking 
subsidiaries of the bank holding company in companies holding bank 
premises of such subsidiaries are exempted from the divestment 
requirements by section 4(c)(1) of the Act. It is the Board's view that 
section 4(c)(1), exempting shares owned or acquired by a bank holding 
company in any company engaged solely in holding or operating properties 
used wholly or substantially by any subsidiary bank, is to be read and 
interpreted, like section 4(c)(5), as applying to shares owned 
indirectly by a bank holding company through a banking subsidiary as 
well as to shares held directly by the bank holding company. A contrary 
interpretation would impair the right that member banks controlled by 
bank holding companies would otherwise have to invest, subject to the 
limitations of section 24A of the Federal Reserve Act, in stock of 
companies holding their bank premises; and such a result was not, in the 
Board's opinion, intended by the Bank Holding Company Act.

[21 FR 10472, Dec. 29, 1956. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.102  Bank holding company indirectly owning nonbanking company 
through subsidiaries.

    (a) The Board of Governors has been requested for an opinion 
regarding the exemptions contained in section 4(c)(5) of the Bank 
Holding Company Act of 1956. It is stated that Y Company is an 
investment company which is not a bank holding company and which is not 
engaged in any business other than investing in securities, which 
securities do not include more than 5 per centum of the outstanding 
voting securities of any company and do not include any asset having a 
value greater than 5 per centum of the value of the total assets of X 
Corporation, a bank holding company. It is stated that direct ownership 
by X Corporation of voting shares of Y Company would be exempt by reason 
of section 4(c)(5) from the prohibition of section 4 of the Act against 
ownership by bank holding companies of nonbanking assets.

[[Page 151]]

    (b) It was asked whether it makes any difference that the shares of 
Y Company are not owned directly by X Corporation but instead are owned 
through Subsidiaries A and B. X Corporation owns all the voting shares 
of Subsidiary A, which owns one-half of the voting shares of Subsidiary 
B. Subsidiaries A and B each own one-third of the voting shares of Y 
Company.
    (c) Section 4(c)(5) is divided into two parts. The first part 
exempts the ownership of securities of nonbanking companies when the 
securities do not include more than 5 percent of the voting securities 
of the nonbanking company and do not have a value greater than 5 percent 
of the value of the total assets of the bank holding company. The second 
part exempts the ownership of securities of an investment company which 
is not a bank holding company and is not engaged in any business other 
than investing in securities, provided the securities held by the 
investment company meet the 5 percent tests mentioned above.
    (d) In Sec. 225.101, the Board expressed the opinion that the first 
exemption in section 4(c)(5):

    * * * is as applicable to such shares when held by a banking 
subsidiary of a bank holding company as when held directly by the bank 
holding company itself. While the exemption specifically refers only to 
shares held or acquired by the bank holding company, the prohibition of 
the Act against retention of nonbanking interests applies to indirect as 
well as direct ownership of shares of a nonbanking company, and, in the 
absence of a clear mandate to the contrary, any exception to this 
prohibition should be given equal breadth with the prohibition. Any 
other interpretation would lead to unwarranted results.

    (e) The Board is of the view that the principles stated in that 
opinion are also applicable to the second exemption in section 4(c)(5), 
and that they apply whether or not the subsidiary owning the shares is a 
banking subsidiary. Accordingly, on the basis of the facts presented, 
the Board is of the opinion that the second exemption in section 4(c)(5) 
applies to the indirect ownership by X Corporation of shares of Y 
Company through Subsidiaries A and B.

[22 FR 2533, Apr. 13, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.103  Bank holding company acquiring stock by dividends, stock 
splits or exercise of rights.

    (a) The Board of Governors has been asked whether a bank holding 
company may receive bank stock dividends or participate in bank stock 
splits without the Board's prior approval, and whether such a company 
may exercise, without the Board's prior approval, rights to subscribe to 
new stock issued by banks in which the holding company already owns 
stock.
    (b) Neither a stock dividend nor a stock split results in any change 
in a stockholder's proportional interest in the issuing company or any 
increase in the assets of that company. Such a transaction would have no 
effect upon the extent of a holding company's control of the bank 
involved; and none of the five factors required by the Bank Holding 
Company Act to be considered by the Board in approving a stock 
acquisition would seem to have any application. In view of the 
objectives and purposes of the act, the word ``acquire'' would not seem 
reasonably to include transactions of this kind.
    (c) On the other hand, the exercise by a bank holding company of the 
right to subscribe to an issue of additional stock of a bank could 
result in an increase in the holding company's proportional interest in 
the bank. The holding company would voluntarily pay additional funds for 
the extra shares and would ``acquire'' the additional stock even under a 
narrow meaning of that term. Moreover, the exercise of such rights would 
cause the assets of the issuing company to be increased and in a sense, 
therefore, the ``size or extent'' of the bank holding company system 
would be expanded.
    (d) In the circumstances, it is the Board's opinion that receipt of 
bank stock by means of a stock dividend or stock split, assuming no 
change in the class of stock, does not require the Board's prior 
approval under the act, but that purchase of bank stock by a bank 
holding company through the exercise of rights does require the Board's 
prior approval, unless one of the exceptions set forth in section 3(a) 
is applicable.

[22 FR 7461, Sept. 19, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]

[[Page 152]]



Sec. 225.104  ``Services'' under section 4(c)(1) of Bank Holding 
Company Act.

    (a) Section 4(c)(1) of the Bank Holding Company Act, among other 
things, exempts from the nonbanking divestment requirements of section 
4(a) of the Act shares of a company engaged ``solely in the business of 
furnishing services to or performing services for'' its bank holding 
company or subsidiary banks thereof.
    (b) The Board of Governors has had occasion to express opinions as 
to whether this section of law applies to the following two sets of 
facts:
    (1) In the first case, Corporation X, a nonbanking subsidiary of a 
bank holding company (Holding Company A), was engaged in the business of 
purchasing installment paper suitable for investment by banking 
subsidiaries of Holding Company A. All installment paper purchased by 
Corporation X was sold by it to a bank which is a subsidiary of Holding 
Company A, without recourse, at a price equal to the cost of the 
installment paper to Corporation X, and with compensation to the latter 
based on the earnings from such paper remaining after certain reserves, 
expenses and charges. The subsidiary bank sold participations in such 
installment paper to the other affiliated banks of Holding Company A 
which desired to participate. Purchases by Corporation X consisted 
mainly of paper insured under Title I of the National Housing Act and, 
in addition, Corporation X purchased time payment contracts covering 
sales of appliances by dealers under contractual arrangements with 
utilities, as well as paper covering home improvements which was not 
insured. Pursuant to certain service agreements, Corporation X made all 
collections, enforced guaranties, filed claims under Title I insurance 
and performed other services for the affiliated banks. Also Corporation 
X rendered to banking subsidiaries of Holding Company A various 
accounting, statistical and advisory services such as payroll, life 
insurance and budget loan installment account.
    (2) In the second case, Corporation Y, a nonbanking subsidiary of a 
bank holding company (Holding Company B, which was also a bank), 
solicited business on behalf of Holding Company B from dealers, 
throughout several adjoining or contiguous States, who made time sales 
and desired to convert their time sales paper into cash; but Corporation 
Y made no loans or purchases of sales contracts and did not discount or 
advance money for time sales obligations. Corporation Y investigated 
credit standings of purchasers obligated on time sale contracts to be 
acquired by Holding Company B, Corporation Y received from dealers the 
papers offered by them and inspected such papers to see that they were 
in order, and transmitted to Holding Company B for its determination to 
purchase, including, in some cases, issuance of drafts in favor of 
dealers in order to facilitate their prompt receipt of payment for 
installment paper purchased by Holding Company B. Corporation Y made 
collections of delinquent paper or delinquent installments, which 
sometimes involved repossession and resale of the automobile or other 
property which secured the paper. Also, upon request of purchasers 
obligated on paper held by Holding Company B, Corporation Y transmitted 
installment payments to Holding Company B. Holding Company B reimbursed 
Corporation Y for its actual costs and expenses in performing the 
services mentioned above, including the salaries and wages of all 
Corporation Y officers and employees.
    (c) While the term ``services'' is sometimes used in a broad and 
general sense, the legislative history of the Bank Holding Company Act 
indicates that in section 4(c)(1) the word was meant to be somewhat more 
limited in its application. An early version of the bill specifically 
exempted companies engaged in serving the bank holding company and its 
subsidiary banks in ``auditing, appraising, investment counseling''. The 
statute as finally enacted does not expressly mention any specific type 
of servicing activity for exemption. In recommending the change, the 
Senate Banking and Currency Committee stated that the types of services 
contemplated are ``in the fields of advertising, public relations, 
developing new business, organizations,

[[Page 153]]

operations, preparing tax returns, personnel, and many others'', which 
indicates that latitude should be given to the range of activities 
contemplated by this section beyond those specifically set forth in the 
early draft of the bill. (84th Cong., 2d Sess., Senate Report 1095, Part 
2, p. 3.) It nevertheless seems evident that Congress intended such 
services to be types of activities generally comparable to those 
mentioned above from the early bill (``auditing, appraising, investment 
counseling'') and in the excerpt from the Committee Report on the later 
bill (``advertising, public relations, developing new business, 
organization, operations, preparing tax returns, personnel, and many 
others''). This legislative history and the context in which the term 
``services'' is used in section 4(c)(1) seem to suggest that the term 
was in general intended to refer to servicing operations which a bank 
could carry on itself, but which the bank or its holding company chooses 
to have done through another organization. Moreover, the report of the 
Senate Banking and Currency Committee indicated that the types of 
servicing permitted under section 4(c)(1) are to be distinguished from 
activities of a ``financial, fiduciary, or insurance nature'', such as 
those which might be considered for possible exemption under section 
4(c)(6) of the Act.
    (d) With respect to the first set of facts, the Board expressed the 
opinion that certain of the activities of Corporation X, such as the 
accounting, statistical and advisory services referred to above, may be 
within the range of servicing activities contemplated by section 
4(c)(1), but that this would not appear to be the case with the main 
activity of Corporation X, which was the purchase of installment paper 
and the resale of such paper at cost, without recourse, to banking 
subsidiaries of Holding Company A. This latter and basic activity of 
Corporation X appeared to involve essentially a financial relationship 
between it and the banking subsidiaries of Holding Company A and 
appeared beyond the category of servicing exemptions contemplated by 
section 4(c)(1) of the Act. Accordingly, it was the Board's view that 
Corporation X could not be regarded as qualifying under section 4 (c)(1) 
as a company engaged ``solely in the business of furnishing services to 
or performing services for'' Holding Company A or subsidiary banks 
thereof.
    (e) With respect to the second set of facts, the Board expressed the 
opinion that some of the activities engaged in by Corporation Y were 
clearly within the range of servicing activities contemplated by section 
4(c)(1). There was some question as to whether or not some of the other 
activities of Corporation Y mentioned above could meet the test, but on 
balance, it seemed that all such activities probably were activities in 
which Holding Company B, which as already indicated was a bank, could 
itself engage, at the present locations of Corporation Y, without being 
engaged in the operation of bank branches at those locations. In the 
circumstances, while the question was not free from doubt, the Board 
expressed the opinion that the activities of Corporation Y were those of 
a company engaged ``solely in the business of furnishing services to or 
performing services for'' Holding Company B within the meaning of 
section 4(c)(1) of the Act, and that, accordingly, the control by 
Holding Company B of shares in Corporation Y was exempted under that 
section.

[23 FR 2675, May 23, 1958. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.107  Acquisition of stock in small business investment company.

    (a) A registered bank holding company requested an opinion by the 
Board of Governors with respect to whether that company and its banking 
subsidiaries may acquire stock in a small business investment company 
organized pursuant to the Small Business Investment Act of 1958.
    (b) It is understood that the bank holding company and its 
subsidiary banks propose to organize and subscribe for stock in a small 
business investment company which would be chartered pursuant to the 
Small Business Investment Act of 1958 which provides for long-term 
credit and equity financing for small business concerns.

[[Page 154]]

    (c) Section 302(b) of the Small Business Investment Act authorizes 
national banks, as well as other member banks and nonmember insured 
banks to the extent permitted by applicable State law, to invest capital 
in small business investment companies not exceeding one percent of the 
capital and surplus of such banks. Section 4(c)(4) of the Bank Holding 
Company Act exempts from the prohibitions of section 4 of the Act 
``shares which are of the kinds and amounts eligible for investment by 
National banking associations under the provisions of section 5136 of 
the Revised Statutes''. Section 5136 of the Revised Statutes (paragraph 
``Seventh'') in turn provides, in part, as follows:

Except as hereinafter provided or otherwise permitted by law nothing 
herein contained shall authorize the purchase by the association for its 
own account of any shares of stock of any corporation.


Since the shares of a small business investment company are of a kind 
and amount expressly made eligible for investment by a national bank 
under the Small Business Investment Act of 1958, it follows, therefore, 
that the ownership or control of such shares by a bank holding company 
would be exempt from the prohibitions of section 4 of the Bank Holding 
Company Act by virtue of the provisions of section 4(c)(4) of that Act. 
Accordingly, the ownership or control of such shares by the bank holding 
company would be exempt from the prohibitions of section 4 of the Bank 
Holding Company Act.
    (d) An additional question is presented, however, as to whether 
section 6 of the Bank Holding Company Act prohibits banking subsidiaries 
of the bank holding company from purchasing stock in a small business 
investment company where the latter is a ``subsidiary'' under that Act.
    (e) Section 6(a)(1) of the Act makes it unlawful for a bank to 
invest any of its funds in the capital stock of any other subsidiary of 
the bank holding company. However, section 6(a)(1) was, in effect, 
amended by section 302(b) of the Small Business Investment Act (15 
U.S.C. 682) as amended by the Act of June 11, 1960 (Pub. L. 86-502) so 
as to nullify this prohibition when the ``subsidiary'' is a small 
business investment company.
    (f) Accordingly, section 6 of the Bank Holding Company Act does not 
prohibit banking subsidiaries of the bank holding company from 
purchasing stock in a small business investment company organized 
pursuant to the Small Business Investment Act of 1958, where that 
company is or will be a subsidiary of the bank holding company.

[25 FR 7485, Aug. 9, 1960. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.109  ``Services'' under section 4(c)(1) of Bank Holding 
Company Act.

    (a) The Board of Governors has been requested by a bank holding 
company for an interpretation under section 4(c)(1) of the Bank Holding 
Company Act which, among other things, exempts from the nonbanking 
divestment requirements of section 4(a) of the Act, shares of a company 
engaged ``solely in the business of furnishing services to or performing 
services for'' its bank holding company or subsidiary banks thereof.
    (b) It is understood that a nonbanking subsidiary of the holding 
company engages in writing comprehensive automobile insurance (fire, 
theft, and collision) which is sold only to customers of a subsidiary 
bank of the holding company in connection with the bank's retail 
installment loans; that when payment is made on a loan secured by a lien 
on a motor vehicle, renewal policies are not issued by the insurance 
company; and that the insurance company receives the usual agency 
commissions on all comprehensive automobile insurance written for 
customers of the bank.
    (c) It is also understood that the insurance company writes credit 
life insurance for the benefit of the bank and its installment-loan 
customers; that each insured debtor is covered for an amount equal to 
the unpaid balance of his note to the bank, not to exceed $5,000; that 
as the note is reduced by regular monthly payments, the amount of 
insurance is correspondingly reduced so that at all times the debtor is 
insured for the unpaid balance of his note; that each insurance contract 
provides for payment in full of the entire

[[Page 155]]

loan balance upon the death or permanent disability of the insured 
borrower; and that this credit life insurance is written only at the 
request of, and solely for, the bank's borrowing customers. It is 
further understood that the insurance company engages in no other 
activity.
    (d) As indicated in Sec. 225.104 (23 FR 2675), the term 
``services,'' while sometimes used in a broad and general sense, appears 
to be somewhat more limited in its application in section 4(c)(1) of the 
Bank Holding Company Act. Unlike an early version of the Senate bill (S. 
2577, before amendment), the act as finally enacted does not expressly 
mention any type of servicing activity for exemption. The legislative 
history of the Act, however, as indicated in the relevant portion of the 
record of the Senate Banking and Currency Committee on amended S. 2577 
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3) makes it 
evident that Congress had in mind the exemption of services comparable 
to the types of activities mentioned expressly in the early Senate bill 
(``auditing, appraising, investment counseling'') and in the Committee 
Report on the later bill (``advertising, public relations, developing 
new business, organization, operations, preparing tax returns, 
personnel, and many others''). Furthermore, this Committee Report 
expressly stated that the provision of section 4(c)(1) with respect to 
``furnishing services to or performing services for'' was not intended 
to supplant the exemption contained under section 4 (c)(6) of the Act.
    (e) The only activity of the insurance company (writing 
comprehensive automobile insurance and credit life insurance) appears to 
involve an insurance relationship between it and a banking subsidiary of 
the holding company which the legislative history clearly indicates does 
not come within the meaning of the phrase ``furnishing services to or 
performing services for'' a bank holding company or its banking 
subsidiaries.
    (f) Accordingly, it is the Board's view that the insurance company 
could not be regarded as qualifying as a company engaged ``solely in the 
business of furnishing services to or performing services for'' the bank 
holding company or banks with respect to which the latter is a bank 
holding company.

[23 FR 9017, Nov. 20, 1958. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.111  Limit on investment by bank holding company system in 
stock of small business investment companies.

    (a) Under the provisions of section 4(c)(5) of the Bank Holding 
Company Act, as amended (12 U.S.C. 1843), a bank holding company may 
acquire shares of nonbank companies ``which are of the kinds and amounts 
eligible for investment'' by national banks. Pursuant to section 302(b) 
of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)), as 
amended by Title II of the Small Business Act Amendments of 1967 (Pub. 
L. 90-104, 81 Stat. 268, 270), a national bank may invest in stock of 
small business investment companies (SBICs) subject to certain 
restrictions.
    (b) On the basis of the foregoing statutory provisions, it is the 
position of the Board that a bank holding company may acquire direct or 
indirect ownership or control of stock of an SBIC subject to the 
following limits:
    (1) The total direct and indirect investments of a bank holding 
company in stock of SBICs may not exceed:
    (i) With respect to all stock of SBICs owned or controlled directly 
or indirectly by a subsidiary bank, 5 percent of that bank's capital and 
surplus;
    (ii) With respect to all stock of SBICs owned directly by a bank 
holding company that is a bank, 5 percent of that bank's capital and 
surplus; and
    (iii) With respect to all stock of SBICs otherwise owned or 
controlled directly or indirectly by a bank holding company, 5 percent 
of its proportionate interest in the capital and surplus of each 
subsidiary bank (that is, the holding company's percentage of that 
bank's stock times that bank's capital and surplus) less that bank's 
investment in stock of SBICs; and
    (2) A bank holding company may not acquire direct or indirect 
ownership or control of 50 percent or more of the shares of any class of 
equity securities of an SBIC that have actual or potential voting 
rights.

[[Page 156]]

    (c) A bank holding company or a bank subsidiary that acquired direct 
or indirect ownership or control of 50 percent or more of any such class 
of equity securities prior to January 9, 1968, is not required to divest 
to a level below 50 percent. A bank that acquired 50 percent or more 
prior to January 9, 1968, may become a subsidiary in a holding company 
system without any necessity for divesting to a level below 50 percent: 
Provided, That such action does not result in the bank holding company 
acquiring control of a percentage greater than that controlled by such 
bank.

(12 U.S.C. 248. Interprets 12 U.S.C. 1843, 15 U.S.C. 682)

[33 FR 6967, May 9, 1968. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.112  Indirect control of small business concern through 
convertible debentures held by small business investment company.

    (a) A question has been raised concerning the applicability of 
provisions of the Bank Holding Company Act of 1956 to the acquisition by 
a bank holding company of stock of a small business investment company 
(``SBIC'') organized pursuant to the Small Business Investment Act of 
1958 (``SBI Act'').
    (b) As indicated in the interpretation of the Board (Sec. 225.107) 
published at 23 FR 7813, it is the Board's opinion that, since stock of 
an SBIC is eligible for purchase by national banks and since section 
4(c)(4) of the Holding Company Act exempts stock eligible for investment 
by national banks from the prohibitions of section 4 of that Act, a bank 
holding company may lawfully acquire stock in such an SBIC.
    (c) However, section 304 of the SBI Act provides that debentures of 
a small business concern purchased by a small business investment 
company may be converted at the option of such company into stock of the 
small business concern. The question therefore arises as to whether, in 
the event of such conversion, the parent bank holding company would be 
regarded as having acquired ``direct or indirect ownership or control'' 
of stock of the small business concern in violation of section 4(a) of 
the Holding Company Act.
    (d) The Small Business Investment Act clearly contemplates that one 
of the primary purposes of that Act was to enable SBICs to provide 
needed equity capital to small business concerns through the purchase of 
debentures convertible into stock. Thus, to the extent that a 
stockholder in an SBIC might acquire indirect control of stock of a 
small business concern, such control appears to be a natural and 
contemplated incident of ownership of stock of the SBIC. The Office of 
the Comptroller of the Currency has informally indicated concurrence 
with this interpretation insofar as it affects investments by national 
banks in stock of an SBIC.
    (e) Since the exception as to stock eligible for investment by 
national banks contained in section 4(c)(4) of the Holding Company Act 
was apparently intended to permit a bank holding company to acquire any 
stock that would be eligible for purchase by a national bank, it is the 
Board's view that section 4(a)(1) of the Act does not prohibit a bank 
holding company from acquiring stock of an SBIC, even though ownership 
of such stock may result in the acquisition of indirect ownership or 
control of stock of a small business concern which would not itself be 
eligible for purchase directly by a national bank or a bank holding 
company.

[24 FR 1584, Mar. 4, 1959. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.113  Services under section 4(a) of Bank Holding Company Act.

    (a) The Board of Governors has been requested for an opinion as to 
whether the performance of certain functions by a bank holding company 
for four banks of which it owns less than 25 percent of the voting 
shares is in violation of section 4(a) of the Bank Holding Company Act.
    (b) It is claimed that the holding company is engaged in 
``managing'' four nonsubsidiary banks, for which services it receives 
``management fees.'' Specifically, the company engages in the following 
activities for the four nonsubsidiary banks: (1) Establishment and 
supervision of loaning policies; (2) direction of the purchase and sale 
of investment securities; (3)

[[Page 157]]

selection and training of officer personnel; (4) establishment and 
enforcement of operating policies; and (5) general supervision over all 
policies and practices.
    (c) The question raised is whether these activities are prohibited 
by section 4(a)(2) of the Bank Holding Company Act, which permits a bank 
holding company to engage in only three categories of business: (1) 
Banking; (2) managing or controlling banks; and (3) furnishing services 
to or performing services for any bank of which the holding company owns 
or controls 25 percent or more of the voting shares.
    (d) Clearly, the activities of the company with respect to the four 
nonsubsidiary banks do not constitute ``banking.'' With respect to the 
business of ``managing or controlling'' banks, it is the Board's view 
that such business, within the purview of section 4(a)(2), is 
essentially the exercise of a broad governing influence of the sort 
usually exercised by bank stockholders, as distinguished from direct or 
active participation in the establishment or carrying out of particular 
policies or operations. The latter kinds of activities fall within the 
third category of businesses in which a bank holding company is 
permitted to engage. In the Board's view, the activities enumerated 
above fall in substantial part within that third category.
    (e) Section 4(a)(2), like all other sections of the Holding Company 
Act, must be interpreted in the light of all of its provisions, as well 
as in the light of other sections of the Act. The expression ``managing 
* * * banks,'' if it could be taken by itself, might appear to include 
activities of the sort enumerated. However, such an interpretation of 
those words would virtually nullify the last portion of section 4(a)(2), 
which permits a holding company to furnish services to or perform 
services for ``any bank of which it owns or controls 25 per centum or 
more of the voting shares.''
    (f) Since Congress explicitly authorized the performance of services 
for banks that are at least 25 percent owned by a holding company, it 
obviously intended that the holding company should not perform services 
for banks in which it owns less than 25 percent of the voting shares. 
However, if the second category--``managing or controlling banks''--were 
interpreted to permit the holding company to perform services for any 
bank, including a bank in which it held less than 25 percent of the 
stock (or no stock whatsoever), the last clause of section 4(a)(2) would 
be meaningless.
    (g) It is principally for this reason--that is, to give effective 
meaning to the final clause of section 4(a)(2)--that the Board 
interprets ``managing or controlling banks'' in that provision as 
referring to the exercise of a stockholder's management or control of 
banks, rather than direct and active participation in their operations. 
To repeat, such active participation in operations falls within the 
third category (``furnishing services to or performing services for any 
bank'') and consequently may be engaged in only with respect to banks in 
which the holding company ``owns or controls 25 per centum or more of 
the voting shares.''
    (h) Accordingly, it is the Board's conclusion that, in performing 
the services enumerated, the bank holding company is ``furnishing 
services to or performing services for'' the four banks referred to. 
Under the Act such furnishing or performing of services is permissible 
only if the holding company owns or controls 25 percent of the voting 
shares of each bank receiving such services, and, since the company owns 
less than 25 percent of the voting shares of these banks, it follows 
that these activities are prohibited by section 4(a)(2).
    (i) While this conclusion is required, in the Board's opinion, by 
the language of the statute, it may be noted further that any other 
conclusion would make it possible for bank holding company or any other 
corporation, through arrangements for the ``managing'' of banks in the 
manner here involved, to acquire effective control of banks without 
acquiring bank stocks and thus to evade the underlying objectives of 
section 3 of the Act.

[25 FR 281, Jan. 14, 1960. Redesignated at 36 FR 21666, Nov. 12, 1971]

[[Page 158]]



Sec. 225.115  Applicability of Bank Service Corporation Act in certain 
bank holding company situations.

    (a) Questions have been presented to the Board of Governors 
regarding the applicability of the recently enacted Bank Service 
Corporation Act (Pub. L. 87-856, approved October 23, 1962) in cases 
involving service corporations that are subsidiaries of bank holding 
companies under the Bank Holding Company Act of 1956. In addition to 
being charged with the administration of the latter Act, the Board is 
named in the Bank Service Corporation Act as the Federal supervisory 
agency with respect to the performance of bank services for State member 
banks.
    (b) Holding company-owned corporation serving only subsidiary banks. 
(1) One question is whether the Bank Service Corporation Act is 
applicable in the case of a corporation, wholly owned by a bank holding 
company, which is engaged in performing ``bank services'', as defined in 
section 1(b) of the Act, exclusively for subsidiary banks of the holding 
company.
    (2) Except as noted below with respect to section 5 thereof, the 
Bank Service Corporation Act is not applicable in this case. This is 
true because none of the stock of the corporation performing the 
services is owned by any bank and the corporation, therefore, is not a 
``bank service corporation'' as defined in section 1(c) of the Act. A 
corporation cannot meet that definition unless part of its stock is 
owned by two or more banks. The situation clearly is unaffected by 
section 2(b) of the Act which permits a corporation that fell within the 
definition initially to continue to function as a bank service 
corporation although subsequently only one of the banks remains as a 
stockholder in the corporation.
    (3) However, although it is not a bank service corporation, the 
corporation in question and each of the banks for which it performs bank 
services are subject to section 5 of the Bank Service Corporation Act. 
That section, which requires the furnishing of certain assurances to the 
appropriate Federal supervisory agency in connection with the 
performance of bank services for a bank, is applicable whether such 
services are performed by a bank service corporation or by others.
    (4) Section 4(a)(1) of the Bank Holding Company Act prohibits the 
acquisition by a bank holding company of ``direct or indirect ownership 
or control'' of shares of a nonbanking company, subject to certain 
exceptions. Section 4(c)(1) of the Act exempts from section 4(a)(1) 
shares of a company engaged ``solely in the business of furnishing 
services to or performing services for'' its bank holding company or 
subsidiary banks thereof. Assuming that the bank services performed by 
the corporation in question are ``services'' of the kinds contemplated 
by section 4(c)(1) of the Bank Holding Company Act (as would be true, 
for example, of the electronic data processing of deposit accounts), the 
holding company's ownership of the corporation's shares in the situation 
described above clearly is permissible under that section of the Act.
    (c) Bank service corporation owned by holding company subsidiaries 
and serving also other banks. (1) The other question concerns the 
applicability of the Bank Service Corporation Act and the Bank Holding 
Company Act in the case of a corporation, all the stock of which is 
owned either by a bank holding company and its subsidiary banks together 
or by the subsidiary banks alone, which is engaged in performing ``bank 
services'', as defined in section 1(b) of the Bank Service Corporation 
Act, for the subsidiary banks and for other banks, as well.
    (2) In contrast to the situation under paragraph (b) of this 
section, the corporation in this case is a ``bank service corporation'' 
within the meaning of section 1(c) of the Bank Service Corporation Act 
because of the ownership by each of the subsidiary banks of a part of 
the corporation's stock. This stock ownership is one of the important 
facts differentiating this case from the first one. Being a bank service 
corporation, the corporation in question is subject to section 3 of the 
Act concerning applications to bank service corporations by competitive 
banks for bank services, and to section 4 forbidding a bank service 
corporation from engaging in any activity other than the performance of 
bank services

[[Page 159]]

for banks. Section 5, mentioned previously and relating to 
``assurances'', also is applicable in this case.
    (3) The other important difference between this case and the 
situation in paragraph (b) of this section is that here the bank service 
corporation performs services for nonsubsidiary banks, as well as for 
subsidiary banks. This is permissible because section 2(a) of the Bank 
Service Corporation Act, which authorizes any two or more banks to 
invest limited amounts in a bank service corporation, removes all 
limitations and prohibitions of Federal law exclusively relating to 
banks that otherwise would prevent any such investment. From the 
legislative history of section 2(a), it is clear that section 6 of the 
Bank Holding Company Act is among the limitations and prohibitions so 
removed. But for such removal, section 6(a)(1) of that Act would make it 
unlawful for any of the subsidiary banks of the bank holding company in 
question to own stock in the bank service corporation subsidiary of the 
holding company, as the exemption in section 6(b)(1) would not apply 
because of the servicing by the bank service corporation of 
nonsubsidiary banks.
    (4) Because the bank service corporation referred to in the question 
is serving banks other than the subsidiary banks, the bank holding 
company is not exempt under section 4(c)(1) of the Bank Holding Company 
Act from the prohibition of acquisition of nonbanking interests in 
section 4(a)(1) of that Act. The bank holding company, however, is 
entitled to the benefit of the exemption in section 4(c)(4) of the Act. 
That section exempts from section 4(a) ``shares which are of the kinds 
and amounts eligible for investment by National banking associations 
under the provisions of section 5136 of the Revised Statutes''. Section 
5136 provides, in part, that: ``Except as hereinafter provided or 
otherwise permitted by law, nothing herein contained shall authorize the 
purchase by the association for its own account of any shares of stock 
of any corporation.'' As the provisions of section 2(a) of the Bank 
Service Corporation Act and its legislative history make it clear that 
shares of a bank service corporation are of a kind eligible for 
investment by national banks under section 5136, it follows that the 
direct or indirect ownership on control of such shares by a bank holding 
company are permissible within the amount limitation discussed in 
paragraph (d) of this section.
    (d) Limit on investment by bank holding company system in stock of 
bank service corporation. (1) In the situation presented by paragraph 
(c) the bank holding company clearly owns or controls, directly or 
indirectly, all of the stock of the bank service corporation. The 
remaining question, therefore, is whether the total direct and indirect 
investment of the bank holding company in the bank service corporation 
exceeds the amount permissible under the Bank Holding Company Act.
    (2) The effect of sections 4(a)(1) and 4(c)(4) of the Bank Holding 
Company Act is to limit the amount of shares of a bank service 
corporation that a bank holding company may own or control, directly or 
indirectly, to the amount eligible for investment by a national bank, as 
previously indicated. Under section 2(a) of the Bank Service Corporation 
Act, the amount of shares of a bank service corporation eligible for 
investment by a national bank may not exceed ``10 per centum [of the 
bank's] * * * paid-in and unimpaired capital and unimpaired surplus''.
    (3) The Board's view is that this aspect of the matter should be 
determined in accordance with the principles set forth in Sec. 225.111, 
as revised (27 FR 12671), involving the application of sections 4(a)(1) 
and 4(c)(4) of the Bank Holding Company Act in the light of section 
302(b) of the Small Business Investment Act limiting the amount eligible 
for investment by a national bank in the shares of a small business 
investment company to two percent of the bank's ``capital and surplus''.
    (4) Except for the differences in the percentage figures, the 
investment limitation in section 302(b) of the Small Business Investment 
Act is essentially the same as the investment limitation in section 2(a) 
of the Bank Service Corporation Act since, as an accounting matter and 
for the purposes under consideration, ``capital and surplus'' may be 
regarded as equivalent in meaning to ``paid-in and unimpaired capital 
and

[[Page 160]]

unimpaired surplus.'' Accordingly, the maximum permissible investment by 
a bank holding company system in the stock of a bank service corporation 
should be determined in accordance with the formula prescribed in Sec. 
222.111.

[27 FR 12918, Dec. 29, 1962. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.118  Computer services for customers of subsidiary banks.

    (a) The question has been presented to the Board of Governors 
whether a wholly-owned nonbanking subsidiary (``service company'') of a 
bank holding company, which is now exempt from the prohibitions of 
section 4 of the Bank Holding Company Act of 1956 (``the Act'') because 
its sole business is the providing of services for the holding company 
and the latter's subsidiary banks, would lose its exempt status if it 
should provide data processing services for customers of the subsidiary 
banks.
    (b) The Board understood from the facts presented that the service 
company owns a computer which it utilizes to furnish data processing 
services for the subsidiary banks of its parent holding company. 
Customers of these banks have requested that the banks provide for them 
computerized billing, accounting, and financial records maintenance 
services. The banks wish to utilize the computer services of the service 
company in providing these and other services of a similar nature. It is 
proposed that, in each instance where a subsidiary bank undertakes to 
provide such services, the bank will enter into a contract directly with 
the customer and then arrange to have the service company perform the 
services for it, the bank. In no case will the service company provide 
services for anyone other than its affiliated banks. Moreover, it will 
not hold itself out as, nor will its parent corporation or affiliated 
banks represent it to be, authorized or willing to provide services for 
others.
    (c) Section 4(c)(1) of the Act permits a holding company to own 
shares in ``any company engaged solely * * * in the business of 
furnishing services to or performing services for such holding company 
and banks with respect to which it is a bank holding company * * *.'' 
The Board has ruled heretofore that the term ``services'' as used in 
section 4(c)(1) is to be read as relating to those services (excluding 
``closely related'' activities of ``a financial, fiduciary, or insurance 
nature'' within the meaning of section 4(c)(6)) which a bank itself can 
provide for its customers (Sec. 225.104). A determination as to whether 
a particular service may legitimately be rendered or performed by a bank 
for its customers must be made in the light of applicable Federal or 
State statutory or regulatory provisions. In the case of a State-
chartered bank, the laws of the State in which the bank operates, 
together with any interpretations thereunder rendered by appropriate 
bank authorities, would govern the right of the bank to provide a 
particular service. In the case of a national bank, a similar 
determination would require reference to provisions of Federal law 
relating to the establishment and operation of national banks, as well 
as to pertinent rulings or interpretations promulgated thereunder.
    (d) Accordingly, on the assumption that all of the services to be 
performed are of the kinds that the holding company's subsidiary banks 
may render for their customers under applicable Federal or State law, 
the Board concluded that the rendition of such services by the service 
company for its affiliated banks would not adversely affect its exempt 
status under section 4(c)(1) of the Act.
    (e) In arriving at the above conclusion, the Board emphasized that 
its views were premised explicitly upon the facts presented to it, and 
particularly its understanding that banks are permitted, under 
applicable Federal or State law to provide the proposed computer 
services. The Board emphasized also that in respect to the service 
company's operations, there continues in effect the requirement under 
section 4(c)(1) that the service company engage solely in the business 
of furnishing services to or performing services for the bank holding 
company and its subsidiary banks. The Board added that any substantial 
change in the facts that had been presented might require re-examination 
of the service company's status under section 4(c)(1).

[29 FR 12361, Aug. 28, 1964. Redesignated at 36 FR 21666, Nov. 12, 1971]

[[Page 161]]



Sec. 225.121  Acquisition of Edge corporation affiliate by State member 
banks of registered bank holding company.

    (a) The Board has been asked whether it is permissible for the 
commercial banking affiliates of a bank holding company registered under 
the Bank Holding Company Act of 1956, as amended, to acquire and hold 
the shares of the holding company's Edge corporation subsidiary 
organized under section 25(a) of the Federal Reserve Act.
    (b) Section 9 of the Bank Holding Company Act amendments of 1966 
(Pub. L. 89-485, approved July 1, 1966) repealed section 6 of the Bank 
Holding Company Act of 1956. That rendered obsolete the Board's 
interpretation of section 6 that was published in the March 1966 Federal 
Reserve Bulletin, page 339 (Sec. 225.120). Thus, so far as Federal 
Banking law applicable to State member banks is concerned, the answer to 
the foregoing question depends on the provisions of section 23A of the 
Federal Reserve Act, as amended by the 1966 amendments to the Bank 
Holding Company Act. By its specific terms, the provisions of section 
23A do not apply to an affiliate organized under section 25(a) of the 
Federal Reserve Act.
    (c) Accordingly, the Board concludes that, except for such 
restrictions as may exist under applicable State law, it would be 
legally permissible by virtue of paragraph 20 of section 9 of the 
Federal Reserve Act for any or all of the State member banks that are 
affiliates of a registered bank holding company to acquire and hold 
shares of the Edge corporation subsidiary of the bank holding company 
within the amount limitation in the last sentence of paragraph 12 of 
section 25(a) of the Federal Reserve Act.

(12 U.S.C. 24, 248, 335, 371c, 611, 618)

[31 FR 10263, July 29, 1966. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.122  Bank holding company ownership of mortgage companies.

