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  <AMDDATE>Jan. 1, 2005</AMDDATE>
  <FMTR>
    <TITLEPG>
      <CODE>CODE OF FEDERAL REGULATIONS</CODE>
      <PRTPAGE P="1"/>
      <TITLENUM>12</TITLENUM>
      <PARTS>Parts 220 to 299</PARTS>
      <REVISED>Revised as of January 1, 2005</REVISED>
      <SUBJECT>Banks and Banking</SUBJECT>
      <CONTAINS>Containing a codification of documents of general applicability and future effect</CONTAINS>
      <DATE>As of January 1, 2005</DATE>
      <ANCIL>With Ancillaries</ANCIL>
      <PUB>
        <P>Published by</P>
        <P>Office of the Federal Register</P>
        <P>National Archives and Records</P>
        <P>Administration</P>
      </PUB>
      <SPECED>A Special Edition of the Federal Register</SPECED>
    </TITLEPG>
    <BTITLE>
      <PRTPAGE P="?ii"/>
      <HD SOURCE="HED">U.S. GOVERNMENT OFFICIAL EDITION NOTICE</HD>
      <HD SOURCE="HED">Legal Status and Use of Seals and Logos</HD>
      <GPH DEEP="54" HTYPE="LEFT" SPAN="1">
        <GID>e:\seals\archives.ai</GID>
      </GPH>
      <P>The seal of the National Archives and Records Administration (NARA) authenticates the Code of Federal Regulations (CFR) as the official codification of Federal regulations established under the Federal Register Act. Under the provisions of 44 U.S.C. 1507, the contents of the CFR, a special edition of the Federal Register, shall be judicially noticed. The CFR is prima facie evidence of the original documents published in the Federal Register (44 U.S.C. 1510).</P>
      <P>It is prohibited to use NARA's official seal and the stylized Code of Federal Regulations logo on any republication of this material without the express, written permission of the Archivist of the United States or the Archivist's designee. Any person using NARA's official seals and logos in a manner inconsistent with the provisions of 36 CFR part 1200 is subject to the penalties specified in 18 U.S.C. 506, 701, and 1017.</P>
      <HD SOURCE="HED">Use of ISBN Prefix</HD>
      <P>This is the Official U.S. Government edition of this publication and is herein identified to certify its authenticity. Use of the 0--16 ISBN prefix is for U.S. Government Printing Office Official Editions only. The Superintendent of Documents of the U.S. Government Printing Office requests that any reprinted edition clearly be labeled as a copy of the authentic work with a new ISBN.</P>
      <GPO/>
      <GPH DEEP="18" HTYPE="LEFT" SPAN="1">
        <GID>e:\seals\gpologo.eps</GID>
      </GPH>
      <P>U . S . G O V E R N M E N T P R I N T I N G O F F I C E</P>
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      <P>http://bookstore.gpo.gov</P>
      <P>Phone: toll-free (866) 512-1800; DC area (202) 512-1800</P>
    </BTITLE>
    <TOC>
      <PRTPAGE P="iii"/>
      <HD SOURCE="HED">Table of Contents</HD>
      <PGHD>Page</PGHD>
      <EXPL>
        <SUBJECT>Explanation</SUBJECT>
        <PG>v</PG>
      </EXPL>
      <TITLENO>
        <HD SOURCE="HED">Title 12:</HD>
        <CHAPTI>
          <SUBJECT>Chapter II—Federal Reserve System (Continued)</SUBJECT>
          <PG>3</PG>
        </CHAPTI>
      </TITLENO>
      <FAIDS>
        <HD SOURCE="HED">Finding Aids:</HD>
        <SUBJECT>Table of CFR Titles and Chapters</SUBJECT>
        <PG>891</PG>
        <SUBJECT>Alphabetical List of Agencies Appearing in the CFR</SUBJECT>
        <PG>909</PG>
        <SUBJECT>List of CFR Sections Affected</SUBJECT>
        <PG>919</PG>
      </FAIDS>
    </TOC>
    <CITE>
      <PRTPAGE P="iv"/>
      <P>Cite this Code:<E T="01">CFR</E>
      </P>

      <CITEP>To cite the regulations in this volume use title, part and section number. Thus, <E T="01"> 12 CFR 220.1</E> refers to title 12, part 220, section 1.</CITEP>
    </CITE>
    <EXPLA>
      <PRTPAGE P="v"/>
      <HD SOURCE="HED">Explanation</HD>
      <P>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.</P>
      <P>Each volume of the Code is revised at least once each calendar year and issued on a quarterly basis approximately as follows:</P>
      <IPAR>
        <P SOURCE="P1">Title 1 through Title 16</P>
        <STUB>as of January 1</STUB>
        <P SOURCE="P1">Title 17 through Title 27</P>
        <STUB>as of April 1</STUB>
        <P SOURCE="P1">Title 28 through Title 41</P>
        <STUB>as of July 1</STUB>
        <P SOURCE="P1">Title 42 through Title 50</P>
        <STUB>as of October 1</STUB>
      </IPAR>
      <P>The appropriate revision date is printed on the cover of each volume.</P>
      <SIDEHED>
        <HD SOURCE="HED">LEGAL STATUS</HD>
        <P>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).</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">HOW TO USE THE CODE OF FEDERAL REGULATIONS</HD>
        <P>The Code of Federal Regulations is kept up to date by the individual issues of the Federal Register. These two publications must be used together to determine the latest version of any given rule.</P>