    (a) The Board of Governors recently considered whether a bank 
holding may acquire, either directly or through a subsidiary, the stock 
of a so-called ``mortgage company'' that would be operated on the 
following basis: The company would solicit mortgage loans on behalf of a 
bank in the holding company system, assemble credit information, make 
property inspections and appraisals, and secure title information. The 
company would also participate in the preparation of applications for 
mortgage loans, which it would submit, together with recommendations 
with respect to action thereon, to the bank, which alone would decide 
whether to make any or all of the loans requested. The company would in 
addition solicit investors to purchase mortgage loans from the bank and 
would seek to have such investors contract with the bank for the 
servicing of such loans.
    (b) Under section 4 of the Bank Holding Company Act (12 U.S.C. 
1843), a bank holding company is generally prohibited from acquiring 
``direct or indirect ownership'' of stock of nonbanking corporations. 
The two exceptions principally involved in the question presented are 
with respect to (1) stock that is eligible for investment by a national 
bank (section 4(c)(5) of the Act) and (2) shares of a company 
``furnishing services to or performing services for such bank holding 
company or its banking subsidiaries'' (section 4(c)(1)(C) of the Act).
    (c) The Board has previously indicated its view that a national bank 
is forbidden by the so-called ``stock-purchase prohibition'' of 
paragraph ``Seventh'' of section 5136 of the Revised Statutes (12 U.S.C. 
24) to purchase ``for its own account * * * any shares of stock of any 
corporation'' except (1) to the extent permitted by specific provisions 
of Federal law or (2) as comprised within the concept of ``such 
incidental powers as shall be necessary to carry on the business of 
banking'' referred to in the first sentence of said paragraph 
``Seventh''. There is no specific statutory provision authorizing a 
national bank to purchase stock in a mortgage company, and in the 
Board's view such purchase may not properly be regarded as authorized 
under the ``incidental powers'' clause. (See 1966 Federal Reserve 
Bulletin 1151; 12 CFR 208.119.) Accordingly, a bank holding company may 
not acquire stock in a mortgage

[[Page 162]]

company on the basis of the section 4(c)(5) exemption.
    (d) However, the Board does not believe that such conclusion 
prejudices consideration of the question whether such a company is 
within the section 4(c)(1)(C) ``servicing exemption''. The basic purpose 
of section 4 of the Act is to confine a bank holding company's 
activities to the management and control of banks. In determining 
whether an activity in which a bank could itself engage is within the 
servicing exemption, the question is simply whether such activity may 
appropriately be considered as ``furnishing services to or performing 
services for'' a bank.
    (e) As indicated in the Board's interpretation published in the 1958 
Federal Reserve Bulletin at page 431 (12 CFR 225.104), the legislative 
history of the servicing exemption indicates that it includes the 
following activities: ``auditing, appraising, investment counseling'' 
and ``advertising, public relations, developing new business, 
organization, operations, preparing tax returns, and personnel''. The 
legislative history further indicates that some other activities also 
are within the scope of the exemption. However, the types of servicing 
permitted under such exemption must be distinguished from activities of 
a ``financial fiduciary, or insurance nature'', such as those that might 
be considered for possible exemption under section 4(c)(8) of the Act.
    (f) In considering the interrelation of these exemptions in the 
light of the purpose of the prohibition against bank holding company 
interests in nonbanking organizations, the Board has concluded that the 
appropriate test for determining whether a mortgage company may be 
considered as within the servicing exemption is whether the company will 
perform as principal any banking activities--such as receiving deposits, 
paying checks, extending credit, conducting a trust department, and the 
like. In other words, if the mortgage company is to act merely as an 
adjunct to a bank for the purpose of facilitating the banks operations, 
the company may appropriately be considered as within the scope of the 
servicing exemption.\1\
---------------------------------------------------------------------------

    \1\ Insofar as the 1958 interpretation referred to above suggested 
that the branch banking laws are an appropriate general test for 
determining the scope of the servicing exemption, such interpretation is 
hereby modified. In view of the different purposes to be served by the 
branch banking laws and by section 4 of the Bank Holding Company Act, 
the Board has concluded that basing determinations under the latter 
solely on the basis of determinations under the former is inappropriate.
---------------------------------------------------------------------------

    (g) On this basis the Board concluded that, insofar as the Bank 
Holding Company Act is concerned, a bank holding company may acquire, 
either directly or through a subsidiary, the stock of a mortgage company 
whose functions are as described in the question presented. On the other 
hand, in the Board's view, a bank holding company may not acquire, on 
the basis of the servicing exemption, a mortgage company whose functions 
include such activities as extending credit for its own account, 
arranging interim financing, entering into mortgage service contracts on 
a fee basis, or otherwise performing functions other than solely on 
behalf of a bank.

(12 U.S.C. 248)

[32 FR 15004, Oct. 3, 1967, as amended at 35 FR 19662, Dec. 29, 1970. 
Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.123  Activities closely related to banking.

    (a) Effective June 15, 1971, the Board of Governors has amended 
Sec. 225.4(a) of Regulation Y to implement its regulatory authority 
under section 4(c)(8) of the Bank Holding Company Act. In some respects 
activities determined by the Board to be closely related to banking are 
described in general terms that will require interpretation from time to 
time. The Board's views on some questions that have arisen are set forth 
below.
    (b) Section 225.4(a) states that a company whose ownership by a bank 
holding company is authorized on the basis of that section may engage 
solely in specified activities. That limitation refers only to 
activities the authority for which depends on section 4(c)(8) of the 
Act. It does not prevent a holding company from establishing one 
subsidiary

[[Page 163]]

to engage, for example, in activities specified in Sec. 225.4(a) and 
also in activities that fall within the scope of section 4(c)(1)(C) of 
the Act--the ``servicing'' exemption.
    (c) The amendments to Sec. 225.4(a) do not apply to restrict the 
activities of a company previously approved by the Board on the basis of 
section 4(c)(8) of the Act. Activities of a company authorized on the 
basis of section 4(c)(8) either before the 1970 Amendments or pursuant 
to the amended Sec. 225.4(a) may be shifted in a corporate 
reorganization to another company within the holding company system 
without complying with the procedures of Sec. 225.4(b), as long as all 
the activities of such company are permissible under one of the 
exemptions in section 4 of the Act.
    (d) Under the procedures in Sec. 225.4(a)(c), a holding company 
that wishes to change the location at which it engages in activities 
authorized pursuant to Sec. 225.4(a) must publish notice in a newspaper 
of general circulation in the community to be served. The Board does not 
regard minor changes in location as within the coverage of that 
requirement. A move from one site to another within a 1-mile radius 
would constitute such a minor change if the new site is in the same 
State.
    (e) Data processing. In providing packaged data processing and 
transmission services for banking, financial and economic data for 
installation on the premises of the customer, as authorized by Sec. 
225.4(a)(8)(ii), a bank holding company should limit its activities to 
providing facilities that perform banking functions, such as check 
collection, or other similar functions for customers that are depository 
or other similar institutions, such as mortgage companies. In addition, 
the Board regards the following as incidental activities necessary to 
carry on the permissible activities in this area:
    (1) Providing excess capacity, not limited to the processing or 
transmission of banking, financial or economic data on data processing 
or transmission equipment or facilities used in connection with 
permissible data processing and data transmission activities, where:
    (A) Equipment is not purchased solely for the purpose of creating 
excess capacity;
    (B) Hardware is not offered in connection therewith; and
    (C) Facilities for the use of the excess capacity do not include the 
provision of any software, other than systems software (including 
language), network communications support, and the operating personnel 
and documentation necessary for the maintenance and use of these 
facilities.
    (2) Providing by-products of permissible data processing and data 
transmission activities, where not designed, or appreciably enhanced, 
for the purpose of marketability.
    (3) Furnishing any data processing service upon request of a 
customer if such data processing service is not otherwise reasonably 
available in the relevant market area; and

In order to eliminate or reduce to an insignificant degree any 
possibility of unfair competition where services, facilities, by-
products or excess capacity are provided by a bank holding company's 
nonbank subsidiary or related entity, the entity providing the services, 
facilities, by-products and/or excess capacity should have separate 
books and financial statements, and should provide these books and 
statements to any new or renewal customer requesting financial data. 
Consolidated or other financial statements of the bank holding company 
should not be provided unless specifically requested by the customer.

(Interprets and applies 12 U.S.C. 1843 (c)(8))

[36 FR 10778, June 3, 1971, as amended at 36 FR 11806, June 19, 1971. 
Redesignated at 36 FR 21666, Nov. 12, 1971 and amended at 40 FR 13477, 
Mar. 27, 1975; 47 FR 37372, Aug. 26, 1982; 52 FR 45161, Nov. 25, 1987]



Sec. 225.124  Foreign bank holding companies.

    (a) Effective December 1, 1971, the Board of Governors has added a 
new Sec. 225.4(g) to Regulation Y implementing its authority under 
section 4(c)(9) of the Bank Holding Company Act. The Board's views on 
some questions that have arisen in connection with the meaning of terms 
used in Sec. 225.4(g) are set forth in paragraphs (b) through (g) of 
this section.

[[Page 164]]

    (b) The term ``activities'' refers to nonbanking activities and does 
not include the banking activities that foreign banks conduct in the 
United States through branches or agencies licensed under the banking 
laws of any State of the United States or the District of Columbia.
    (c) A company (including a bank holding company) will not be deemed 
to be engaged in ``activities'' in the United States merely because it 
exports (or imports) products to (or from) the United States, or 
furnishes services or finances goods or services in the United States, 
from locations outside the United States. A company is engaged in 
``activities'' in the United States if it owns, leases, maintains, 
operates, or controls any of the following types of facilities in the 
United States:
    (1) A factory,
    (2) A wholesale distributor or purchasing agency,
    (3) A distribution center,
    (4) A retail sales or service outlet,
    (5) A network of franchised dealers,
    (6) A financing agency, or
    (7) Similar facility for the manufacture, distribution, purchasing, 
furnishing, or financing of goods or services locally in the United 
States.

A company will not be considered to be engaged in ``activities'' in the 
United States if its products are sold to independent importers, or are 
distributed through independent warehouses, that are not controlled or 
franchised by it.
    (d) In the Board's opinion, section 4 (a)(1) of the Bank Holding 
Company Act applies to ownership or control of shares of stock as an 
investment and does not apply to ownership or control of shares of stock 
in the capacity of an underwriter or dealer in securities. Underwriting 
or dealing in shares of stock are nonbanking activities prohibited to 
bank holding companies by section 4(a)(2) of the Act, unless otherwise 
exempted. Under Sec. 225.4(g) of Regulation Y, foreign bank holding 
companies are exempt from the prohibitions of section 4 of the Act with 
respect to their activities outside the United States; thus foreign bank 
holding companies may underwrite or deal in shares of stock (including 
shares of United States issuers) to be distributed outside the United 
States, provided that shares so acquired are disposed of within a 
reasonable time.
    (e) A foreign bank holding company does not ``indirectly'' own 
voting shares by reason of the ownership or control of such voting 
shares by any company in which it has a noncontrolling interest. A 
foreign bank holding company may, however, ``indirectly'' control such 
voting shares if its noncontrolling interest in such company is 
accompanied by other arrangements that, in the Board's judgment, result 
in control of such shares by the bank holding company. The Board has 
made one exception to this general approach. A foreign bank holding 
company will be considered to indirectly own or control voting shares of 
a bank if that bank holding company acquires more than 5 percent of any 
class of voting shares of another bank holding company. A bank holding 
company may make such an acquisition only with prior approval of the 
Board.
    (f) A company is ``indirectly'' engaged in activities in the United 
States if any of its subsidiaries (whether or not incorporated under the 
laws of this country) is engaged in such activities. A company is not 
``indirectly'' engaged in activities in the United States by reason of a 
noncontrolling interest in a company engaged in such activities.
    (g) Under the foregoing rules, a foreign bank holding company may 
have a noncontrolling interest in a foreign company that has a U.S. 
subsidiary (but is not engaged in the securities business in the United 
States) if more than half of the foreign company's consolidated assets 
and revenues are located and derived outside the United States. For the 
purpose of such determination, the assets and revenues of the United 
States subsidiary would be counted among the consolidated assets and 
revenues of the foreign company to the extent required or permitted by 
generally accepted accounting principles in the United States. The 
foreign bank holding company would not, however, be permitted to 
``indirectly'' control voting shares of the said U.S. subsidiary, as 
might be the case if there are other arrangements accompanying its 
noncontrolling interest in the foreign parent company that, in the 
Board's judgment, result in control of

[[Page 165]]

such shares by the bank holding company.

(Interprets and applies 12 U.S.C. 1843 (a) (1), (2), and (c)(9))

[36 FR 21808, Nov. 16, 1971]



Sec. 225.125  Investment adviser activities.

    (a) Effective February 1, 1972, the Board of Governors amended Sec. 
225.4(a) of Regulation Y to add ``serving as investment adviser, as 
defined in section 2(a)(20) of the Investment Company Act of 1940, to an 
investment company registered under that Act'' to the list of activities 
it has determined to be so closely related to banking or managing or 
controlling banks as to be a proper incident thereto. During the course 
of the Board's consideration of this amendment several questions arose 
as to the scope of such activity, particularly in view of certain 
restrictions imposed by sections 16, 20, 21, and 32 of the Banking Act 
of 1933 (12 U.S.C. 24, 377, 378, 78) (sometimes referred to hereinafter 
as the ``Glass-Steagall Act provisions'') and the U.S. Supreme Court's 
decision in Investment Company Institute v. Camp, 401 U.S. 617 (1971). 
The Board's views with respect to some of these questions are set forth 
below.
    (b) It is clear from the legislative history of the Bank Holding 
Company Act Amendments of 1970 (84 Stat. 1760) that the Glass-Steagall 
Act provisions were not intended to be affected thereby. Accordingly, 
the Board regards the Glass-Steagall Act provisions and the Board's 
prior interpretations thereof as applicable to a holding company's 
activities as an investment adviser. Consistently with the spirit and 
purpose of the Glass-Steagall Act, this interpretation applies to all 
bank holding companies registered under the Bank Holding Company Act 
irrespective of whether they have subsidiaries that are member banks.
    (c) Under Sec. 225.4(a)(5), as amended, bank holding companies 
(which term, as used herein, includes both their bank and nonbank 
subsidiaries) may, in accordance with the provisions of Sec. 225.4 (b), 
act as investment advisers to various types of investment companies, 
such as ``open-end'' investment companies (commonly referred to as 
``mutual funds'') and ``closed-end'' investment companies. Briefly, a 
mutual fund is an investment company which, typically, is continuously 
engaged in the issuance of its shares and stands ready at any time to 
redeem the securities as to which it is the issuer; a closed-end 
investment company typically does not issue shares after its initial 
organization except at infrequent intervals and does not stand ready to 
redeem its shares.
    (d) The Board intends that a bank holding company may exercise all 
functions that are permitted to be exercised by an ``investment 
adviser'' under the Investment Company Act of 1940, except to the extent 
limited by the Glass-Steagall Act provisions, as described, in part, 
hereinafter.
    (e) The Board recognizes that presently most mutual funds are 
organized, sponsored and managed by investment advisers with which they 
are affiliated and that their securities are distributed to the public 
by such affiliated investment advisers, or subsidiaries or affiliates 
thereof. However, the Board believes that (1) The Glass-Steagall Act 
provisions do not permit a bank holding company to perform all such 
functions, and (2) It is not necessary for a bank holding company to 
perform all such functions in order to engage effectively in the 
described activity.
    (f) In the Board's opinion, the Glass-Steagall Act provisions, as 
interpreted by the U.S. Supreme Court, forbid a bank holding company to 
sponsor, organize, or control a mutual fund. However, the Board does not 
believe that such restrictions apply to closed-end investment companies 
as long as such companies are not primarily or frequently engaged in the 
issuance, sale, and distribution of securities. A bank holding company 
should not act as investment adviser to an investment company that has a 
name similar to the name of the holding company or any of its subsidiary 
banks, unless the prospectus of the investment company contains the 
disclosures required in paragraph (h) of this section. In no case should 
a bank holding company act as investment adviser to an investment 
company that has either the same

[[Page 166]]

name as the name of the holding company or any of its subsidiary banks, 
or a name that contains the word ``bank.''
    (g) In view of the potential conflicts of interests that may exist, 
a bank holding company and its bank and nonbank subsidiaries should not 
purchase in their sole discretion, in a fiduciary capacity (including as 
managing agent), securities of any investment company for which the bank 
holding company acts as investment adviser unless, the purchase is 
specifically authorized by the terms of the instrument creating the 
fiduciary relationship, by court order, or by the law of the 
jurisdiction under which the trust is administered.
    (h) Under section 20 of the Glass-Steagall Act, a member bank is 
prohibited from being affiliated with a company that directly, or 
through a subsidiary, engages principally in the issue, flotation, 
underwriting, public sale, or distribution of securities. A bank holding 
company or its nonbank subsidiary may not engage, directly or 
indirectly, in the underwriting, public sale or distribution of 
securities of any investment company for which the holding company or 
any nonbank subsidiary provides investment advice except in compliance 
with the terms of section 20, and only after obtaining the Board's 
approval under section 4 of the Bank Holding Company Act and subject to 
the limitations and disclosures required by the Board in those cases. 
The Board has determined, however, that the conduct of securities 
brokerage activities by a bank holding company or its nonbank 
subsidiaries, when conducted individually or in combination with 
investment advisory activities, is not deemed to be the underwriting, 
public sale, or distribution of securities prohibited by the Glass-
Steagall Act, and the U.S. Supreme Court has upheld that determination. 
See Securities Industry Ass'n v. Board of Governors, 468 U.S. 207 
(1984); see also Securities Industry Ass'n v. Board of Governors, 821 
F.2d 810 (D.C. Cir. 1987), cert. denied, 484 U.S. 1005 (1988). 
Accordingly, the Board believes that a bank holding company or any of 
its nonbank subsidiaries that has been authorized by the Board under the 
Bank Holding Company Act to conduct securities brokerage activities 
(either separately or in combination with investment advisory 
activities) may act as agent, upon the order and for the account of 
customers of the holding company or its nonbank subsidiary, to purchase 
or sell shares of an investment company for which the bank holding 
company or any of its subsidiaries acts as an investment adviser. In 
addition, a bank holding company or any of its nonbank subsidiaries that 
has been authorized by the Board under the Bank Holding Company Act to 
provide investment advice to third parties generally (either separately 
or in combination with securities brokerage services) may provide 
investment advice to customers with respect to the purchase or sale of 
shares of an investment company for which the holding company or any of 
its subsidiaries acts as an investment adviser. In the event that a bank 
holding company or any of its nonbank subsidiaries provides brokerage or 
investment advisory services (either separately or in combination) to 
customers in the situations described above, at the time the service is 
provided the bank holding company should instruct its officers and 
employees to caution customers to read the prospectus of the investment 
company before investing and must advise customers in writing that the 
investment company's shares are not insured by the Federal Deposit 
Insurance Corporation, and are not deposits, obligations of, or endorsed 
or guaranteed in any way by, any bank, unless that happens to be the 
case. The holding company or nonbank subsidiary must also disclose in 
writing to the customer the role of the company or affiliate as adviser 
to the investment company. These disclosures may be made orally so long 
as written disclosure is provided to the customer immediately 
thereafter. To the extent that a bank owned by a bank holding company 
engages in providing advisory or brokerage services to bank customers in 
connection with an investment company advised by the bank holding 
company or a nonbank affiliate, but is not required by the bank's 
primary regulator to make disclosures comparable to the disclosures 
required to be made by bank holding companies providing such services, 
the bank holding company should require

[[Page 167]]

its subsidiary bank to make the disclosures required in this paragraph 
to be made by a bank holding company that provides such advisory or 
brokerage services.
    (i) Acting in such capacities as registrar, transfer agent, or 
custodian for an investment company is not a selling activity and is 
permitted under Sec. 225.4(a)(4) of Regulation Y. However, in view of 
potential conflicts of interests, a bank holding company which acts both 
as custodian and investment adviser for an investment company should 
exercise care to maintain at a minimal level demand deposit accounts of 
the investment company which are placed with a bank affiliate and should 
not invest cash funds of the investment company in time deposit accounts 
(including certificates of deposit) of any bank affiliate.

[37 FR 1464, Jan. 29, 1972, as amended by Reg. Y, 57 FR 30391, July 9, 
1992; 61 FR 45875, Aug. 30, 1996; Reg. Y, 62 FR 9343, Feb. 28, 1997]



Sec. 225.126  Activities not closely related to banking.

    Pursuant to section 4(c)(8) of the Bank Holding Company Act and 
Sec. 225.4(a) of Regulation Y, the Board of Governors has determined 
that the following activities are not so closely related to banking or 
managing or controlling banks as to be a proper incident thereto:
    (a) Insurance premium funding--that is, the combined sale of mutual 
funds and insurance.
    (b) Underwriting life insurance that is not sold in connection with 
a credit transaction by a bank holding company, or a subsidiary thereof.
    (c) Real estate brokerage (see 1972 Fed. Res. Bulletin 428).
    (d) Land development (see 1972 Fed. Res. Bulletin 429).
    (e) Real estate syndication.
    (f) Management consulting (see 1972 Fed. Res. Bulletin 571).
    (g) Property management (see 1972 Fed. Res. Bulletin 652).

[Reg. Y, 37 FR 20329, Sept. 29, 1972; 37 FR 21938, Oct. 17, 1972, as 
amended at 54 FR 37302, Sept. 8, 1989]



Sec. 225.127  Investment in corporations or projects designed primarily 
to promote community welfare.

    (a) Under Sec. 225.25(b)(6) of Regulation Y, a bank holding company 
may, in accordance with the provisions of Sec. 225.23, engage in 
``making equity and debt investments in corporations or projects 
designed primarily to promote community welfare, such as the economic 
rehabilitation and development of low-income areas.'' The Board included 
that activity among those the Board has determined to be so closely 
related to banking or managing or controlling banks as be a proper 
incident thereto, in order to permit bank holding companies to fulfill 
their civic responsibilities. As indicated hereinafter in this 
interpretation, the Board intends Sec. 225.25(b)(6) to enable bank 
holding companies to take an active role in the quest for solutions to 
the Nation's social problems. Although the interpretation primarily 
focuses on low- and moderate-income housing, it is not intended to limit 
projects under Sec. 225.25(b)(6) to that area. Other investments 
primarily designed to promote community welfare are considered 
permissible, but have not been defined in order to provide bank holding 
companies flexibility in approaching community problems. For example, 
bank holding companies may utilize this flexibility to provide new and 
creative approaches to the promotion of employment opportunities for 
low-income persons. Bank holding companies possess a unique combination 
of financial and managerial resources making them particularly suited 
for a meaningful and substantial role in remedying our social ills. 
Section 225.25(b)(6) is intended to provide an opportunity for them to 
assume such a role.
    (b) Under the authority of Sec. 225.25(b)(6), a bank holding 
company may invest in community development corporations established 
pursuant to Federal or State law. A bank holding company may also 
participate in other civic projects, such as a municipal parking 
facility sponsored by a local civic organization as a means to promote 
greater public use of the community's facilities.
    (c) Within the category of permissible investments under Sec. 
225.25(b)(6)

[[Page 168]]

are investments in projects to construct or rehabilitate multifamily 
low- or moderate-income housing with respect to which a mortgage is 
insured under section 221(d)(3), 221(d)(4), or 236 of the National 
Housing Act (12 U.S.C. 1701) and investments in projects to construct or 
rehabilitate low- or moderate-income housing which is financed or 
assisted by direct loan, tax abatement, or insurance under provisions of 
State or local law, similar to the aforementioned Federal programs, 
provided that, with respect to all such projects the owner is, by 
statute, regulation, or regulatory authority, limited as to the rate of 
return on his investment in the project, as to rentals or occupancy 
charges for units in the project, and in such other respects as would be 
a ``limited dividend corporation'' (as defined by the Secretary of 
Housing and Urban Development).
    (d) Investments in other projects that may be considered to be 
designed primarily to promote community welfare include but are not 
limited to: (1) Projects for the construction or rehabilitation of 
housing for the benefit of persons of low- or moderate-income, (2) 
projects for the construction or rehabilitation of ancillary local 
commercial facilities necessary to provide goods or services principally 
to persons residing in low- or moderate-income housing, and (3) projects 
designed explicitly to create improved job opportunities for low- or 
moderate-income groups (for example, minority equity investments, on a 
temporary basis, in small or medium-sized locally-controlled businesses 
in low-income urban or other economically depressed areas). In the case 
of de novo projects, the copy of the notice with respect to such other 
projects which is to be furnished to Reserve Banks in accordance with 
the provisions of Sec. 225.23 should be accompanied by a memorandum 
which demonstrates that such projects meet the objectives of Sec. 
225.25(b)(6).
    (e) Investments in corporations or projects organized to build or 
rehabilitate high-income housing, or commercial, office, or industrial 
facilities that are not designed explicitly to create improved job 
opportunities for low-income persons shall be presumed not to be 
designed primarily to promote community welfare, unless there is 
substantial evidence to the contrary, even though to some extent the 
investment may benefit the community.
    (f) Section 6 of the Depository Institutions Disaster Relief Act of 
1992 permits state member banks (12 U.S.C. 338a) and national banks (12 
U.S.C. 24 (Eleventh)) to invest in the stock of community development 
corporations that are designed primarily to promote the public welfare 
of low- and moderate-income communities and persons in the areas of 
housing, services and employment. The Board and the Office of the 
Comptroller of the Currency have adopted rules that permit state member 
banks and national banks to make certain investments without prior 
approval. The Board believes that these rules are consistent with the 
Board's interpretation of, and decisions regarding, the scope of 
community welfare activities permissible for bank holding companies. 
Accordingly, approval received by a bank holding company to conduct 
activities designed to promote the community welfare under section 
4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)) and Sec. 
225.25(b)(6) of the Board's Regulation Y (12 CFR 225.25(b)(6)) includes 
approval to engage, either directly or through a subsidiary, in the 
following activities, up to five percent of the bank holding company's 
total consolidated capital stock and surplus, without additional Board 
or Reserve Bank approval:
    (1) Invest in and provide financing to a corporation or project or 
class of corporations or projects that the Board previously has 
determined is a public welfare project pursuant to paragraph 23 of 
section 9 of the Federal Reserve Act (12 U.S.C. 338a);
    (2) Invest in and provide financing to a corporation or project that 
the Office of the Comptroller of the Currency previously has determined, 
by order or regulation, is a public welfare investment pursuant to 
section 5136 of the Revised Statutes (12 U.S.C. 24 (Eleventh));
    (3) Invest in and provide financing to a community development 
financial institution pursuant to section 103(5) of the Community 
Development Banking

[[Page 169]]

and Financial Institutions Act of 1994 (12 U.S.C. 4702(5));
    (4) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent residential property if a majority of the units will be 
occupied by low- and moderate-income persons or if the property is a 
``qualified low-income building'' as defined in section 42(c)(2) of the 
Internal Revenue Code (26 U.S.C. 42(c)(2));
    (5) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent nonresidential real property or other assets located in a 
low- or moderate-income area provided the property is used primarily for 
low- and moderate-income persons;
    (6) Invest in and provide financing to one or more small businesses 
located in a low- or moderate-income area to stimulate economic 
development;
    (7) Invest in, provide financing to, develop, and otherwise assist 
job training or placement facilities or programs designed primarily for 
low- and moderate-income persons;
    (8) Invest in and provide financing to an entity located in a low- 
or moderate-income area if that entity creates long-term employment 
opportunities, a majority of which (based on full time equivalent 
positions) will be held by low- and moderate-income persons; and
    (9) Provide technical assistance, credit counseling, research, and 
program development assistance to low- and moderate-income persons, 
small businesses, or nonprofit corporations to help achieve community 
development.
    (g) For purposes of paragraph (f) of this section, low- and 
moderate-income persons or areas means individuals and communities whose 
incomes do not exceed 80 percent of the median income of the area 
involved, as determined by the U.S. Department of Housing and Urban 
Development. Small businesses are businesses that are smaller than the 
maximum size eligibility standards established by the Small Business 
Administration (SBA) for the Small Business Investment Company and 
Development Company Programs or the SBA section 7A loan program; and 
specifically include those businesses that are majority-owned by members 
of minority groups or by women.
    (h) For purposes of paragraph (f) of this section, five percent of 
the total consolidated capital stock and surplus of a bank holding 
company includes its total investment in projects described in paragraph 
(f) of this section, when aggregated with similar types of investments 
made by depository institutions controlled by the bank holding company. 
The term total consolidated capital stock and surplus of the bank 
holding company means total equity capital and the allowance for loan 
and lease losses. For bank holding companies that file the FR Y-9C 
(Consolidated Financial Statements for Bank Holding Companies), these 
items are readily ascertained from Schedule HC--Consolidated Balance 
Sheet (total equity capital (line 27h) and allowance for loan and lease 
losses (line 4b)). For bank holding companies filing the FR Y-SP (Parent 
Company Only Financial Statements for Small Bank Holding Companies), an 
approximation of these items is ascertained from the Balance Sheet 
(total equity capital (line 16e)) and allowance for loan and lease 
losses (line 3b)) and from the Report of Condition for Insured Banks 
(Schedule RC--Balance Sheet (line 4b)).

[37 FR 11316, June 7, 1972; 37 FR 13336, July 7, 1972, as amended at 
Reg. Y, 59 FR 63713, Dec. 9, 1994]



Sec. 225.129  Activities closely related to banking.

    Courier activities. The Board's amendment of Sec. 225.4(a), which 
adds courier services to the list of closely related activities is 
intended to permit holding companies to transport time critical 
materials of limited intrinsic value of the types utilized by banks and 
bank-related firms in performing their business activities. Such 
transportation activities are of particular importance in the check 
clearing process of the banking system, but are also important to the 
performance of other activities, including the processing of 
financially-related economic data. The authority is not intended to 
permit holding companies to engage generally in the provision of 
transportation services.
    During the course of the Board's proceedings pertaining to courier 
services,

[[Page 170]]

objections were made that courier activities were not a proper incident 
to banking because of the possibility that holding companies would or 
had engaged in unfair competitive practices. The Board believes that 
adherence to the following principles will eliminate or reduce to an 
insignificant degree any possibility of unfair competition:
    a. A holding company courier subsidiary established under section 
4(c)(8) should be a separate, independent corporate entity, not merely a 
servicing arm of a bank.
    b. As such, the subsidiary should exist as a separate, profit-
oriented operation and should not be subsidized by the holding company 
system.
    c. Services performed should be explicitly priced, and shall not be 
paid for indirectly, for example, on the basis of deposits maintained at 
or loan arrangements with affiliated banks.

Accordingly, entry of holding companies into courier activities on the 
basis of section 4(c)(8) will be conditioned as follows:
    1. The courier subsidiary shall perform services on an explicit fee 
basis and shall be structured as an individual profit center designed to 
be operated on a profitable basis. The Board may regard operating losses 
sustained over an extended period as being inconsistent with continued 
authority to engage in courier activities.
    2. Courier services performed on behalf of an affiliate's customer 
(such as the carriage of incoming cash letters) shall be paid for by the 
customer. Such payments shall not be made indirectly, for example, on 
the basis of imputed earnings on deposits maintained at or of loan 
arrangements with subsidiaries of the holding company. Concern has also 
been expressed that bank-affiliated courier services will be utilized to 
gain a competitive advantage over firms competing with other holding 
company affiliates. To reduce the possibility that courier affiliates 
might be so employed, the Board will impose the following third 
condition:
    3. The courier subsidiary shall, when requested by any bank or any 
data processing firm providing financially-related data processing 
services which firm competes with a banking or data processing 
subsidiary of Applicant, furnish comparable service at comparable rates, 
unless compliance with such request would be beyond the courier 
subsidiary's practical capacity. In this regard, the courier subsidiary 
should make known to the public its minimum rate schedule for services 
and its general pricing policies thereto. The courier subsidiary is also 
expected to maintain for a reasonable period of time (not less than two 
years) each request denied with the reasons for such denial.

[38 FR 32126, Nov. 21, 1973, as amended at 40 FR 36309, Aug. 20, 1975]



Sec. 225.130  Issuance and sale of short-term debt obligations by 
bank holding companies.

    For text of interpretation, see Sec. 250.221 of this chapter.

[38 FR 35231, Dec. 26, 1973]



Sec. 225.131  Activities closely related to banking.

    (a) Bank management consulting advice. The Board's amendment of 
Sec. 225.4(a), which adds bank management consulting advice to the list 
of closely related activities, described in general terms the nature of 
such activity. This interpretation is intended to explain in greater 
detail certain of the terms in the amendment.
    (b) It is expected that bank management consulting advice would 
include, but not be limited to, advice concerning: Bank operations, 
systems and procedures; computer operations and mechanization; 
implementation of electronic funds transfer systems; site planning and 
evaluation; bank mergers and the establishment of new branches; 
operation and management of a trust department; international banking; 
foreign exchange transactions; purchasing policies and practices; cost 
analysis, capital adequacy and planning; auditing; accounting 
procedures; tax planning; investment advice (as authorized in Sec. 
225.4(a)(5)); credit policies and administration, including credit 
documentation, evaluation, and debt collection; product development, 
including specialized lending provisions; marketing operations, 
including research, market development and advertising programs; 
personnel operations,

[[Page 171]]

including recruiting, training, evaluation and compensation; and 
security measures and procedures.
    (c) In permitting bank holding companies to provide management 
consulting advice to nonaffiliated ``banks'', the Board intends such 
advice to be given only to an institution that both accepts deposits 
that the depositor has a legal right to withdraw on demand and engages 
in the business of making commercial loans. It is also intended that 
such management consulting advice may be provided to the ``operations 
subsidiaries'' of a bank, since such subsidiaries perform functions that 
a bank is empowered to perform directly at locations at which the bank 
is authorized to engage in business (Sec. 250.141 of this chapter).
    (d) Although a bank holding company providing management consulting 
advice is prohibited by the regulation from owning or controlling, 
directly or indirectly, any equity securities in a client bank, this 
limitation does not apply to shares of a client bank acquired, directly 
or indirectly, as a result of a default on a debt previously contracted. 
This limitation is also inapplicable to shares of a client bank acquired 
by a bank holding company, directly or indirectly, in a fiduciary 
capacity: Provided, That the bank holding company or its subsidiary does 
not have sole discretionary authority to vote such shares or shares held 
with sole voting rights constitute not more than five percent of the 
outstanding voting shares of a client bank.

[39 FR 8318, Mar. 5, 1974; 39 FR 21120, June 19, 1974]



Sec. 225.132  Acquisition of assets.

    (a) From time to time questions have arisen as to whether and under 
what circumstances a bank holding company engaged in nonbank activities, 
directly or indirectly through a subsidiary, pursuant to section 4(c)(8) 
of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 
1843(c)(3)), may acquire the assets and employees of another company, 
without first obtaining Board approval pursuant to section 4(c) (8) and 
the Board's Regulation Y (12 CFR 225.4(b)).
    (b) In determining whether Board approval is required in connection 
with the acquisition of assets, it is necessary to determine (a) whether 
the acquisition is made in the ordinary course of business \1\ or (b) 
whether it constitutes the acquisition, in whole or in part, of a going 
concern.\2\ 
---------------------------------------------------------------------------

    \1\ Section 225.4(c)(3) of the Board's Regulation Y (12 CFR 
225.4(c)(3)) generally prohibits a bank holding company or its 
subsidiary engaged in activities pursuant to authority of section 
4(c)(8) of the Act from being a party to any merger ``or acquisition of 
assets other than in the ordinary course of business'' without prior 
Board approval.
    \2\ In accordance with the provisions of section 4(c)(8) of the Act 
and Sec. 225.4(b) of Regulation Y, the acquisition of a going concern 
requires prior Board approval.
---------------------------------------------------------------------------

    (c) The following examples illustrate transactions where prior Board 
approval will generally be required:
    (1) The transaction involves the acquisition of all or substantially 
all of the assets of a company, or a subsidiary, division, department or 
office thereof.
    (2) The transaction involves the acquisition of less than 
``substantially all'' of the assets of a company, or a subsidiary, 
division, department or office thereof, the operations of which are 
being terminated or substantially discontinued by the seller, but such 
asset acquisition is significant in relation to the size of the same 
line of nonbank activity of the holding company (e.g., consumer finance 
mortgage banking, data processing). For purposes of this interpretation, 
an acquisition would generally be presumed to be significant if the book 
value of the nonbank assets being acquired exceeds 50 percent of the 
book value of the nonbank assets of the holding company or nonbank 
subsidiary comprising the same line of activity.
    (3) The transaction involves the acquisition of assets for resale 
and the sale of such assets is not a normal business activity of the 
acquiring holding company.
    (4) The transaction involves the acquisition of the assets of a 
company, or a subsidiary, division, department or office thereof, and a 
major purpose of the transaction is to hire some of the seller's 
principal employees who are expert, skilled and experienced in the

[[Page 172]]

business of the company being acquired.
    (d) In some cases it may be difficult, due to the wide variety of 
circumstances involving possible acquisition of assets, to determine 
whether such acquisitions require prior Board approval. Bank holding 
companies are encouraged to contact their local Reserve Bank for 
guidance where doubt exists as to whether such an acquisition is in the 
ordinary course of business or an acquisition, in whole or in part, of a 
going concern.

[39 FR 35128, Sept. 30, 1974, as amended at Reg. Y, 57 FR 28779, June 
29, 1992]



Sec. 225.133  Computation of amount invested in foreign corporations 
under general consent procedures.

    For text of this interpretation, see Sec. 211.111 of this 
subchapter.

[40 FR 43199, Sept. 19, 1975]



Sec. 225.134  Escrow arrangements involving bank stock resulting in a 
violation of the Bank Holding Company Act.

    (a) In connection with a recent application to become a bank holding 
company, the Board considered a situation in which shares of a bank were 
acquired and then placed in escrow by the applicant prior to the Board's 
approval of the application. The facts indicated that the applicant 
company had incurred debt for the purpose of acquiring bank shares and 
immediately after the purchase the shares were transferred to an 
unaffiliated escrow agent with instructions to retain possession of the 
shares pending Board action on the company's application to become a 
bank holding company. The escrow agreement provided that, if the 
application were approved by the Board, the escrow agent was to return 
the shares to the applicant company; and, if the application were 
denied, the escrow agent was to deliver the shares to the applicant 
company's shareholders upon their assumption of debt originally incurred 
by the applicant in the acquisition of the bank shares. In addition, the 
escrow agreement provided that, while the shares were held in escrow, 
the applicant could not exercise voting or any other ownership rights 
with respect to those shares.
    (b) On the basis of the above facts, the Board concluded that the 
company had violated the prior approval provisions of section 3 of the 
Bank Holding Company Act (``Act'') at the time that it made the initial 
acquisition of bank shares and that, for purposes of the Act, the 
company continued to control those shares in violation of the Act. In 
view of these findings, individuals and bank holding companies should 
not enter into escrow arrangements of the type described herein, or any 
similar arrangement, without securing the prior approval of the Board, 
since such action could constitute a violation of the Act.
    (c) While the above represents the Board's conclusion with respect 
to the particular escrow arrangement involved in the proposal presented, 
the Board does not believe that the use of an escrow arrangement would 
always result in a violation of the Act. For example, it appears that a 
transaction whereby bank shares are placed in escrow pending Board 
action on an application would not involve a violation of the Act so 
long as title to such shares remains with the seller during the pendency 
of the application; there are no other indicia that the applicant 
controls the shares held in escrow; and, in the event of a Board denial 
of the application, the escrow agreement provides that the shares would 
be returned to the seller.

[41 FR 9859, Mar. 8, 1976. Correctly designated at 41 FR 12009, Mar. 23, 
1976]



Sec. 225.136  Utilization of foreign subsidiaries to sell long-term 

debt obligations in foreign markets and to transfer the proceeds to 
their United States 
          parent(s) for domestic purposes.

    For text of this interpretation, see Sec. 211.112 of this 
subchapter.

[42 FR 752, Jan. 4, 1977]



Sec. 225.137  Acquisitions of shares pursuant to section 4(c)(6) of the 
Bank Holding Company Act.