        <P>To determine whether a Code volume has been amended since its revision date (in this case, January 1, 2005), consult the “List of CFR Sections Affected (LSA),” which is issued monthly, and the “Cumulative List of Parts Affected,” which appears in the Reader Aids section of the daily Federal Register. These two lists will identify the Federal Register page number of the latest amendment of any given rule.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">EFFECTIVE AND EXPIRATION DATES</HD>
        <P>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 dates and effective dates are usually not the same and care must be exercised by the user in determining the actual effective date. In instances where the effective date is beyond the cut-off date for the Code a note has been inserted to reflect the future effective date. In those instances where a regulation published in the Federal Register states a date certain for expiration, an appropriate note will be inserted following the text.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">OMB CONTROL NUMBERS</HD>

        <P>The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires Federal agencies to display an OMB control number with their information collection request. <PRTPAGE P="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.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">OBSOLETE PROVISIONS</HD>
        <P>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.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">CFR INDEXES AND TABULAR GUIDES</HD>

        <P>A subject index to the Code of Federal Regulations is contained in a separate volume, revised annually as of January 1, entitled CFR <E T="04">Index and Finding Aids.</E> This volume contains the Parallel Table of Statutory Authorities and Agency Rules (Table I). A list of CFR titles, chapters, and parts and an alphabetical list of agencies publishing in the CFR are also included in this volume.</P>
        <P>An index to the text of “Title 3—The President” is carried within that volume.</P>
        <P>The Federal Register Index is issued monthly in cumulative form. This index is based on a consolidation of the “Contents” entries in the daily Federal Register.</P>
        <P>A List of CFR Sections Affected (LSA) is published monthly, keyed to the revision dates of the 50 CFR titles.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">REPUBLICATION OF MATERIAL</HD>
        <P>There are no restrictions on the republication of textual material appearing in the Code of Federal Regulations.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">INQUIRIES</HD>
        <P>For a legal interpretation or explanation of any regulation in this volume, contact the issuing agency. The issuing agency's name appears at the top of odd-numbered pages.</P>
        <P>For inquiries concerning CFR reference assistance, call 202-741-6000 or write to the Director, Office of the Federal Register, National Archives and Records Administration, Washington, DC 20408 or e-mail fedreg.info@nara.gov.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">SALES</HD>
        <P>The Government Printing Office (GPO) processes all sales and distribution of the CFR. For payment by credit card, call toll-free, 866-512-1800, or DC area, 202-512-1800, M-F 8 a.m. to 4 p.m. e.s.t. or fax your order to 202-512-2250, 24 hours a day. For payment by check, write to the Superintendent of Documents, Attn: New Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954. For GPO Customer Service call 202-512-1803.</P>
      </SIDEHED>
      <SIDEHED>
        <HD SOURCE="HED">ELECTRONIC SERVICES</HD>

        <P>The full text of the Code of Federal Regulations, the LSA (List of CFR Sections Affected), The United States Government Manual, the Federal Register, Public Laws, Public Papers, Weekly Compilation of Presidential Documents and the Privacy Act Compilation are available in electronic format at www.gpoaccess.gov/nara (“GPO Access”). For more information, contact Electronic Information Dissemination Services, U.S. Government Printing Office. Phone 202-512-1530, or 888-293-6498 (toll-free). E-mail, gpoaccess@gpo.gov.<PRTPAGE P="vii"/>
        </P>
        <P>The Office of the Federal Register also offers a free service on the National Archives and Records Administration's (NARA) World Wide Web site for public law numbers, Federal Register finding aids, and related information.  Connect to NARA's web site at www.archives.gov/federal_register. The NARA site also contains links to GPO Access.</P>
      </SIDEHED>
      <SIG>
        <NAME>Raymond A. Mosley,</NAME>
        <POSITION>Director,</POSITION>
        <OFFICE>Office of the Federal Register.</OFFICE>
      </SIG>
      <DATE>January 1, 2005.</DATE>
    </EXPLA>
    <THISTITL>
      <PRTPAGE P="ix"/>
      <HD SOURCE="HED">THIS TITLE</HD>
      <P>Title 12—<E T="04">Banks and Banking</E> 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.</P>
      <P>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.</P>
    </THISTITL>
  </FMTR>
  <TITLE>
    <LRH>12 CFR Ch. II (1-1-05 Edition)</LRH>
    <RRH>Federal Reserve System</RRH>
    <CFRTITLE>
      <TITLEHD>
        <PRTPAGE P="1"/>
        <HD SOURCE="HED">Title 12—Banks and Banking</HD>
        <P>(This book contains parts 220 to 299)</P>
      </TITLEHD>
      <CFRTOC>
        <PTHD>Part</PTHD>
        <CHAPTI>
          <SUBJECT>
            <E T="04">chapter ii</E>—Federal Reserve System (Continued)</SUBJECT>
          <PG>220</PG>
        </CHAPTI>
        <CROSSREF>
          <HD SOURCE="HED">Cross References:</HD>
          <P>Farmers Home Administration: See Agriculture, 7 CFR, chapter XVIII.</P>
          <P>Office of Assistant Secretary for Housing—Federal Housing Commissioner, Department of Housing and Urban Development: See Housing and Urban Development, 24 CFR, chapter II.</P>
          <P>Fiscal Service: See Money and Finance: Treasury, 31 CFR, chapter II.</P>
          <P>Monetary Offices: See Money and Finance: Treasury, 31 CFR, chapter I.</P>
          <P>Commodity Credit Corporation: See Agriculture, 7 CFR, chapter XIV.</P>
          <P>Small Business Administration: See Business Credit and Assistance, 13 CFR, chapter I.</P>
          <P>Rural Electrification Administration: See Agriculture, 7 CFR, chapter XVII.</P>
        </CROSSREF>
      </CFRTOC>
    </CFRTITLE>
    <CHAPTER>
      <TOC>
        <TOCHD>
          <PRTPAGE P="3"/>
          <HD SOURCE="HED">CHAPTER II—FEDERAL RESERVE SYSTEM</HD>
        </TOCHD>
        <SUBCHAP>
          <HD SOURCE="HED">SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM</HD>
        </SUBCHAP>
        <PTHD>Part</PTHD>
        <PGHD>Page</PGHD>
        <CHAPTI>
          <PT>220</PT>
          <SUBJECT>Credit by brokers and dealers (Regulation T)</SUBJECT>
          <PG>5</PG>
          <PT>221</PT>
          <SUBJECT>Credit by banks and persons other than brokers or dealers for the purpose of purchasing or carrying margin stock (Regulation U)</SUBJECT>
          <PG>34</PG>
          <PT>222</PT>
          <SUBJECT>Fair credit reporting (regulation V)</SUBJECT>
          <PG>55</PG>
          <PT>223</PT>
          <SUBJECT>Transactions between member banks and their affiliates (Regulation W)</SUBJECT>
          <PG>57</PG>
          <PT>224</PT>
          <SUBJECT>Borrowers of securities credit (Regulation X)</SUBJECT>
          <PG>81</PG>
          <PT>225</PT>
          <SUBJECT>Bank holding companies and change in bank control (Regulation Y)</SUBJECT>
          <PG>82</PG>
          <PT>226</PT>
          <SUBJECT>Truth in lending (Regulation Z)</SUBJECT>
          <PG>253</PG>
          <PT>227</PT>
          <SUBJECT>Unfair or deceptive acts or practices (Regulation AA)</SUBJECT>
          <PG>500</PG>
          <PT>228</PT>
          <SUBJECT>Community reinvestment (Regulation BB)</SUBJECT>
          <PG>503</PG>
          <PT>229</PT>
          <SUBJECT>Availability of funds and collection of checks (Regulation CC)</SUBJECT>
          <PG>523</PG>
          <PT>230</PT>
          <SUBJECT>Truth in savings (Regulation DD)</SUBJECT>
          <PG>655</PG>
          <PT>231</PT>
          <SUBJECT>Netting eligibility for financial institution (Regulation EE)</SUBJECT>
          <PG>691</PG>
          <PT>250</PT>
          <SUBJECT>Miscellaneous interpretations</SUBJECT>
          <PG>692</PG>
          <PT>261</PT>
          <SUBJECT>Rules regarding availability of information</SUBJECT>
          <PG>721</PG>
          <PT>261a</PT>
          <SUBJECT>Rules regarding access to personal information under the Privacy Act of 1974</SUBJECT>
          <PG>738</PG>
          <PT>261b</PT>
          <SUBJECT>Rules regarding public observation of meetings.</SUBJECT>
          <PG>744</PG>
          <PT>262</PT>
          <SUBJECT>Rules of procedure</SUBJECT>
          <PG>749</PG>
          <PT>263</PT>
          <SUBJECT>Rules of practice for hearings</SUBJECT>
          <PG>757</PG>
          <PT>264</PT>
          <SUBJECT>Employee responsibilities and conduct</SUBJECT>
          <PG>803</PG>
          <PT>264a</PT>
          <RESERVED>[Reserved]</RESERVED>
          <PT>264b</PT>
          <SUBJECT>Rules regarding foreign gifts and decorations</SUBJECT>
          <PG>803</PG>
          <PT>265</PT>
          <SUBJECT>Rules regarding delegation of authority</SUBJECT>
          <PG>806</PG>
          <PT>266</PT>
          <SUBJECT>Limitations on activities of former members and employees of the Board</SUBJECT>
          <PG>824</PG>
          <PT>267</PT>
          <SUBJECT>Rules of organization and procedure of the Consumer Advisory Council</SUBJECT>
          <PG>826</PG>
          <PT>268</PT>
          <SUBJECT>Rules regarding equal opportunity</SUBJECT>
          <PG>828<PRTPAGE P="4"/>
          </PG>
          <PT>269</PT>
          <SUBJECT>Policy on labor relations for the Federal Reserve banks</SUBJECT>
          <PG>860</PG>
          <PT>269a</PT>
          <SUBJECT>Definitions</SUBJECT>
          <PG>865</PG>
          <PT>269b</PT>
          <SUBJECT>Charges of unfair labor practices</SUBJECT>
          <PG>866</PG>
        </CHAPTI>