    (a) The Board has received a request for an interpretation of 
section 4(c)(6) of the Bank Holding Company Act

[[Page 173]]

(``Act'') \1\ in connection with a proposal under which a number of bank 
holding companies would purchase interests in an insurance company to be 
formed for the purpose of underwriting or reinsuring credit life and 
credit accident and health insurance sold in connection with extensions 
of credit by the stockholder bank holding companies and their 
affiliates.
---------------------------------------------------------------------------

    \1\ It should be noted that every Board Order granting approval 
under section 4(c)(8) of the Act contains the following paragraph:
    ``This determination is subject . . . to the Board's authority to 
require such modification or termination of the activities of a holding 
company or any of its subsidiaries as the Board finds necessary to 
assure compliance with the provisions and purposes of the Act and the 
Board's regulations and orders issued thereunder, or to prevent evasion 
thereof.''
    The Board believes that, even apart from this Interpretation, this 
language preserves the authority of the Board to require the revisions 
contemplated in this Interpretation.
---------------------------------------------------------------------------

    (b) Each participating holding company would own no more than 5 
percent of the outstanding voting shares of the company. However, the 
investment of each holding company would be represented by a separate 
class of voting security, so that each stockholder would own 100 percent 
of its respective class. The participating companies would execute a 
formal ``Agreement Among Stockholders'' under which each would agree to 
use its best efforts at all times to direct or recommend to customers 
and clients the placement of their life, accident and health insurance 
directly or indirectly with the company. Such credit-related insurance 
placed with the company would be identified in the records of the 
company as having been originated by the respective stockholder. A 
separate capital account would be maintained for each stockholder 
consisting of the original capital contribution increased or decreased 
from time to time by the net profit or loss resulting from the insurance 
business attributable to each stockholder. Thus, each stockholder would 
receive a return on its investment based upon the claims experience and 
profitability of the insurance business that it had itself generated. 
Dividends declared by the board of directors of the company would be 
payable to each stockholder only out of the earned surplus reflected in 
the respective stockholder's capital account.
    (c) It has been requested that the Board issue an interpretation 
that section 4(c)(6) of the Act provides an exemption under which 
participating bank holding companies may acquire such interests in the 
company without prior approval of the Board.
    (d) On the basis of a careful review of the documents submitted, in 
light of the purposes and provisions of the Act, the Board has concluded 
that section 4(c)(6) of the Act is inapplicable to this proposal and 
that a bank holding company must obtain the approval of the Board before 
participating in such a proposal in the manner described. The Board's 
conclusion is based upon the following considerations:
    (1) Section 2(a)(2)(A) of the Act provides that a company is deemed 
to have control over a second company if it owns or controls ``25 per 
centum or more of any class of voting securities'' of the second 
company. In the case presented, the stock interest of each participant 
would be evidenced by a different class of stock and each would 
accordingly, own 100 percent of a class of voting securities of the 
company. Thus, each of the stockholders would be deemed to ``control'' 
the company and prior Board approval would be required for each 
stockholder's acquisition of stock in the company.

The Board believes that this application of section 2(a)(2)(A) of the 
Act is particularly appropriate on the facts presented here. The company 
is, in practical effect, a conglomeration of separate business ventures 
each owned 100 percent by a stockholder the value of whose economic 
interest in the company is determined by reference to the profits and 
losses attributable to its respective class of stock. Furthermore, it is 
the Board's opinion that this application of section 2(a)(2)(A) is not 
inconsistent with section 4(c)(6). Even assuming that section (4)(c)(6) 
is intended to refer to all outstanding voting shares, and not merely 
the outstanding shares of a particular class of securities, section 
4(c)(6) must be viewed as permitting ownership of 5 percent of a 
company's voting stock only when that ownership does not

[[Page 174]]

constitute ``control'' as otherwise defined in the Act. For example, it 
is entirely possible that a company could exercise a controlling 
influence over the management and policies of a second company, and thus 
``control'' that company under the Act's definitions, even though it 
held less than 5 percent of the voting stock of the second company. To 
view section 4(c)(6) as an unqualified exemption for holdings of less 
than 5 percent would thus create a serious gap in the coverage of the 
Act.
    (2) The Board believes that section 4(c)(6) should properly be 
interpreted as creating an exemption from the general prohibitions in 
section 4 on ownership of stock in nonbank companies only for passive 
investments amounting to not more than 5 percent of a company's 
outstanding stock, and that the exemption was not intended to allow a 
group of holding companies, through concerted action, to engage in an 
activity as entrepreneurs. Section 4 of the Act, of course, prohibits 
not only owning stock in nonbank companies, but engaging in activities 
other than banking or those activities permitted by the Board under 
section 4(c)(8) as being closely related to banking. Thus, if a holding 
company may be deemed to be engaging in an activity through the medium 
of a company in which it owns less than 5 percent of the voting stock it 
may nevertheless require Board approval, despite the section 4(c)(6) 
exemption.
    (e) To accept the argument that section 4(c)(6) is an unqualified 
grant of permission to a bank holding company to own 5 percent of the 
shares of any nonbanking company irrespective of the nature or extent of 
the holding company's participation in the affairs of the nonbanking 
company would, in the Board's view, create the potential for serious and 
widespread evasion of the Act's controls over nonbanking activities. 
Such a construction would allow a group of 20 bank holding companies--or 
even a single bank holding company and one or more nonbank companies--to 
engage in entrepreneurial joint ventures in businesses prohibited to 
bank holding companies, a result the Board believes to be contrary to 
the intent of Congress.
    (f) In this proposal, each of the participating stockholders must be 
viewed as engaging in the business of insurance underwriting. Each 
stockholder would agree to channel to the company the insurance business 
it generates, and the value of the interest of each stockholder would be 
determined by reference to the profitability of the business generated 
by that stockholder itself. There is no sharing or pooling among 
stockholders of underwriting risks assumed by the company, and profit or 
loss from investments is allocated on the basis of each bank holding 
company's allocable underwriting profit or loss. The interest of each 
stockholder is thus clearly that of an entrepreneur rather than that of 
an investor.
    (g) Accordingly, on the basis of the factual situation before the 
Board, and for the reasons summarized above, the Board has concluded 
that section 4(c)(6) of the Act cannot be interpreted to exempt the 
ownership of 5 percent of the voting stock of a company under the 
circumstances described, and that a bank holding company wishing to 
become a stockholder in a company under this proposal would be required 
to obtain the Board's approval to do so.

[42 FR 1263, Jan. 6, 1977; 42 FR 2951, Jan. 14, 1977]



Sec. 225.138  Statement of policy concerning divestitures by bank 
holding companies.

    (a) From time to time the Board of Governors receives requests from 
companies subject to the Bank Holding Company Act, or other laws 
administered by the Board, to extend time periods specified either by 
statute or by Board order for the divestiture of assets held or 
activities engaged in by such companies. Such divestiture requirements 
may arise in a number of ways. For example, divestiture may be ordered 
by the Board in connection with an acquisition found to have been made 
in violation of law. In other cases the divestiture may be pursuant to a 
statutory requirement imposed at the time and amendment to the Act was 
adopted, or it may be required as a result of a foreclosure upon 
collateral

[[Page 175]]

held by the company or a bank subsidiary in connection with a debt 
previously contracted in good faith. Certain divestiture periods may be 
extended in the discretion of the Board, but in other cases the Board 
may be without statutory authority, or may have only limited authority, 
to extend a specified divestiture period.
    (b) In the past, divestitures have taken many different forms, and 
the Board has followed a variety of procedures in enforcing divestiture 
requirements. Because divestitures may occur under widely disparate 
factual circumstances, and because such forced dispositions may have the 
potential for causing a serious adverse economic impact upon the 
divesting company, the Board believes it is important to maintain a 
large measure of flexibility in dealing with divestitures. For these 
reasons, there can be no fixed rule as to the type of divestiture that 
will be appropriate in all situations. For example, where divestiture 
has been ordered to terminate a control relationship created or 
maintained in violation of the Act, it may be necessary to impose 
conditions that will assure that the unlawful relationship has been 
fully terminated and that it will not arise in the future. In other 
circumstances, however, less stringent conditions may be appropriate.
    (1) Avoidance of delays in divestitures. Where a specific time 
period has been fixed for accomplishing divestiture, the affected 
company should endeavor and should be encouraged to complete the 
divestiture as early as possible during the specific period. There will 
generally be substantial advantages to divesting companies in taking 
steps to plan for and accomplish divestitures well before the end of the 
divestiture period. For example, delays may impair the ability of the 
company to realize full value for the divested assets, for as the end of 
the divestiture period approaches the ``forced sale'' aspect of the 
divestiture may lead potential buyers to withhold firm offers and to 
bargain for lower prices. In addition, because some prospective 
purchasers may themselves require regulatory approval to acquire the 
divested property, delay by the divesting company may--by leaving 
insufficient time to obtain such approv als--have the effect of 
narrowing the range of prospective purchases. Thus, delay in planning 
for divestiture may increase the likelihood that the company will seek 
an extension of the time for divestiture if difficulty is encountered in 
securing a purchaser, and in certain situations, of course, the Board 
may be without statutory authority to grant extensions.
    (2) Submissions and approval of divestiture plans. When a 
divestiture requirement is imposed, the company affected should 
generally be asked to submit a divestiture plan promptly for review and 
approval by the Reserve Bank or the Board. Such a requirement may be 
imposed pursuant to the Board's authority under section 5(b) of the Bank 
Holding Company Act to issue such orders as may be necessary to enable 
the Board to administer and carry out the purposes of the Act and 
prevent evasions thereof. A divestiture plan should be as specific as 
possible, and should indicate the manner in which divestiture will be 
accomplished--for example, by a bulk sale of the assets to a third 
party, by ``spinoff'' or distribution of shares to the shareholders of 
the divesting company, or by termination of prohibited activities. In 
addition, the plan should specify the steps the company expects to take 
in effecting the divestiture and assuring its completeness, and should 
indicate the time schedule for taking such steps. In appropriate 
circumstances, the divestiture plan should make provision for assuring 
that ``controlling influence'' relationships, such as management or 
financial interlocks, will not continue to exist.
    (3) Periodic progress reports. A company subject to a divestiture 
requirement should generally be required to submit regular periodic 
reports detailing the steps it has taken to effect divestiture. Such a 
requirement may be imposed pursuant to the Board's authority under 
section 5(b) of the Bank Holding Company Act, referred to above, as well 
as its authority under section 5(c) of the Act to require reports for 
the purpose of keeping the Board informed as to whether the Act and 
Board regulations and order thereunder are being complied with. Reports 
should set forth in detail such matters

[[Page 176]]

as the identities of potential buyers who have been approached by the 
company, the dates of discussions with potential buyers and the 
identities of the individuals involved in such discussions, the terms of 
any offers received, and the reasons for rejecting any offers. In 
addition, the reports should indicate whether the company has employed 
brokers, investment bankers or others to assist in the divestiture, or 
its reasons for not doing so, and should describe other efforts by the 
company to seek out possible purchasers. The purpose of requiring such 
reports is to insure that substantial and good faith efforts being made 
by the company to satisfy its divestiture obligations. The frequency of 
such reports may vary depending upon the nature of the divestiture and 
the period specified for divestiture. However, such reports should 
generally not be required less frequently than every three months, and 
may in appropriate cases be required on a monthly or even more frequent 
basis. Progress reports as well as divestiture plans should be afforded 
confidential treatment.
    (4) Extensions of divestiture periods. Certain divestiture periods--
such as December 31, 1980 deadline for divestitures required by the 1970 
Amendments to the Bank Holding Company Act--are not extendable. In such 
cases it is imperative that divestiture be accomplished in a timely 
manner. In certain other cases, the Board may have discretion to extend 
a statutorily prescribed divestiture period within specified limits. For 
example, under section 4(c)(2) of the Act the Board may extend for three 
one-year periods the two-year period in which a bank subsidiary of a 
holding company is otherwise required to divest shares acquired in 
satisfaction of a debt previously contracted in good faith. In such 
cases, however, when the permissible extensions expire the Board no 
longer has discretion to grant further extensions. In still other cases, 
where a divestiture period is prescribed by the Board, in the exercise 
of its regulatory judgment, the Board may have broader discretion to 
grant extensions. Where extensions of specified divestiture periods are 
permitted by law, extensions should not be granted except under 
compelling circumstances. Neither unfavorable market conditions, nor the 
possibility that the company may incur some loss, should alone be viewed 
as constituting such circumstances--particularly if the company has 
failed to take earlier steps to accomplish a divestiture under more 
favorable circumstances. Normally, a request for an extension will not 
be considered unless the company has established that it has made 
substantial and continued good faith efforts to accomplish the 
divestiture within the prescribed period. Furthermore, requests for 
extensions of divestiture periods must be made sufficiently in advance 
of the expiration of the prescribed period both to enable the Board to 
consider the request in an orderly manner and to enable the company to 
effect a timely divestiture in the event the request for extension is 
denied. Companies subject to divestiture requirements should be aware 
that a failure to accomplish a divestiture within the prescribed period 
may in and of itself be viewed as a separate violation of the Act.
    (5) Use of trustees. In appropriate cases a company subject to a 
divestiture requirement may be required to place the assets subject to 
divestiture with an independent trustee under instructions to accomplish 
a sale by a specified date, by public auction if necessary. Such a 
trustee may be given the responsibility for exercising the voting rights 
with respect to shares being divested. The use of such a trustee may be 
particularly appropriate where the divestiture is intended to terminate 
a control relationship established or maintained in violation of law, or 
where the divesting company has demonstrated an inability or 
unwillingness to take timely steps to effect a divestiture.
    (6) Presumptions of control. Bank holding companies contemplating a 
divestiture should be mindful of section 2(g)(3) of the Bank Holding 
Company Act, which creates a presumption of continued control over the 
transferred assets where the transferee is indebted to the transferor, 
or where certain interlocks exist, as well as Sec. 225.2 of Regulation 
Y, which sets forth certain additional control presumptions. Where one 
of these presumptions has

[[Page 177]]

arisen with respect to divested assets, the divestiture will not be 
considered as complete until the presumption has been overcome. It 
should be understood that the inquiry into the termination of control 
relationships is not limited by the statutory and regulatory 
presumptions of control, and that the Board may conclude that a control 
relationship still exists even though the presumptions do not apply.
    (7) Role of the Reserve Banks. The Reserve Banks have a 
responsibility for supervising and enforcing divestitures. Specifically, 
in coordination with Board staff they should review divestiture plans to 
assure that proposed divestitures will result in the termination of 
control relationships and will not create unsafe or unsound conditions 
in any bank or bank holding company; they should monitor periodic 
progress reports to assure that timely steps are being taken to effect 
divestitures; and they should prompt companies to take such steps when 
it appears that progress is not being made. Where Reserve Banks have 
delegated authority to extend divestiture periods, that authority should 
be exercised consistently with this policy statement.

[42 FR 10969, Feb. 25, 1977]



Sec. 225.139  Presumption of continued control under section 2(g)(3) 
of the Bank Holding Company Act.

    (a) Section 2(g)(3) of the Bank Holding Company Act (the ``Act'') 
establishes a statutory presumption that where certain specified 
relationships exist between a transferor and transferee of shares, the 
transferor (if it is a bank holding company, or a company that would be 
such but for the transfer) continues to own or control indirectly the 
transferred shares.\1\ This presumption arises by operation of law, as 
of the date of the transfer, without the need for any order or 
determination by the Board. Operation of the presumption may be 
terminated only by the issuance of a Board determination, after 
opportunity for hearing, ``that the transferor is not in fact capable of 
controlling the transferee.'' \2\
---------------------------------------------------------------------------

    \1\ The presumption arises where the transferee ``is indebted to the 
transferor, or has one or more officers, directors, trustees, or 
beneficiaries in common with or subject to control by the transferor.''
    \2\ The Board has delegated to its General Counsel the authority to 
issue such determinations, 12 CFR 265.2(b)(1).
---------------------------------------------------------------------------

    (b) The purpose of section 2(g)(3) is to provide the Board an 
opportunity to assess the effectiveness of divestitures in certain 
situations in which there may be a risk that the divestiture will not 
result in the complete termination of a control relationship. By 
presuming control to continue as a matter of law, section 2(g)(3) 
operates to allow the effectiveness of the divestiture to be assessed 
before the divesting company is permitted to act on the assumption that 
the divestiture is complete. Thus, for example, if a holding company 
divests its banking interest under circumstances where the presumption 
of continued control arises, the divesting company must continue to 
consider itself bound by the Act until an appropriate order is entered 
by the Board dispelling the presumption. Section 2(g)(3) does not 
establish a substantive rule that invalidates transfers to which it 
applies, and in a great many cases the Board has acted favorably on 
applications to have the presumption dispelled. It merely provides a 
procedural opportunity for Board consideration of the effect of such 
transfers in advance of their being deemed effective. Whether or not the 
statutory presumption arises, the substantive test for assessing the 
effectiveness of a divestiture is the same--that is, the Board must be 
assured that all control relationships between the transferor and the 
transferred property have been terminated and will not be 
reestablished.\3\
---------------------------------------------------------------------------

    \3\ It should be noted, however, that the Board will require 
termination of any interlocking management relationships between the 
divesting company and the transferee or the divested company as a 
precondition of finding that a divestiture is complete. Similarly, the 
retention of an economic interest in the divested company that would 
create an incentive for the divesting company to attempt to influence 
the management of the divested company will preclude a finding that the 
divestiture is complete. (See the Board's Order in the matter of 
``International Bank'', 1977 Federal Reserve Bulletin 1106, 1113.)

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[[Page 178]]

    (c) In the course of administering section 2(g)(3) the Board has had 
several occasions to consider the scope of that section. In addition, 
questions have been raised by and with the Board's staff as to coverage 
of the section. Accordingly, the Board believes it would be useful to 
set forth the following interpretations of section 2(g)(3):
    (1) The terms transferor and transferee, as used in section 2(g)(3), 
include parents and subsidiaries of each. Thus, for example, where a 
transferee is indebted to a subsidiary of the transferor, or where a 
specified interlocking relationship exists between the transferor or 
transferee and a subsidiary of the other (or between subsidiaries of 
each), the presumption arises. Similarly, if a parent of the transferee 
is indebted to a parent of the transferor, the presumption arises. The 
presumption of continued control also arises where an interlock or debt 
relationship is retained between the divesting company and the company 
being divested, since the divested company will be or may be viewed as a 
subsidiary of the transferee or group of transferees.
    (2) The terms officers, directors, and trustees, as used in section 
2(g)(3), include persons performing functions normally associated with 
such positions (including general partners in a partnership and limited 
partners having a right to participate in the management of the affairs 
of the partnership) as well as persons holding such positions in an 
advisory or honorary capacity. The presumption arises not only where the 
transferee or transferred company has an officer, director or trustee in 
common with the transferor, but where the transferee himself holds such 
a position with the transferor. \4\ It should be noted that where a 
transfer takes the form of a pro-rata distribution, or spin-off, of 
shares to a company's shareholders, officers and directors of the 
transferor company are likely to receive a portion of such shares. The 
presumption of continued control would, of course, attach to any shares 
transferred to officers and directors of the divesting company, whether 
by spinoff or outright sale. However, the presumption will be of legal 
significance--and will thus require an application under section 
2(g)(3)--only where the total number of shares subject to the 
presumption exceeds one of the applicable thresholds in the Act. For 
example, where officers and directors of a one-bank holding company 
receive in the aggregate 25 percent or more of the stock of a bank 
subsidiary being divested by the holding company, the holding company 
would be presumed to continue to control the divested bank. In such a 
case it would be necessary for the divesting company to demonstrate that 
it no longer controls either the divested bank or the officer/director 
transferees. However, if officers and directors were to receive in the 
aggregate less than 25 percent of the bank's stock (and no other shares 
were subject to the presumption), section 2(g)(3) would not have the 
legal effect of presuming continued control of the bank.\5\ In the case 
of a divestiture of nonbank shares, an application under section 2(g)(3) 
would be required whenever officers and directors of the divesting 
company received in the aggregate more than 5 percent of the shares of 
the company being divested.
---------------------------------------------------------------------------

    \4\ It has been suggested that the words in common with in section 
2(g)(3) evidence an intent to make the presumption applicable only where 
the transferee is a company having an interlock with the transferor. 
Such an interpretation would, in the Board's view, create an unwarranted 
gap in the coverage of section 2(g)(3). Furthermore, because the 
presumption clearly arises where the transferee is an individual who is 
indebted to the transferor such an interpretation would result in an 
illogical internal inconsistency in the statute.
    \5\ Of course, the fact that section 2(g)(3) would not operate to 
presume continued control would not necessarily mean that control had in 
fact been terminated if control could be exercised through other means.
---------------------------------------------------------------------------

    (3) Although section 2(g)(3) refers to transfers of shares it is 
not, in the Board's view, limited to disposition of corporate stock. 
General or limited partnership interests, for example, are included 
within the term shares. Furthermore, the transfer of all or 
substantially all of the assets of a company, or the transfer of such a 
significant volume of assets that the transfer may in effect constitute 
the disposition

[[Page 179]]

of a separate activity of the company, is deemed by the Board to involve 
a transfer of shares of that company.
    (4) The term indebtedness giving rise to the presumption of 
continued control under section 2(g)(3) of the Act is not limited to 
debt incurred in connection with the transfer; it includes any debt 
outstanding at the time of transfer from the transferee to the 
transferor or its subsidiaries. However, the Board believes that not 
every kind of indebtedness was within the contemplation of the Congress 
when section 2(g)(3) was adopted. Routine business credit of limited 
amounts and loans for personal or household purposes are generally not 
the kinds of indebtedness that, standing alone, support a presumption 
that the creditor is able to control the debtor. Accordingly, the Board 
does not regard the presumption of section 2(g)(3) as applicable to the 
following categories of credit, provided the extensions of credit are 
not secured by the transferred property and are made in the ordinary 
course of business of the transferor (or its subsidiary) that is 
regularly engaged in the business of extending credit:
    (i) Consumer credit extended for personal or household use to an 
individual transferee; (ii) student loans made for the education of the 
individual transferee or a spouse or child of the transferee; (iii) a 
home mortgage loan made to an individual transferee for the purchase of 
a residence for the individual's personal use and secured by the 
residence; and (iv) loans made to companies (as defined in section 2(b) 
of the Act) in an aggregate amount not exceeding ten per cent of the 
total purchase price (or if not sold, the fair market value) of the 
transferred property. The amounts and terms of the preceding categories 
of credit should not differ substantially from similar credit extended 
in comparable circumstances to others who are not transferees. It should 
be understood that, while the statutory presumption in situations 
involving these categories of credit may not apply, the Board is not 
precluded in any case from examining the facts of a particular transfer 
and finding that the divestiture of control was ineffective based on the 
facts of record.
    (d) Section 2(g)(3) provides that a Board determination that a 
transferor is not in fact capable of controlling a transferee shall be 
made after opportunity for hearing. It has been the Board's routine 
practice since 1966 to publish notice in the Federal Register of 
applications filed under section 2(g)(3) and to offer interested parties 
an opportunity for a hearing. Virtually without exception no comments 
have been submitted on such applications by parties other than the 
applicant and, with the exception of one case in which the request was 
later withdrawn, no hearings have been requested in such cases. Because 
the Board believes that the hearing provision in section 2(g)(3) was 
intended as a protection for applicants who are seeking to have the 
presumption overcome by a Board order, a hearing would not be of use 
where an application is to be granted. In light of the experience 
indicating that the publication of Federal Register notice of such 
applications has not served a useful purpose, the Board has decided to 
alter its procedures in such cases. In the future, Federal Register 
notice of section 2(g)(3) applications will be published only in cases 
in which the Board's General Counsel, acting under delegated authority, 
has determined not to grant such an application and has referred the 
matter to the Board for decision.\6\
---------------------------------------------------------------------------

    \6\ It should be noted that in the event a third party should take 
exception to a Board order under section 2(g)(3) finding that control 
has been terminated, any rights such party might have would not be 
prejudiced by the order. If such party brought facts to the Board's 
attention indicating that control had not been terminated the Board 
would have ample authority to revoke its order and take necessary 
remedial action.
    Orders issued under section 2(g)(3) are published in the Federal 
Reserve ``Bulletin.''

---------------------------------------------------------------------------
(12 U.S.C. 1841, 1844)

[43 FR 6214, Feb. 14, 1978; 43 FR 15147, Apr. 11, 1978; 43 FR 15321, 
Apr. 12, 1978, as amended at 45 FR 8280, Feb. 7, 1980; 45 FR 11125, Feb. 
20, 1980]



Sec. 225.140  Disposition of property acquired in satisfaction of debts 
previously contracted.

    (a) The Board recently considered the permissibility, under section 
4 of the

[[Page 180]]

Bank Holding Company Act, of a subsidiary of a bank holding company 
acquiring and holding assets acquired in satisfaction of a debt 
previously contracted in good faith (a ``dpc'' acquisition). In the 
situation presented, a lending subsidiary of a bank holding company made 
a ``dpc'' acquisition of assets and transferred them to a wholly-owned 
subsidiary of the bank holding company for the purpose of effecting an 
orderly divestiture. The question presented was whether such ``dpc'' 
assets could be held indefinitely by a bank holding company subsidiary 
as incidental to its permissible lending activity.
    (b) While the Board believes that ``dpc'' acquisitions may be 
regarded as normal, necessary and incidental to the business of lending, 
the Board does not believe that the holding of assets acquired ``dpc'' 
without any time restrictions is appropriate from the standpoint of 
prudent banking and in light of the prohibitions in section 4 of the Act 
against engaging in nonbank activities. If a nonbanking subsidiary of a 
bank holding company were permitted, either directly or through a 
subsidiary, to hold ``dpc'' assets of substantial amount over an 
extended period of time, the holding of such property could result in an 
unsafe or unsound banking practice or in the holding company engaging in 
an impermissible activity in connection with the assets, rather than 
liquidating them.
    (c) The Board notes that section 4(c)(2) of the Bank Holding Company 
Act provides an exemption from the prohibitions of section 4 of the Act 
for bank holding company subsidiaries to acquire shares ``dpc''. It also 
provides that such ``dpc'' shares may be held for a period of two years, 
subject to the Board's authority to grant three one-year extensions up 
to a maximum of five years.\1\ Viewed in light of the Congressional 
policy evidenced by section 4(c)(2), the Board believes that a lending 
subsidiary of a bank holding company or the holding company itself, 
should be permitted, as an incident to permissible lending activities, 
to make acquisitions of ``dpc'' assets. Consistent with the principles 
underlying the provisions of section 4(c)(2) of the Act and as a matter 
of prudent banking practice, such assets may be held for no longer than 
five years from the date of acquisition. Within the divestiture period 
it is expected that the company will make good faith efforts to dispose 
of ``dpc'' shares or assets at the earliest practicable date. While no 
specific authorization is necessary to hold such assets for the five-
year period, after two years from the date of acquisition of such 
assets, the holding company should report annually on its efforts to 
accomplish divestiture to its Reserve Bank. The Reserve Bank will 
monitor the efforts of the company to effect an orderly divestiture, and 
may order divestiture before the end of the five-year period if 
supervisory concerns warrant such action.
---------------------------------------------------------------------------

    \1\ The Board notes that where the dpc shares or other similar 
interests represent less than 5 percent of the total of such interests 
outstanding, they may be retained on the basis of section 4(c)(6), even 
if originally acquired dpc.
---------------------------------------------------------------------------

    (d) The Board recognizes that there are instances where a company 
may encounter particular difficulty in attempting to effect an orderly 
divestiture of ``dpc'' real estate holdings within the divestiture 
period, notwithstanding its persistent good faith efforts to dispose of 
such property. In the Depository Institutions Deregulation and Monetary 
Control Act of 1980, (Pub. L. 96-221) Congress, recognizing that real 
estate possesses unusual characteristics, amended the National Banking 
Act to permit national banks to hold real estate for five years and for 
an additional five-year period subject to certain conditions. Consistent 
with the policy underlying the recent Congressional enactment, and as a 
matter of supervisory policy, a bank holding company may be permitted to 
hold real estate acquired ``dpc'' beyond the initial five-year period 
provided that the value of the real estate on the books of the company 
has been written down to fair market value, the carrying costs are not 
significant in relation to the overall financial position of the 
company, and the company has made good faith efforts to effect 
divestiture. Companies holding real estate for this extended period are 
expected to make active efforts to dispose of it, and should keep the 
Reserve Bank advised

[[Page 181]]

on a regular basis concerning their ongoing efforts. Fair market value 
should be derived from appraisals, comparable sales or some other 
reasonable method. In any case, ``dpc'' real estate would not be 
permitted to be held beyond 10 years from the date of its acquisition.
    (e) With respect to the transfer by a subsidiary of other ``dpc'' 
shares or assets to another company in the holding company system, 
including a section 4(c)(1)(D) liquidating subsidiary, or to the holding 
company itself, such transfers would not alter the original divestiture 
period applicable to such shares or assets at the time of their 
acquisition. Moreover, to ensure that assets are not carried at inflated 
values for extended periods of time, the Board expects, in the case of 
all such intracompany transfers, that the shares or assets will be 
transferred at a value no greater than the fair market value at the time 
of transfer and that the transfer will be made in a normal arms-length 
transaction.
    (f) With regard to ``dpc'' assets acquired by a banking subsidiary 
of a holding company, so long as the assets continue to be held by the 
bank itself, the Board will regard them as being solely within the 
regulatory authority of the primary supervisor of the bank.

(12 U.S.C. 1843 (c)(1)(d), (c)(2), (c)(8), and 1844 (b); 12 U.S.C. 1818)

[45 FR 49905, July 28, 1980]



Sec. 225.141  Operations subsidiaries of a bank holding company.

    In orders approving the retention by a bank holding company of a 
4(c)(8) subsidiary, the Board has stated that it would permit, without 
any specific regulatory approval, the formation of a wholly owned 
subsidiary of an approved 4(c)(8) company to engage in activities that 
such a company could itself engage in directly through a division or 
department. (Northwestern Financial Corporation, 65 Federal Reserve 
Bulletin 566 (1979).) Section 4(a)(2) of the Act provides generally that 
a bank holding company may engage directly in the business of managing 
and controlling banks and permissible nonbank activities, and in 
furnishing services directly to its subsidiaries. Even though section 4 
of the Act generally prohibits the acquisition of shares of nonbanking 
organizations, the Board does not believe that such prohibition should 
apply to the formation by a holding company of a wholly-owned subsidiary 
to engage in activities that it could engage in directly. Accordingly, 
as a general matter, the Board will permit without any regulatory 
approval a bank holding company to form a wholly-owned subsidiary to 
perform servicing activities for subsidiaries that the holding company 
itself could perform directly or through a department or a division 
under section 4(a)(2) of the Act. The Board believes that permitting 
this type of subsidiary is not inconsistent with the nonbanking 
prohibitions of section 4 of the Act, and is consistent with the 
authority in section 4(c)(1)(C) of the Act, which permits a bank holding 
company, without regulatory approval, to form a subsidiary to perform 
services for its banking subsidiaries. The Board notes, however, that a 
servicing subsidiary established by a bank holding company in reliance 
on this interpretation will be an affiliate of the subsidiary bank of 
the holding company for the purposes of the lending restrictions of 
section 23A of the Federal Reserve Act. (12 U.S.C. 371c)

(12 U.S.C. 1843(a)(2) and 1844(b))

[45 FR 54326, July 15, 1980]



Sec. 225.142  Statement of policy concerning bank holding companies 

engaging in futures, forward and options contracts on U.S. Government 
and agency securities 
          and money market instruments.

    (a) Purpose of financial contract positions. In supervising the 
activities of bank holding companies, the Board has adopted and 
continues to follow the principle that bank holding companies should 
serve as a source of strength for their subsidiary banks. Accordingly, 
the Board believes that any positions that bank holding companies or 
their nonbank subsidiaries take in financial contracts should reduce 
risk exposure, that is, not be speculative.
    (b) Establishment of prudent written policies, appropriate 
limitations and internal controls and audit programs. If the parent 
organization or nonbank subsidiary is taking or intends to take 
positions in financial contracts, that

[[Page 182]]

company's board of directors should approve prudent written policies and 
establish appropriate limitations to insure that financial contract 
activities are performed in a safe and sound manner with levels of 
activity reasonably related to the organization's business needs and 
capacity to fulfill obligations. In addition, internal controls and 
internal audit programs to monitor such activity should be established. 
The board of directors, a duly authorized committee thereof or the 
internal auditors should review periodically (at least monthly) all 
financial contract positions to insure conformity with such policies and 
limits. In order to determine the company's exposure, all open positions 
should be reviewed and market values determined at least monthly, or 
more often, depending on volume and magnitude of positions.
    (c) Formulating policies and recording financial contracts. In 
formulating its policies and procedures, the parent holding company may 
consider the interest rate exposure of its nonbank subsidiaries, but not 
that of its bank subsidiaries. As a matter of policy, the Board believes 
that any financial contracts executed to reduce the interest rate 
exposure of a bank affiliate of a holding company should be reflected on 
the books and records of the bank affiliate (to the extent required by 
the bank policy statements), rather than on the books and records of the 
parent company. If a bank has an interest rate exposure that management 
believes requires hedging with financial contracts, the bank should be 
the direct beneficiary of any effort to reduce that exposure. The Board 
also believes that final responsibility for financial contract 
transactions for the account of each affiliated bank should reside with 
the management of that bank.
    (d) Accounting. The joint bank policy statements of March 12, 1980 
include accounting guidelines for banks that engage in financial 
contract activities. Since the Financial Accounting Standards Board is 
presently considering accounting standards for contract activities, no 
specific accounting requirements for financial contracts entered into by 
parent bank holding companies and nonbank subsidiaries are being 
mandated at this time. The Board expects to review further developments 
in this area.
    (e) Board to monitor bank holding company transactions in financial 
contracts. The Board intends to monitor closely bank holding company 
transactions in financial contracts to ensure that any such activity is 
consistent with maintaining a safe and sound banking system. In any 
cases where bank holding companies are found to be engaging in 
speculative practices, the Board is prepared to institute appropriate 
action under the Financial Institutions Supervisory Act of 1966, as 
amended.
    (f) Federal Reserve Bank notification. Bank holding companies should 
furnish written notification to their District Federal Reserve Bank 
within 10 days after financial contract activities are begun by the 
parent or a nonbank subsidiary. Holding companies in which the parent or 
a nonbank subsidiary currently engage in financial contract activity 
should furnish notice by March 31, 1983.

(Secs. 5(b) and 8 of the Bank Holding Company Act (12 U.S.C. 1844 and 
1847); sec. 8(b) of the Financial Institutions Supervisory Act (12 
U.S.C. 1818(b))

[48 FR 7720, Feb. 24, 1983]



Sec. 225.143  Policy statement on nonvoting equity investments by bank 
holding companies.

    (a) Introduction. (1) In recent months, a number of bank holding 
companies have made substantial equity investments in a bank or bank 
holding company (the ``acquiree'') located in states other than the home 
state of the investing company through acquisition of preferred stock or 
nonvoting common shares of the acquiree. Because of the evident interest 
in these types of investments and because they raise substantial 
questions under the Bank Holding Company Act (the ``Act''), the Board 
believes it is appropriate to provide guidance regarding the consistency 
of such arrangements with the Act.
    (2) This statement sets out the Board's concerns with these 
investments, the considerations the Board will take into account in 
determining whether the investments are consistent with the Act, and the 
general scope of

[[Page 183]]

arrangements to be avoided by bank holding companies. The Board 
recognizes that the complexity of legitimate business arrangements 
precludes rigid rules designed to cover all situations and that 
decisions regarding the existence or absence of control in any 
particular case must take into account the effect of the combination of 
provisions and covenants in the agreement as a whole and the particular 
facts and circumstances of each case. Nevertheless, the Board believes 
that the factors outlined in this statement provide a framework for 
guiding bank holding companies in complying with the requirements of the 
Act.
    (b) Statutory and regulatory provisions. (1) Under section 3(a) of 
the Act, a bank holding company may not acquire direct or indirect 
ownership or control of more than 5 per cent of the voting shares of a 
bank without the Board's prior approval. (12 U.S.C. 1842(a)(3)). In 
addition, this section of the Act provides that a bank holding company 
may not, without the Board's prior approval, acquire control of a bank: 
That is, in the words of the statute, ``for any action to be taken that 
causes a bank to become a subsidiary of a bank holding company.'' (12 
U.S.C. 1842(a)(2)). Under the Act, a bank is a subsidiary of a bank 
holding company if:
    (i) The company directly or indirectly owns, controls, or holds with 
power to vote 25 per cent or more of the voting shares of the bank;
    (ii) The company controls in any manner the election of a majority 
of the board of directors of the bank; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company has the power, directly or indirectly, to 
exercise a controlling influence over the management or policies of the 
bank. (12 U.S.C. 1841(d)).
    (2) In intrastate situations, the Board may approve bank holding 
company acquisitions of additional banking subsidiaries. However, where 
the acquiree is located outside the home state of the investing bank 
holding company, section 3(d) of the Act prevents the Board from 
approving any application that will permit a bank holding company to 
``acquire, directly or indirectly, any voting shares of, interest in, or 
all or substantially all of the assets of any additional bank.'' (12 
U.S.C. 1842(d)(1)).
    (c) Review of agreements. (1) In apparent expectation of statutory 
changes that might make interstate banking permissible, bank holding 
companies have sought to make substantial equity investments in other 
bank holding companies across state lines, but without obtaining more 
than 5 per cent of the voting shares or control of the acquiree. These 
investments involve a combination of the following arrangements:
    (i) Options on, warrants for, or rights to convert nonvoting shares 
into substantial blocks of voting securities of the acquiree bank 
holding company or its subsidiary bank(s);
    (ii) Merger or asset acquisition agreements with the out-of-state 
bank or bank holding company that are to be consummated in the event 
interstate banking is permitted;
    (iii) Provisions that limit or restrict major policies, operations 
or decisions of the acquiree; and
    (iv) Provisions that make acquisition of the acquiree or its 
subsidiary bank(s) by a third party either impossible or economically 
impracticable.

The various warrants, options, and rights are not exercisable by the 
investing bank holding company unless interstate banking is permitted, 
but may be transferred by the investor either immediately or after the 
passage of a period of time or upon the occurrence of certain events.
    (2) After a careful review of a number of these agreements, the 
Board believes that investments in nonvoting stock, absent other 
arrangements, can be consistent with the Act. Some of the agreements 
reviewed appear consistent with the Act since they are limited to 
investments of relatively moderate size in nonvoting equity that may 
become voting equity only if interstate banking is authorized.
    (3) However, other agreements reviewed by the Board raise 
substantial problems of consistency with the control provisions of the 
Act because the investors, uncertain whether or when interstate banking 
may be authorized, have evidently sought to assure the soundness of 
their investments, prevent takeovers by others, and allow for

[[Page 184]]

sale of their options, warrants, or rights to a person of the investor's 
choice in the event a third party obtains control of the acquiree or the 
investor otherwise becomes dissatisfied with its investment. Since the 
Act precludes the investors from protecting their investments through 
ownership or use of voting shares or other exercise of control, the 
investors have substituted contractual agreements for rights normally 
achieved through voting shares.
    (4) For example, various covenants in certain of the agreements seek 
to assure the continuing soundness of the investment by substantially 
limiting the discretion of the acquiree's management over major policies 
and decisions, including restrictions on entering into new banking 
activities without the investor's approval and requirements for 
extensive consultations with the investor on financial matters. By their 
terms, these covenants suggest control by the investing company over the 
management and policies of the acquiree.
    (5) Similarly, certain of the agreements deprive the acquiree bank 
holding company, by covenant or because of an option, of the right to 
sell, transfer, or encumber a majority or all of the voting shares of 
its subsidiary bank(s) with the aim of maintaining the integrity of the 
investment and preventing takeovers by others. These long-term 
restrictions on voting shares fall within the presumption in the Board's 
Regulation Y that attributes control of shares to any company that 
enters into any agreement placing long-term restrictions on the rights 
of a holder of voting securities. (12 CFR 225.2(b)(4)).
    (6) Finally, investors wish to reserve the right to sell their 
options, warrants or rights to a person of their choice to prevent being 
locked into what may become an unwanted investment. The Board has taken 
the position that the ability to control the ultimate disposition of 
voting shares to a person of the investor's choice and to secure the 
economic benefits therefrom indicates control of the shares under the 
Act.\1\ Moreover, the ability to transfer rights to large blocks of 
voting shares, even if nonvoting in the hands of the investing company, 
may result in such a substantial position of leverage over the 
management of the acquiree as to involve a structure that inevitably 
results in control prohibited by the Act.
---------------------------------------------------------------------------

    \1\ See Board letter dated March 18, 1982, to C. A. Cavendes, 
Sociedad Financiera.
---------------------------------------------------------------------------

    (d) Provisions that avoid control. (1) In the context of any 
particular agreement, provisions of the type described above may be 
acceptable if combined with other provisions that serve to preclude 
control. The Board believes that such agreements will not be consistent 
with the Act unless provisions are included that will preserve 
management's discretion over the policies and decisions of the acquiree 
and avoid control of voting shares.
    (2) As a first step towards avoiding control, covenants in any 
agreement should leave management free to conduct banking and 
permissible nonbanking activities. Another step to avoid control is the 
right of the acquiree to ``call'' the equity investment and options or 
warrants to assure that covenants that may become inhibiting can be 
avoided by the acquiree. This right makes such investments or agreements 
more like a loan in which the borrower has a right to escape covenants 
and avoid the lender's influence by prepaying the loan.
    (3) A measure to avoid problems of control arising through the 
investor's control over the ultimate disposition of rights to 
substantial amounts of voting shares of the acquiree would be a 
provision granting the acquiree a right of first refusal before 
warrants, options or other rights may be sold and requiring a public and 
dispersed distribution of these rights if the right of first refusal is 
not exercised.
    (4) In this connection, the Board believes that agreements that 
involve rights to less than 25 percent of the voting shares, with a 
requirement for a dispersed public distribution in the event of sale, 
have a much greater prospect of achieving consistency with the Act than 
agreements involving a greater percentage. This guideline is drawn by 
analogy from the provision in the Act that ownership of 25 percent or 
more of the voting securities of a bank constitutes control of the bank.