        <SUBCHAP>
          <HD SOURCE="HED">SUBCHAPTER B—FEDERAL OPEN MARKET COMMITTEE</HD>
        </SUBCHAP>
        <CHAPTI>
          <PT>270</PT>
          <SUBJECT>Open market operations of Federal Reserve banks</SUBJECT>
          <PG>875</PG>
          <PT>271</PT>
          <SUBJECT>Rules regarding availability of information</SUBJECT>
          <PG>876</PG>
          <PT>272</PT>
          <SUBJECT>Rules of procedure</SUBJECT>
          <PG>883</PG>
          <PT>281</PT>
          <SUBJECT>Statements of policy</SUBJECT>
          <PG>885</PG>
        </CHAPTI>
        <SUBCHAP>
          <HD SOURCE="HED">SUBCHAPTER C—FEDERAL RESERVE SYSTEM LABOR RELATIONS PANEL</HD>
        </SUBCHAP>
        <CHAPTI>
          <PT>290-299</PT>
          <RESERVED>[Reserved]</RESERVED>
        </CHAPTI>
        <SUPPLPUB>
          <HD SOURCE="HED">Supplementary Publications:</HD>
          <P>
            <E T="03">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.</E>
          </P>
        </SUPPLPUB>
      </TOC>
      <SUBCHAP TYPE="N">
        <PRTPAGE P="5"/>
        <HD SOURCE="HED">SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM</HD>
        <PART>
          <EAR>Pt. 220</EAR>
          <HD SOURCE="HED">PART 220—CREDIT BY BROKERS AND DEALERS (REGULATION T)</HD>
          <CONTENTS>
            <SECHD>Sec.</SECHD>
            <SECTNO>220.1</SECTNO>
            <SUBJECT>Authority, purpose, and scope.</SUBJECT>
            <SECTNO>220.2</SECTNO>
            <SUBJECT>Definitions.</SUBJECT>
            <SECTNO>220.3</SECTNO>
            <SUBJECT>General provisions.</SUBJECT>
            <SECTNO>220.4</SECTNO>
            <SUBJECT>Margin account.</SUBJECT>
            <SECTNO>220.5</SECTNO>
            <SUBJECT>Special memorandum account.</SUBJECT>
            <SECTNO>220.6</SECTNO>
            <SUBJECT>Good faith account.</SUBJECT>
            <SECTNO>220.7</SECTNO>
            <SUBJECT>Broker-dealer credit account.</SUBJECT>
            <SECTNO>220.8</SECTNO>
            <SUBJECT>Cash account.</SUBJECT>
            <SECTNO>220.9</SECTNO>
            <SUBJECT>Clearance of securities, options, and futures.</SUBJECT>
            <SECTNO>220.10</SECTNO>
            <SUBJECT>Borrowing and lending securities.</SUBJECT>
            <SECTNO>220.11</SECTNO>
            <SUBJECT>Requirements for the list of marginable OTC stocks and the list of foreign margin stocks.</SUBJECT>
            <SECTNO>220.12</SECTNO>
            <SUBJECT>Supplement: margin requirements.</SUBJECT>
            <SUBJGRP>
              <HD SOURCE="HED">Interpretations</HD>
              <SECTNO>220.101</SECTNO>
              <SUBJECT>Transactions of customers who are brokers or dealers.</SUBJECT>
              <SECTNO>220.102</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.103</SECTNO>
              <SUBJECT>Borrowing of securities.</SUBJECT>
              <SECTNO>220.104</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.105</SECTNO>
              <SUBJECT>Ninety-day rule in special cash account.</SUBJECT>
              <SECTNO>220.106-220.107</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.108</SECTNO>
              <SUBJECT>International Bank Securities.</SUBJECT>
              <SECTNO>220.109</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.110</SECTNO>
              <SUBJECT>Assistance by Federal credit union to its members.</SUBJECT>
              <SECTNO>220.111</SECTNO>
              <SUBJECT>Arranging for extensions of credit to be made by a bank.</SUBJECT>
              <SECTNO>220.112</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.113</SECTNO>
              <SUBJECT>Necessity for prompt payment and delivery in special cash accounts.</SUBJECT>
              <SECTNO>220.114-220.116</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.117</SECTNO>
              <SUBJECT>Exception to 90-day rule in special cash account.</SUBJECT>
              <SECTNO>220.118</SECTNO>
              <SUBJECT>Time of payment for mutual fund shares purchased in a special cash account.</SUBJECT>
              <SECTNO>220.119</SECTNO>
              <SUBJECT>Applicability of margin requirements to credit extended to corporation in connection with retirement of stock.</SUBJECT>
              <SECTNO>220.120</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.121</SECTNO>
              <SUBJECT>Applicability of margin requirements to joint account between two creditors.</SUBJECT>
              <SECTNO>220.122</SECTNO>
              <SUBJECT>“Deep in the money put and call options” as extensions of credit.</SUBJECT>
              <SECTNO>220.123</SECTNO>
              <SUBJECT>Partial delayed issue contracts covering nonconvertible bonds.</SUBJECT>
              <SECTNO>220.124</SECTNO>
              <SUBJECT>Installment sale of tax-shelter programs as “arranging” for credit.</SUBJECT>
              <SECTNO>220.125-220.126</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.127</SECTNO>
              <SUBJECT>Independent broker/dealers arranging credit in connection with the sale of insurance premium funding programs.</SUBJECT>