[[Page 185]]

    (5) The Board expects that one effect of this guideline would be to 
hold down the size of the nonvoting equity investment by the investing 
company relative to the acquiree's total equity, thus avoiding the 
potential for control because the investor holds a very large proportion 
of the acquiree's total equity. Observance of the 25 percent guideline 
will also make provisions in agreements providing for a right of first 
refusal or a public and widely dispersed offering of rights to the 
acquiree's shares more practical and realistic.
    (6) Finally, certain arrangements should clearly be avoided 
regardless of other provisions in the agreement that are designed to 
avoid control. These are:
    (i) Agreements that enable the investing bank holding company (or 
its designee) to direct in any manner the voting of more than 5 per cent 
of the voting shares of the acquiree;
    (ii) Agreements whereby the investing company has the right to 
direct the acquiree's use of the proceeds of an equity investment by the 
investing company to effect certain actions, such as the purchase and 
redemption of the acquiree's voting shares; and
    (iii) The acquisition of more than 5 per cent of the voting shares 
of the acquiree that ``simultaneously'' with their acquisition by the 
investing company become nonvoting shares, remain nonvoting shares while 
held by the investor, and revert to voting shares when transferred to a 
third party.
    (e) Review by the Board. This statement does not constitute the 
exclusive scope of the Board's concerns, nor are the considerations with 
respect to control outlined in this statement an exhaustive catalog of 
permissible or impermissible arrangements. The Board has instructed its 
staff to review agreements of the kind discussed in this statement and 
to bring to the Board's attention those that raise problems of 
consistency with the Act. In this regard, companies are requested to 
notify the Board of the terms of such proposed merger or asset 
acquisition agreements or nonvoting equity investments prior to their 
execution or consummation.

[47 FR 30966, July 16, 1982]



Sec. 225.145  Limitations established by the Competitive Equality 
Banking Act of 1987 on the activities and growth of nonbank banks.

    (a) Introduction. Effective August 10, 1987, the Competitive 
Equality Banking Act of 1987 (``CEBA'') redefined the term ``bank'' in 
the Bank Holding Company Act (``BHC Act'' or ``Act'') to include any 
bank the deposits of which are insured by the Federal Deposit Insurance 
Corporation as well as any other institution that accepts demand or 
checkable deposit accounts and is engaged in the business of making 
commercial loans. 12 U.S.C. 1841(c). CEBA also contained a grandfather 
provision for certain companies affected by this redefinition. CEBA 
amended section 4 of the BHC Act to permit a company that on March 5, 
1987, controlled a nonbank bank (an institution that became a bank as a 
result of enactment of CEBA) and that was not a bank holding company on 
August 9, 1987, to retain its nonbank bank and not be treated as a bank 
holding company for purposes of the BHC Act if the company and its 
subsidiary nonbank bank observe certain limitations imposed by CEBA.\1\ 
Certain of these limitations are codified in section 4(f)(3) of the BHC 
Act and generally restrict nonbank banks from commencing new activities 
or certain cross-marketing activities with affiliates after March 5, 
1987, or permitting overdrafts for affiliates or incurring overdrafts on 
behalf of affiliates at a Federal Reserve Bank. 12 U.S.C. 1843(f)(3).\2\ 
The Board's views regarding

[[Page 186]]

the meaning and scope of these limitations are set forth below and in 
provisions of the Board's Regulation Y (12 CFR 225.52).
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 1843(f). Such a company is treated as a bank holding 
company, however, for purposes of the anti-tying provisions in section 
106 of the BHC Act Amendments of 1970 (12 U.S.C. 1971 et seq.) and the 
insider lending limitations of secton 22(h) of the Federal Reserve Act 
(12 U.S.C. 375b). The company is also subject to certain examination and 
enforcement provisions to assure compliance with CEBA.
    \2\ CEBA also prohibits, with certain limited exceptions, a company 
controlling a grandfathered nonbank bank from acquiring control of an 
additional bank or thrift institution or acquiring, directly or 
indirectly after March 5, 1987, more than 5 percent of the assets or 
shares of a bank or thrift institution. 12 U.S.C. 1843(f)(2).
---------------------------------------------------------------------------

    (b) Congressional findings. (1) At the outset, the Board notes that 
the scope and application of the Act's limitations on nonbank banks must 
be guided by the Congressional findings set out in section 4(f)(3) of 
the BHC Act. Congress was aware that these nonbank banks had been 
acquired by companies that engage in a wide range of nonbanking 
activities, such as retailing and general securities activities that are 
forbidden to bank holding companies under section 4 of the BHC Act. In 
section 4(f)(3), Congress found that nonbank banks controlled by 
grandfathered nonbanking companies may, because of their relationships 
with affiliates, be involved in conflicts of interest, concentration of 
resources, or other effects adverse to bank safety and soundness. 
Congress also found that nonbank banks may be able to compete unfairly 
against banks controlled by bank holding companies by combining banking 
services with financial services not permissible for bank holding 
companies. Section 4(f)(3) states that the purpose of the nonbank bank 
limitations is to minimize any such potential adverse effects or 
inequities by restricting the activities of nonbank banks until further 
Congressional action in the area of bank powers could be undertaken. 
Similarly, the Senate Report accompanying CEBA states that the 
restrictions CEBA places on nonbank banks ``will help prevent existing 
nonbank banks from changing their basic character * * * while Congress 
considers proposals for comprehensive legislation; from drastically 
eroding the separation of banking and commerce; and from increasing the 
potential for unfair competition, conflicts of interest, undue 
concentration of resources, and other adverse effects.'' S. Rep. No. 
100-19, 100th Cong., 1st Sess. 12 (1987). See also H. Rep. No. 100-261, 
100th Cong., 1st Sess. 124 (1987) (the ``Conference Report'').
    (2) Thus, Congress explicitly recognized in the statute itself that 
nonbanking companies controlling grandfathered nonbank banks, which 
include the many of the nation's largest commercial and financial 
organizations, were being accorded a significant competitive advantage 
that could not be matched by bank holding companies because of the 
general prohibition against nonbanking activities in section 4 of the 
BHC Act. Congress recognized that this inequality in regulatory approach 
could inflict serious competitive harm on regulated bank holding 
companies as the grandfathered entities sought to exploit potential 
synergies between banking and commercial products and services. See 
Conference Report at 125-126. The basic and stated purpose of the 
restrictions on grandfathered nonbank banks is to minimize these 
potential anticompetitive effects.
    (3) The Board believes that the specific CEBA limitations should be 
implemented in light of these Congressional findings and the legislative 
intent reflected in the plain meaning of the terms used in the statute. 
In those instances when the language of the statute did not provide 
clear guidance, legislative materials and the Congressional intent 
manifested in the overall statutory structure were considered. The Board 
also notes that prior precedent requires that grandfather exceptions in 
the BHC Act, such as the nonbank bank limitations and particularly the 
exceptions thereto, are to be interpreted narrowly in order to ensure 
the proper implementation of Congressional intent.\3\
---------------------------------------------------------------------------

    \3\ E.g., Maryland National Corporation, 73 Federal Reserve Bulletin 
310, 313-314 (1987). Cf., Spokane & Inland Empire Railroad Co. v. United 
States, 241 U.S. 344, 350 (1915).
---------------------------------------------------------------------------

    (c) Activity limitation--(1) Scope of activity. (i) The first 
limitation established under section 4(f)(3) provides that a nonbank 
bank shall not ``engage in any activity in which such bank was not 
lawfully engaged as of March 5, 1987.'' The term activity as used in 
this provision of CEBA is not defined. The structure and placement of 
the CEBA activity restriction within section 4 of the BHC Act and its 
legislative history do, however, provide direction as to certain 
transactions that Congress intended to treat as separate activities, 
thereby providing guidance as to the meaning Congress intended to 
ascribe

[[Page 187]]

to the term generally. First, it is clear that the term activity was not 
meant to refer to banking as a single activity. To the contrary, the 
term must be viewed as distinguishing between deposit taking and lending 
activities and treating demand deposit-taking as a separate activity 
from general deposit-taking and commercial lending as separate from the 
general lending category.
    (ii) Under the activity limitation, a nonbank bank may engage only 
in activities in which it was ``lawfully engaged'' as of March 5, 1987. 
As of that date, a nonbank bank could not have been engaged in both 
demand deposit-taking and commercial lending activity without placing it 
and its parent holding company in violation of the BHC Act. Thus, under 
the activity limitations, a nonbank bank could not after March 5, 1987, 
commence the demand deposit-taking or commercial lending activity that 
it did not conduct as of March 5, 1987. The debates and Senate and 
Conference Reports on CEBA confirm that Congress intended the activity 
limitation to prevent a grandfathered nonbank bank from converting 
itself into a full-service bank by both offering demand deposits and 
engaging in the business of making commercial loans.\4\ Thus, these 
types of transactions provide a clear guide as to the type of banking 
transactions that would constitute activities under CEBA and the degree 
of specificity intended by Congress in interpreting that term.
---------------------------------------------------------------------------

    \4\ Conference Report at 124-25; S. Rep. No. 100-19 at 12, 32; H. 
Rep. No. 99-175, 99th Cong., 1st Sess. 3 (1985) (``the activities 
limitation is to prevent an institution engaged in a limited range of 
functions from expanding into new areas and becoming, in essence, a 
full-service bank''); 133 Cong. Rec. S4054 (daily ed. March 27, 1987); 
(Comments of Senator Proxmire).
---------------------------------------------------------------------------

    (iii) It is also clear that the activity limitation was not intended 
simply to prevent a nonbank bank from both accepting demand deposits and 
making commercial loans; it has a broader scope and purpose. If Congress 
had meant the term to refer to just these two activities, it would have 
used the restriction it used in another section of CEBA dealing with 
nonbank banks owned by bank holding companies which has this result, 
i.e., the nonbank bank could not engage in any activity that would have 
caused it to become a bank under the prior bank definition in the Act. 
See 12 U.S.C. 1843(g)(1)(A). Indeed, an earlier version of CEBA under 
consideration by the Senate Banking Committee contained such a provision 
for nonbank banks owned by commercial holding companies, which was 
deleted in favor of the broader activity limitation actually enacted. 
Committee Print No. 1, (Feb. 17, 1987). In this regard, both the Senate 
Report and Conference Report refer to demand deposit-taking and 
commercial lending as examples of activities that could be affected by 
the activity limitation, not as the sole activities to be limited by the 
provision.\5\
---------------------------------------------------------------------------

    \5\ Conference Report at 124-125; S. Rep. No. 100-19 at 32.
---------------------------------------------------------------------------

    (iv) Finally, additional guidance as to the meaning of the term 
activity is provided by the statutory context in which the term appears. 
The activity limitation is contained in section 4 of the BHC Act, which 
regulates the investments and activities of bank holding companies and 
their nonbank subsidiaries. The Board believes it reasonable to conclude 
that by placing the CEBA activity limitation in section 4 of the BHC 
Act, Congress meant that Board and judicial decisions regarding the 
meaning of the term activity in that section be looked to for guidance. 
This is particularly appropriate given the fact that grandfathered 
nonbank banks, whether owned by bank holding companies or unregulated 
holding companies, were treated as nonbank companies and not banks 
before enactment of CEBA.
    (v) This interpretation of the term activity draws support from 
comments by Senator Proxmire during the Senate's consideration of the 
provision that the term was not intended to apply ``on a product-by-
product, customer-by-customer basis.'' 133 Cong. Rec. S4054-5 (daily ed. 
March 27, 1987). This is the same manner in which the Board has 
interpreted the term activity in the nonbanking provision of section 4 
as referring to generic categories

[[Page 188]]

of activities, not to discrete products and services.
    (vi) Accordingly, consistent with the terms and purposes of the 
legislation and the Congressional intent to minimize unfair competition 
and the other adverse effects set out in the CEBA findings, the Board 
concludes that the term activity as used in section 4(f)(3) means any 
line of banking or nonbanking business. This definition does not, 
however, envision a product-by-product approach to the activity 
limitation. The Board believes it would be helpful to describe the 
application of the activity limitation in the context of the following 
major categories of activities: deposit-taking, lending, trust, and 
other activities engaged in by banks.
    (2) Deposit-taking activities. (i) With respect to deposit-taking, 
the Board believes that the activity limitation in section 4(f)(3) 
generally refers to three types of activity: demand deposit-taking; non-
demand deposit-taking with a third party payment capability; and time 
and savings deposit-taking without third party payment powers. As 
previously discussed, it is clear from the terms and intent of CEBA that 
the activity limitation would prevent, and was designed to prevent, 
nonbank banks that prior to the enactment of CEBA had refrained from 
accepting demand deposits in order to avoid coverage as a bank under the 
BHC Act, from starting to take these deposits after enactment of CEBA 
and thus becoming full-service banks. Accordingly, CEBA requires that 
the taking of demand deposits be treated as a separate activity.
    (ii) The Board also considers nondemand deposits withdrawable by 
check or other similar means for payment to third parties or others to 
constitute a separate line of business for purposes of applying the 
activity limitation. In this regard, the Board has previously recognized 
that this line of businesss constitutes a permissible but separate 
activity under section 4 of the BHC Act. Furthermore, the offering of 
accounts with transaction capability requires different expertise and 
systems than non-transaction deposit-taking and represented a distinct 
new activity that traditionally separated banks from thrift and similar 
institutions.
    (iii) Support for this view may also be found in the House Banking 
Committee report on proposed legislation prior to CEBA that contained a 
similar prohibition on new activities for nonbank banks. In discussing 
the activity limitation, the report recognized a distinction between 
demand deposits and accounts with transaction capability and those 
without transaction capability:

    With respect to deposits, the Committee recognizes that it is 
legitimate for an institution currently involved in offering demand 
deposits or other third party transaction accounts to make use of new 
technologies that are in the process of replacing the existing check-
based, paper payment system. Again, however, the Committee does not 
believe that technology should be used as a lever for an institution 
that was only incidentally involved in the payment system to transform 
itself into a significant offeror of transaction account capability. \6\
---------------------------------------------------------------------------

    \6\ H. Rep. No. 99-175, 99th Cong., 1st Sess. 13 (1985).
---------------------------------------------------------------------------

    (iv) Finally, this distinction between demand and nondemand 
checkable accounts and accounts not subject to withdrawal by check was 
specifically recognized by Congress in the redefinition of the term bank 
in CEBA to include an institution that takes demand deposits or 
``deposits that the depositor may withdraw by check or other means for 
payment to third parties or others'' as well as in various exemptions 
from that definition for trust companies, credit card banks, and certain 
industrial banks. \7\
---------------------------------------------------------------------------

    \7\ See 12 U.S.C. 1841(c)(2) (D), (F), (H), and (I).
---------------------------------------------------------------------------

    (v) Thus, an institution that as of March 5, 1987, offered only time 
and savings accounts that were not withdrawable by check for payment to 
third parties could not thereafter begin offering accounts with 
transaction capability, for example, NOW accounts or other types of 
transaction accounts.
    (3) Lending. As noted, the CEBA activity limitation does not treat 
lending as a single activity; it clearly distinguishes between 
commercial and other types of lending. This distinction is also 
reflected in the definition of bank in the BHC Act in effect both prior 
to

[[Page 189]]

and after enactment of CEBA as well as in various of the exceptions from 
this definition. In addition, commercial lending is a specialized form 
of lending involving different techniques and analysis from other types 
of lending. Based upon these factors, the Board would view commercial 
lending as a separate and distinct activity for purposes of the activity 
limitation in section 4(f)(3). The Board's decisions under section 4 of 
the BHC Act have not generally differentiated between types of 
commercial lending, and thus the Board would view commercial lending as 
a single activity for purposes of CEBA. Thus, a nonbank bank that made 
commercial loans as of March 5, 1987, could make any type of commercial 
loan thereafter.
    (i) Commercial lending. For purposes of the activity limitation, a 
commercial loan is defined in accordance with the Supreme Court's 
decision in Board of Governors v. Dimension Financial Corporation, 474 
U.S. 361 (1986), as a direct loan to a business customer for the purpose 
of providing funds for that customer's business. In this regard, the 
Board notes that whether a particular transaction is a commercial loan 
must be determined not from the face of the instrument, but from the 
application of the definition of commercial loan in the Dimension 
decision to that transaction. Thus, certain transactions of the type 
mentioned in the Board's ruling at issue in Dimension and in the Senate 
and Conference Reports in the CEBA legislation \8\ would be commercial 
loans if they meet the test for commercial loans established in 
Dimension. Under this test, a commercial loan would not include, for 
example, an open-market investment in a commercial entity that does not 
involve a borrower-lender relationship or negotiation of credit terms, 
such as a money market transaction.
---------------------------------------------------------------------------

    \8\ S. Rep. No. 100-19 at 31; Conference Report at 123.
---------------------------------------------------------------------------

    (ii) Other lending. Based upon the guidance in the Act as to the 
degree of specificity required in applying the activity limitation with 
respect to lending, the Board believes that, in addition to commercial 
lending, there are three other types of lending activities: consumer 
mortgage lending, consumer credit card lending, and other consumer 
lending. Mortgage lending and credit card lending are recognized, 
discrete lines of banking and business activity, involving techniques 
and processes that are different from and more specialized than those 
required for general consumer lending. For example, these activities 
are, in many cases, conducted by specialized institutions, such as 
mortgage companies and credit card institutions, or through separate 
organizational structures within an institution, particularly in the 
case of mortgage lending. Additionally, the Board's decisions under 
section 4 of the Act have recognized mortgage banking and credit card 
lending as separate activities for bank holding companies. The Board's 
Regulation Y reflects this specialization, noting as examples of 
permissible lending activity: consumer finance, credit card and mortgage 
lending. 12 CFR 225.25(b)(1). Finally, CEBA itself recognizes the 
specialized nature of credit card lending by exempting an institution 
specializing in that activity from the bank definition. For purpose of 
the activity limitation, a consumer mortgage loan will mean any loan to 
an individual that is secured by real estate and that is not a 
commercial loan. A credit card loan would be any loan made to an 
individual by means of a credit card that is not a commercial loan.
    (4) Trust activities. Under section 4 of the Act, the Board has 
historically treated trust activities as a single activity and has not 
differentiated the function on the basis of whether the customer was an 
individual or a business. See 12 CFR 225.25(b)(3). Similarly, the trust 
company exemption from the bank definition in CEBA makes no distinction 
between various types of trust activities. Accordingly, the Board would 
view trust activities as a separate activity without additional 
differentiation for purposes of the activity limitation in section 
4(f)(3).
    (5) Other activities. With respect to activities other than the 
various traditional deposit-taking, lending or trust activities, the 
Board believes it appropriate, for the reasons discussed above,

[[Page 190]]

to apply the activity limitation in section 4(f)(3) as the term activity 
generally applies in other provisions of section 4 of the BHC Act. Thus, 
a grandfathered nonbank bank could not, for example, commence after 
March 5, 1987, any of the following activities (unless it was engaged in 
such an activity as of that date): discount securities brokerage, full-
service securities brokerage investment advisory services, underwriting 
or dealing in government securities as permissible for member banks, 
foreign exchange transaction services, real or personal property 
leasing, courier services, data processing for third parties, insurance 
agency activities,\9\ real estate development, real estate brokerage, 
real estate syndication, insurance underwriting, management consulting, 
futures commission merchant, or activities of the general type listed in 
Sec. 225.25(b) of Regulation Y.
---------------------------------------------------------------------------

    \9\ In this area, section 4 of the Act does not treat all insurance 
agency activities as a single activity. Thus, for example, the Act 
treats the sale of credit-related life, accident and health insurance as 
a separate activity from general insurance agency activities. See 12 
U.S.C. 1843(c)(8).
---------------------------------------------------------------------------

    (6) Meaning of engaged in. In order to be engaged in an activity, a 
nonbank bank must demonstrate that it had a program in place to provide 
a particular product or service included within the grandfathered 
activity to a customer and that it was in fact offering the product or 
service to customers as of March 5, 1987. Thus, a nonbank bank is not 
engaged in an activity as of March 5, 1987, if the product or service in 
question was in a planning state as of that date and had not been 
offered or delivered to a customer. Consistent with prior Board 
interpretations of the term activity in the grandfather provisions of 
section 4, the Board does not believe that a company may be engaged in 
an activity on the basis of a single isolated transaction that was not 
part of a program to offer the particular product or to conduct in the 
activity on an ongoing basis. For example, a nonbank bank that held an 
interest in a single real estate project would not thereby be engaged in 
real estate development for purposes of this provision, unless evidence 
was presented indicating the interest was held under a program to 
commence a real estate development business.
    (7) Meaning of as of The Board believes that the grandfather date 
``as of March 5, 1987'' as used throughout section 4(f)(3) should refer 
to activities engaged in on March 5, 1987, or a reasonably short period 
preceding this date not exceeding 13 months. 133 Cong. Rec. S3957 (daily 
ed. March 26, 1987). (Remarks of Senators Dodd and Proxmire). Activities 
that the institution had terminated prior to March 5, 1988, however, 
would not be considered to have been conducted or engaged in as of March 
5. For example, if within 13 months of March 5, 1987, the nonbank bank 
had terminated its commercial lending activity in order to avoid the 
bank definition in the Act, the nonbank bank could not recommence that 
activity after enactment of CEBA.
    (d) Cross-marketing limitation--(1) In general. Section 4(f)(3) also 
limits cross-marketing activities by nonbank banks and their affiliates. 
Under this provision, a nonbank bank may not offer or market a product 
or service of an affiliate unless the product or service may be offered 
by bank holding companies generally under section 4(c)(8) of the BHC 
Act. In addition, a nonbank bank may not permit any of its products or 
services to be offered or marketed by or through a nonbank affiliate 
unless the affiliate engages only in activities permissible for a bank 
holding company under section 4(c)(8). These limitations are subject to 
an exception for products or services that were being so offered or 
marketed as of March 5, 1987, but only in the same manner in which they 
were being offered or marketed as of that date.
    (2) Examples of impermissible cross-marketing. The Conference Report 
illustrates the application of this limitation to the following two 
covered transactions: (i) products and services of an affiliate that 
bank holding companies may not offer under the BHC Act, and (ii) 
products and services of the nonbank bank. In the first case, the 
restrictions would prohibit, for example, a company from marketing life 
insurance or automotive supplies through its affiliate nonbank bank 
because these products are not generally

[[Page 191]]

permissible under the BHC Act. Conference Report at 126. In the second 
case, a nonbank bank may not permit its products or services to be 
offered or marketed through a life insurance affiliate or automobile 
parts retailer because these affiliates engage in activities prohibited 
under the BHC Act. Id.
    (3) Permissible cross-marketing. On the other hand, a nonbank bank 
could offer to its customers consumer loans from an affiliated mortgage 
banking or consumer finance company. These affiliates could likewise 
offer their customers the nonbank bank's products or services provided 
the affiliates engaged only in activities permitted for bank holding 
companies under the closely-related-to-banking standard of section 
4(c)(8) of the BHC Act. If the affiliate is engaged in both permissible 
and impermissible activities within the meaning of section 4(c)(8) of 
the BHC Act, however, the affiliate could not offer or market the 
nonbank bank's products or services.
    (4) Product approach to cross-marketing restriction. (i) Unlike the 
activity restrictions, the cross-marketing restrictions of CEBA apply by 
their terms to individual products and services. Thus, an affiliate of a 
nonbank bank that was engaged in activities that are not permissible for 
bank holding companies and that was marketing a particular product or 
service of a nonbank bank on the grandfather date could continue to 
market that product and, as discussed below, could change the terms and 
conditions of the loan. The nonbank affiliate could not, however, begin 
to offer or market another product or service of the nonbank bank.
    (ii) The Board believes that the term product or service must be 
interpreted in light of its accepted ordinary commercial usage. In some 
instances, commercial usage has identified a group of products so 
closely related that they constitute a product line (e.g., certificates 
of deposit) and differences in versions of the product (e.g., a one-year 
certificate of deposit) simply represent a difference in the terms of 
the product.\10\ This approach is consistent with the treatment in 
CEBA's legislative history of certificates of deposit as a product line 
rather than each particular type of CD as a separate product.\11\
---------------------------------------------------------------------------

    \10\ American Bankers Association, Banking Terminology (1981).
    \11\ During the Senate debates on CEBA, Senator Proxmire in response 
to a statement from Senator Cranston that the joint-marketing 
restrictions do not lock into place the specific terms or conditions of 
the particular grandfathered product or service, stated:
    That is correct. For example, if a nonbank bank was jointly 
marketing on March 5, 1987, a 3 year, $5,000 certificate of deposit, 
this bill would not prohibit offering in the same manner a 1 year, 
$2,000 certificate of deposit with a different interest rate. 133 Cong. 
Rec. S3959 (daily ed. March 26, 1987).
---------------------------------------------------------------------------

    (iii) In the area of consumer lending, the Board believes the 
following provide examples of different consumer loan products: mortgage 
loans to finance the purchase of the borrower's residence, unsecured 
consumer loans, consumer installment loans secured by the personal 
property to be purchased (e.g. automobile, boat or home appliance 
loans), or second mortgage loans.\12\ Under this interpretation, a 
nonbank bank that offered automobile loans through a nonbank affiliate 
on the grandfather date could market boat loans, appliance loans or any 
type of secured consumer installment loan through that affiliate. It 
could not, however, market unsecured consumer loans, home mortgage loans 
or other types of consumer loans.
---------------------------------------------------------------------------

    \12\ In this regard, the Supreme Court in United States v. 
Philadelphia National Bank, noted that ``the principal banking products 
are of course various types of credit, for example: unsecured personal 
and business loans, mortgage loans, loans secured by securities or 
accounts receivable, automobile installment and consumer goods, 
installment loans, tuition financing, bank credit cards, revolving 
credit funds.'' 374 U.S. 321, 326 n.5 (1963).
---------------------------------------------------------------------------

    (iv) In other areas, the Board believes that the determination as to 
what constitutes a product or service should be made on a case-by-case 
basis consistent with the principles that the terms product or service 
must be interpreted in accordance with their ordinary commercial usage 
and must be narrower in scope than the definition of activity. 
Essentially, the concept applied in this analysis is one of permitting 
the continuation of the specific product marketing activity that was 
undertaken as

[[Page 192]]

of March 5, 1987. Thus, for example, while insurance underwriting may 
constitute a separate activity under CEBA, a nonbank bank could not 
market a life insurance policy issued by the affiliate if on the 
grandfather date it had only marketed homeowners' policies issued by the 
affiliate.
    (5) Change in terms and conditions permitted. (i) The cross-
marketing restrictions would not limit the ability of the institution to 
change the specific terms and conditions of a particular grandfathered 
product or service. The Conference Report indicates a legislative intent 
not to lock into place the specific terms or conditions of a 
grandfathered product or service. Conference Report at 126. For example, 
a nonbank bank marketing a three-year, $5,000 certificate of deposit 
through an affiliate under the exemption could offer a one-year $2,000 
certificate of deposit with a different interest rate after the 
grandfather date. See footnote 11 above. Modifications that alter the 
type of product, however, are not permitted. Thus, a nonbank bank that 
marketed through affiliates on March 5, 1987, only certificates of 
deposit could not commence marketing MMDA's or NOW accounts after the 
grandfather date.
    (ii) General changes in the character of the product or service as 
the result of market or technological innovation are similarly permitted 
to the extent that they do not transform a grandfathered product into a 
new product. Thus, an unsecured line of credit could not be modified to 
include a lien on the borrower's residence without becoming a new 
product.
    (6) Meaning of offer or market. In the Board's opinion, the terms 
offer or market in the cross-marketing restrictions refer to the 
presentation to a customer of an institution's products or service 
through any type of program, including telemarketing, advertising 
brochures, direct mailing, personal solicitation, customer referrals, or 
joint-marketing agreements or presentations. An institution must have 
offered or actually marketed the product or service on March 5 or 
shortly before that date (as discussed above) to qualify for the 
grandfather privilege. Thus, if the cross-marketing program was in the 
planning stage on March 5, 1987, the program would not quality for 
grandfather treatment under CEBA.
    (7) Limitations on cross-marketing to in the same manner. (i) The 
cross-marketing restriction in section 4(f)(3) contains a grandfather 
provision that permits products or services that would otherwise be 
prohibited from being offered or marketed under the provision to 
continue to be offered or marketed by a particular entity if the 
products or services were being so offered or marketed as of March 5, 
1987, but ``only in the same manner in which they were being offered or 
marketed as of that date.'' Thus, to qualify for the grandfather 
provision, the manner of offering or marketing the otherwise prohibited 
product or service must remain the same as on the grandfather date.
    (ii) In interpreting this provision, the Board notes that Congress 
designed the joint-marketing restrictions to prevent the significant 
risk to the public posed by the conduct of such activities by insured 
banks affiliated with companies engaged in general commerce, to ensure 
objectivity in the credit-granting process and to ``minimize the unfair 
competitive advantage that grandfathered commercial companies owning 
nonbank banks might otherwise engage over regulated bank holding 
companies and our competing commercial companies that have no subsidiary 
bank.'' Conference Report at 125-126. The Board believes that 
determinations regarding the manner of cross-marketing of a particular 
product or service may best be accomplished by applying the limitation 
to the particular facts in each case consistent with the stated purpose 
of this provision of CEBA and the general principle that grandfather 
restrictions and exceptions to general prohibitions must be narrowly 
construed in order to prevent the exception from nullifying the rule. 
Essentially, as in the scope of the term ``product or service'', the 
guiding principle of Congressional intent with respect to this term is 
to permit only the continuation of the specific types of cross-marketing 
activity that were undertaken as of March 5, 1987.
    (8) Eligibility for cross-marketing grandfather exemption. The 
Conference Report also clarifies that entitlement to

[[Page 193]]

an exemption to continue to cross-market products and services otherwise 
prohibited by the statute applies only to the specific company that was 
engaged in the activity as of March 5, 1987. Conference Report at 126. 
Thus, an affiliate that was not engaged in cross-marketing products or 
services as of the grandfather date may not commence these activities 
under the exemption even if such activities were being conducted by 
another affiliate. Id.; see also S. Rep. No. 100-19 at 33-34.
    (e) Eligibility for grandfathered nonbank bank status. In reviewing 
the reports required by CEBA, the Board notes that a number of 
institutions that had not commenced business operations on August 10, 
1987, the date of enactment of CEBA, claimed grandfather privileges 
under section 4(f)(3) of CEBA. To qualify for grandfather privileges 
under section 4(f)(3), the institution must have ``bec[o]me a bank as a 
result of the enactment of [CEBA]'' and must have been controlled by a 
nonbanking company on March 5, 1987. 12 U.S.C. 1843(f)(1)(A). An 
institution that did not have FDIC insurance on August 10, 1987, and 
that did not accept demand deposits or transaction accounts or engage in 
the business of commercial lending on that date, would not have become a 
bank as a result of enactment of CEBA. Thus, institutions that had not 
commenced operations on August 10, 1987, could not qualify for 
grandfather privileges under section 4(f)(3) of CEBA. This view is 
supported by the activity limitations of section 4(f)(3), which, as 
noted, limit the activities of grandfathered nonbank banks to those in 
which they were lawfully engaged as of March 5, 1987. A nonbank bank 
that had not commenced conducting business activities on March 5, 1987, 
could not after enactment of CEBA engage in any activities under this 
provision.

[Reg. Y, 53 FR 37746, Sept. 28, 1988, as amended by Reg. Y, 62 FR 9343, 
Feb. 28, 1997]



                 Subpart J_Merchant Banking Investments

    Source: Reg. Y, 66 FR 8484, Jan. 31, 2001, unless otherwise noted.



Sec. 225.170  What type of investments are permitted by this subpart, 
and under what conditions may they be made?

    (a) What types of investments are permitted by this subpart? Section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) and 
this subpart authorize a financial holding company, directly or 
indirectly and as principal or on behalf of one or more persons, to 
acquire or control any amount of shares, assets or ownership interests 
of a company or other entity that is engaged in any activity not 
otherwise authorized for the financial holding company under section 4 
of the Bank Holding Company Act. For purposes of this subpart, shares, 
assets or ownership interests acquired or controlled under section 
4(k)(4)(H) and this subpart are referred to as ``merchant banking 
investments.'' A financial holding company may not directly or 
indirectly acquire or control any merchant banking investment except in 
compliance with the requirements of this subpart.
    (b) Must the investment be a bona fide merchant banking investment? 
The acquisition or control of shares, assets or ownership interests 
under this subpart is not permitted unless it is part of a bona fide 
underwriting or merchant or investment banking activity.
    (c) What types of ownership interests may be acquired? Shares, 
assets or ownership interests of a company or other entity include any 
debt or equity security, warrant, option, partnership interest, trust 
certificate or other instrument representing an ownership interest in 
the company or entity, whether voting or nonvoting.
    (d) Where in a financial holding company may merchant banking 
investments be made? A financial holding company and any subsidiary 
(other than a depository institution or subsidiary of a depository 
institution) may acquire or control merchant banking investments. A 
financial holding company and its subsidiaries may not acquire or 
control merchant banking investments on behalf of a depository 
institution or subsidiary of a depository institution.
    (e) May assets other than shares be held directly? A financial 
holding company may not under this subpart acquire or

[[Page 194]]

control assets, other than debt or equity securities or other ownership 
interests in a company, unless:
    (1) The assets are held by or promptly transferred to a portfolio 
company;
    (2) The portfolio company maintains policies, books and records, 
accounts, and other indicia of corporate, partnership or limited 
liability organization and operation that are separate from the 
financial holding company and limit the legal liability of the financial 
holding company for obligations of the portfolio company; and
    (3) The portfolio company has management that is separate from the 
financial holding company to the extent required by Sec. 225.171.
    (f) What type of affiliate is required for a financial holding 
company to make merchant banking investments? A financial holding 
company may not acquire or control merchant banking investments under 
this subpart unless the financial holding company qualifies under at 
least one of the following paragraphs:
    (1) Securities affiliate. The financial holding company is or has an 
affiliate that is registered under the Securities Exchange Act of 1934 
(15 U.S.C. 78c, 78o, 78o-4) as:
    (i) A broker or dealer; or
    (ii) A municipal securities dealer, including a separately 
identifiable department or division of a bank that is registered as a 
municipal securities dealer.
    (2) Insurance affiliate with an investment adviser affiliate. The 
financial holding company controls:
    (i) An insurance company that is predominantly engaged in 
underwriting life, accident and health, or property and casualty 
insurance (other than credit-related insurance), or providing and 
issuing annuities; and
    (ii) A company that:
    (A) Is registered with the Securities and Exchange Commission as an 
investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 
80b-1 et seq.); and
    (B) Provides investment advice to an insurance company.



Sec. 225.171  What are the limitations on managing or operating a 
portfolio company held as a merchant banking investment?

    (a) May a financial holding company routinely manage or operate a 
portfolio company? Except as permitted in paragraph (e) of this section, 
a financial holding company may not routinely manage or operate any 
portfolio company.
    (b) When does a financial holding company routinely manage or 
operate a company?
    (1) Examples of routine management or operation--(i) Executive 
officer interlocks at the portfolio company. A financial holding company 
routinely manages or operates a portfolio company if any director, 
officer or employee of the financial holding company serves as or has 
the responsibilities of an executive officer of the portfolio company.
    (ii) Interlocks by executive officers of the financial holding 
company.--
    (A) Prohibition. A financial holding company routinely manages or 
operates a portfolio company if any executive officer of the financial 
holding company serves as or has the responsibilities of an officer or 
employee of the portfolio company.
    (B) Definition. For purposes of paragraph (b)(1)(ii)(A) of this 
section, the term ``financial holding company'' includes the financial 
holding company and only the following subsidiaries of the financial 
holding company:
    (1) A securities broker or dealer registered under the Securities 
Exchange Act of 1934;
    (2) A depository institution;
    (3) An affiliate that engages in merchant banking activities under 
this subpart or insurance company investment activities under section 
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I));
    (4) A small business investment company (as defined in section 
302(b) of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)) 
controlled by the financial holding company or by any depository 
institution controlled by the financial holding company; and

[[Page 195]]

    (5) Any other affiliate that engages in significant equity 
investment activities that are subject to a special capital charge under 
the capital adequacy rules or guidelines of the Board.
    (iii) Covenants regarding ordinary course of business. A financial 
holding company routinely manages or operates a portfolio company if any 
covenant or other contractual arrangement exists between the financial 
holding company and the portfolio company that would restrict the 
portfolio company's ability to make routine business decisions, such as 
entering into transactions in the ordinary course of business or hiring 
officers or employees other than executive officers.
    (2) Presumptions of routine management or operation. A financial 
holding company is presumed to routinely manage or operate a portfolio 
company if:
    (i) Any director, officer, or employee of the financial holding 
company serves as or has the responsibilities of an officer (other than 
an executive officer) or employee of the portfolio company; or
    (ii) Any officer or employee of the portfolio company is supervised 
by any director, officer, or employee of the financial holding company 
(other than in that individual's capacity as a director of the portfolio 
company).
    (c) How may a financial holding company rebut a presumption that it 
is routinely managing or operating a portfolio company? A financial 
holding company may rebut a presumption that it is routinely managing or 
operating a portfolio company under paragraph (b)(2) of this section by 
presenting information to the Board demonstrating to the Board's 
satisfaction that the financial holding company is not routinely 
managing or operating the portfolio company.
    (d) What arrangements do not involve routinely managing or operating 
a portfolio company?--(1) Director representation at portfolio 
companies. A financial holding company may select any or all of the 
directors of a portfolio company or have one or more of its directors, 
officers, or employees serve as directors of a portfolio company if:
    (i) The portfolio company employs officers and employees responsible 
for routinely managing and operating the company; and
    (ii) The financial holding company does not routinely manage or 
operate the portfolio company, except as permitted in paragraph (e) of 
this section.
    (2) Covenants or other provisions regarding extraordinary events. A 
financial holding company may, by virtue of covenants or other written 
agreements with a portfolio company, restrict the ability of the 
portfolio company, or require the portfolio company to consult with or 
obtain the approval of the financial holding company, to take actions 
outside of the ordinary course of the business of the portfolio company. 
Examples of the types of actions that may be subject to these types of 
covenants or agreements include, but are not limited to, the following:
    (i) The acquisition of significant assets or control of another 
company by the portfolio company or any of its subsidiaries;
    (ii) Removal or selection of an independent accountant or auditor or 
investment banker by the portfolio company;
    (iii) Significant changes to the business plan or accounting methods 
or policies of the portfolio company;
    (iv) Removal or replacement of any or all of the executive officers 
of the portfolio company;
    (v) The redemption, authorization or issuance of any equity or debt 
securities (including options, warrants or convertible shares) of the 
portfolio company or any borrowing by the portfolio company outside of 
the ordinary course of business;
    (vi) The amendment of the articles of incorporation or by-laws (or 
similar governing documents) of the portfolio company; and
    (vii) The sale, merger, consolidation, spin-off, recapitalization, 
liquidation, dissolution or sale of substantially all of the assets of 
the portfolio company or any of its significant subsidiaries.
    (3) Providing advisory and underwriting services to, and having 
consultations with, a portfolio company. A financial holding company 
may:
    (i) Provide financial, investment and management consulting advice 
to a

[[Page 196]]

portfolio company in a manner consistent with and subject to any 
restrictions on such activities contained in Sec. Sec. 225.28(b)(6) or 
225.86(b)(1) of this part (12 CFR 225.28(b)(6) and 225.86(b)(1));
    (ii) Provide assistance to a portfolio company in connection with 
the underwriting or private placement of its securities, including 
acting as the underwriter or placement agent for such securities; and
    (iii) Meet with the officers or employees of a portfolio company to 
monitor or provide advice with respect to the portfolio company's 
performance or activities.
    (e) When may a financial holding company routinely manage or operate 
a portfolio company?--(1) Special circumstances required. A financial 
holding company may routinely manage or operate a portfolio company only 
when intervention by the financial holding company is necessary or 
required to obtain a reasonable return on the financial holding 
company's investment in the portfolio company upon resale or other 
disposition of the investment, such as to avoid or address a significant 
operating loss or in connection with a loss of senior management at the 
portfolio company.
    (2) Duration Limited. A financial holding company may routinely 
manage or operate a portfolio company only for the period of time as may 
be necessary to address the cause of the financial holding company's 
involvement, to obtain suitable alternative management arrangements, to 
dispose of the investment, or to otherwise obtain a reasonable return 
upon the resale or disposition of the investment.
    (3) Notice required for extended involvement. A financial holding 
company may not routinely manage or operate a portfolio company for a 
period greater than nine months without prior written notice to the 
Board.
    (4) Documentation required. A financial holding company must 
maintain and make available to the Board upon request a written record 
describing its involvement in routinely managing or operating a 
portfolio company.
    (f) May a depository institution or its subsidiary routinely manage 
or operate a portfolio company?--(1) In general. A depository 
institution and a subsidiary of a depository institution may not 
routinely manage or operate a portfolio company in which an affiliated 
company owns or controls an interest under this subpart.
    (2) Definition applying provisions governing routine management or 
operation. For purposes of this section other than paragraph (e) and for 
purposes of Sec. 225.173(d), a financial holding company includes a 
depository institution controlled by the financial holding company and a 
subsidiary of such a depository institution.
    (3) Exception for certain subsidiaries of depository institutions. 
For purposes of paragraph (e) of this section, a financial holding 
company includes a financial subsidiary held in accordance with section 
5136A of the Revised Statutes (12 U.S.C. 24a) or section 46 of the 
Federal Deposit Insurance Act (12 U.S.C. 1831w), and a subsidiary that 
is a small business investment company and that is held in accordance 
with the Small Business Investment Act (15 U.S.C. 661 et seq.), and such 
a subsidiary may, in accordance with the limitations set forth in this 
section, routinely manage or operate a portfolio company in which an 
affiliated company owns or controls an interest under this subpart.