              <SECTNO>220.128</SECTNO>
              <SUBJECT>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.</SUBJECT>
              <SECTNO>220.129-220.130</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>220.131</SECTNO>
              <SUBJECT>Application of the arranging section to broker-dealer activities under SEC Rule 144A.</SUBJECT>
              <SECTNO>220.132</SECTNO>
              <SUBJECT>Credit to brokers and dealers.</SUBJECT>
            </SUBJGRP>
          </CONTENTS>
          <AUTH>
            <HD SOURCE="HED">Authority:</HD>
            <P>15 U.S.C. 78c, 78g, 78q, and 78w.</P>
          </AUTH>
          <EDNOTE>
            <HD SOURCE="HED">Editorial Note:</HD>
            <P>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.</P>
          </EDNOTE>
          <SECTION>
            <SECTNO>§ 220.1</SECTNO>
            <SUBJECT>Authority, purpose, and scope.</SUBJECT>
            <P>(a) <E T="03">Authority and purpose.</E> 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 <E T="03">et seq.</E>). 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.</P>
            <P>(b) <E T="03">Scope.</E> (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.</P>
            <P>(2) This part does not preclude any exchange, national securities association, or creditor from imposing additional requirements or taking action for its own protection.</P>
            <P>(3) This part does not apply to:</P>
            <P>(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;</P>

            <P>(ii) Credit extended by a creditor based on a good faith determination that the borrower is an exempted borrower;<PRTPAGE P="6"/>
            </P>
            <P>(iii) Financial relations between a customer and a broker or dealer registered only under section 15C of the Act; and</P>
            <P>(iv) Financial relations between a foreign branch of a creditor and a foreign person involving foreign securities.</P>
            <CITA>[Reg. T, 63 FR 2820, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.2</SECTNO>
            <SUBJECT>Definitions.</SUBJECT>
            <P>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:</P>
            <P>
              <E T="03">Affiliated corporation</E> 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.</P>
            <P>
              <E T="03">Cash equivalent</E> 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.</P>
            <P>
              <E T="03">Covered option transaction</E> 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:</P>
            <P>(1) The amount at risk is held in the account in cash, cash equivalents, or via an escrow receipt; and</P>
            <P>(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.</P>
            <P>
              <E T="03">Credit balance</E> means the cash amount due the customer in a margin account after debiting amounts transferred to the special memorandum account.</P>
            <P>
              <E T="03">Creditor</E> 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.</P>
            <P>
              <E T="03">Current market value</E> of:</P>
            <P>(1) A security means:</P>
            <P>(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</P>
            <P>(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.</P>
            <P>(2) Any other collateral means a value determined by any reasonable method.</P>
            <P>
              <E T="03">Customer</E> excludes an exempted borrower and includes:</P>
            <P>(1) Any person or persons acting jointly:</P>
            <P>(i) To or for whom a creditor extends, arranges, or maintains any credit; or</P>
            <P>(ii) Who would be considered a customer of the creditor according to the ordinary usage of the trade;</P>
            <P>(2) Any partner in a firm who would be considered a customer of the firm absent the partnership relationship; and</P>
            <P>(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.</P>
            <P>
              <E T="03">Debit balance</E> means the cash amount owed to the creditor in a margin account after debiting amounts transferred to the special memorandum account.</P>
            <P>
              <E T="03">Delivery against payment, Payment against delivery, or a C.O.D. transaction</E> 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.</P>
            <P>
              <E T="03">Equity</E> 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.<PRTPAGE P="7"/>
            </P>
            <P>
              <E T="03">Escrow agreement</E> 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.</P>
            <P>
              <E T="03">Examining authority</E> means:</P>
            <P>(1) The national securities exchange or national securities association of which a creditor is a member; or</P>
            <P>(2) If a member of more than one self-regulatory organization, the organization designated by the SEC as the examining authority for the creditor.</P>