Sec. 225.172  What are the holding periods permitted for merchant 
banking investments?

    (a) Must investments be made for resale? A financial holding company 
may own or control shares, assets and ownership interests pursuant to 
this subpart only for a period of time to enable the sale or disposition 
thereof on a reasonable basis consistent with the financial viability of 
the financial holding company's merchant banking investment activities.
    (b) What period of time is generally permitted for holding merchant 
banking investments?--(1) In general. Except as provided in this section 
or Sec. 225.173, a financial holding company may not, directly or 
indirectly, own, control or hold any share, asset or ownership interest 
pursuant to this subpart for a period that exceeds 10 years.
    (2) Ownership interests acquired from or transferred to companies 
held under this subpart. For purposes of paragraph

[[Page 197]]

(b)(1) of this section, shares, assets or ownership interests--
    (i) Acquired by a financial holding company from a company in which 
the financial holding company held an interest under this subpart will 
be considered to have been acquired by the financial holding company on 
the date that the share, asset or ownership interest was acquired by the 
company; and
    (ii) Acquired by a company from a financial holding company will be 
considered to have been acquired by the company on the date that the 
share, asset or ownership interest was acquired by the financial holding 
company if--
    (A) The financial holding company held the share, asset, or 
ownership interest under this subpart; and
    (B) The financial holding company holds an interest in the acquiring 
company under this subpart.
    (3) Interests previously held by a financial holding company under 
limited authority. For purposes of paragraph (b)(1) of this section, any 
shares, assets, or ownership interests previously owned or controlled, 
directly or indirectly, by a financial holding company under any other 
provision of the Federal banking laws that imposes a limited holding 
period will if acquired under this subpart be considered to have been 
acquired by the financial holding company under this subpart on the date 
the financial holding company first acquired ownership or control of the 
shares, assets or ownership interests under such other provision of law. 
For purposes of this paragraph (b)(3), a financial holding company 
includes a depository institution controlled by the financial holding 
company and any subsidiary of such a depository institution.
    (4) Approval required to hold interests held in excess of time 
limit. A financial holding company may seek Board approval to own, 
control or hold shares, assets or ownership interests of a company under 
this subpart for a period that exceeds the period specified in paragraph 
(b)(1) of this section. A request for approval must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for the request, including information that 
addresses the factors in paragraph (b)(5) of this section; and
    (iii) Explain the financial holding company's plan for divesting the 
shares, assets or ownership interests.
    (5) Factors governing Board determinations. In reviewing any 
proposal under paragraph (b)(4) of this section, the Board may consider 
all the facts and circumstances related to the investment, including:
    (i) The cost to the financial holding company of disposing of the 
investment within the applicable period;
    (ii) The total exposure of the financial holding company to the 
company and the risks that disposing of the investment may pose to the 
financial holding company;
    (iii) Market conditions;
    (iv) The nature of the portfolio company's business;
    (v) The extent and history of involvement by the financial holding 
company in the management and operations of the company; and
    (vi) The average holding period of the financial holding company's 
merchant banking investments.
    (6) Restrictions applicable to investments held beyond time period. 
A financial holding company that directly or indirectly owns, controls 
or holds any share, asset or ownership interest of a company under this 
subpart for a total period that exceeds the period specified in 
paragraph (b)(1) of this section must--
    (i) For purposes of determining the financial holding company's 
regulatory capital, apply to the financial holding company's adjusted 
carrying value of such shares, assets, or ownership interests a capital 
charge determined by the Board that must be:
    (A) Higher than the maximum marginal Tier 1 capital charge 
applicable under the Board's capital adequacy rules or guidelines (see 
12 CFR 225 Appendix A) to merchant banking investments held by that 
financial holding company; and
    (B) In no event less than 25 percent of the adjusted carrying value 
of the investment; and

[[Page 198]]

    (ii) Abide by any other restrictions that the Board may impose in 
connection with granting approval under paragraph (b)(4) of this 
section.



Sec. 225.173  How are investments in private equity funds treated 
under this subpart?

    (a) What is a private equity fund? For purposes of this subpart, a 
``private equity fund'' is any company that:
    (1) Is formed for the purpose of and is engaged exclusively in the 
business of investing in shares, assets, and ownership interests of 
financial and nonfinancial companies for resale or other disposition;
    (2) Is not an operating company;
    (3) No more than 25 percent of the total equity of which is held, 
owned or controlled, directly or indirectly, by the financial holding 
company and its directors, officers, employees and principal 
shareholders;
    (4) Has a maximum term of not more than 15 years; and
    (5) Is not formed or operated for the purpose of making investments 
inconsistent with the authority granted under section 4(k)(4)(H) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) or evading the 
limitations governing merchant banking investments contained in this 
subpart.
    (b) What form may a private equity fund take? A private equity fund 
may be a corporation, partnership, limited liability company or other 
type of company that issues ownership interests in any form.
    (c) What is the holding period permitted for interests in private 
equity funds?
    (1) In general. A financial holding company may own, control or hold 
any interest in a private equity fund under this subpart and any 
interest in a portfolio company that is owned or controlled by a private 
equity fund in which the financial holding company owns or controls any 
interest under this subpart for the duration of the fund, up to a 
maximum of 15 years.
    (2) Request to hold interest for longer period. A financial holding 
company may seek Board approval to own, control or hold an interest in 
or held through a private equity fund for a period longer than the 
duration of the fund in accordance with Sec. 225.172(b) of this 
subpart.
    (3) Application of rules. The rules described in Sec. 225.172(b)(2) 
and (3) governing holding periods of interests acquired, transferred or 
previously held by a financial holding company apply to interests in, 
held through, or acquired from a private equity fund.
    (d) How do the restrictions on routine management and operation 
apply to private equity funds and investments held through a private 
equity fund?--(1) Portfolio companies held through a private equity 
fund. A financial holding company may not routinely manage or operate a 
portfolio company that is owned or controlled by a private equity fund 
in which the financial holding company owns or controls any interest 
under this subpart, except as permitted under Sec. 225.171(e).
    (2) Private equity funds controlled by a financial holding company. 
A private equity fund that is controlled by a financial holding company 
may not routinely manage or operate a portfolio company, except as 
permitted under Sec. 225.171(e).
    (3) Private equity funds that are not controlled by a financial 
holding company. A private equity fund may routinely manage or operate a 
portfolio company so long as no financial holding company controls the 
private equity fund or as permitted under Sec. 225.171(e).
    (4) When does a financial holding company control a private equity 
fund? A financial holding company controls a private equity fund for 
purposes of this subpart if the financial holding company, including any 
director, officer, employee or principal shareholder of the financial 
holding company:
    (i) Serves as a general partner, managing member, or trustee of the 
private equity fund (or serves in a similar role with respect to the 
private equity fund);
    (ii) Owns or controls 25 percent or more of any class of voting 
shares or similar interests in the private equity fund;
    (iii) In any manner selects, controls or constitutes a majority of 
the directors, trustees or management of the private equity fund; or

[[Page 199]]

    (iv) Owns or controls more than 5 percent of any class of voting 
shares or similar interests in the private equity fund and is the 
investment adviser to the fund.



Sec. 225.174  What aggregate thresholds apply to merchant banking 
investments?

    (a) In general. A financial holding company may not, without Board 
approval, directly or indirectly acquire any additional shares, assets 
or ownership interests under this subpart or make any additional capital 
contribution to any company the shares, assets or ownership interests of 
which are held by the financial holding company under this subpart if 
the aggregate carrying value of all merchant banking investments held by 
the financial holding company under this subpart exceeds:
    (1) 30 percent of the Tier 1 capital of the financial holding 
company; or
    (2) After excluding interests in private equity funds, 20 percent of 
the Tier 1 capital of the financial holding company.
    (b) How do these thresholds apply to a private equity fund? 
Paragraph (a) of this section applies to the interest acquired or 
controlled by the financial holding company under this subpart in a 
private equity fund. Paragraph (a) of this section does not apply to any 
interest in a company held by a private equity fund or to any interest 
held by a person that is not affiliated with the financial holding 
company.
    (c) How long do these thresholds remain in effect? This Sec. 
225.174 shall cease to be effective on the date that a final rule issued 
by the Board that specifically addresses the appropriate regulatory 
capital treatment of merchant banking investments becomes effective.



Sec. 225.175  What risk management, record keeping and reporting 
policies are required to make merchant banking investments?

    (a) What internal controls and records are necessary?--(1) General. 
A financial holding company, including a private equity fund controlled 
by a financial holding company, that makes investments under this 
subpart must establish and maintain policies, procedures, records and 
systems reasonably designed to conduct, monitor and manage such 
investment activities and the risks associated with such investment 
activities in a safe and sound manner, including policies, procedures, 
records and systems reasonably designed to:
    (i) Monitor and assess the carrying value, market value and 
performance of each investment and the aggregate portfolio;
    (ii) Identify and manage the market, credit, concentration and other 
risks associated with such investments;
    (iii) Identify, monitor and assess the terms, amounts and risks 
arising from transactions and relationships (including contingent fees 
or contingent interests) with each company in which the financial 
holding company holds an interest under this subpart;
    (iv) Ensure the maintenance of corporate separateness between the 
financial holding company and each company in which the financial 
holding company holds an interest under this subpart and protect the 
financial holding company and its depository institution subsidiaries 
from legal liability for the operations conducted and financial 
obligations of each such company; and
    (v) Ensure compliance with this part and any other provisions of law 
governing transactions and relationships with companies in which the 
financial holding company holds an interest under this subpart (e.g., 
fiduciary principles or sections 23A and 23B of the Federal Reserve Act 
(12 U.S.C. 371c, 371c-1), if applicable).
    (2) Availability of records. A financial holding company must make 
the policies, procedures and records required by paragraph (a)(1) of 
this section available to the Board or the appropriate Reserve Bank upon 
request.
    (b) What periodic reports must be filed? A financial holding company 
must provide reports to the appropriate Reserve Bank in such format and 
at such times as the Board may prescribe.
    (c) Is notice required for the acquisition of companies?--(1) 
Fulfillment of statutory notice requirement. Except as required in 
paragraph (c)(2) of this section, no post-acquisition notice under 
section 4(k)(6) of the Bank Holding Company Act (12 U.S.C. 1843(k)(6)) 
is required by a financial holding company in connection with an 
investment

[[Page 200]]

made under this subpart if the financial holding company has previously 
filed a notice under Sec. 225.87 indicating that it had commenced 
merchant banking investment activities under this subpart.
    (2) Notice of large individual investments. A financial holding 
company must provide written notice to the Board on the appropriate form 
within 30 days after acquiring more than 5 percent of the voting shares, 
assets or ownership interests of any company under this subpart, 
including an interest in a private equity fund, at a total cost to the 
financial holding company that exceeds the lesser of 5 percent of the 
Tier 1 capital of the financial holding company or $200 million.



Sec. 225.176  How do the statutory cross marketing and sections 23A 
and B limitations apply to merchant banking investments?

    (a) Are cross marketing activities prohibited?--(1) In general. A 
depository institution, including a subsidiary of a depository 
institution, controlled by a financial holding company may not:
    (i) Offer or market, directly or through any arrangement, any 
product or service of any company if more than 5 percent of the 
company's voting shares, assets or ownership interests are owned or 
controlled by the financial holding company pursuant to this subpart; or
    (ii) Allow any product or service of the depository institution, 
including any product or service of a subsidiary of the depository 
institution, to be offered or marketed, directly or through any 
arrangement, by or through any company described in paragraph (a)(1)(i) 
of this section.
    (2) How are certain subsidiaries treated? For purposes of paragraph 
(a)(1) of this section, a subsidiary of a depository institution does 
not include a financial subsidiary held in accordance with section 5136A 
of the Revised Statutes (12 U.S.C. 24a) or section 46 of the Federal 
Deposit Insurance Act. (12 U.S.C. 1831w), any company held by a company 
owned in accordance with section 25 or 25A of the Federal Reserve Act 
(12 U.S.C. 601 et seq.; 12 U.S.C. 611 et seq.), or any company held by a 
small business investment company owned in accordance with the Small 
Business Investment Act of 1958 (15 U.S.C. 661 et seq.).
    (3) How do the cross marketing restrictions apply to private equity 
funds? The restriction contained in paragraph (a)(1) of this section 
does not apply to:
    (i) Portfolio companies held by a private equity fund that the 
financial holding company does not control; or
    (ii) The sale, offer or marketing of any interest in a private 
equity fund, whether or not controlled by the financial holding company.
    (b) When are companies held under section 4(k)(4)(H) affiliates 
under sections 23A and B?--(1) Rebuttable presumption of control. The 
following rebuttable presumption of control shall apply for purposes of 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c, 371c-
1): if a financial holding company directly or indirectly owns or 
controls more than 15 percent of the total equity of a company pursuant 
to this subpart, the company shall be presumed to be an affiliate of any 
member bank that is affiliated with the financial holding company.
    (2) Request to rebut presumption. A financial holding company may 
rebut this presumption by providing information acceptable to the Board 
demonstrating that the financial holding company does not control the 
company.
    (3) Presumptions that control does not exist. Absent evidence to the 
contrary, the presumption in paragraph (b)(1) of this section will be 
considered to have been rebutted without Board approval under paragraph 
(b)(2) of this section if any one of the following requirements are met:
    (i) No officer, director or employee of the financial holding 
company serves as a director, trustee, or general partner (or individual 
exercising similar functions) of the company;
    (ii) A person that is not affiliated or associated with the 
financial holding company owns or controls a greater percentage of the 
equity capital of the portfolio company than the amount owned or 
controlled by the financial holding company, and no more than one 
officer or employee of the holding company serves as a director or 
trustee

[[Page 201]]

(or individual exercising similar functions) of the company; or
    (iii) A person that is not affiliated or associated with the 
financial holding company owns or controls more than 50 percent of the 
voting shares of the portfolio company, and officers and employees of 
the holding company do not constitute a majority of the directors or 
trustees (or individuals exercising similar functions) of the company.
    (4) Convertible instruments. For purposes of paragraph (b)(1) of 
this section, equity capital includes options, warrants and any other 
instrument convertible into equity capital.
    (5) Application of presumption to private equity funds. A financial 
holding company will not be presumed to own or control the equity 
capital of a company for purposes of paragraph (b)(1) of this section 
solely by virtue of an investment made by the financial holding company 
in a private equity fund that owns or controls the equity capital of the 
company unless the financial holding company controls the private equity 
fund as described in Sec. 225.173(d)(4).
    (6) Application of sections 23A and B to U.S. branches and agencies 
of foreign banks. Sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1) shall apply to all covered transactions between 
each U.S. branch and agency of a foreign bank that acquires or controls, 
or that is affiliated with a company that acquires or controls, merchant 
banking investments and--
    (i) Any portfolio company that the foreign bank or affiliated 
company controls or is presumed to control under paragraph (b)(1) of 
this section; and
    (ii) Any company that the foreign bank or affiliated company 
controls or is presumed to control under paragraph (b)(1) of this 
section if the company is engaged in acquiring or controlling merchant 
banking investments and the proceeds of the covered transaction are used 
for the purpose of funding the company's merchant banking investment 
activities.



Sec. 225.177  Definitions.

    (a) What do references to a financial holding company include?--(1) 
Except as otherwise expressly provided, the term ``financial holding 
company'' as used in this subpart means the financial holding company 
and all of its subsidiaries, including a private equity fund or other 
fund controlled by the financial holding company.
    (2) Except as otherwise expressly provided, the term ``financial 
holding company'' does not include a depository institution or 
subsidiary of a depository institution or any portfolio company 
controlled directly or indirectly by the financial holding company.
    (b) What do references to a depository institution include? For 
purposes of this subpart, the term ``depository institution'' includes a 
U.S. branch or agency of a foreign bank.
    (c) What is a portfolio company? A portfolio company is any company 
or entity:
    (1) That is engaged in any activity not authorized for the financial 
holding company under section 4 of the Bank Holding Company Act (12 
U.S.C. 1843); and
    (2) Any shares, assets or ownership interests of which are held, 
owned or controlled directly or indirectly by the financial holding 
company pursuant to this subpart, including through a private equity 
fund that the financial holding company controls.
    (d) Who are the executive officers of a company?--(1) An executive 
officer of a company is any person who participates or has the authority 
to participate (other than in the capacity as a director) in major 
policymaking functions of the company, whether or not the officer has an 
official title, the title designates the officer as an assistant, or the 
officer serves without salary or other compensation.
    (2) The term ``executive officer'' does not include--
    (i) Any person, including a person with an official title, who may 
exercise a certain measure of discretion in the performance of his 
duties, including the discretion to make decisions in the ordinary 
course of the company's business, but who does not participate in the 
determination of major policies of the company and whose decisions are 
limited by policy standards fixed by senior management of the company; 
or

[[Page 202]]

    (ii) Any person who is excluded from participating (other than in 
the capacity of a director) in major policymaking functions of the 
company by resolution of the board of directors or by the bylaws of the 
company and who does not in fact participate in such policymaking 
functions.

                          Conditions to Orders



Sec. 225.200  Conditions to Board's section 20 orders.

    (a) Introduction. Under section 20 of the Glass-Steagall Act (12 
U.S.C. 377) and section 4(c)(8) of the Bank Holding Company Act (12 
U.S.C. 1843(c)(8)), a nonbank subsidiary of a bank holding company may 
to a limited extent underwrite and deal in securities for which 
underwriting and dealing by a member bank is prohibited. Pursuant to the 
Securities Act of 1933 and the Securities Exchange Act of 1934, these 
so-called section 20 subsidiaries are required to register with the SEC 
as broker-dealers and are subject to all the financial reporting, anti-
fraud and financial responsibility rules applicable to broker-dealers. 
In addition, transactions between insured depository institutions and 
their section 20 affiliates are restricted by sections 23A and 23B of 
the Federal Reserve Act (12 U.S.C. 371c and 371c-1). The Board expects a 
section 20 subsidiary, like any other subsidiary of a bank holding 
company, to be operated prudently. Doing so would include observing 
corporate formalities (such as the maintenance of separate accounting 
and corporate records), and instituting appropriate risk management, 
including independent trading and exposure limits consistent with parent 
company guidelines.
    (b) Conditions. As a condition of each order approving establishment 
of a section 20 subsidiary, a bank holding company shall comply with the 
following conditions.
    (1) Capital. (i) A bank holding company shall maintain adequate 
capital on a fully consolidated basis. If operating a section 20 
authorized to underwrite and deal in all types of debt and equity 
securities, a bank holding company shall maintain strong capital on a 
fully consolidated basis.
    (ii) In the event that a bank or thrift affiliate of a section 20 
subsidiary shall become less than well capitalized (as defined in 
section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o), and 
the bank holding company shall fail to restore it promptly to the well 
capitalized level, the Board may, in its discretion, reimpose the 
funding, credit extension and credit enhancement firewalls contained in 
its 1989 order allowing underwriting and dealing in bank-ineligible 
securities,\1\ or order the bank holding company to divest the section 
20 subsidiary.
---------------------------------------------------------------------------

    \1\ Firewalls 5-8, 19, 21 and 22 of J.P. Morgan & Co., The Chase 
Manhattan Corp., Bankers Trust New York Corp., Citicorp, and Security 
Pacific Corp., 75 Federal Reserve Bulletin 192, 214-16 (1989).
---------------------------------------------------------------------------

    (iii) A foreign bank that operates a branch or agency in the United 
States shall maintain strong capital on a fully consolidated basis at 
levels above the minimum levels required by the Basle Capital Accord. In 
the event that the Board determines that the foreign bank's capital has 
fallen below these levels and the foreign bank fails to restore its 
capital position promptly, the Board may, in its discretion, reimpose 
the funding, credit extension and credit enhancement firewalls contained 
in its 1990 order allowing foreign banks to underwrite and deal in bank-
ineligible securities,\2\ or order the foreign bank to divest the 
section 20 subsidiary.
---------------------------------------------------------------------------

    \2\ Firewalls 5-8, 19, 21 and 22 of Canadian Imperial Bank of 
Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank PLC, 
76 Federal Reserve Bulletin 158, (1990).
---------------------------------------------------------------------------

    (2) Internal controls. (i) Each bank holding company or foreign bank 
shall cause its subsidiary banks, thrifts, branches or agencies \3\ to 
adopt policies and procedures, including appropriate limits on exposure, 
to govern their participation in transactions underwritten or arranged 
by a section 20 affiliate.
---------------------------------------------------------------------------

    \3\ The terms ``branch'' and ``agency'' refer to a U.S. branch and 
agency of a foreign bank.
---------------------------------------------------------------------------

    (ii) Each bank holding company or foreign bank shall ensure that an 
independent and thorough credit evaluation has been undertaken in 
connection with participation by a bank, thrift, or branch or agency in 
such transactions, and that adequate documentation of

[[Page 203]]

that evaluation is maintained for review by examiners of the appropriate 
federal banking agency and the Federal Reserve.
    (3) Interlocks restriction. (i) Directors, officers or employees of 
a bank or thrift subsidiary of a bank holding company, or a bank or 
thrift subsidiary or branch or agency of a foreign bank, shall not serve 
as a majority of the board of directors or the chief executive officer 
of an affiliated section 20 subsidiary.
    (ii) Directors, officers or employees of a section 20 subsidiary 
shall not serve as a majority of the board of directors or the chief 
executive officer of an affiliated bank or thrift subsidiary or branch 
or agency, except that the manager of a branch or agency may act as a 
director of the underwriting subsidiary.
    (iii) For purposes of this standard, the manager of a branch or 
agency of a foreign bank generally will be considered to be the chief 
executive officer of the branch or agency.
    (4) Customer disclosure--(i) Disclosure to section 20 customers. A 
section 20 subsidiary shall provide, in writing, to each of its retail 
customers,\4\ at the time an investment account is opened, the same 
minimum disclosures, and obtain the same customer acknowledgment, 
described in the Interagency Statement on Retail Sales of Nondeposit 
Investment Products (Statement) as applicable in such situations. These 
disclosures must be provided regardless of whether the section 20 
subsidiary is itself engaged in activities through arrangements with a 
bank that is covered by the Statement.
---------------------------------------------------------------------------

    \4\ For purposes of this operating standard, a retail customer is 
any customer that is not an ``accredited investor'' as defined in 17 CFR 
230.501(a).
---------------------------------------------------------------------------

    (ii) Disclosures accompanying investment advice. A director, 
officer, or employee of a bank, thrift, branch or agency may not express 
an opinion on the value or the advisability of the purchase or the sale 
of a bank-ineligible security that he or she knows is being underwritten 
or dealt in by a section 20 affiliate unless he or she notifies the 
customer of the affiliate's role.
    (5) Intra-day credit. Any intra-day extension of credit to a section 
20 subsidiary by an affiliated bank, thrift, branch or agency shall be 
on market terms consistent with section 23B of the Federal Reserve Act.
    (6) Restriction on funding purchases of securities during 
underwriting period. No bank, thrift, branch or agency shall knowingly 
extend credit to a customer secured by, or for the purpose of 
purchasing, any bank-ineligible security that a section 20 affiliate is 
underwriting or has underwritten within the past 30 days, unless:
    (i) The extension of credit is made pursuant to, and consistent with 
any conditions imposed in a preexisting line of credit that was not 
established in contemplation of the underwriting; or
    (ii) The extension of credit is made in connection with clearing 
transactions for the section 20 affiliate.
    (7) Reporting requirement. (i) Each bank holding company or foreign 
bank shall submit quarterly to the appropriate Federal Reserve Bank any 
FOCUS report filed with the NASD or other self-regulatory organizations, 
and any information required by the Board to monitor compliance with 
these operating standards and section 20 of the Glass-Steagall Act, on 
forms provided by the Board.
    (ii) In the event that a section 20 subsidiary is required to 
furnish notice concerning its capitalization to the Securities and 
Exchange Commission pursuant to 17 CFR 240.17a-11, a copy of the notice 
shall be filed concurrently with the appropriate Federal Reserve Bank.
    (8) Foreign banks. A foreign bank shall ensure that any extension of 
credit by its branch or agency to a section 20 affiliate, and any 
purchase by such branch or agency, as principal or fiduciary, of 
securities for which a section 20 affiliate is a principal underwriter, 
conforms to sections 23A and 23B of the Federal Reserve Act, and that 
its branches and agencies not advertise or suggest that they are 
responsible for the obligations of a section 20 affiliate, consistent 
with section 23B(c) of the Federal Reserve Act.

[62 FR 45306, Aug. 27, 1997, as amended by Reg. Y, 63 FR 14804, Mar. 27, 
1998]

[[Page 204]]

  Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
                      Companies: Risk-Based Measure

                               I. Overview

    The Board of Governors of the Federal Reserve System has adopted a 
risk-based capital measure to assist in the assessment of the capital 
adequacy of bank holding companies (banking organizations).\1\ The 
principal objectives of this measure are to: (i) Make regulatory capital 
requirements more sensitive to differences in risk profiles among 
banking organizations; (ii) factor off-balance sheet exposures into the 
assessment of capital adequacy; (iii) minimize disincentives to holding 
liquid, low-risk assets; and (iv) achieve greater consistency in the 
evaluation of the capital adequacy of major banking organizations 
throughout the world.\2\
---------------------------------------------------------------------------

    \1\ Supervisory ratios that relate capital to total assets for bank 
holding companies are outlined in appendices B and D of this part.
    \2\ The risk-based capital measure is based upon a framework 
developed jointly by supervisory authorities from the countries 
represented on the Basle Committee on Banking Regulations and 
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the 
Group of Ten Central Bank Governors. The framework is described in a 
paper prepared by the BSC entitled ``International Convergence of 
Capital Measurement,'' July 1988.
---------------------------------------------------------------------------

    The risk-based capital guidelines include both a definition of 
capital and a framework for calculating weighted risk assets by 
assigning assets and off-balance sheet items to broad risk categories. 
An institution's risk-based capital ratio is calculated by dividing its 
qualifying capital (the numerator of the ratio) by its weighted risk 
assets (the denominator).\3\ The definition of qualifying capital is 
outlined below in section II, and the procedures for calculating 
weighted risk assets are discussed in section III. Attachment I 
illustrates a sample calculation of weighted risk assets and the risk-
based capital ratio.
---------------------------------------------------------------------------

    \3\ Banking organizations will initially be expected to utilize 
period-end amounts in calculating their risk-based capital ratios. When 
necessary and appropriate, ratios based on average balances may also be 
calculated on a case-by-case basis. Moreover, to the extent banking 
organizations have data on average balances that can be used to 
calculate risk-based ratios, the Federal Reserve will take such data 
into account.
---------------------------------------------------------------------------

    In addition, when certain organizations that engage in trading 
activities calculate their risk-based capital ratio under this appendix 
A, they must also refer to appendix E of this part, which incorporates 
capital charges for certain market risks into the risk-based capital 
ratio. When calculating their risk-based capital ratio under this 
appendix A, such organizations are required to refer to appendix E of 
this part for supplemental rules to determine qualifying and excess 
capital, calculate risk-weighted assets, calculate market risk 
equivalent assets, and calculate risk-based capital ratios adjusted for 
market risk.
    The risk-based capital guidelines also establish a schedule for 
achieving a minimum supervisory standard for the ratio of qualifying 
capital to weighted risk assets and provide for transitional 
arrangements during a phase-in period to facilitate adoption and 
implementation of the measure at the end of 1992. These interim 
standards and transitional arrangements are set forth in section IV.
    The risk-based guidelines apply on a consolidated basis to bank 
holding companies with consolidated assets of $150 million or more. For 
bank holding companies with less than $150 million in consolidated 
assets, the guidelines will be applied on a bank-only basis unless: (a) 
The parent bank holding company is engaged in nonbank activity involving 
significant leverage;\4\ or (b) the parent company has a significant 
amount of outstanding debt that is held by the general public.
---------------------------------------------------------------------------

    \4\ A parent company that is engaged in significant off-balance 
sheet activities would generally be deemed to be engaged in activities 
that involve significant leverage.
---------------------------------------------------------------------------

    The risk-based guidelines are to be used in the inspection and 
supervisory process as well as in the analysis of applications acted 
upon by the Federal Reserve. Thus, in considering an application filed 
by a bank holding company, the Federal Reserve will take into account 
the organization's risk-based capital ratio, the reasonableness of its 
capital plans, and the degree of progress it has demonstrated toward 
meeting the interim and final risk-based capital standards.
    The risk-based capital ratio focuses principally on broad categories 
of credit risk, although the framework for assigning assets and off-
balance sheet items to risk categories does incorporate elements of 
transfer risk, as well as limited instances of interest rate and market 
risk. The risk-based ratio does not, however, incorporate other factors 
that can affect an organization's financial condition. These factors 
include overall interest rate exposure; liquidity, funding and market 
risks; the quality and level of earnings; investment or loan portfolio 
concentrations; the quality of loans and investments; the effectiveness 
of loan and investment policies; and management's ability to monitor and 
control financial and operating risks.

[[Page 205]]

    In addition to evaluating capital ratios, an overall assessment of 
capital adequacy must take account of these other factors, including, in 
particular, the level and severity of problem and classified assets. For 
this reason, the final supervisory judgment on an organization's capital 
adequacy may differ significantly from conclusions that might be drawn 
solely from the level of the organization's risk-based capital ratio.
    The risk-based capital guidelines establish minimum ratios of 
capital to weighted risk assets. In light of the considerations just 
discussed, banking organizations generally are expected to operate well 
above the minimum risk-based ratios. In particular, banking 
organizations contemplating significant expansion proposals are expected 
to maintain strong capital levels substantially above the minimum ratios 
and should not allow significant diminution of financial strength below 
these strong levels to fund their expansion plans. Institutions with 
high or inordinate levels of risk are also expected to operate above 
minimum capital standards. In all cases, institutions should hold 
capital commensurate with the level and nature of the risks to which 
they are exposed. Banking organizations that do not meet the minimum 
risk-based standard, or that are otherwise considered to be inadequately 
capitalized, are expected to develop and implement plans acceptable to 
the Federal Reserve for achieving adequate levels of capital within a 
reasonable period of time.
    The Board will monitor the implementation and effect of these 
guidelines in relation to domestic and international developments in the 
banking industry. When necessary and appropriate, the Board will 
consider the need to modify the guidelines in light of any significant 
changes in the economy, financial markets, banking practices, or other 
relevant factors.

  II. Definition of Qualifying Capital for the Risk Based Capital Ratio

    An institution's qualifying total capital consists of two types of 
capital components: ``core capital elements'' (comprising tier 1 
capital) and ``supplementary capital elements'' (comprising tier 2 
capital). These capital elements and the various limits, restrictions, 
and deductions to which they are subject, are discussed below and are 
set forth in Attachment II.
    The Federal Reserve will, on a case-by-case basis, determine 
whether, and if so how much of, any instrument that does not fit wholly 
within the terms of one of the capital categories set forth below or 
that does not have an ability to absorb losses commensurate with the 
capital treatment otherwise specified below will be counted as an 
element of tier 1 or tier 2 capital. In making such a determination, the 
Federal Reserve will consider the similarity of the instrument to 
instruments explicitly treated in the guidelines, the ability of the 
instrument to absorb losses while the institution operates as a going 
concern, the maturity and redemption features of the instrument, and 
other relevant terms and factors. To qualify as an element of tier 1 or 
tier 2 capital, a capital instrument may not contain or be covered by 
any covenants, terms, or restrictions that are inconsistent with safe 
and sound banking practices.
    Redemptions of permanent equity or other capital instruments before 
stated maturity could have a significant impact on an organization's 
overall capital structure. Consequently, an organization considering 
such a step should consult with the Federal Reserve before redeeming any 
equity or debt capital instrument (prior to maturity) if such redemption 
could have a material effect on the level or composition of the 
organization's capital base.\5\
---------------------------------------------------------------------------

    \5\ Consultation would not ordinarily be necessary if an instrument 
were redeemed with the proceeds of, or replaced by, a like amount of a 
similar or higher quality capital instrument and the organization's 
capital position is considered fully adequate by the Federal Reserve. In 
the case of limited-life tier 2 instruments, consultation would 
generally be obviated if the new security is of equal or greater 
maturity than the one it replaces.
---------------------------------------------------------------------------

                 A. The Components of Qualifying Capital

    1. Core capital elements (tier 1 capital). The tier 1 component of 
an institution's qualifying capital must represent at least 50 percent 
of qualifying total capital and may consist of the following items that 
are defined as core capital elements:
    (i) Common stockholders' equity;
    (ii) Qualifying noncumulative perpetual preferred stock (including 
related surplus);
    (iii) Qualifying cumulative perpetual preferred stock (including 
related surplus), subject to certain limitations described below; and
    (iv) Minority interest in the equity accounts of consolidated 
subsidiaries.
    Tier 1 capital is generally defined as the sum of core capital 
elements \6\ less any amounts of goodwill, other intangible assets, 
interest-only strips receivables and nonfinancial equity investments 
that are required to be deducted in accordance with section II.B. of 
this appendix A.
---------------------------------------------------------------------------

    \6\ [Reserved]
---------------------------------------------------------------------------

    a. Common stockholders' equity. For purposes of calculating the 
risk-based capital ratio, common stockholders' equity is limited to 
common stock; related surplus; and retained earnings, including capital 
reserves and adjustments for the cumulative effect of foreign currency 
translation, net of any

[[Page 206]]

treasury stock; less net unrealized holding losses on available-for-sale 
equity securities with readily determinable fair values. For this 
purpose, net unrealized holding gains on such equity securities and net 
unrealized holding gains (losses) on available-for-sale debt securities 
are not included in common stockholders' equity.
    b. Perpetual preferred stock. Perpetual preferred stock is defined 
as preferred stock that does not have a maturity date, that cannot be 
redeemed at the option of the holder of the instrument, and that has no 
other provisions that will require future redemption of the issue. 
Consistent with these provisions, any perpetual preferred stock with a 
feature permitting redemption at the option of the issuer may qualify as 
capital only if the redemption is subject to prior approval of the 
Federal Reserve. In general, preferred stock will qualify for inclusion 
in capital only if it can absorb losses while the issuer operates as a 
going concern (a fundamental characteristic of equity capital) and only 
if the issuer has the ability and legal right to defer or eliminate 
preferred dividends.
    Perpetual preferred stock in which the dividend is reset 
periodically based, in whole or in part, upon the banking organization's 
current credit standing (that is, auction rate perpetual preferred 
stock, including so-called Dutch auction money market, and remarketable 
preferred) will not qualify for inclusion in Tier 1 capital.\7\ Such 
instruments, however, qualify for inclusion in Tier 2 capital.
---------------------------------------------------------------------------

    \7\ Adjustable rate perpetual preferred stock (that is, perpetual 
preferred stock in which the dividend rate is not affected by the 
issuer's credit standing or financial condition but is adjusted 
periodically according to a formula based solely on general market 
interest rates) may be included in Tier 1 up to the limits specified for 
perpetual preferred stock.
---------------------------------------------------------------------------

    For bank holding companies, both cumulative and noncumulative 
perpetual preferred stock qualify for inclusion in Tier 1. However, the 
aggregate amount of cumulative perpetual preferred stock that may be 
included in a holding company's tier 1 is limited to one-third of the 
sum of core capital elements, excluding the cumulative perpetual 
preferred stock (that is, items i, ii, and iv above). Stated 
differently, the aggregate amount may not exceed 25 percent of the sum 
of all core capital elements, including cumulative perpetual preferred 
stock (that is, items, i, ii, iii, and iv above). Any cumulative 
perpetual preferred stock outstanding in excess of this limit may be 
included in tier 2 capital without any sublimits within that tier (see 
discussion below).
    While the guidelines allow for the inclusion of noncumulative 
perpetual preferred stock and limited amounts of cumulative perpetual 
preferred stock in tier 1, it is desirable from a supervisory standpoint 
that voting common equity remain the dominant form of tier 1 capital. 
Thus, bank holding companies should avoid overreliance on preferred 
stock or nonvoting equity elements within tier 1.
    c. Minority interest in equity accounts of consolidated 
subsidiaries. This element is included in tier 1 capital because, as a 
general rule, it represents equity that is freely available to absorb 
losses in operating subsidiaries whose assets are included in a banking 
organization's risk-weighted asset base. While not subject to an 
explicit sublimit within tier 1, banking organizations are expected to 
avoid using minority interest in the equity accounts of consolidated 
subsidiaries as an avenue for introducing into their capital structures 
elements that might not otherwise qualify as tier 1 capital or that 
would, in effect, result in an excessive reliance on preferred stock 
within tier 1. Minority interests in small business investment 
companies, investment funds that hold nonfinancial equity investments 
(as defined in section II.B.5.b. of this appendix A), and subsidiaries 
engaged in nonfinancial activities are not included in the banking 
organization's tier 1 or total capital base if the organization's 
interest in the company or fund is held under one of the legal 
authorities listed in section II.B.5.b. In addition, minority interests 
in consolidated asset-backed commercial paper programs (ABCP) (as 
defined in section III.B.6. of this appendix A) that are sponsored by a 
banking organization are not to be included in the organization's tier 1 
or total capital base if the bank holding company excludes the 
consolidated assets of such programs from risk-weighted assets pursuant 
to section III.B.6. of this appendix.
    2. Supplementary capital elements (tier 2 capital). The tier 2 
component of an institution's qualifying capital may consist of the 
following items that are defined as supplementary capital elements:
    (i) Allowance for loan and lease losses (subject to limitations 
discussed below);
    (ii) Perpetual preferred stock and related surplus (subject to 
conditions discussed below);
    (iii) Hybrid capital instruments (as defined below), perpetual debt, 
and mandatory convertible debt securities;
    (iv) Term subordinated debt and intermediate-term preferred stock, 
including related surplus (subject to limitations discussed below);
    (v) Unrealized holding gains on equity securities (subject to 
limitations discussed in section II.A.2.e. of this appendix).
    The maximum amount of tier 2 capital that may be included in an 
institution's