            <P>
              <E T="03">Exempted borrower</E> 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:</P>
            <P>(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;</P>
            <P>(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</P>
            <P>(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.</P>
            <P>
              <E T="03">Exempted securities mutual fund</E> 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).</P>
            <P>
              <E T="03">Foreign margin stock</E> means a foreign security that is an equity security that:</P>
            <P>(1) Appears on the Board's periodically published List of Foreign Margin Stocks; or</P>
            <P>(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.</P>
            <P>
              <E T="03">Foreign person</E> means a person other than a United States person as defined in section 7(f) of the Act.</P>
            <P>
              <E T="03">Foreign security</E> means a security issued in a jurisdiction other than the United States.</P>
            <P>
              <E T="03">Good faith</E> with respect to:</P>
            <P>(1) Margin means the amount of margin which a creditor would require in exercising sound credit judgment;</P>
            <P>(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.</P>
            <P>
              <E T="03">Margin call</E> 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.</P>
            <P>
              <E T="03">Margin deficiency</E> means the amount by which the required margin exceeds the equity in the margin account.</P>
            <P>
              <E T="03">Margin equity security</E> means a margin security that is an equity security (as defined in section 3(a)(11) of the Act).</P>
            <P>
              <E T="03">Margin excess</E> 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 § 220.12 (the Supplement).</P>
            <P>
              <E T="03">Margin security</E> means:</P>
            <P>(1) Any security registered or having unlisted trading privileges on a national securities exchange;</P>
            <P>(2) After January 1, 1999, any security listed on the Nasdaq Stock Market;</P>
            <P>(3) Any non-equity security;</P>
            <P>(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);</P>
            <P>(5) Any foreign margin stock;</P>

            <P>(6) Any debt security convertible into a margin security;<PRTPAGE P="8"/>
            </P>
            <P>(7) Until January 1, 1999, any OTC margin stock; or</P>
            <P>(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).</P>
            <P>
              <E T="03">Money market mutual fund</E> 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).</P>
            <P>
              <E T="03">Non-equity security</E> means a security that is not an equity security (as defined in section 3(a)(11) of the Act).</P>
            <P>
              <E T="03">Nonexempted security</E> means any security other than an exempted security (as defined in section 3(a)(12) of the Act).</P>
            <P>
              <E T="03">OTC margin stock</E> 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.</P>
            <P>
              <E T="03">Payment period</E> 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.</P>
            <P>
              <E T="03">Purpose credit</E> means credit for the purpose of:</P>
            <P>(1) Buying, carrying, or trading in securities; or</P>
            <P>(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.</P>
            <P>
              <E T="03">Short call or short put</E> means a call option or a put option that is issued, endorsed, or guaranteed in or for an account.</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>
              <E T="03">Underlying asset</E> means:</P>
            <P>(1) The security or other asset that will be delivered upon exercise of an option; or</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2821, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.3</SECTNO>
            <SUBJECT>General provisions.</SUBJECT>
            <P>(a) <E T="03">Records.</E> The creditor shall maintain a record for each account showing the full details of all transactions.</P>
            <P>(b) <E T="03">Separation of accounts—</E>(1) <E T="03">In general.</E> 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.</P>
            <P>(2) <E T="03">Exceptions.</E> Notwithstanding paragraph (b)(1) of this section:</P>
            <P>(i) For purposes of calculating the required margin for a security in a margin account, assets held in the good faith account pursuant to § 220.6(e)(1)(i) or (ii) may serve in lieu of margin;</P>
            <P>(ii) Transfers may be effected between the margin account and the special memorandum account pursuant to §§ 220.4 and 220.5.</P>
            <P>(c) <E T="03">Maintenance of credit.</E> Except as prohibited by this part, any credit initially extended in compliance with this part may be maintained regardless of:<PRTPAGE P="9"/>