[[Page 207]]

qualifying total capital is limited to 100 percent of tier 1 capital 
(net of goodwill, other intangible assets, interest-only strips 
receivables and nonfinancial equity investments that are required to be 
deducted in accordance with section II.B. of this appendix A).
    The elements of supplementary capital are discussed in greater 
detail below.\8\
---------------------------------------------------------------------------

    \8\ [Reserved]
---------------------------------------------------------------------------

    a. Allowance for loan and lease losses. Allowances for loan and 
lease losses are reserves that have been established through a charge 
against earnings to absorb future losses on loans or lease financing 
receivables. Allowances for loan and lease losses exclude ``allocated 
transfer risk reserves,'' \9\ and reserves created against identified 
losses.
---------------------------------------------------------------------------

    \9\ Allocated transfer risk reserves are reserves that have been 
established in accordance with Section 905(a) of the International 
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain 
assets whose value U.S. supervisory authorities have found to be 
significantly impaired by protracted transfer risk problems.
---------------------------------------------------------------------------

    During the transition period, the risk-based capital guidelines 
provide for reducing the amount of this allowance that may be included 
in an institution's total capital. Initially, it is unlimited. However, 
by year-end 1990, the amount of the allowance for loan and lease losses 
that will qualify as capital will be limited to 1.5 percent of an 
institution's weighted risk assets. By the end of the transition period, 
the amount of the allowance qualifying for inclusion in Tier 2 capital 
may not exceed 1.25 percent of weighted risk assets.\10\
---------------------------------------------------------------------------

    \10\ The amount of the allowance for loan and lease losses that may 
be included in Tier 2 capital is based on a percentage of gross weighted 
risk assets. A banking organization may deduct reserves for loan and 
lease losses in excess of the amount permitted to be included in Tier 2 
capital, as well as allocated transfer risk reserves, from the sum of 
gross weighted risk assets and use the resulting net sum of weighted 
risk assets in computing the denominator of the risk-based capital 
ratio.
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    b. Perpetual preferred stock. Perpetual preferred stock, as noted 
above, is defined as preferred stock that has no maturity date, that 
cannot be redeemed at the option of the holder, and that has no other 
provisions that will require future redemption of the issue. Such 
instruments are eligible for inclusion in Tier 2 capital without 
limit.\11\
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    \11\ Long-term preferred stock with an original maturity of 20 years 
or more (including related surplus) will also qualify in this category 
as an element of Tier 2. If the holder of such an instrument has a right 
to require the issuer to redeem, repay, or repurchase the instrument 
prior to the original stated maturity, maturity would be defined, for 
risk-based capital purposes, as the earliest possible date on which the 
holder can put the instrument back to the issuing banking organization.
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    c. Hybrid capital instruments, perpetual debt, and mandatory 
convertible debt securities. Hybrid capital instruments include 
instruments that are essentially permanent in nature and that have 
certain characteristics of both equity and debt. Such instruments may be 
included in Tier 2 without limit. The general criteria hybrid capital 
instruments must meet in order to qualify for inclusion in Tier 2 
capital are listed below:
    (1) The instrument must be unsecured; fully paid-up and subordinated 
to general creditors. If issued by a bank, it must also be subordinated 
to claims or depositors.
    (2) The instrument must not be redeemable at the option of the 
holder prior to maturity, except with the prior approval of the Federal 
Reserve. (Consistent with the Board's criteria for perpetual debt and 
mandatory convertible securities, this requirement implies that holders 
of such instruments may not accelerate the payment of principal except 
in the event of bankruptcy, insolvency, or reorganization.)
    (3) The instrument must be available to participate in losses while 
the issuer is operating as a going concern. (Term subordinated debt 
would not meet this requirement.) To satisfy this requirement, the 
instrument must convert to common or perpetual preferred stock in the 
event that the accumulated losses exceed the sum of the retained 
earnings and capital surplus accounts of the issuer.
    (4) The instrument must provide the option for the issuer to defer 
interest payments if: a) the issuer does not report a profit in the 
preceding annual period (defined as combined profits for the most recent 
four quarters), and b) the issuer eliminates cash dividends on common 
and preferred stock.
    Perpetual debt and mandatory convertible debt securities that meet 
the criteria set forth in 12 CFR part 225, appendix B, also qualify as 
unlimited elements of Tier 2 capital for bank holding companies.
    d. Subordinated debt and intermediate-term preferred stock. (i) The 
aggregate amount of term subordinated debt (excluding mandatory 
convertible debt) and intermediate-term preferred stock that may be 
treated as supplementary capital is limited to 50 percent of Tier 1 
capital (net of goodwill and other intangible assets required to be 
deducted in accordance with section II.B.1.b. of this appendix). Amounts 
in excess of these limits may be issued and, while not included in the 
ratio calculation, will be taken into account in the overall assessment 
of an organization's funding and financial condition.

[[Page 208]]

    (ii) Subordinated debt and intermediate-term preferred stock must 
have an original weighted average maturity of at least five years to 
qualify as supplementary capital.\12\ (If the holder has the option to 
require the issuer to redeem, repay, or repurchase the instrument prior 
to the stated maturity, maturity would be defined, for risk-based 
capital purposes, as the earliest possible date on which the holder can 
put the instrument back to the issuing banking organization.) \13\ In 
the case of subordinated debt, the instrument must be unsecured and must 
clearly state on its face that it is not a deposit and is not insured by 
a Federal agency. Bank holding company debt must be subordinated in the 
right of payment to all senior indebtedness of the company.
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    \12\ Unsecured term debt issued by bank holding companies prior to 
March 12, 1988, and qualifying as secondary capital at the time of 
issuance continues to qualify as an element of supplementary capital 
under the risk-based framework, subject to the 50 percent of Tier 1 
capital limitation. Bank holding company term debt issued on or after 
March 12, 1988, must be subordinated in order to qualify as capital.
    \13\ As a limited-life capital instrument approaches maturity it 
begins to take on characteristics of a short-term obligation. For this 
reason, the outstanding amount of term subordinated debt and limited-
life preferred stock eligible for inclusion in Tier 2 is reduced, or 
discounted, as these instruments approach maturity: one-fifth of the 
original amount (less redemptions) is excluded each year during the 
instrument's last five years before maturity. When the remaining 
maturity is less than one year, the instrument is excluded from Tier 2 
capital.
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    e. Unrealized gains on equity securities and unrealized gains 
(losses) on other assets. Up to 45 percent of pretax net unrealized 
holding gains (that is, the excess, if any, of the fair value over 
historical cost) on available-for-sale equity securities with readily 
determinable fair values may be included in supplementary capital. 
However, the Federal Reserve may exclude all or a portion of these 
unrealized gains from Tier 2 capital if the Federal Reserve determines 
that the equity securities are not prudently valued. Unrealized gains 
(losses) on other types of assets, such as bank premises and available-
for-sale debt securities, are not included in supplementary capital, but 
the Federal Reserve may take these unrealized gains (losses) into 
account as additional factors when assessing an institution's overall 
capital adequacy.
    f. Revaluation reserves. i. Such reserves reflect the formal balance 
sheet restatement or revaluation for capital purposes of asset carrying 
values to reflect current market values. The Federal Reserve generally 
has not included unrealized asset appreciation in capital ratio 
calculations, although it has long taken such values into account as a 
separate factor in assessing the overall financial strength of a banking 
organization.
    ii. Consistent with long-standing supervisory practice, the excess 
of market values over book values for assets held by bank holding 
companies will generally not be recognized in supplementary capital or 
in the calculation of the risk-based capital ratio. However, all bank 
holding companies are encouraged to disclose their equivalent of 
premises (building) and security revaluation reserves. The Federal 
Reserve will consider any appreciation, as well as any depreciation, in 
specific asset values as additional considerations in assessing overall 
capital strength and financial condition.

            B. Deductions from Capital and Other Adjustments

    Certain assets are deducted from an organization's capital for the 
purpose of calculating the risk-based capital ratio.\14\ These assets 
include:
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    \14\ Any assets deducted from capital in computing the numerator of 
the ratio are not included in weighted risk assets in computing the 
denominator of the ratio.
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    (i)(a) Goodwill--deducted from the sum of core capital elements.
    (b) Certain identifiable intangible assets, that is, intangible 
assets other than goodwill--deducted from the sum of core capital 
elements in accordance with section II.B.1.b. of this appendix.
    (c) Certain credit-enhancing interest-only strips receivables--
deducted from the sum of core capital elements in accordance with 
sections II.B.1.c. through e. of this appendix.
    (ii) Investments in banking and finance subsidiaries that are not 
consolidated for accounting or supervisory purposes, and investments in 
other designated subsidiaries or associated companies at the discretion 
of the Federal Reserve--deducted from total capital components (as 
described in greater detail below).
    (iii) Reciprocal holdings of capital instruments of banking 
organizations--deducted from total capital components.
    (iv) Deferred tax assets--portions are deducted from the sum of core 
capital elements in accordance with section II.B.4. of this Appendix A.
    (v) Nonfinancial equity investments--portions are deducted from the 
sum of core capital elements in accordance with section II.B.5 of this 
appendix A.
    1. Goodwill and other intangible assets--a. Goodwill. Goodwill is an 
intangible asset that represents the excess of the purchase price

[[Page 209]]

over the fair market value of identifiable assets acquired less 
liabilities assumed in acquisitions accounted for under the purchase 
method of accounting. Any goodwill carried on the balance sheet of a 
bank holding company after December 31, 1992, will be deducted from the 
sum of core capital elements in determining Tier 1 capital for ratio 
calculation purposes. Any goodwill in existence before March 12, 1988, 
is ``grandfathered'' during the transition period and is not deducted 
from core capital elements until after December 31, 1992. However, bank 
holding company goodwill acquired as a result of a merger or acquisition 
that was consummated on or after March 12, 1988, is deducted 
immediately.
    b. Other intangible assets. i. All servicing assets, including 
servicing assets on assets other than mortgages (i.e., nonmortgage 
servicing assets), are included in this appendix as identifiable 
intangible assets. The only types of identifiable intangible assets that 
may be included in, that is, not deducted from, an organization's 
capital are readily marketable mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships. The total 
amount of these assets that may be included in capital is subject to the 
limitations described below in sections II.B.1.d. and e. of this 
appendix.
    ii. The treatment of identifiable intangible assets set forth in 
this section generally will be used in the calculation of a bank holding 
company's capital ratios for supervisory and applications purposes. 
However, in making an overall assessment of a bank holding company's 
capital adequacy for applications purposes, the Board may, if it deems 
appropriate, take into account the quality and composition of an 
organization's capital, together with the quality and value of its 
tangible and intangible assets.
    c. Credit-enhancing interest-only strips receivables (I/Os) i. 
Credit-enhancing I/Os are on-balance sheet assets that, in form or in 
substance, represent a contractual right to receive some or all of the 
interest due on transferred assets and expose the bank holding company 
to credit risk directly or indirectly associated with transferred assets 
that exceeds a pro rata share of the bank holding company's claim on the 
assets, whether through subordination provisions or other credit 
enhancement techniques. Such I/Os, whether purchased or retained, 
including other similar ``spread'' assets, may be included in, that is, 
not deducted from, a bank holding company's capital subject to the 
limitations described below in sections II.B.1.d. and e. of this 
appendix.
    ii. Both purchased and retained credit-enhancing I/Os, on a non-tax 
adjusted basis, are included in the total amount that is used for 
purposes of determining whether a bank holding company exceeds the tier 
1 limitation described below in this section. In determining whether an 
I/O or other types of spread assets serve as a credit enhancement, the 
Federal Reserve will look to the economic substance of the transaction.
    d. Fair value limitation. The amount of mortgage servicing assets, 
nonmortgage servicing assets, and purchased credit card relationships 
that a bank holding company may include in capital shall be the lesser 
of 90 percent of their fair value, as determined in accordance with 
section II.B.1.f. of this appendix, or 100 percent of their book value, 
as adjusted for capital purposes in accordance with the instructions to 
the Consolidated Financial Statements for Bank Holding Companies (FR Y-
9C Report). The amount of credit-enhancing I/Os that a bank holding 
company may include in capital shall be its fair value. If both the 
application of the limits on mortgage servicing assets, nonmortgage 
servicing assets, and purchased credit card relationships and the 
adjustment of the balance sheet amount for these assets would result in 
an amount being deducted from capital, the bank holding company would 
deduct only the greater of the two amounts from its core capital 
elements in determining tier 1 capital.
    e. Tier 1 capital limitation. i. The total amount of mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships that may be included in capital, in the aggregate, 
cannot exceed 100 percent of tier 1 capital. Nonmortgage servicing 
assets and purchased credit card relationships are subject, in the 
aggregate, to a separate sublimit of 25 percent of tier 1 capital. In 
addition, the total amount of credit-enhancing I/Os (both purchased and 
retained) that may be included in capital cannot exceed 25 percent of 
tier 1 capital.\15\
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    \15\ Amounts of servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os (both retained and purchased) 
in excess of these limitations, as well as all other identifiable 
intangible assets, including core deposit intangibles and favorable 
leaseholds, are to be deducted from a bank holding company's core 
capital elements in determining tier 1 capital. However, identifiable 
intangible assets (other than mortgage servicing assets and purchased 
credit card relationships) acquired on or before February 19, 1992, 
generally will not be deducted from capital for supervisory purposes, 
although they will continue to be deducted for applications purposes.
---------------------------------------------------------------------------

    ii. For purposes of calculating these limitations on mortgage 
servicing assets, nonmortgage servicing assets, purchased credit card 
relationships, and credit-enhancing I/Os, tier 1 capital is defined as 
the sum of core capital elements, net of goodwill, and net of all 
identifiable intangible assets other

[[Page 210]]

than mortgage servicing assets, nonmortgage servicing assets, and 
purchased credit card relationships, but prior to the deduction of any 
disallowed mortgage servicing assets, any disallowed nonmortgage 
servicing assets, any disallowed purchased credit card relationships, 
any disallowed credit-enhancing I/Os (both purchased and retained), any 
disallowed deferred tax assets, and any nonfinancial equity investments.
    iii. Bank holding companies may elect to deduct disallowed mortgage 
servicing assets, disallowed nonmortgage servicing assets, and 
disallowed credit-enhancing I/Os (both purchased and retained) on a 
basis that is net of any associated deferred tax liability. Deferred tax 
liabilities netted in this manner cannot also be netted against 
deferred-tax assets when determining the amount of deferred-tax assets 
that are dependent upon future taxable income.
    f. Valuation. Bank holding companies must review the book value of 
all intangible assets at least quarterly and make adjustments to these 
values as necessary. The fair value of mortgage servicing assets, 
nonmortgage servicing assets, purchased credit card relationships, and 
credit-enhancing I/Os also must be determined at least quarterly. This 
determination shall include adjustments for any significant changes in 
original valuation assumptions, including changes in prepayment 
estimates or account attrition rates. Examiners will review both the 
book value and the fair value assigned to these assets, together with 
supporting documentation, during the inspection process. In addition, 
the Federal Reserve may require, on a case-by-case basis, an independent 
valuation of a bank holding company's intangible assets or credit-
enhancing I/Os.
    g. Growing organizations. Consistent with long-standing Board 
policy, banking organizations experiencing substantial growth, whether 
internally or by acquisition, are expected to maintain strong capital 
positions substantially above minimum supervisory levels, without 
significant reliance on intangible assets or credit-enhancing I/Os.
    2. Investments in certain subsidiaries-- a. Unconsolidated banking 
or finance subsidiaries. The aggregate amount of investments in banking 
or finance subsidiaries \16\ whose financial statements are not 
consolidated for accounting or regulatory reporting purposes, regardless 
of whether the investment is made by the parent bank holding company or 
its direct or indirect subsidiaries, will be deducted from the 
consolidated parent banking organization's total capital components.\17\ 
Generally, investments for this purpose are defined as equity and debt 
capital investments and any other instruments that are deemed to be 
capital in the particular subsidiary.
---------------------------------------------------------------------------

    \16\ For this purpose, a banking and finance subsidiary generally is 
defined as any company engaged in banking or finance in which the parent 
institution holds directly or indirectly more than 50 percent of the 
outstanding voting stock, or which is otherwise controlled or capable of 
being controlled by the parent institution.
    \17\ An exception to this deduction would be made in the case of 
shares acquired in the regular course of securing or collecting a debt 
previously contracted in good faith. The requirements for consolidation 
are spelled out in the instructions to the FR Y-9C Report.
---------------------------------------------------------------------------

    Advances (that is, loans, extensions of credit, guarantees, 
commitments, or any other forms of credit exposure) to the subsidiary 
that are not deemed to be capital will generally not be deducted from an 
organization's capital. Rather, such advances generally will be included 
in the parent banking organization's consolidated assets and be assigned 
to the 100 percent risk category, unless such obligations are backed by 
recognized collateral or guarantees, in which case they will be assigned 
to the risk category appropriate to such collateral or guarantees. These 
advances may, however, also be deducted from the consolidated parent 
banking organization's capital if, in the judgment of the Federal 
Reserve, the risks stemming from such advances are comparable to the 
risks associated with capital investments or if the advances involve 
other risk factors that warrant such an adjustment to capital for 
supervisory purposes. These other factors could include, for example, 
the absence of collateral support.
    Inasmuch as the assets of unconsolidated banking and finance 
subsidiaries are not fully reflected in a banking organization's 
consolidated total assets, such assets may be viewed as the equivalent 
of off-balance sheet exposures since the operations of an unconsolidated 
subsidiary could expose the parent organization and its affiliates to 
considerable risk. For this reason, it is generally appropriate to view 
the capital resources invested in these unconsolidated entities as 
primarily supporting the risks inherent in these off-balance sheet 
assets, and not generally available to support risks or absorb losses 
elsewhere in the organization.
    b. Other subsidiaries and investments. The deduction of investments, 
regardless of whether they are made by the parent bank holding company 
or by its direct or indirect subsidiaries, from a consolidated banking 
organization's capital will also be applied in the case of any 
subsidiaries, that, while consolidated for accounting purposes, are not

[[Page 211]]

consolidated for certain specified supervisory or regulatory purposes, 
such as to facilitate functional regulation. For this purpose, aggregate 
capital investments (that is, the sum of any equity or debt instruments 
that are deemed to be capital) in these subsidiaries will be deducted 
from the consolidated parent banking organization's total capital 
components.\18\
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    \18\ Investments in unconsolidated subsidiaries will be deducted 
from both Tier 1 and Tier 2 capital. As a general rule, one-half (50 
percent) of the aggregate amount of capital investments will be deducted 
from the bank holding company's Tier 1 capital and one-half (50 percent) 
from its Tier 2 capital. However, the Federal Reserve may, on a case-by-
case basis, deduct a proportionately greater amount from Tier 1 if the 
risks associated with the subsidiary so warrant. If the amount 
deductible from Tier 2 capital exceeds actual Tier 2 capital, the excess 
would be deducted from Tier 1 capital. Bank holding companies' risk-
based capital ratios, net of these deductions, must exceed the minimum 
standards set forth in section IV.
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    Advances (that is, loans, extensions of credit, guarantees, 
commitments, or any other forms of credit exposure) to such subsidiaries 
that are not deemed to be capital will generally not be deducted from 
capital. Rather, such advances will normally be included in the parent 
banking organization's consolidated assets and assigned to the 100 
percent risk category, unless such obligations are backed by recognized 
collateral or guarantees, in which case they will be assigned to the 
risk category appropriate to such collateral or guarantees. These 
advances may, however, be deducted from the consolidated parent banking 
organization's capital if, in the judgment of the Federal Reserve, the 
risks stemming from such advances are comparable to the risks associated 
with capital investments or if such advances involve other risk factors 
that warrant such an adjustment to capital for supervisory purposes. 
These other factors could include, for example, the absence of 
collateral support.\19\
---------------------------------------------------------------------------

    \19\ In assessing the overall capital adequacy of a banking 
organization, the Federal Reserve may also consider the organization's 
fully consolidated capital position.
---------------------------------------------------------------------------

    In general, when investments in a consolidated subsidiary are 
deducted from a consolidated parent banking organization's capital, the 
subsidiary's assets will also be excluded from the consolidated assets 
of the parent banking organization in order to assess the latter's 
capital adequacy.\20\
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    \20\ If the subsidiary's assets are consolidated with the parent 
banking organization for financial reporting purposes, this adjustment 
will involve excluding the subsidiary's assets on a line-by-line basis 
from the consolidated parent organization's assets. The parent banking 
organization's capital ratio will then be calculated on a consolidated 
basis with the exception that the assets of the excluded subsidiary will 
not be consolidated with the remainder of the parent banking 
organization.
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    The Federal Reserve may also deduct from a banking organization's 
capital, on a case-by-case basis, investments in certain other 
subsidiaries in order to determine if the consolidated banking 
organization meets minimum supervisory capital requirements without 
reliance on the resources invested in such subsidiaries.
    The Federal Reserve will not automatically deduct investments in 
other unconsolidated subsidiaries or investments in joint ventures and 
associated companies.\21\ Nonetheless, the resources invested in these 
entities, like investments in unconsolidated banking and finance 
subsidiaries, support assets not consolidated with the rest of the 
banking organization's activities and, therefore, may not be generally 
available to support additional leverage or absorb losses elsewhere in 
the banking organization. Moreover, experience has shown that banking 
organizations stand behind the losses of affiliated institutions, such 
as joint ventures and associated companies, in order to protect the 
reputation of the organization as a whole. In some cases, this has led 
to losses that have exceeded the investments in such organizations.
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    \21\ The definition of such entities is contained in the 
instructions to the Consolidated Financial Statements for Bank Holding 
Companies. Under regulatory reporting procedures, associated companies 
and joint ventures generally are defined as companies in which the 
banking organization owns 20 to 50 percent of the voting stock.
---------------------------------------------------------------------------

    For this reason, the Federal Reserve will monitor the level and 
nature of such investments for individual banking organizations and may, 
on a case-by-case basis, deduct such investments from total capital 
components, apply an appropriate risk-weighted capital charge against 
the organization's proportionate share of the assets of its associated 
companies, require a line-by-line consolidation of the entity (in the 
event that the parent's control over the entity makes it the functional 
equivalent of a subsidiary), or otherwise require the organization to 
operate with a risk-based capital ratio above the minimum.
    In considering the appropriateness of such adjustments or actions, 
the Federal Reserve will generally take into account whether:
    (1) The parent banking organization has significant influence over 
the financial or

[[Page 212]]

managerial policies or operations of the subsidiary, joint venture, or 
associated company;
    (2) The banking organization is the largest investor in the 
affiliated company; or
    (3) Other circumstances prevail that appear to closely tie the 
activities of the affiliated company to the parent banking organization.
    3. Reciprocal holdings of banking organizations' capital 
instruments. Reciprocal holdings of banking organizations' capital 
instruments (that is, instruments that qualify as Tier 1 or Tier 2 
capital) will be deducted from an organization's total capital 
components for the purpose of determining the numerator of the risk-
based capital ratio.
    Reciprocal holdings are cross-holdings resulting from formal or 
informal arrangements in which two or more banking organizations swap, 
exchange, or otherwise agree to hold each other's capital instruments. 
Generally, deductions will be limited to intentional cross-holdings. At 
present, the Board does not intend to require banking organizations to 
deduct non-reciprocal holdings of such capital instruments.\22\
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    \22\ Deductions of holdings of capital securities also would not be 
made in the case of interstate ``stake out'' investments that comply 
with the Board's Policy Statement on Nonvoting Equity Investments, 12 
CFR 225.143 (Federal Reserve Regulatory Service 4-172.1; 68 Federal 
Reserve Bulletin 413 (1982)). In addition, holdings of capital 
instruments issued by other banking organizations but taken in 
satisfaction of debts previously contracted would be exempt from any 
deduction from capital. The Board intends to monitor nonreciprocal 
holdings of other banking organizations' capital instruments and to 
provide information on such holdings to the Basle Supervisors' Committee 
as called for under the Basle capital framework.
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    4. Deferred-tax assets. a. The amount of deferred-tax assets that is 
dependent upon future taxable income, net of the valuation allowance for 
deferred-tax assets, that may be included in, that is, not deducted 
from, a bank holding company's capital may not exceed the lesser of:
    i. The amount of these deferred-tax assets that the bank holding 
company is expected to realize within one year of the calendar quarter-
end date, based on its projections of future taxable income for that 
year,\23\ or
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    \23\ To determine the amount of expected deferred-tax assets 
realizable in the next 12 months, an institution should assume that all 
existing temporary differences fully reverse as of the report date. 
Projected future taxable income should not include net operating loss 
carry-forwards to be used during that year or the amount of existing 
temporary differences a bank holding company expects to reverse within 
the year. Such projections should include the estimated effect of tax-
planning strategies that the organization expects to implement to 
realize net operating losses or tax-credit carry-forwards that would 
otherwise expire during the year. Institutions do not have to prepare a 
new 12-month projection each quarter. Rather, on interim report dates, 
institutions may use the future-taxable income projections for their 
current fiscal year, adjusted for any significant changes that have 
occurred or are expected to occur.
---------------------------------------------------------------------------

    ii. 10 percent of tier 1 capital.
    b. The reported amount of deferred-tax assets, net of any valuation 
allowance for deferred-tax assets, in excess of the lesser of these two 
amounts is to be deducted from a banking organization's core capital 
elements in determining tier 1 capital. For purposes of calculating the 
10 percent limitation, tier 1 capital is defined as the sum of core 
capital elements, net of goodwill and net of all identifiable intangible 
assets other than mortgage servicing assets, nonmortgage servicing 
assets, and purchased credit card relationships, but prior to the 
deduction of any disallowed mortgage servicing assets, any disallowed 
nonmortgage servicing assets, any disallowed purchased credit card 
relationships, any disallowed credit-enhancing I/Os, any disallowed 
deferred-tax assets, and any nonfinancial equity investments. There 
generally is no limit in tier 1 capital on the amount of deferred-tax 
assets that can be realized from taxes paid in prior carry-back years or 
from future reversals of existing taxable temporary differences.
    5. Nonfinancial equity investments--a. General. A bank holding 
company must deduct from its core capital elements the sum of the 
appropriate percentages (as determined below) of the adjusted carrying 
value of all nonfinancial equity investments held by the parent bank 
holding company or by its direct or indirect subsidiaries. For purposes 
of this section II.B.5, investments held by a bank holding company 
include all investments held directly or indirectly by the bank holding 
company or any of its subsidiaries.
    b. Scope of nonfinancial equity investments. A nonfinancial equity 
investment means any equity investment held by the bank holding company: 
under the merchant banking authority of section 4(k)(4)(H) of the BHC 
Act and subpart J of the Board's Regulation Y (12 CFR 225.175 et seq.); 
under section 4(c)(6) or 4(c)(7) of BHC Act in a nonfinancial company or 
in a company that makes investments in nonfinancial companies; in a 
nonfinancial company through a small business investment company (SBIC) 
under section 302(b) of

[[Page 213]]

the Small Business Investment Act of 1958; \24\ in a nonfinancial 
company under the portfolio investment provisions of the Board's 
Regulation K (12 CFR 211.8(c)(3)); or in a nonfinancial company under 
section 24 of the Federal Deposit Insurance Act (other than section 
24(f)).\25\ A nonfinancial company is an entity that engages in any 
activity that has not been determined to be financial in nature or 
incidental to financial activities under section 4(k) of the Bank 
Holding Company Act (12 U.S.C. 1843(k)).
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    \24\ An equity investment made under section 302(b) of the Small 
Business Investment Act of 1958 in an SBIC that is not consolidated with 
the parent banking organization is treated as a nonfinancial equity 
investment.
    \25\ See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C. 
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a. In a case in which 
the Board of Directors of the FDIC, acting directly in exceptional cases 
and after a review of the proposed activity, has permitted a lesser 
capital deduction for an investment approved by the Board of Directors 
under section 24 of the Federal Deposit Insurance Act, such deduction 
shall also apply to the consolidated bank holding company capital 
calculation so long as the bank's investments under section 24 and SBIC 
investments represent, in the aggregate, less than 15 percent of the 
Tier 1 capital of the bank.
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    c. Amount of deduction from core capital. i. The bank holding 
company must deduct from its core capital elements the sum of the 
appropriate percentages, as set forth in Table 1, of the adjusted 
carrying value of all nonfinancial equity investments held by the bank 
holding company. The amount of the percentage deduction increases as the 
aggregate amount of nonfinancial equity investments held by the bank 
holding company increases as a percentage of the bank holding company's 
Tier 1 capital.

         Table 1--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
 Aggregate adjusted carrying value of all
   nonfinancial equity investments held     Deduction from Core Capital
    directly or indirectly by the bank      Elements (as a percentage of
 holding company (as a percentage of the    the adjusted carrying value
   Tier 1 capital of the parent banking          of the investment)
             organization)\1\
------------------------------------------------------------------------
Less than 15 percent.....................  8 percent.
15 percent to 24.99 percent..............  12 percent.
25 percent and above.....................  25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
  nonfinancial equity investments as a percentage of Tier 1 capital,
  Tier 1 capital is defined as the sum of core capital elements net of
  goodwill and net of all identifiable intangible assets other than
  mortgage servicing assets, nonmortgage servicing assets and purchased
  credit card relationships, but prior to the deduction for any
  disallowed mortgage servicing assets, any disallowed nonmortgage
  servicing assets, any disallowed purchased credit card relationships,
  any disallowed credit enhancing I/Os (both purchased and retained),
  any disallowed deferred tax assets, and any nonfinancial equity
  investments.

    ii. These deductions are applied on a marginal basis to the portions 
of the adjusted carrying value of nonfinancial equity investments that 
fall within the specified ranges of the parent holding company's Tier 1 
capital. For example, if the adjusted carrying value of all nonfinancial 
equity investments held by a bank holding company equals 20 percent of 
the Tier 1 capital of the bank holding company, then the amount of the 
deduction would be 8 percent of the adjusted carrying value of all 
investments up to 15 percent of the company's Tier 1 capital, and 12 
percent of the adjusted carrying value of all investments in excess of 
15 percent of the company's Tier 1 capital.
    iii. The total adjusted carrying value of any nonfinancial equity 
investment that is subject to deduction under this paragraph is excluded 
from the bank holding company's risk-weighted assets for purposes of 
computing the denominator of the company's risk-based capital ratio.\26\
---------------------------------------------------------------------------

    \26\ For example, if 8 percent of the adjusted carrying value of a 
nonfinancial equity investment is deducted from Tier 1 capital, the 
entire adjusted carrying value of the investment will be excluded from 
risk-weighted assets in calculating the denominator for the risk-based 
capital ratio.
---------------------------------------------------------------------------

    iv. As noted in section I, this appendix establishes minimum risk-
based capital ratios and banking organizations are at all times expected 
to maintain capital commensurate with the level and nature of the risks 
to which they are exposed. The risk to a banking organization from 
nonfinancial equity investments increases with its concentration in such 
investments and strong capital levels above the minimum requirements are 
particularly important when a banking organization has a high degree of 
concentration in

[[Page 214]]

nonfinancial equity investments (e.g., in excess of 50 percent of Tier 1 
capital). The Federal Reserve intends to monitor banking organizations 
and apply heightened supervision to equity investment activities as 
appropriate, including where the banking organization has a high degree 
of concentration in nonfinancial equity investments, to ensure that each 
organization maintains capital levels that are appropriate in light of 
its equity investment activities. The Federal Reserve also reserves 
authority to impose a higher capital charge in any case where the 
circumstances, such as the level of risk of the particular investment or 
portfolio of investments, the risk management systems of the banking 
organization, or other information, indicate that a higher minimum 
capital requirement is appropriate.
    d. SBIC investments. i. No deduction is required for nonfinancial 
equity investments that are held by a bank holding company through one 
or more SBICs that are consolidated with the bank holding company or in 
one or more SBICs that are not consolidated with the bank holding 
company to the extent that all such investments, in the aggregate, do 
not exceed 15 percent of the aggregate of the bank holding company's pro 
rata interests in the Tier 1 capital of its subsidiary banks. Any 
nonfinancial equity investment that is held through or in an SBIC and 
not required to be deducted from Tier 1 capital under this section 
II.B.5.d. will be assigned a 100 percent risk-weight and included in the 
parent holding company's consolidated risk-weighted assets.\27\
---------------------------------------------------------------------------

    \27\ If a bank holding company has an investment in an SBIC that is 
consolidated for accounting purposes but that is not wholly owned by the 
bank holding company, the adjusted carrying value of the bank holding 
company's nonfinancial equity investments through the SBIC is equal to 
the holding company's proportionate share of the adjusted carrying value 
of the SBIC's equity investments in nonfinancial companies. The 
remainder of the SBIC's adjusted carrying value (i.e. the minority 
interest holders' proportionate share) is excluded from the risk-
weighted assets of the bank holding company. If a bank holding company 
has an investment in a SBIC that is not consolidated for accounting 
purposes and has current information that identifies the percentage of 
the SBIC's assets that are equity investments in nonfinancial companies, 
the bank holding company may reduce the adjusted carrying value of its 
investment in the SBIC proportionately to reflect the percentage of the 
adjusted carrying value of the SBIC's assets that are not equity 
investments in nonfinancial companies. If a bank holding company reduces 
the adjusted carrying value of its investment in a non-consolidated SBIC 
to reflect financial investments of the SBIC, the amount of the 
adjustment will be risk weighted at 100 percent and included in the 
bank's risk-weighted assets.
---------------------------------------------------------------------------

    ii. To the extent the adjusted carrying value of all nonfinancial 
equity investments that a bank holding company holds through one or more 
SBICs that are consolidated with the bank holding company or in one or 
more SBICs that are not consolidated with the bank holding company 
exceeds, in the aggregate, 15 percent of the aggregate Tier 1 capital of 
the company's subsidiary banks, the appropriate percentage of such 
amounts (as set forth in Table 1) must be deducted from the bank holding 
company's core capital elements. In addition, the aggregate adjusted 
carrying value of all nonfinancial equity investments held through a 
consolidated SBIC and in a non-consolidated SBIC (including any 
investments for which no deduction is required) must be included in 
determining, for purposes of Table 1, the total amount of nonfinancial 
equity investments held by the bank holding company in relation to its 
Tier 1 capital.
    e. Transition provisions. No deduction under this section II.B.5 is 
required to be made with respect to the adjusted carrying value of any 
nonfinancial equity investment (or portion of such an investment) that 
was made by the bank holding company prior to March 13, 2000, or that 
was made after such date pursuant to a binding written commitment \28\ 
entered into by the bank holding company prior to March 13, 2000, 
provided that in either case the bank holding company has continuously 
held the investment since the relevant investment date.\29\ For

[[Page 215]]

purposes of this section II.B.5.e., a nonfinancial equity investment 
made prior to March 13, 2000, includes any shares or other interests 
received by the bank holding company through a stock split or stock 
dividend on an investment made prior to March 13, 2000, provided the 
bank holding company provides no consideration for the shares or 
interests received and the transaction does not materially increase the 
bank'' holding company's proportional interest in the company. The 
exercise on or after March 13, 2000, of options or warrants acquired 
prior to March 13, 2000, is not considered to be an investment made 
prior to March 13, 2000, if the bank holding company provides any 
consideration for the shares or interests received upon exercise of the 
options or warrants. Any nonfinancial equity investment (or portion 
thereof) that is not required to be deducted from Tier 1 capital under 
this section II.B.5.e. must be included in determining the total amount 
of nonfinancial equity investments held by the bank holding company in 
relation to its Tier 1 capital for purposes of Table 1. In addition, any 
nonfinancial equity investment (or portion thereof) that is not required 
to be deducted from Tier 1 capital under this section II.B.5.e. will be 
assigned a 100-percent risk weight and included in the bank holding 
company's consolidated risk-weighted assets.
---------------------------------------------------------------------------

    \28\ A ``binding written commitment'' means a legally binding 
written agreement that requires the banking organization to acquire 
shares or other equity of the company, or make a capital contribution to 
the company, under terms and conditions set forth in the agreement. 
Options, warrants, and other agreements that give a banking organization 
the right to acquire equity or make an investment, but do not require 
the banking organization to take such actions, are not considered a 
binding written commitment for purposes of this section II.B.5.
    \29\ For example, if a bank holding company made an equity 
investment in 100 shares of a nonfinancial company prior to March 13, 
2000, that investment would not be subject to a deduction under this 
section II.B.5. However, if the bank holding company made any additional 
equity investment in the company after March 13, 2000, such as by 
purchasing additional shares of the company (including through the 
exercise of options or warrants acquired before or after March 13, 2000) 
or by making a capital contribution to the company, and such investment 
was not made pursuant to a binding written commitment entered into 
before March 13, 2000, the adjusted carrying value of the additional 
investment would be subject to a deduction under this section II.B.5. In 
addition, if the bank holding company sold and repurchased shares of the 
company after March 13, 2000, the adjusted carrying value of the re-
acquired shares would be subject to a deduction under this section 
II.B.5.
---------------------------------------------------------------------------

    f. Adjusted carrying value. i. For purposes of this section II.B.5., 
the ``adjusted carrying value'' of investments is the aggregate value at 
which the investments are carried on the balance sheet of the 
consolidated bank holding company reduced by any unrealized gains on 
those investments that are reflected in such carrying value but excluded 
from the bank holding company's Tier 1 capital and associated deferred 
tax liabilities. For example, for investments held as available-for-sale 
(AFS), the adjusted carrying value of the investments would be the 
aggregate carrying value of the investments (as reflected on the 
consolidated balance sheet of the bank holding company) less any 
unrealized gains on those investments that are included in other 
comprehensive income and not reflected in Tier 1 capital, and associated 
deferred tax liabilities.\30\
---------------------------------------------------------------------------

    \30\ Unrealized gains on AFS investments may be included in 
supplementary capital to the extent permitted under section II.A.2.e of 
this appendix A. In addition, the unrealized losses on AFS equity 
investments are deducted from Tier 1 capital in accordance with section 
II.A.1.a of this appendix A.
---------------------------------------------------------------------------

    ii. As discussed above with respect to consolidated SBICs, some 
equity investments may be in companies that are consolidated for 
accounting purposes. For investments in a nonfinancial company that is 
consolidated for accounting purposes under generally accepted accounting 
principles, the parent banking organization's adjusted carrying value of 
the investment is determined under the equity method of accounting (net 
of any intangibles associated with the investment that are deducted from 
the consolidated bank holding company's core capital in accordance with 
section II.B.1 of this Appendix). Even though the assets of the 
nonfinancial company are consolidated for accounting purposes, these 
assets (as well as the credit equivalent amounts of the company's off-
balance sheet items) should be excluded from the banking organization's 
risk-weighted assets for regulatory capital purposes.
    g. Equity investments. For purposes of this section II.B.5, an 
equity investment means any equity instrument (including common stock, 
preferred stock, partnership interests, interests in limited liability 
companies, trust certificates and warrants and call options that give 
the holder the right to purchase an equity instrument), any equity 
feature of a debt instrument (such as a warrant or call option), and any 
debt instrument that is convertible into equity where the instrument or 
feature is held under one of the legal authorities listed in section 
II.B.5.b. of this appendix. An investment in any other instrument 
(including subordinated debt) may be treated as an equity investment if, 
in the judgment of the Federal Reserve, the instrument is the functional 
equivalent of equity or exposes the state member bank to essentially the 
same risks as an equity instrument.

   Attachment II--Summary of Definition of Qualifying Capital for Bank
                           Holding Companies*
                   [Using the Year-End 1992 Standard]
------------------------------------------------------------------------
               Components                      Minimum requirements
------------------------------------------------------------------------
CORE CAPITAL (Tier 1)..................  Must equal or exceed 4% of
                                          weighted-risk assets.
    Common stockholders' equity........  No limit.

[[Page 216]]

 
    Qualifying noncumulative perpetual   No limit; bank holding
     preferred stock.                     companies should avoid undue
                                          reliance on preferred stock in
                                          tier 1.
    Qualifying cumulative perpetual      Limited to 25% of the sum of
     preferred stock.                     common stock, qualifying
                                          perpetual stock, and minority
                                          interests.
    Minority interest in equity          Organizations should avoid
     accounts of consolidated             using minority interests to
     subsidiaries.                        introduce elements not
                                          otherwise qualifying for tier
                                          1 capital.
Less: Goodwill, other intangible
 assets, credit-enhancing interest-only
 strips and nonfinancial equity
 investments required to be deducted
 from capital \1\
SUPPLEMENTARY CAPITAL (Tier 2).........  Total of tier 2 is limited to
                                          100% of tier 1. \2\
    Allowance for loan and lease losses  Limited to 1.25% of weighted-
                                          risk assets. \2\
    Perpetual preferred stock..........  No limit within tier 2.
    Hybrid capital instruments and       No limit within tier 2.
     equity contract notes.
    Subordinated debt and intermediate-  Subordinated debt and
     term preferred stock (original       intermediate-term preferred
     weighted average maturity of 5       stock are limited to 50% of
     years or more).                      tier 1 \2\; amortized for
                                          capital purposes as they
                                          approach maturity.
Revaluation reserves (equity and         Not included; organizations
 building).                               encouraged to disclose; may be
                                          evaluated on a case-by-case
                                          basis for international
                                          comparisons; and taken into
                                          account in making an overall
                                          assessment of capital.
DEDUCTIONS (from sum of tier 1 and tier
 2)
    Investments in unconsolidated        As a general rule, one-half of
     subsidiaries.                        the aggregate investments will
                                          be deducted from tier 1
                                          capital and one-half from tier
                                          2 capital. \3\
Reciprocal holdings of banking
 organizations' capital securities
    Other deductions (such as other      On a case-by-case basis or as a
     subsidiaries or joint ventures) as   matter of policy after a
     determined by supervisory            formal rulemaking.
     authority.
      TOTAL CAPITAL (tier 1 + tier 2-    Must equal or exceed 8% of
       deductions).                       weighted-risk assets.
------------------------------------------------------------------------
\1\ Requirements for the deduction of other intangible assets and
  residual interests are set forth in section II.B.1. of this appendix.
\2\ Amounts in excess of limitations are permitted but do not qualify as
  capital.
\3\ A proportionately greater amount may be deducted from tier 1
  capital, if the risks associated with the subsidiary so warrant.
* See discussion in section II of the guidelines for a complete
  description of the requirements for, and the limitations on, the
  components of qualifying capital.

III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet 
                                  Items

                              A. Procedures

    Assets and credit equivalent amounts of off-balance sheet items of 
bank holding companies are assigned to one of several broad risk 
categories, according to the obligor, or, if relevant, the guarantor or 
the nature of the collateral. The aggregate dollar value of the amount 
in each category is then multiplied by the risk weight associated with 
that category. The resulting weighted values from each of the risk 
categories are added together, and this sum is the banking 
organization's total weighted risk assets that comprise the denominator 
of the risk-based capital ratio. Attachment I provides a sample 
calculation.
    Risk weights for all off-balance sheet items are determined by a 
two-step process. First, the ``credit equivalent amount'' of off-balance 
sheet items is determined, in most cases, by multiplying the off-balance 
sheet item by a credit conversion factor. Second, the credit equivalent 
amount is treated like any balance sheet asset and generally is assigned 
to the appropriate risk category according to the obligor, or, if 
relevant, the guarantor or the nature of the collateral.
    In general, if a particular item qualifies for placement in more 
than one risk category, it is assigned to the category that has the 
lowest risk weight. A holding of a U.S. municipal revenue bond that is 
fully guaranteed by a U.S. bank, for example, would be assigned the 20 
percent risk weight appropriate to claims guaranteed by U.S. banks, 
rather than the 50 percent risk weight appropriate to U.S. municipal 
revenue bonds.\31\
---------------------------------------------------------------------------

    \31\ An investment in shares of a fund whose portfolio consists 
primarily of various securities or money market instruments that, if 
held separately, would be assigned to different risk categories, 
generally is assigned to the risk category appropriate to the highest 
risk-weighted asset that the fund is permitted to hold in accordance 
with the stated investment objectives set forth in the prospectus. An 
organization may, at its option, assign a fund investment on a pro rata 
basis to different risk categories according to the investment limits in 
the fund's prospectus. In no case will an investment in shares in any 
fund be assigned to a total risk weight of less than 20 percent. If an 
organization chooses to assign a fund investment on a pro rata basis, 
and the sum of the investment limits of assets in the fund's prospectus 
exceeds 100 percent, the organization must assign risk weights in 
descending order. If, in order to maintain a necessary degree of short-
term liquidity, a fund is permitted to hold an insignificant amount of 
its assets in short-term, highly liquid securities of superior credit 
quality that do not qualify for a preferential risk weight, such 
securities generally will be disregarded when determining the risk 
category into which the organization's holding in the overall fund 
should be assigned. The prudent use of hedging instruments by a fund to 
reduce the risk of its assets will not increase the risk weighting of 
the fund investment. For example, the use of hedging instruments by a 
fund to reduce the interest rate risk of its government bond portfolio 
will not increase the risk weight of that fund above the 20 percent 
category. Nonetheless, if a fund engages in any activities that appear 
speculative in nature or has any other characteristics that are 
inconsistent with the preferential risk weighting assigned to the fund's 
assets, holdings in the fund will be assigned to the 100 percent risk 
category.

---------------------------------------------------------------------------

[[Page 217]]

    The Federal Reserve will, on a case-by-case basis, determine the 
appropriate risk weight for any asset or credit equivalent amount of an 
off-balance sheet item that does not fit wholly within the terms of one 
of the risk weight categories set forth below or that imposes risks on a 
bank holding company that are incommensurate with the risk weight 
otherwise specified below for the asset or off-balance sheet item. In 
addition, the Federal Reserve will, on a case-by-case basis, determine 
the appropriate credit conversion factor for any off-balance sheet item 
that does not fit wholly within the terms of one of the credit 
conversion factors set forth below or that imposes risks on a banking 
organization that are incommensurate with the credit conversion factors 
otherwise specified below for the off-balance sheet item. In making such 
a determination, the Federal Reserve will consider the similarity of the 
asset or off-balance sheet item to assets or off-balance sheet items 
explicitly treated in the guidelines, as well as other relevant factors.

           B. Collateral, Guarantees, and Other Considerations

    1. Collateral. The only forms of collateral that are formally 
recognized by the risk-based capital framework are: Cash on deposit in a 
subsidiary lending institution; securities issued or guaranteed by the 
central governments of the OECD-based group of countries,\32\ U.S. 
Government agencies, or U.S. Government-sponsored agencies; and 
securities issued by multilateral lending institutions or regional 
development banks. Claims fully secured by such collateral generally are 
assigned to the 20 percent risk-weight category. Collateralized 
transactions meeting all the conditions described in section III.C.1. 
may be assigned a zero percent risk weight.
---------------------------------------------------------------------------

    \32\ The OECD-based group of countries comprises all full members of 
the Organization for Economic Cooperation and Development (OECD) 
regardless of entry date, as well as countries that have concluded 
special lending arrangements with the International Monetary Fund (IMF) 
associated with the IMF's General Arrangements to Borrow, but excludes 
any country that has rescheduled its external sovereign debt within the 
previous five years. As of November 1995, the OECD included the 
following countries: Australia, Austria, Belgium, Canada, Denmark, 
Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, 
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, 
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United 
States; and Saudi Arabia had concluded special lending arrangements with 
the IMF associated with the IMF's General Arrangements to Borrow. A 
rescheduling of external sovereign debt generally would include any 
renegotiation of terms arising from a country's inability or 
unwillingness to meet its external debt service obligations, but 
generally would not include renegotiations of debt in the normal course 
of business, such as a renegotiation to allow the borrower to take 
advantage of a decline in interest rates or other change in market 
conditions.
---------------------------------------------------------------------------

    With regard to collateralized claims that may be assigned to the 20 
percent risk-weight category, the extent to which qualifying securities 
are recognized as collateral is determined by their current market 
value. If such a claim is only partially secured, that is, the market 
value of the pledged securities is less than the face amount of a 
balance-sheet asset or an off-balance-sheet item, the portion that is 
covered by the market value of the qualifying collateral is assigned to 
the 20 percent risk category, and the portion of the claim that is not 
covered by collateral in the form of cash or a qualifying security is 
assigned to the risk category appropriate to the obligor or, if 
relevant, the guarantor. For example, to the extent that a claim on a 
private sector obligor is collateralized by the current market value of 
U.S. Government securities, it would be placed in the 20 percent risk 
category and the balance would be assigned to the 100 percent risk 
category.

[[Page 218]]

    2. Guarantees. Guarantees of the OECD and non-OECD central 
governments, U.S. Government agencies, U.S. Government-sponsored 
agencies, state and local governments of the OECD-based group of 
countries, multilateral lending institutions and regional development 
banks, U.S. depository institutions, and foreign banks are also 
recognized. If a claim is partially guaranteed, that is, coverage of the 
guarantee is less than the face amount of a balance sheet asset or an 
off-balance sheet item, the portion that is not fully covered by the 
guarantee is assigned to the risk category appropriate to the obligor 
or, if relevant, to any collateral. The face amount of a claim covered 
by two types of guarantees that have different risk weights, such as a 
U.S. Government guarantee and a state guarantee, is to be apportioned 
between the two risk categories appropriate to the guarantors.
    The existence of other forms of collateral or guarantees that the 
risk-based capital framework does not formally recognize may be taken 
into consideration in evaluating the risks inherent in an organization's 
loan portfolio--which, in turn, would affect the overall supervisory 
assessment of the organization's capital adequacy.
    3. Recourse obligations, direct credit substitutes, residual 
interests, and asset- and mortgage-backed securities. Direct credit 
substitutes, assets transferred with recourse, and securities issued in 
connection with asset securitizations and structured financings are 
treated as described below. The term ``asset securitizations'' or 
``securitizations'' in this rule includes structured financings, as well 
as asset securitization transactions.
    a. Definitions--i. Credit derivative means a contract that allows 
one party (the ``protection purchaser'') to transfer the credit risk of 
an asset or off-balance sheet credit exposure to another party (the 
``protection provider''). The value of a credit derivative is dependent, 
at least in part, on the credit performance of the ``reference asset.''
    ii. Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed in connection 
with a transfer of assets (including loan servicing assets) and that 
obligate the bank holding company to protect investors from losses 
arising from credit risk in the assets transferred or the loans 
serviced. Credit-enhancing representations and warranties include 
promises to protect a party from losses resulting from the default or 
nonperformance of another party or from an insufficiency in the value of 
the collateral. Credit-enhancing representations and warranties do not 
include:
    1. Early default clauses and similar warranties that permit the 
return of, or premium refund clauses covering, 1-4 family residential 
first mortgage loans that qualify for a 50 percent risk weight for a 
period not to exceed 120 days from the date of transfer. These 
warranties may cover only those loans that were originated within 1 year 
of the date of transfer;
    2. Premium refund clauses that cover assets guaranteed, in whole or 
in part, by the U.S. Government, a U.S. Government agency or a 
government-sponsored enterprise, provided the premium refund clauses are 
for a period not to exceed 120 days from the date of transfer; or
    3. Warranties that permit the return of assets in instances of 
misrepresentation, fraud or incomplete documentation.
    iii. Direct credit substitute means an arrangement in which a bank 
holding company assumes, in form or in substance, credit risk associated 
with an on- or off-balance sheet credit exposure that was not previously 
owned by the bank holding company (third-party asset) and the risk 
assumed by the bank holding company exceeds the pro rata share of the 
bank holding company's interest in the third-party asset. If the bank 
holding company has no claim on the third-party asset, then the bank 
holding company's assumption of any credit risk with respect to the 
third party asset is a direct credit substitute. Direct credit 
substitutes include, but are not limited to:
    1. Financial standby letters of credit that support financial claims 
on a third party that exceed a bank holding company's pro rata share of 
losses in the financial claim;
    2. Guarantees, surety arrangements, credit derivatives, and similar 
instruments backing financial claims that exceed a bank holding 
company's pro rata share in the financial claim;
    3. Purchased subordinated interests or securities that absorb more 
than their pro rata share of losses from the underlying assets;
    4. Credit derivative contracts under which the bank holding company 
assumes more than its pro rata share of credit risk on a third party 
exposure;
    5. Loans or lines of credit that provide credit enhancement for the 
financial obligations of an account party;
    6. Purchased loan servicing assets if the servicer is responsible 
for credit losses or if the servicer makes or assumes credit-enhancing 
representations and warranties with respect to the loans serviced. 
Mortgage servicer cash advances that meet the conditions of section 
III.B.3.a.viii. of this appendix are not direct credit substitutes;
    7. Clean-up calls on third party assets. Clean-up calls that are 10 
percent or less of the original pool balance that are exercisable at the 
option of the bank holding company are not direct credit substitutes; 
and
    8. Liquidity facilities that provide liquidity support to ABCP 
(other than eligible ABCP liquidity facilities).

[[Page 219]]

    iv. Eligible ABCP liquidity facility means a liquidity facility 
supporting ABCP, in form or in substance, that is subject to an asset 
quality test at the time of draw that precludes funding against assets 
that are 90 days or more past due or in default. In addition, if the 
assets that an eligible ABCP liquidity facility is required to fund 
against are externally rated assets or exposures at the inception of the 
facility, the facility can be used to fund only those assets or 
exposures that are externally rated investment grade at the time of 
funding. Notwithstanding the eligibility requirements set forth in the 
two preceding sentences, a liquidity facility will be considered an 
eligible ABCP liquidity facility if the assets that are funded under the 
liquidity facility and which do not meet the eligibility requirements 
are guaranteed, either conditionally or unconditionally, by the U.S. 
government or its agencies, or by the central government of an OECD 
country.
    v. Externally rated means that an instrument or obligation has 
received a credit rating from a nationally recognized statistical rating 
organization.
    vi. Face amount means the notional principal, or face value, amount 
of an off-balance sheet item; the amortized cost of an asset not held 
for trading purposes; and the fair value of a trading asset.
    vii. Financial asset means cash or other monetary instrument, 
evidence of debt, evidence of an ownership interest in an entity, or a 
contract that conveys a right to receive or exchange cash or another 
financial instrument from another party.
    viii. Financial standby letter of credit means a letter of credit or 
similar arrangement that represents an irrevocable obligation to a 
third-party beneficiary:
    1. To repay money borrowed by, or advanced to, or for the account 
of, a second party (the account party), or
    2. To make payment on behalf of the account party, in the event that 
the account party fails to fulfill its obligation to the beneficiary.
    ix. Liquidity Facility means a legally binding commitment to provide 
liquidity support to ABCP by lending to, or purchasing assets from, any 
structure, program, or conduit in the event that funds are required to 
repay maturing ABCP.
    x. Mortgage servicer cash advance means funds that a residential 
mortgage loan servicer advances to ensure an uninterrupted flow of 
payments, including advances made to cover foreclosure costs or other 
expenses to facilitate the timely collection of the loan. A mortgage 
servicer cash advance is not a recourse obligation or a direct credit 
substitute if:
    1. The servicer is entitled to full reimbursement and this right is 
not subordinated to other claims on the cash flows from the underlying 
asset pool; or
    2. For any one loan, the servicer's obligation to make 
nonreimbursable advances is contractually limited to an insignificant 
amount of the outstanding principal balance of that loan.
    xi. Nationally recognized statistical rating organization (NRSRO) 
means an entity recognized by the Division of Market Regulation of the 
Securities and Exchange Commission (or any successor Division) 
(Commission) as a nationally recognized statistical rating organization 
for various purposes, including the Commission's uniform net capital 
requirements for brokers and dealers.
    xii. Recourse means the retention, by a bank holding company, in 
form or in substance, of any credit risk directly or indirectly 
associated with an asset it has transferred and sold that exceeds a pro 
rata share of the banking organization's claim on the asset. If a 
banking organization has no claim on a transferred asset, then the 
retention of any risk of credit loss is recourse. A recourse obligation 
typically arises when a bank holding company transfers assets and 
retains an explicit obligation to repurchase the assets or absorb losses 
due to a default on the payment of principal or interest or any other 
deficiency in the performance of the underlying obligor or some other 
party. Recourse may also exist implicitly if a bank holding company 
provides credit enhancement beyond any contractual obligation to support 
assets it has sold. The following are examples of recourse arrangements:
    1. Credit-enhancing representations and warranties made on the 
transferred assets;
    2. Loan servicing assets retained pursuant to an agreement under 
which the bank holding company will be responsible for credit losses 
associated with the loans being serviced. Mortgage servicer cash 
advances that meet the conditions of section III.B.3.a.x. of this 
appendix are not recourse arrangements;
    3. Retained subordinated interests that absorb more than their pro 
rata share of losses from the underlying assets;
    4. Assets sold under an agreement to repurchase, if the assets are 
not already included on the balance sheet;
    5. Loan strips sold without contractual recourse where the maturity 
of the transferred loan is shorter than the maturity of the commitment 
under which the loan is drawn;
    6. Credit derivatives issued that absorb more than the bank holding 
company's pro rata share of losses from the transferred assets;
    7. Clean-up calls at inception that are greater than 10 percent of 
the balance of the original pool of transferred loans. Clean-up calls 
that are 10 percent or less of the original pool balance that are 
exercisable at the option of the bank holding company are not recourse 
arrangements; and

[[Page 220]]

    8. Liquidity facilities that provide liquidity support to ABCP 
(other than eligible ABCP liquidity facilities).
    xiii. Residual interest means any on-balance sheet asset that 
represents an interest (including a beneficial interest) created by a 
transfer that qualifies as a sale (in accordance with generally accepted 
accounting principles) of financial assets, whether through a 
securitization or otherwise, and that exposes the bank holding company 
to credit risk directly or indirectly associated with the transferred 
assets that exceeds a pro rata share of the bank holding company's claim 
on the assets, whether through subordination provisions or other credit 
enhancement techniques. Residual interests generally include credit-
enhancing I/Os, spread accounts, cash collateral accounts, retained 
subordinated interests, other forms of over-collateralization, and 
similar assets that function as a credit enhancement. Residual interests 
further include those exposures that, in substance, cause the bank 
holding company to retain the credit risk of an asset or exposure that 
had qualified as a residual interest before it was sold. Residual 
interests generally do not include interests purchased from a third 
party, except that purchased credit-enhancing I/Os are residual 
interests for purposes of this appendix.
    xiv. Risk participation means a participation in which the 
originating party remains liable to the beneficiary for the full amount 
of an obligation (e.g., a direct credit substitute) notwithstanding that 
another party has acquired a participation in that obligation.
    xv. Securitization means the pooling and repackaging by a special 
purpose entity of assets or other credit exposures into securities that 
can be sold to investors. Securitization includes transactions that 
create stratified credit risk positions whose performance is dependent 
upon an underlying pool of credit exposures, including loans and 
commitments.
    xvi. Sponsor means a bank holding company that establishes an ABCP 
program; approves the sellers permitted to participate in the program; 
approves the asset pools to be purchased by the program; or administers 
the program by monitoring the assets, arranging for debt placement, 
compiling monthly reports, or ensuring compliance with the program 
documents and with the program's credit and investment policy.
    xvii. Structured finance program means a program where receivable 
interests and asset-backed securities issued by multiple participants 
are purchased by a special purpose entity that repackages those 
exposures into securities that can be sold to investors. Structured 
finance programs allocate credit risks, generally, between the 
participants and credit enhancement provided to the program.
    xviii. Traded position means a position that is externally rated and 
is retained, assumed, or issued in connection with an asset 
securitization, where there is a reasonable expectation that, in the 
near future, the rating will be relied upon by unaffiliated investors to 
purchase the position; or an unaffiliated third party to enter into a 
transaction involving the position, such as a purchase, loan, or 
repurchase agreement.
    b. Credit equivalent amounts and risk weight of recourse obligations 
and direct credit substitutes. i. Credit equivalent amount. Except as 
otherwise provided in sections III.B.3.c. through f. and III.B.5. of 
this appendix, the credit-equivalent amount for a recourse obligation or 
direct credit substitute is the full amount of the credit-enhanced 
assets for which the bank holding company directly or indirectly retains 
or assumes credit risk multiplied by a 100 percent conversion factor.
    ii. Risk-weight factor. To determine the bank holding company's 
risk-weight factor for off-balance sheet recourse obligations and direct 
credit substitutes, the credit equivalent amount is assigned to the risk 
category appropriate to the obligor in the underlying transaction, after 
considering any associated guarantees or collateral. For a direct credit 
substitute that is an on-balance sheet asset (e.g., a purchased 
subordinated security), a bank holding company must calculate risk-
weighted assets using the amount of the direct credit substitute and the 
full amount of the assets it supports, i.e., all the more senior 
positions in the structure. The treatment of direct credit substitutes 
that have been syndicated or in which risk participations have been 
conveyed or acquired is set forth in section III.D.1 of this appendix.
    c. Externally-rated positions: credit-equivalent amounts and risk 
weights of recourse obligations, direct credit substitutes, residual 
interests, and asset- and mortgage-backed securities (including asset-
backed commercial paper)--i. Traded positions. With respect to a 
recourse obligation, direct credit substitute, residual interest (other 
than a credit-enhancing I/Ostrip) or asset- and mortgage-backed security 
(including asset-backed commercial paper) that is a traded position and 
that has received an external rating on a long-term position that is one 
grade below investment grade or better or a short-term rating that is 
investment grade, the bank holding company may multiply the face amount 
of the position by the appropriate risk weight, determined in accordance 
with the tables below. Stripped mortgage-backed securities and other 
similar instruments, such as interest-only or principal-only strips that 
are not credit enhancements, must be assigned to the 100 percent risk 
category. If a traded position has received more than one external 
rating, the lowest single rating will apply.

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------------------------------------------------------------------------
                                                            Risk weight
     Long-term rating category            Examples         (In percent)
------------------------------------------------------------------------
Highest or second highest           AAA, AA.............              20
 investment grade.
Third highest investment grade....  A...................              50
Lowest investment grade...........  BBB.................             100
One category below investment       BB..................             200
 grade.


------------------------------------------------------------------------
                                                            Risk weight
         Short-term rating                Examples         (In percent)
------------------------------------------------------------------------
Highest investment grade..........  A-1, P-1............              20
Second highest investment grade...  A-2, P-2............              50
Lowest investment grade...........  A-3, P-3............             100
------------------------------------------------------------------------

    ii. Non-traded positions. A recourse obligation, direct credit 
substitute, or residual interest (but not a credit-enhancing I/O strip) 
extended in connection with a securitization that is not a traded 
position may be assigned a risk weight in accordance with section 
III.B.3.c.i. of this appendix if:
    1. It has been externally rated by more than one NRSRO;
    2. It has received an external rating on a long-term position that 
is one grade below investment grade or better or on a short-term 
position that is investment grade by all NRSROs providing a rating;
    3. The ratings are publicly available; and
    4. The ratings are based on the same criteria used to rate traded 
positions.
    If the ratings are different, the lowest rating will determine the 
risk category to which the recourse obligation, direct credit 
substitute, or residual interest will be assigned.
    d. Senior positions not externally rated. For a recourse obligation, 
direct credit substitute, residual interest, or asset-or mortgage-backed 
security that is not externally rated but is senior or preferred in all 
features to a traded position (including collateralization and 
maturity), a bank holding company may apply a risk weight to the face 
amount of the senior position in accordance with section III.B.3.c.i. of 
this appendix, based on the traded position, subject to any current or 
prospective supervisory guidance and the bank holding company satisfying 
the Federal Reserve that this treatment is appropriate. This section 
will apply only if the traded subordinated position provides substantive 
credit support to the unrated position until the unrated position 
matures.
    e. Capital requirement for residual interests--i. Capital 
requirement for credit-enhancing I/O strips. After applying the 
concentration limit to credit-enhancing I/O strips (both purchased and 
retained) in accordance with sections II.B.2.c. through e. of this 
appendix, a bank holding company must maintain risk-based capital for a 
credit-enhancing I/O strip (both purchased and retained), regardless of 
the external rating on that position, equal to the remaining amount of 
the credit-enhancing I/O (net of any existing associated deferred tax 
liability), even if the amount of risk-based capital required to be 
maintained exceeds the full risk-based capital requirement for the 
assets transferred. Transactions that, in substance, result in the 
retention of credit risk associated with a transferred credit-enhancing 
I/O strip will be treated as if the credit-enhancing I/O strip was 
retained by the bank holding company and not transferred.
    ii. Capital requirement for other residual interests. 1. If a 
residual interest does not meet the requirements of sections III.B.3.c. 
or d. of this appendix, a bank holding must maintain risk-based capital 
equal to the remaining amount of the residual interest that is retained 
on the balance sheet (net of any existing associated deferred tax 
liability), even if the amount of risk-based capital required to be 
maintained exceeds the full risk-based capital requirement for the 
assets transferred. Transactions that, in substance, result in the 
retention of credit risk associated with a transferred residual interest 
will be treated as if the residual interest was retained by the bank 
holding company and not transferred.
    2. Where the aggregate capital requirement for residual interests 
and other recourse obligations in connection with the same transfer of 
assets exceed the full risk-based capital requirement for those assets, 
a bank holding company must maintain risk-based capital equal to the 
greater of the risk-based capital requirement for the residual interest 
as calculated under section III.B.3.e.ii.1. of this appendix or the full 
risk-based capital requirement for the assets transferred.
    f. Positions that are not rated by an NRSRO. A position (but not a 
residual interest) maintained in connection with a securitization and 
that is not rated by a NRSRO may be risk-weighted based on the bank 
holding company's determination of the credit rating of the position, as 
specified in the table below, multiplied by the face amount of the 
position. In order to obtain this treatment, the bank holding company's 
system for determining the credit rating of the position must meet one 
of the three alternative standards set out in sections III.B.3.f.i. 
through III.B.3.f.iii. of this appendix.

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------------------------------------------------------------------------
                                                            Risk weight
          Rating category                 Examples         (In percent)
------------------------------------------------------------------------
Highest or second highest           AAA, AA.............             100
 investment grade.
Third highest investment grade....  A...................             100
Lowest investment grade...........  BBB.................             100
One category below investment       BB..................             200
 grade.
------------------------------------------------------------------------

    i. Internal risk rating used for asset-backed programs. A direct 
credit substitute (other than a purchased credit-enhancing I/O) is 
assumed in connection with an asset-backed commercial paper program 
sponsored by the bank holding company and the bank holding company is 
able to demonstrate to the satisfaction of the Federal Reserve, prior to 
relying upon its use, that the bank holding company's internal credit 
risk rating system is adequate. Adequate internal credit risk rating 
systems usually contain the following criteria:
    1. The internal credit risk system is an integral part of the bank 
holding company's risk management system, which explicitly incorporates 
the full range of risks arising from a bank holding company's 
participation in securitization activities;
    2. Internal credit ratings are linked to measurable outcomes, such 
as the probability that the position will experience any loss, the 
position's expected loss given default, and the degree of variance in 
losses given default on that position;
    3. The bank holding company's internal credit risk system must 
separately consider the risk associated with the underlying loans or 
borrowers, and the risk associated with the structure of a particular 
securitization transaction;
    4. The bank holding company's internal credit risk system must 
identify gradations of risk among ``pass'' assets and other risk 
positions;
    5. The bank holding company must have clear, explicit criteria that 
are used to classify assets into each internal risk grade, including 
subjective factors;
    6. The bank holding company must have independent credit risk 
management or loan review personnel assigning or reviewing the credit 
risk ratings;
    7. The bank holding company must have an internal audit procedure 
that periodically verifies that the internal credit risk ratings are 
assigned in accordance with the established criteria;
    8. The bank holding company must monitor the performance of the 
internal credit risk ratings assigned to nonrated, nontraded direct 
credit substitutes over time to determine the appropriateness of the 
initial credit risk rating assignment and adjust individual credit risk 
ratings, or the overall internal credit risk ratings system, as needed; 
and
    9. The internal credit risk system must make credit risk rating 
assumptions that are consistent with, or more conservative than, the 
credit risk rating assumptions and methodologies of NRSROs.
    ii. Program Ratings. A direct credit substitute or recourse 
obligation (other than a residual interest) is assumed or retained in 
connection with a structured finance program and a NRSRO has reviewed 
the terms of the program and stated a rating for positions associated 
with the program. If the program has options for different combinations 
of assets, standards, internal credit enhancements and other relevant 
factors, and the NRSRO specifies ranges of rating categories to them, 
the bank holding company may apply the rating category that corresponds 
to the bank holding company's position. In order to rely on a program 
rating, the bank holding company must demonstrate to the Federal 
Reserve's satisfaction that the credit risk rating assigned to the 
program meets the same standards generally used by NRSROs for rating 
traded positions. The bank holding company must also demonstrate to the 
Federal Reserve's satisfaction that the criteria underlying the NRSRO's 
assignment of ratings for the program are satisfied for the particular 
position. If a bank holding company participates in a securitization 
sponsored by another party, the Federal Reserve may authorize the bank 
holding company to use this approach based on a programmatic rating 
obtained by the sponsor of the program.
    iii. Computer Program. The bank holding company is using an 
acceptable credit assessment computer program to determine the rating of 
a direct credit substitute or recourse obligation (but not residual 
interest) issued in connection with a structured finance program. A 
NRSRO must have developed the computer program, and the bank holding 
company must demonstrate to the Federal Reserve's satisfaction that 
ratings under the program correspond credibly and reliably with the 
rating of traded positions.
    g. Limitations on risk-based capital requirements--i. Low-level 
exposure. If the maximum contractual exposure to loss retained or 
assumed by a bank holding company in connection with a recourse 
obligation or a direct credit substitute is less than the effective 
risk-based capital requirement for the enhanced assets, the risk-based 
capital requirement is limited to the maximum contractual exposure, less 
any liability account established in accordance with generally accepted 
accounting principles. This limitation does

[[Page 223]]

not apply when a bank holding company provides credit enhancement beyond 
any contractual obligation to support assets it has sold.
    ii. Mortgage-related securities or participation certificates 
retained in a mortgage loan swap. If a bank holding company holds a 
mortgage-related security or a participation certificate as a result of 
a mortgage loan swap with recourse, capital is required to support the 
recourse obligation plus the percentage of the mortgage-related security 
or participation certificate that is not covered by the recourse 
obligation. The total amount of capital required for the on-balance 
sheet asset and the recourse obligation, however, is limited to the 
capital requirement for the underlying loans, calculated as if the 
organization continued to hold these loans as on-balance sheet assets.
    iii. Related on-balance sheet assets. If a recourse obligation or 
direct credit substitute subject to section III.B.3. of this appendix 
also appears as a balance sheet asset, the balance sheet asset is not 
included in an organization's risk-weighted assets to the extent the 
value of the balance sheet asset is already included in the off-balance 
sheet credit equivalent amount for the recourse obligation or direct 
credit substitute, except in the case of loan servicing assets and 
similar arrangements with embedded recourse obligations or direct credit 
substitutes. In that case, both the on-balance sheet assets and the 
related recourse obligations and direct credit substitutes are 
incorporated into the risk-based capital calculation.
    4. Maturity. Maturity is generally not a factor in assigning items 
to risk categories with the exception of claims on non-OECD banks, 
commitments, and interest rate and foreign exchange rate contracts. 
Except for commitments, short-term is defined as one year or less 
remaining maturity and long-term is defined as over one year remaining 
maturity. In the case of commitments, short-term is defined as one year 
or less original maturity and long-term is defined as over one year 
original maturity.
    5. Small Business Loans and Leases on Personal Property Transferred 
with Recourse. a. Notwithstanding other provisions of this appendix A, a 
qualifying banking organization that has transferred small business 
loans and leases on personal property (small business obligations) with 
recourse shall include in weighted-risk assets only the amount of 
retained recourse, provided two conditions are met. First, the 
transaction must be treated as a sale under GAAP and, second, the 
banking organization must establish pursuant to GAAP a non-capital 
reserve sufficient to meet the organization's reasonably estimated 
liability under the recourse arrangement. Only loans and leases to 
businesses that meet the criteria for a small business concern 
established by the Small Business Administration under section 3(a) of 
the Small Business Act are eligible for this capital treatment.
    b. For purposes of this appendix A, a banking organization is 
qualifying if it meets the criteria for well capitalized or, by order of 
the Board, adequately capitalized, as those criteria are set forth in 
the Board's prompt corrective action regulation for state member banks 
(12 CFR 208.40). For purposes of determining whether an organization 
meets these criteria, its capital ratios must be calculated without 
regard to the capital treatment for transfers of small business 
obligations with recourse specified in section III.B.5.a. of this 
appendix A. The total outstanding amount of recourse retained by a 
qualifying banking organization on transfers of small business 
obligations receiving the preferential capital treatment cannot exceed 
15 percent of the organization's total risk-based capital. By order, the 
Board may approve a higher limit.
    c. If a bank holding company ceases to be qualifying or exceeds the 
15 percent capital limitation, the preferential capital treatment will 
continue to apply to any transfers of small business obligations with 
recourse that were consummated during the time that the organization was 
qualifying and did not exceed the capital limit.
    6. Asset-backed commercial paper programs. a. An asset-backed 
commercial paper (ABCP) program means a program that primarily issues 
externally rated commercial paper backed by assets or exposures held in 
a bankruptcy-remote, special purpose entity.
    b. A bank holding company that qualifies as a primary beneficiary 
and must consolidate an ABCP program that is defined as a variable 
interest entity under GAAP may exclude the consolidated ABCP program 
assets from risk-weighted assets provided that the bank holding company 
is the sponsor of the ABCP program. If a bank holding company excludes 
such consolidated ABCP program assets, the bank holding company must 
assess the appropriate risk-based capital charge against any exposures 
of the organization arising in connection with such ABCP programs, 
including direct credit substitutes, recourse obligations, residual 
interests, liquidity facilities, and loans, in accordance with sections 
III.B.3., III.C., and III.D. of this appendix.
    c. If a bank holding company has multiple overlapping exposures 
(such as a program-wide credit enhancement and multiple pool-specific 
liquidity facilities) to an ABCP program that is not consolidated for 
risk-based capital purposes, the bank holding company is not required to 
hold duplicative risk-based capital under this appendix against the 
overlapping position. Instead, the bank holding company should apply to 
the overlapping position the applicable risk-based capital

[[Page 224]]

treatment that results in the highest capital charge.