            </P>
            <P>(1) Reductions in the customer's equity resulting from changes in market prices;</P>
            <P>(2) Any security in an account ceasing to be margin or exempted; or</P>
            <P>(3) Any change in the margin requirements prescribed under this part.</P>
            <P>(d) <E T="03">Guarantee of accounts.</E> No guarantee of a customer's account shall be given any effect for purposes of this part.</P>
            <P>(e) <E T="03">Receipt of funds or securities.</E> (1) A creditor, acting in good faith, may accept as immediate payment:</P>
            <P>(i) Cash or any check, draft, or order payable on presentation; or</P>
            <P>(ii) Any security with sight draft attached.</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(f) <E T="03">Exchange of securities.</E> (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.</P>
            <P>(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.</P>
            <P>(g) <E T="03">Arranging for loans by others.</E> 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.</P>
            <P>(h) <E T="03">Innocent mistakes.</E> 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.</P>
            <P>(i) <E T="03">Foreign currency.</E> (1) Freely convertible foreign currency may be treated at its U.S. dollar equivalent, provided the currency is marked-to-market daily.</P>
            <P>(2) A creditor may extend credit denominated in any freely convertible foreign currency.</P>
            <P>(j) <E T="03">Exempted borrowers.</E> (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.</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2822, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.4</SECTNO>
            <SUBJECT>Margin account.</SUBJECT>
            <P>(a) <E T="03">Margin transactions.</E> (1) All transactions not specifically authorized for inclusion in another account shall be recorded in the margin account.</P>
            <P>(2) A creditor may establish separate margin accounts for the same person to:</P>
            <P>(i) Clear transactions for other creditors where the transactions are introduced to the clearing creditor by separate creditors; or</P>

            <P>(ii) Clear transactions through other creditors if the transactions are cleared by separate creditors; or<PRTPAGE P="10"/>
            </P>
            <P>(iii) Provide one or more accounts over which the creditor or a third party investment adviser has investment discretion.</P>
            <P>(b) <E T="03">Required margin</E>—(1) <E T="03">Applicability.</E> The required margin for each long or short position in securities is set forth in § 220.12 (the Supplement) and is subject to the following exceptions and special provisions.</P>
            <P>(2) <E T="03">Short sale against the box.</E> A short sale “against the box” shall be treated as a long sale for the purpose of computing the equity and the required margin.</P>
            <P>(3) <E T="03">When-issued securities.</E> 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.</P>
            <P>(4) <E T="03">Stock used as cover.</E> (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.</P>
            <P>(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.</P>
            <P>(5) <E T="03">Accounts of partners.</E> 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.</P>
            <P>(6) <E T="03">Contribution to joint venture.</E> 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.</P>
            <P>(7) <E T="03">Transfer of accounts.</E> (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.</P>
            <P>(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.</P>
            <P>(8) <E T="03">Sound credit judgment.</E> In exercising sound credit judgment to determine the margin required in good faith pursuant to § 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.</P>
            <P>(c) <E T="03">When additional margin is required</E>—(1) <E T="03">Computing deficiency.</E> 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.</P>
            <P>(2) <E T="03">Satisfaction of deficiency.</E> 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.</P>
            <P>(3) <E T="03">Time limits.</E> (i) A margin call shall be satisfied within one payment period after the margin deficiency was created or increased.</P>

            <P>(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 <PRTPAGE P="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.</P>
            <P>(4) <E T="03">Satisfaction restriction.</E> Any transaction, position, or deposit that is used to satisfy one requirement under this part shall be unavailable to satisfy any other requirement.</P>
            <P>(d) <E T="03">Liquidation in lieu of deposit.</E> 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.</P>
            <P>(e) <E T="03">Withdrawals of cash or securities.</E> (1) Cash or securities may be withdrawn from an account, except if:</P>