                             C. Risk Weights

    Attachment III contains a listing of the risk categories, a summary 
of the types of assets assigned to each category and the risk weight 
associated with each category, that is, 0 percent, 20 percent, 50 
percent, and 100 percent. A brief explanation of the components of each 
category follows.
    1. Category 1: zero percent. This category includes cash (domestic 
and foreign) owned and held in all offices of subsidiary depository 
institutions or in transit and gold bullion held in either a subsidiary 
depository institution's own vaults or in another's vaults on an 
allocated basis, to the extent it is offset by gold bullion 
liabilities.\33\ The category also includes all direct claims (including 
securities, loans, and leases) on, and the portions of claims that are 
directly and unconditionally guaranteed by, the central governments \34\ 
of the OECD countries and U.S. Government agencies,\35\ as well as all 
direct local currency claims on, and the portions of local currency 
claims that are directly and unconditionally guaranteed by, the central 
governments of non-OECD countries, to the extent that subsidiary 
depository institutions have liabilities booked in that currency. A 
claim is not considered to be unconditionally guaranteed by a central 
government if the validity of the guarantee is dependent upon some 
affirmative action by the holder or a third party. Generally, securities 
guaranteed by the U.S. Government or its agencies that are actively 
traded in financial markets, such as GNMA securities, are considered to 
be unconditionally guaranteed.
---------------------------------------------------------------------------

    \33\ All other holdings of bullion are assigned to the 100 percent 
risk category.
    \34\ A central government is defined to include departments and 
ministries, including the central bank, of the central government. The 
U.S. central bank includes the 12 Federal Reserve Banks, and stock held 
in these banks as a condition of membership is assigned to the zero 
percent risk category. The definition of central government does not 
include state, provincial, or local governments; or commercial 
enterprises owned by the central government. In addition, it does not 
include local government entities or commercial enterprises whose 
obligations are guaranteed by the central government, although any 
claims on such entities guaranteed by central governments are placed in 
the same general risk category as other claims guaranteed by central 
governments. OECD central governments are defined as central governments 
of the OECD-based group of countries; non-OECD central governments are 
defined as central governments of countries that do not belong to the 
OECD-based group of countries.
    \35\ A U.S. Governmnt agency is defined as an instrumentality of the 
U.S. Government whose obligations are fully and explicitly guaranteed as 
to the timely payment of principal and interest by the full faith and 
credit of the U.S. Government. Such agencies include the Government 
National Mortgage Association (GNMA), the Veterans Administration (VA), 
the Federal Housing Administration (FHA), the Export-Import Bank (Exim 
Bank), the Overseas Private Investment Corporation (OPIC), the Commodity 
Credit Corporation (CCC), and the Small Business Administration (SBA).
---------------------------------------------------------------------------

    This category also includes claims collateralized by cash on deposit 
in the subsidiary lending institution or by securities issued or 
guaranteed by OECD central governments or U.S. government agencies for 
which a positive margin of collateral is maintained on a daily basis, 
fully taking into account any change in the banking organization's 
exposure to the obligor or counterparty under a claim in relation to the 
market value of the collateral held in support of that claim.
    2. Category 2: 20 percent. a. This category includes cash items in 
the process of collection, both foreign and domestic; short-term claims 
(including demand deposits) on, and the portions of short-term claims 
that are guaranteed by,\36\ U.S. depository institutions \37\ and 
foreign banks \38\; and long-term

[[Page 225]]

claims on, and the portions of long-term claims that are guaranteed by, 
U.S. depository institutions and OECD banks.\39\
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    \36\ Claims guaranteed by U.S. depository institutions and foreign 
banks include risk participations in both bankers acceptances and 
standby letters of credit, as well as participations in commitments, 
that are conveyed to U.S. depository institutions or foreign banks.
    \37\ U.S. depository institutions are defined to include branches 
(foreign and domestic) of federally-insured banks and depository 
institutions chartered and headquartered in the 50 states of the United 
States, the District of Columbia, Puerto Rico, and U.S. territories and 
possessions. The definition encompasses banks, mutual or stock savings 
banks, savings or building and loan associations, cooperative banks, 
credit unions, and international banking facilities or domestic banks. 
U.S.-chartered depository institutions owned by foreigners are also 
included in the definition. However, branches and agencies of foreign 
banks located in the U.S., as well as all bank holding companies, are 
excluded.
    \38\ Foreign banks are distinguished as either OECD banks or non-
OECD banks. OECD banks include banks and their branches (foreign and 
domestic) organized under the laws of countries (other than the U.S.) 
that belong to the OECD-based group of countries. Non-OECD banks include 
banks and their branches (foreign and domestic) organized under the laws 
of countries that do not belong to the OECD-based group of countries. 
For this purpose, a bank is defined as an institution that engages in 
the business of banking; is recognized as a bank by the bank supervisory 
or monetary authorities of the country of its organization or principal 
banking operations; receives deposits to a substantial extent in the 
regular course of business; and has the power to accept demand deposits.
    \39\ Long-term claims on, or guaranteed by, non-OECD banks and all 
claims on bank holding companies are assigned to the 100 percent risk 
category, as are holdings of bank-issued securities that qualify as 
capital of the issuing banks.
---------------------------------------------------------------------------

    b. This category also includes the portions of claims that are 
conditionally guaranteed by OECD central governments and U.S. Government 
agencies, as well as the portions of local currency claims that are 
conditionally guaranteed by non-OECD central governments, to the extent 
that subsidiary depository institutions have liabilities booked in that 
currency. In addition, this category also includes claims on, and the 
portions of claims that are guaranteed by, U.S. government-sponsored 
\40\ agencies and claims on, and the portions of claims guaranteed by, 
the International Bank for Reconstruction and Development (World Bank), 
the International Finance Corporation, the Interamerican Development 
Bank, the Asian Development Bank, the African Development Bank, the 
European Investment Bank, the European Bank for Reconstruction and 
Development, the Nordic Investment Bank, and other multilateral lending 
institutions or regional development banks in which the U.S. government 
is a shareholder or contributing member. General obligation claims on, 
or portions of claims guaranteed by the full faith and credit of, states 
or other political subdivisions of the U.S. or other countries of the 
OECD--based group are also assigned to this category.\41\
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    \40\ For this purpose, U.S. government-sponsored agencies are 
defined as agencies originally established or chartered by the Federal 
government to serve public purposes specified by the U.S. Congress but 
whose obligations are not explicitly guaranteed by the full faith and 
credit of the U.S. government. These agencies include the Federal Home 
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage 
Association (FNMA), the Farm Credit System, the Federal Home Loan Bank 
System, and the Student Loan Marketing Association (SLMA). Claims on 
U.S. government-sponsored agencies include capital stock in a Federal 
Home Loan Bank that is held as a condition of membership in that Bank.
    \41\ Claims on, or guaranteed by, states or other political 
subdivisions of countries that do not belong to the OECD-based group of 
countries are placed in the 100 percent risk category.
---------------------------------------------------------------------------

    c. This category also includes the portions of claims (including 
repurchase transactions) collateralized by cash on deposit in the 
subsidiary lending institution or by securities issued or guaranteed by 
OECD central governments or U.S. government agencies that do not qualify 
for the zero percent risk-weight category; collateralized by securities 
issued or guaranteed by U.S. government-sponsored agencies; or 
collateralized by securities issued by multilateral lending institutions 
or regional development banks in which the U.S. government is a 
shareholder or contributing member.
    d. This category also includes claims \42\ on, or guaranteed by, a 
qualifying securities firm \43\ incorporated in the United States or 
other member of the OECD-based group of countries provided that: the 
qualifying securities firm has a long-term issuer credit rating, or a 
rating on at least one issue of long-term debt, in one of the three 
highest investment grade rating categories from a nationally recognized 
statistical rating organization; or the claim is guaranteed by the 
firm's parent company and the parent company has such a rating. If 
ratings are available from more than one rating agency, the lowest 
rating will be used to determine whether the

[[Page 226]]

rating requirement has been met. This category also includes a 
collateralized claim on a qualifying securities firm in such a country, 
without regard to satisfaction of the rating standard, provided the 
claim arises under a contract that:
---------------------------------------------------------------------------

    \42\ Claims on a qualifying securities firm that are instruments the 
firm, or its parent company, uses to satisfy its applicable capital 
requirement are not eligible for this risk weight.
    \43\ With regard to securities firms incorporated in the United 
States, qualifying securities firms are those securities firms that are 
broker-dealers registered with the Securities and Exchange Commission 
and are in compliance with the SEC's net capital rule, 17 CFR 240.15c3-
1. With regard to securities firms incorporated in other countries in 
the OECD-based group of countries, qualifying securities firms are those 
securities firms that a banking organization is able to demonstrate are 
subject to consolidated supervision and regulation (covering their 
direct and indirect subsidiaries, but not necessarily their parent 
organizations) comparable to that imposed on banks in OECD countries. 
Such regulation must include risk-based capital requirements comparable 
to those applied to banks under the Accord on International Convergence 
of Capital Measurement and Capital Standards (1988, as amended in 1998) 
(Basel Accord).
---------------------------------------------------------------------------

    (1) Is a reverse repurchase/repurchase agreement or securities 
lending/borrowing transaction executed under standard industry 
documentation;
    (2) Is collateralized by debt or equity securities that are liquid 
and readily marketable;
    (3) Is marked-to-market daily;
    (4) Is subject to a daily margin maintenance requirement under the 
standard industry documentation; and
    (5) Can be liquidated, terminated, or accelerated immediately in 
bankruptcy or similar proceeding, and the security or collateral 
agreement will not be stayed or avoided, under applicable law of the 
relevant jurisdiction.\44\
---------------------------------------------------------------------------

    \44\ For example, a claim is exempt from the automatic stay in 
bankruptcy in the United States if it arises under a securities contract 
or repurchase agreement subject to section 555 or 559 of the Bankruptcy 
Code, respectively (11 U.S.C. 555 or 559), a qualified financial 
contract under section 11(e)(8) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)), or a netting contract between financial institutions 
under sections 401-407 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (12 U.S.C. 4401-4407), or the Board's Regulation 
EE (12 CFR Part 231).
---------------------------------------------------------------------------

    3. Category 3: 50 percent. This category includes loans fully 
secured by first liens \45\ on 1- to 4-family residential properties, 
either owner-occupied or rented, or on multifamily residential 
properties,\46\ that meet certain criteria.\47\ Loans included in this 
category must have been made in accordance with prudent underwriting 
standards;\48\ be performing in accordance with their original terms; 
and not be 90 days or more past due or carried in nonaccrual status. The 
following additional criteria must also be applied to a loan secured by 
a multifamily residential property that is included in this category: 
all principal and interest payments on the loan must have been made on 
time for at least the year preceding placement in this category, or in 
the case where the existing property owner is refinancing a loan on that 
property, all principal and interest payments on the loan being 
refinanced must have been made on time for at least the year preceding 
placement in this category; amortization of the principal and interest 
must occur over a period of not more than 30 years and the minimum 
original maturity for repayment of principal must not be less than 7 
years; and the annual net operating income (before debt service) 
generated by the property during its most recent fiscal year must not be 
less than 120 percent of the loan's current annual debt service (115 
percent if the loan is based on a floating interest rate) or, in the 
case of a cooperative or other not-for-profit housing project, the 
property must generate sufficient cash flow to provide comparable

[[Page 227]]

protection to the institution. Also included in this category are 
privately-issued mortgage-backed securities provided that:
---------------------------------------------------------------------------

    \45\ If a banking organization holds the first and junior lien(s) on 
a residential property and no other party holds an intervening lien, the 
transaction is treated as a single loan secured by a first lien for the 
purposes of determining the loan-to-value ratio and assigning a risk 
weight.
    \46\ Loans that qualify as loans secured by 1- to 4-family 
residential properties or multifamily residential properties are listed 
in the instructions to the FR Y-9C Report. In addition, for risk-based 
capital purposes, loans secured by 1- to 4-family residential properties 
include loans to builders with substantial project equity for the 
construction of 1-to 4-family residences that have been presold under 
firm contracts to purchasers who have obtained firm commitments for 
permanent qualifying mortgage loans and have made substantial earnest 
money deposits. Such loans to builders will be considered prudently 
underwritten only if the bank holding company has obtained sufficient 
documentation that the buyer of the home intends to purchase the home 
(i.e., has a legally binding written sales contract) and has the ability 
to obtain a mortgage loan sufficient to purchase the home (i.e., has a 
firm written commitment for permanent financing of the home upon 
completion).
    \47\ Residential property loans that do not meet all the specified 
criteria or that are made for the purpose of speculative property 
development are placed in the 100 percent risk category.
    \48\ Prudent underwriting standards include a conservative ratio of 
the current loan balance to the value of the property. In the case of a 
loan secured by multifamily residential property, the loan-to-value 
ratio is not conservative if it exceeds 80 percent (75 percent if the 
loan is based on a floating interest rate). Prudent underwriting 
standards also dictate that a loan-to-value ratio used in the case of 
originating a loan to acquire a property would not be deemed 
conservative unless the value is based on the lower of the acquisition 
cost of the property or appraised (or if appropriate, evaluated) value. 
Otherwise, the loan-to-value ratio generally would be based upon the 
value of the property as determined by the most current appraisal, or if 
appropriate, the most current evaluation. All appraisals must be made in 
a manner consistent with the Federal banking agencies' real estate 
appraisal regulations and guidelines and with the banking organization's 
own appraisal guidelines.
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    (1) The structure of the security meets the criteria described in 
section III(B)(3) above;
    (2) if the security is backed by a pool of conventional mortgages, 
on 1- to 4-family residential or multifamily residential properties, 
each underlying mortgage meets the criteria described above in this 
section for eligibility for the 50 percent risk category at the time the 
pool is originated;
    (3) If the security is backed by privately-issued mortgage-backed 
securities, each underlying security qualifies for the 50 percent risk 
category; and
    (4) If the security is backed by a pool of multifamily residential 
mortgages, principal and interest payments on the security are not 30 
days or more past due. Privately-issued mortgage-backed securities that 
do not meet these criteria or that do not qualify for a lower risk 
weight are generally assigned to the 100 percent risk category.
    Also assigned to this category are revenue (non-general obligation) 
bonds or similar obligations, including loans and leases, that are 
obligations of states or other political subdivisions of the U.S. (for 
example, municipal revenue bonds) or other countries of the OECD-based 
group, but for which the government entity is committed to repay the 
debt with revenues from the specific projects financed, rather than from 
general tax funds.
    Credit equivalent amounts of derivative contracts involving standard 
risk obligors (that is, obligors whose loans or debt securities would be 
assigned to the 100 percent risk category) are included in the 50 
percent category, unless they are backed by collateral or guarantees 
that allow them to be placed in a lower risk category.
    4. Category 4: 100 percent. a. All assets not included in the 
categories above are assigned to this category, which comprises standard 
risk assets. The bulk of the assets typically found in a loan portfolio 
would be assigned to the 100 percent category.
    b. This category includes long-term claims on, and the portions of 
long-term claims that are guaranteed by, non-OECD banks, and all claims 
on non-OECD central governments that entail some degree of transfer 
risk.\49\ This category includes all claims on foreign and domestic 
private-sector obligors not included in the categories above (including 
loans to nondepository financial institutions and bank holding 
companies); claims on commercial firms owned by the public sector; 
customer liabilities to the organization on acceptances outstanding 
involving standard risk claims;\50\ investments in fixed assets, 
premises, and other real estate owned; common and preferred stock of 
corporations, including stock acquired for debts previously contracted; 
all stripped mortgage-backed securities and similar instruments; and 
commercial and consumer loans (except those assigned to lower risk 
categories due to recognized guarantees or collateral and loans secured 
by residential property that qualify for a lower risk weight). This 
category also includes claims representing capital of a qualifying 
securities firm.
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    \49\ Such assets include all nonlocal currency claims on, and the 
portions of claims that are guaranteed by, non-OECD central governments 
and those portions of local currency claims on, or guaranteed by, non-
OECD central governments that exceed the local currency liabilities held 
by subsidiary depository institutions.
    \50\ Customer liabilities on acceptances outstanding involving 
nonstandard risk claims, such as claims on U.S. depository institutions, 
are assigned to the risk category appropriate to the identity of the 
obligor or, if relevant, the nature of the collateral or guarantees 
backing the claims. Portions of acceptances conveyed as risk 
participations to U.S. depository institutions or foreign banks are 
assigned to the 20 percent risk category appropriate to short-term 
claims guaranteed by U.S. depository institutions and foreign banks.
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    c. Also included in this category are industrial-development bonds 
and similar obligations issued under the auspices of states or political 
subdivisions of the OECD-based group of countries for the benefit of a 
private party or enterprise where that party or enterprise, not the 
government entity, is obligated to pay the principal and interest, and 
all obligations of states or political subdivisions of countries that do 
not belong to the OECD-based group.
    d. The following assets also are assigned a risk weight of 100 
percent if they have not been deducted from capital: investments in 
unconsolidated companies, joint ventures, or associated companies; 
instruments that qualify as capital issued by other banking 
organizations; and any intangibles, including those that may have been 
grandfathered into capital.

                       D. Off-Balance Sheet Items

    The face amount of an off-balance sheet item is generally 
incorporated into risk-weighted assets in two steps. The face amount is 
first multiplied by a credit conversion factor, except for direct credit 
substitutes and recourse obligations as discussed in section III.D.1. of 
this appendix. The resultant credit equivalent amount is assigned to the 
appropriate risk category according to the obligor or, if relevant, the

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guarantor, the nature of any collateral, or external credit ratings.\51\
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    \51\ The sufficiency of collateral and guarantees for off-balance-
sheet items is determined by the market value of the collateral or the 
amount of the guarantee in relation to the face amount of the item, 
except for derivative contracts, for which this determination is 
generally made in relation to the credit equivalent amount. Collateral 
and guarantees are subject to the same provisions noted under section 
III.B of this appendix A.
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    1. Items with a 100 percent conversion factor. a. Except as 
otherwise provided in section III.B.3. of this appendix, the full amount 
of an asset or transaction supported, in whole or in part, by a direct 
credit substitute or a recourse obligation. Direct credit substitutes 
and recourse obligations are defined in section III.B.3. of this 
appendix.
    b. Sale and repurchase agreements and forward agreements. Forward 
agreements are legally binding contractual obligations to purchase 
assets with certain drawdown at a specified future date. Such 
obligations include forward purchases, forward forward deposits 
placed,\49\ and partly-paid shares and securities; they do not include 
commitments to make residential mortgage loans or forward foreign 
exchange contracts.
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    \52\ Forward forward deposits accepted are treated as interest rate 
contracts.
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    c. Securities lent by a banking organization are treated in one of 
two ways, depending upon whether the lender is at risk of loss. If a 
banking organization, as agent for a customer, lends the customer's 
securities and does not indemnify the customer against loss, then the 
transaction is excluded from the risk-based capital calculation. If, 
alternatively, a banking organization lends its own securities or, 
acting as agent for a customer, lends the customer's securities and 
indemnifies the customer against loss, the transaction is converted at 
100 percent and assigned to the risk weight category appropriate to the 
obligor, or, if applicable, to any collateral delivered to the lending 
organization, or the independent custodian acting on the lending 
organization's behalf. Where a banking organization is acting as agent 
for a customer in a transaction involving the lending or sale of 
securities that is collateralized by cash delivered to the banking 
organization, the transaction is deemed to be collateralized by cash on 
deposit in a subsidiary depository institution for purposes of 
determining the appropriate risk-weight category, provided that any 
indemnification is limited to no more than the difference between the 
market value of the securities and the cash collateral received and any 
reinvestment risk associated with that cash collateral is borne by the 
customer.
    d. In the case of direct credit substitutes in which a risk 
participation \53\ has been conveyed, the full amount of the assets that 
are supported, in whole or in part, by the credit enhancement are 
converted to a credit equivalent amount at 100 percent. However, the pro 
rata share of the credit equivalent amount that has been conveyed 
through a risk participation is assigned to whichever risk category is 
lower: the risk category appropriate to the obligor, after considering 
any relevant guarantees or collateral, or the risk category appropriate 
to the institution acquiring the participation.\54\ Any remainder is 
assigned to the risk category appropriate to the obligor, guarantor, or 
collateral. For example, the pro rata share of the full amount of the 
assets supported, in whole or in part, by a direct credit substitute 
conveyed as a risk participation to a U.S. domestic depository 
institution or foreign bank is assigned to the 20 percent risk 
category.\55\
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    \53\ That is, a participation in which the originating banking 
organization remains liable to the beneficiary for the full amount of 
the direct credit substitute if the party that has acquired the 
participation fails to pay when the instrument is drawn.
    \54\ A risk participation in bankers acceptances conveyed to other 
institutions is also assigned to the risk category appropriate to the 
institution acquiring the participation or, if relevant, the guarantor 
or nature of the collateral.
    \55\ Risk participations with a remaining maturity of over one year 
that are conveyed to non-OECD banks are to be assigned to the 100 
percent risk category, unless a lower risk category is appropriate to 
the obligor, guarantor, or collateral.
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    e. In the case of direct credit substitutes in which a risk 
participation has been acquired, the acquiring banking organization's 
percentage share of the direct credit substitute is multiplied by the 
full amount of the assets that are supported, in whole or in part, by 
the credit enhancement and converted to a credit equivalent amount at 
100 percent. The credit equivalent amount of an acquisition of a risk 
participation in a direct credit substitute is assigned to the risk 
category appropriate to the account party obligor or, if relevant, the 
nature of the collateral or guarantees.
    f. In the case of direct credit substitutes that take the form of a 
syndication where each banking organization is obligated only for its 
pro rata share of the risk and there is no recourse to the originating 
banking organization, each banking organization will only include its 
pro rata share of the assets supported, in whole or in part, by the 
direct

[[Page 229]]

credit substitute in its risk-based capital calculation.\56\
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    \56\ For example, if a banking organization has a 10 percent share 
of a $10 syndicated direct credit substitute that provides credit 
support to a $100 loan, then the banking organization's $1 pro rata 
share in the enhancement means that a $10 pro rata share of the loan is 
included in risk weighted assets.
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    2. Items with a 50 percent conversion factor. a. Transaction-related 
contingencies are converted at 50 percent. Such contingencies include 
bid bonds, performance bonds, warranties, standby letters of credit 
related to particular transactions, and performance standby letters of 
credit, as well as acquisitions of risk participation in performance 
standby letters of credit. Peformance standby letters of credit 
represent obligations backing the performance of nonfinancial or 
commercial contracts or undertakings. To the extent permitted by law or 
regulation, performance standby letters of credit include arrangements 
backing, among other things, subcontractors' and suppliers' performance, 
labor and materials contracts, and construction bids.
    b. The unused portion of commitments with an original maturity 
exceeding one year, including underwriting commitments, and commercial 
and consumer credit commitments also are converted at 50 percent. 
Original maturity is defined as the length of time between the date the 
commitment is issued and the earliest date on which: (1) The banking 
organization can, at its option, unconditionally (without cause) cancel 
the commitment;\57\ and (2) the banking organization is scheduled to 
(and as a normal practice actually does) review the facility to 
determine whether or not it should be extended. Such reviews must 
continue to be conducted at least annually for such a facility to 
qualify as a short-term commitment.
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    \57\ In the case of consumer home equity or mortgage lines of credit 
secured by liens on 1-4 family residential properties, the bank is 
deemed able to unconditionally cancel the commitment for the purpose of 
this criterion if, at its option, it can prohibit additional extensions 
of credit, reduce the credit line, and terminate the commitment to the 
full extent permitted by relevant Federal law.
---------------------------------------------------------------------------

    c.i. Commitments are defined as any legally binding arrangements 
that obligate a banking organization to extend credit in the form of 
loans or leases; to purchase loans, securities, or other assets; or to 
participate in loans and leases. They also include overdraft facilities, 
revolving credit, home equity and mortgage lines of credit, eligible 
ABCP liquidity facilities, and similar transactions. Normally, 
commitments involve a written contract or agreement and a commitment 
fee, or some other form of consideration. Commitments are included in 
weighted-risk assets regardless of whether they contain ``material 
adverse change'' clauses or other provisions that are intended to 
relieve the issuer of its funding obligation under certain conditions. 
In the case of commitments structured as syndications, where the banking 
organization is obligated solely for its pro rata share, only the 
organization's proportional share of the syndicated commitment is taken 
into account in calculating the risk-based capital ratio.
    ii. Banking organizations that are subject to the market risk rules 
are required to convert the notional amount of eligible ABCP liquidity 
facilities, in form or in substance, with an original maturity of over 
one year that are carried in the trading account at 50 percent to 
determine the appropriate credit equivalent amount even though those 
facilities are structured or characterized as derivatives or other 
trading book assets. Liquidity facilities that support ABCP, in form or 
in substance, (including those positions to which the market risk rules 
may not be applied as set forth in section 2(a) of appendix E of this 
part) that are not eligible ABCP liquidity facilities are to be 
considered recourse obligations or direct credit substitutes, and 
assessed the appropriate risk-based capital treatment in accordance with 
section III.B.3. of this appendix.
    d. Once a commitment has been converted at 50 percent, any portion 
that has been conveyed to U.S. depository institutions or OECD banks as 
participations in which the originating banking organization retains the 
full obligation to the borrower if the participating bank fails to pay 
when the instrument is drawn, is assigned to the 20 percent risk 
category. This treatment is analogous to that accorded to conveyances of 
risk participations in standby letters of credit. The acquisition of a 
participation in a commitment by a banking organization is converted at 
50 percent and assigned to the risk category appropriate to the account 
party obligor or, if relevant, the nature of the collateral or 
guarantees.
    e. Revolving underwriting facilities (RUFs), note issuance 
facilities (NIFs), and other similar arrangements also are converted at 
50 percent regardless of maturity. These are facilities under which a 
borrower can issue on a revolving basis short-term paper in its own 
name, but for which the underwriting organizations have a legally 
binding commitment either to purchase any notes the borrower is unable 
to sell by the roll-over date or to advance funds to the borrower.
    3. Items with a 20 percent conversion factor. Short-term, self-
liquidating trade-related contingencies which arise from the movement of 
goods are converted at 20 percent.

[[Page 230]]

Such contingencies generally include commercial letters of credit and 
other documentary letters of credit collateralized by the underlying 
shipments.
    4. Items with a 10 percent conversion factor. a. Unused portions of 
eligible ABCP liquidity facilities with an original maturity of one year 
or less also are converted at 10 percent.
    b. Banking organizations that are subject to the market risk rules 
are required to convert the notional amount of eligible ABCP liquidity 
facilities, in form or in substance, with an original maturity of one 
year or less that are carried in the trading account at 10 percent to 
determine the appropriate credit equivalent amount even though those 
facilities are structured or characterized as derivatives or other 
trading book assets. Liquidity facilities that support ABCP, in form or 
in substance, (including those positions to which the market risk rules 
may not be applied as set forth in section 2(a) of appendix E of this 
part) that are not eligible ABCP liquidity facilities are to be 
considered recourse obligations or direct credit substitutes and 
assessed the appropriate risk-based capital requirement in accordance 
with section III.B.3. of this appendix.
    5. Items with a zero percent conversion factor. These include unused 
portions of commitments (with the exception of eligible ABCP liquidity 
facilities) with an original maturity of one year or less, or which are 
unconditionally cancelable at any time, provided a separate credit 
decision is made before each drawing under the facility. Unused portions 
of lines of credit on retail credit cards and related plans are deemed 
to be short-term commitments if the banking organization has the 
unconditional right to cancel the line of credit at any time, in 
accordance with applicable law.
    E. Derivative Contracts (Interest Rate, Exchange Rate, Commodity- 
(including precious metals) and Equity-Linked Contracts)
    1. Scope. Credit equivalent amounts are computed for each of the 
following off-balance-sheet derivative contracts:
    a. Interest Rate Contracts. These include single currency interest 
rate swaps, basis swaps, forward rate agreements, interest rate options 
purchased (including caps, collars, and floors purchased), and any other 
instrument linked to interest rates that gives rise to similar credit 
risks (including when-issued securities and forward forward deposits 
accepted).
    b. Exchange Rate Contracts. These include cross-currency interest 
rate swaps, forward foreign exchange contracts, currency options 
purchased, and any other instrument linked to exchange rates that gives 
rise to similar credit risks.
    c. Equity Derivative Contracts. These include equity-linked swaps, 
equity-linked options purchased, forward equity-linked contracts, and 
any other instrument linked to equities that gives rise to similar 
credit risks.
    d. Commodity (including precious metal) Derivative Contracts. These 
include commodity-linked swaps, commodity-linked options purchased, 
forward commodity-linked contracts, and any other instrument linked to 
commodities that gives rise to similar credit risks.
    e. Exceptions. Exchange rate contracts with an original maturity of 
fourteen or fewer calendar days and derivative contracts traded on 
exchanges that require daily receipt and payment of cash variation 
margin may be excluded from the risk-based ratio calculation. Gold 
contracts are accorded the same treatment as exchange rate contracts 
except that gold contracts with an original maturity of fourteen or 
fewer calendar days are included in the risk-based ratio calculation. 
Over-the-counter options purchased are included and treated in the same 
way as other derivative contracts.
    2. Calculation of credit equivalent amounts. a. The credit 
equivalent amount of a derivative contract that is not subject to a 
qualifying bilateral netting contract in accordance with section 
III.E.3. of this appendix A is equal to the sum of (i) the current 
exposure (sometimes referred to as the replacement cost) of the 
contract; and (ii) an estimate of the potential future credit exposure 
of the contract.
    b. The current exposure is determined by the mark-to-market value of 
the contract. If the mark-to-market value is positive, then the current 
exposure is equal to that mark-to-market value. If the mark-to-market 
value is zero or negative, then the current exposure is zero. Mark-to-
market values are measured in dollars, regardless of the currency or 
currencies specified in the contract and should reflect changes in 
underlying rates, prices, and indices, as well as counterparty credit 
quality.
    c. The potential future credit exposure of a contract, including a 
contract with a negative mark-to-market value, is estimated by 
multiplying the notional principal amount of the contract by a credit 
conversion factor. Banking organizations should use, subject to examiner 
review, the effective rather than the apparent or stated notional amount 
in this calculation. The credit conversion factors are:

[[Page 231]]



                                               Conversion Factors
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                                         Commodity,
                                                   Interest     Exchange                 excluding     Precious
               Remaining maturity                    rate       rate and      Equity      precious     metals,
                                                                  gold                     metals    except gold
----------------------------------------------------------------------------------------------------------------
One year or less...............................          0.0          1.0          6.0         10.0          7.0
Over one to five years.........................          0.5          5.0          8.0         12.0          7.0
Over five years................................          1.5          7.5         10.0         15.0          8.0
----------------------------------------------------------------------------------------------------------------

    d. For a contract that is structured such that on specified dates 
any outstanding exposure is settled and the terms are reset so that the 
market value of the contract is zero, the remaining maturity is equal to 
the time until the next reset date. For an interest rate contract with a 
remaining maturity of more than one year that meets these criteria, the 
minimum conversion factor is 0.5 percent.
    e. For a contract with multiple exchanges of principal, the 
conversion factor is multiplied by the number of remaining payments in 
the contract. A derivative contract not included in the definitions of 
interest rate, exchange rate, equity, or commodity contracts as set 
forth in section III.E.1. of this appendix A is subject to the same 
conversion factors as a commodity, excluding precious metals.
    f. No potential future exposure is calculated for a single currency 
interest rate swap in which payments are made based upon two floating 
rate indices (a so called floating/floating or basis swap); the credit 
exposure on such a contract is evaluated solely on the basis of the 
mark-to-market value.
    g. The Board notes that the conversion factors set forth above, 
which are based on observed volatilities of the particular types of 
instruments, are subject to review and modification in light of changing 
volatilities or market conditions.
    3. Netting. a. For purposes of this appendix A, netting refers to 
the offsetting of positive and negative mark-to-market values when 
determining a current exposure to be used in the calculation of a credit 
equivalent amount. Any legally enforceable form of bilateral netting 
(that is, netting with a single counterparty) of derivative contracts is 
recognized for purposes of calculating the credit equivalent amount 
provided that:
    i. The netting is accomplished under a written netting contract that 
creates a single legal obligation, covering all included individual 
contracts, with the effect that the banking organization would have a 
claim to receive, or obligation to pay, only the net amount of the sum 
of the positive and negative mark-to-market values on included 
individual contracts in the event that a counterparty, or a counterparty 
to whom the contract has been validly assigned, fails to perform due to 
any of the following events: default, insolvency, liquidation, or 
similar circumstances.
    ii. The banking organization obtains a written and reasoned legal 
opinion(s) representing that in the event of a legal challenge--
including one resulting from default, insolvency, liquidation, or 
similar circumstances--the relevant court and administrative authorities 
would find the banking organization's exposure to be the net amount 
under:
    1. The law of the jurisdiction in which the counterparty is 
chartered or the equivalent location in the case of noncorporate 
entities, and if a branch of the counterparty is involved, then also 
under the law of the jurisdiction in which the branch is located;
    2. The law that governs the individual contracts covered by the 
netting contract; and
    3. The law that governs the netting contract.
    iii. The banking organization establishes and maintains procedures 
to ensure that the legal characteristics of netting contracts are kept 
under review in the light of possible changes in relevant law.
    iv. The banking organization maintains in its files documentation 
adequate to support the netting of derivative contracts, including a 
copy of the bilateral netting contract and necessary legal opinions.
    b. A contract containing a walkaway clause is not eligible for 
netting for purposes of calculating the credit equivalent amount.\58\
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    \58\ A walkaway clause is a provision in a netting contract that 
permits a non-defaulting counterparty to make lower payments than it 
would make otherwise under the contract, or no payment at all, to a 
defaulter or to the estate of a defaulter, even if the defaulter or the 
estate of the defaulter is a net creditor under the contract.
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    c. A banking organization netting individual contracts for the 
purpose of calculating credit equivalent amounts of derivative contracts 
represents that it has met the requirements of this appendix A and all 
the appropriate documents are in the banking

[[Page 232]]

organization's files and available for inspection by the Federal 
Reserve. The Federal Reserve may determine that a banking organization's 
files are inadequate or that a netting contract, or any of its 
underlying individual contracts, may not be legally enforceable under 
any one of the bodies of law described in section III.E.3.a.ii. of this 
appendix A. If such a determination is made, the netting contract may be 
disqualified from recognition for risk-based capital purposes or 
underlying individual contracts may be treated as though they are not 
subject to the netting contract.
    d. The credit equivalent amount of contracts that are subject to a 
qualifying bilateral netting contract is calculated by adding (i) the 
current exposure of the netting contract (net current exposure) and (ii) 
the sum of the estimates of potential future credit exposures on all 
individual contracts subject to the netting contract (gross potential 
future exposure) adjusted to reflect the effects of the netting 
contract.\59\
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    \59\ For purposes of calculating potential future credit exposure to 
a netting counterparty for foreign exchange contracts and other similar 
contracts in which notional principal is equivalent to cash flows, total 
notional principal is defined as the net receipts falling due on each 
value date in each currency.
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    e. The net current exposure is the sum of all positive and negative 
mark-to-market values of the individual contracts included in the 
netting contract. If the net sum of the mark-to-market values is 
positive, then the net current exposure is equal to that sum. If the net 
sum of the mark-to-market values is zero or negative, then the net 
current exposure is zero. The Federal Reserve may determine that a 
netting contract qualifies for risk-based capital netting treatment even 
though certain individual contracts included under the netting contract 
may not qualify. In such instances, the nonqualifying contracts should 
be treated as individual contracts that are not subject to the netting 
contract.
    f. Gross potential future exposure, or Agross is 
calculated by summing the estimates of potential future exposure 
(determined in accordance with section III.E.2 of this appendix A) for 
each individual contract subject to the qualifying bilateral netting 
contract.
    g. The effects of the bilateral netting contract on the gross 
potential future exposure are recognized through the application of a 
formula that results in an adjusted add-on amount (Anet). The 
formula, which employs the ratio of net current exposure to gross 
current exposure (NGR), is expressed as:

Anet = (0.4 x Agross) + 0.6(NGR x 
Agross)

    h. The NGR may be calculated in accordance with either the 
counterparty-by-counterparty approach or the aggregate approach.
    i. Under the counterparty-by-counterparty approach, the NGR is the 
ratio of the net current exposure for a netting contract to the gross 
current exposure of the netting contract. The gross current exposure is 
the sum of the current exposures of all individual contracts subject to 
the netting contract calculated in accordance with section III.E.2. of 
this appendix A. Net negative mark-to-market values for individual 
netting contracts with the same counterparty may not be used to offset 
net positive mark-to-market values for other netting contracts with the 
same counterparty.
    ii. Under the aggregate approach, the NGR is the ratio of the sum of 
all of the net current exposures for qualifying bilateral netting 
contracts to the sum of all of the gross current exposures for those 
netting contracts (each gross current exposure is calculated in the same 
manner as in section III.E.3.h.i. of this appendix A). Net negative 
mark-to-market values for individual counterparties may not be used to 
offset net positive current exposures for other counterparties.
    iii. A banking organization must use consistently either the 
counterparty-by-counterparty approach or the aggregate approach to 
calculate the NGR. Regardless of the approach used, the NGR should be 
applied individually to each qualifying bilateral netting contract to 
determine the adjusted add-on for that netting contract.
    i. In the event a netting contract covers contracts that are 
normally excluded from the risk-based ratio calculation--for example, 
exchange rate contracts with an original maturity of fourteen or fewer 
calendar days or instruments traded on exchanges that require daily 
payment and receipt of cash variation margin--an institution may elect 
to either include or exclude all mark-to-market values of such contracts 
when determining net current exposure, provided the method chosen is 
applied consistently.
    4. Risk Weights. Once the credit equivalent amount for a derivative 
contract, or a group of derivative contracts subject to a qualifying 
bilateral netting contract, has been determined, that amount is assigned 
to the risk category appropriate to the counterparty, or, if relevant, 
the guarantor or the nature of any collateral.\60\ However,

[[Page 233]]

the maximum risk weight applicable to the credit equivalent amount of 
such contracts is 50 percent.
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    \60\ For derivative contracts, sufficiency of collateral or 
guarantees is generally determined by the market value of the collateral 
or the amount of the guarantee in relation to the credit equivalent 
amount. Collateral and guarantees are subject to the same provisions 
noted under section III.B. of this appendix A.
---------------------------------------------------------------------------

    5. Avoidance of double counting. a. In certain cases, credit 
exposures arising from the derivative contracts covered by section 
III.E. of this appendix A may already be reflected, in part, on the 
balance sheet. To avoid double counting such exposures in the assessment 
of capital adequacy and, perhaps, assigning inappropriate risk weights, 
counterparty credit exposures arising from the derivative instruments 
covered by these guidelines may need to be excluded from balance sheet 
assets in calculating a banking organization's risk-based capital 
ratios.
    b. Examples of the calculation of credit equivalent amounts for 
contracts covered under this section III.E. are contained in Attachment 
V of this appendix A.

              IV. Minimum Supervisory Ratios and Standards

    The interim and final supervisory standards set forth below specify 
minimum supervisory ratios based primarily on broad credit risk 
considerations. As noted above, the risk-based ratio does not take 
explicit account of the quality of individual asset portfolios or the 
range of other types of risks to which banking organizations may be 
exposed, such as interest rate, liquidity, market or operational risks. 
For this reason, banking organizations are generally expected to operate 
with capital positions well above the minimum ratios.
    Institutions with high or inordinate levels of risk are expected to 
operate well above minimum capital standards. Banking organizations 
experiencing or anticipating significant growth are also expected to 
maintain capital, including tangible capital positions, well above the 
minimum levels. For example, most such organizations generally have 
operated at capital levels ranging from 100 to 200 basis points above 
the stated minimums. Higher capital ratios could be required if 
warranted by the particular circumstances or risk profiles of individual 
banking organizations. In all cases, organizations should hold capital 
commensurate with the level and nature of all of the risks, including 
the volume and severity of problem loans, to which they are exposed.
    Upon adoption of the risk-based framework, any organization that 
does not meet the interim or final supervisory ratios, or whose capital 
is otherwise considered inadequate, is expected to develop and implement 
a plan acceptable to the Federal Reserve for achieving an adequate level 
of capital consistent with the provisions of these guidelines or with 
the special circumstances affecting the individual organization. In 
addition, such organizations should avoid any actions, including 
increased risk-taking or unwarranted expansion, that would lower or 
further erode their capital positions.

           A. Minimum Risk-Based Ratio After Transition Period

    As reflected in Attachment VI, by year-end 1992, all bank holding 
companies \61\ should meet a minimum ratio of qualifying total capital 
to weighted risk assets of 8 percent, of which at least 4.0 percentage 
points should be in the form of Tier 1 capital. For purposes of section 
IV.A., Tier 1 capital is defined as the sum of core capital elements 
less goodwill and other intangible assets required to be deducted in 
accordance with section II.B.1.b. of this appendix. The maximum amount 
of supplementary capital elements that qualifies as Tier 2 capital is 
limited to 100 percent of Tier 1 capital. In addition, the combined 
maximum amount of subordinated debt and intermediate-term preferred 
stock that qualifies as Tier 2 capital is limited to 50 percent of Tier 
1 capital. The maximum amount of the allowance for loan and lease losses 
that qualifies as Tier 2 capital is limited to 1.25 percent of gross 
weighted risk assets. Allowances for loan and lease losses in excess of 
this limit may, of course, be maintained, but would not be included in 
an organization's total capital. The Federal Reserve will continue to 
require bank holding companies to maintain reserves at levels fully 
sufficient to cover losses inherent in their loan portfolios.
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    \61\ As noted in section I above, bank holding companies with less 
than $150 million in consolidated assets would generally be exempt from 
the calculation and analysis of risk-based ratios on a consolidated 
holding company basis, subject to certain terms and conditions.
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    Qualifying total capital is calculated by adding Tier 1 capital and 
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then 
deducting from this sum certain investments in banking or finance 
subsidiaries that are not consolidated for accounting or supervisory 
purposes, reciprocal holdings of banking organizations' capital 
securities, or other items at the direction of the Federal Reserve. The 
conditions under which these deductions are to be made and the 
procedures for making the deductions are discussed above in section 
II(B).

                       B. Transition Arrangements

    The transition period for implementing the risk-based capital 
standard ends on December 31, 1992. Initially, the risk-based capital 
guidelines do not establish a minimum level

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of capital. However, by year-end 1990, banking organizations are 
expected to meet a minimum interim target ratio for qualifying total 
capital to weighted risk assets of 7.25 percent, at least one-half of 
which should be in the form of Tier 1 capital. For purposes of meeting 
the 1990 interim target, the amount of loan loss reserves that may be 
included in capital is limited to 1.5 percent of weighted risk assets 
and up to 10 percent of an organization's Tier 1 capital may consist of 
supplementary capital elements. Thus, the 7.25 percent interim target 
ratio implies a minimum ratio of Tier 1 capital to weighted risk assets 
of 3.6 percent (one-half of 7.25) and a minimum ratio of core capital 
elements to weighted risk assets ratio of 3.25 percent (nine-tenths of 
the Tier 1 capital ratio).
    Through year-end 1990, banking organizations have the option of 
complying with the minimum 7.25 percent year-end 1990 risk-based capital 
standard, in lieu of the minimum 5.5 percent primary and 6 percent total 
capital to total assets ratios set forth in appendix B of this part. In 
addition, as more fully set forth in appendix D to this part, banking 
organ