            <P>(i) Additional cash or securities are required to be deposited into the account for a transaction on the same or a previous day; or</P>
            <P>(ii) The withdrawal, together with other transactions, deposits, and withdrawals on the same day, would create or increase a margin deficiency.</P>
            <P>(2) Margin excess may be withdrawn or may be transferred to the special memorandum account (§ 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.</P>
            <P>(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.</P>
            <P>(f) <E T="03">Interest, service charges, etc.</E> (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:</P>
            <P>(i) Interest charged on credit maintained in the margin account;</P>
            <P>(ii) Premiums on securities borrowed in connection with short sales or to effect delivery;</P>
            <P>(iii) Dividends, interest, or other distributions due on borrowed securities;</P>
            <P>(iv) Communication or shipping charges with respect to transactions in the margin account; and</P>
            <P>(v) Any other service charges which the creditor may impose.</P>
            <P>(2) A creditor may permit interest, dividends, or other distributions credited to a margin account to be withdrawn from the account if:</P>
            <P>(i) The withdrawal does not create or increase a margin deficiency in the account; or</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2823, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.5</SECTNO>
            <SUBJECT>Special memorandum account.</SUBJECT>
            <P>(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.</P>
            <P>(b) The SMA may contain the following entries:</P>
            <P>(1) Dividend and interest payments;</P>
            <P>(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;</P>
            <P>(3) Proceeds of a sale of securities or cash no longer required on any expired or liquidated security position that may be withdrawn under § 220.4(e); and</P>
            <P>(4) Margin excess transferred from the margin account under § 220.4(e)(2).</P>
            <CITA>[Reg. T, 63 FR 2824, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <PRTPAGE P="12"/>
            <SECTNO>§ 220.6</SECTNO>
            <SUBJECT>Good faith account.</SUBJECT>
            <P>In a good faith account, a creditor may effect or finance customer transactions in accordance with the following provisions:</P>
            <P>(a) <E T="03">Securities entitled to good faith margin</E>—(1) <E T="03">Permissible transactions.</E> 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 § 220.12 (the Supplement).</P>
            <P>(2) <E T="03">Required margin.</E> The required margin is set forth in § 220.12 (the Supplement).</P>
            <P>(3) <E T="03">Satisfaction of margin.</E> 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 § 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.</P>
            <P>(b) <E T="03">Arbitrage.</E> 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:</P>
            <P>(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</P>
            <P>(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.</P>
            <P>(c) <E T="03">“Prime broker” transactions.</E> A creditor may effect transactions for a customer as part of a “prime broker” arrangement in conformity with SEC guidelines.</P>
            <P>(d) <E T="03">Credit to ESOPs.</E> A creditor may extend and maintain credit to employee stock ownership plans without regard to the other provisions of this part.</P>
            <P>(e) <E T="03">Nonpurpose credit.</E> (1) A creditor may:</P>
            <P>(i) Effect and carry transactions in commodities;</P>
            <P>(ii) Effect and carry transactions in foreign exchange;</P>
            <P>(iii) Extend and maintain secured or unsecured nonpurpose credit, subject to the requirements of paragraph (e)(2) of this section.</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2824, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.7</SECTNO>
            <SUBJECT>Broker-dealer credit account.</SUBJECT>
            <P>(a) <E T="03">Requirements.</E> In a broker-dealer credit account, a creditor may effect or finance transactions in accordance with the following provisions.</P>
            <P>(b) <E T="03">Purchase or sale of security against full payment.</E> 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.</P>
            <P>(c) <E T="03">Joint back office.</E> 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.</P>
            <P>(d) <E T="03">Capital contribution.</E> 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.</P>
            <P>(e) <E T="03">Emergency and subordinated credit.</E> A creditor may extend and maintain, with the approval of the appropriate examining authority:</P>
            <P>(1) Credit to meet the emergency needs of any creditor; or</P>
            <P>(2) Subordinated credit to another creditor for capital purposes, if the other creditor:</P>

            <P>(i) Is an affiliated corporation or would not be considered a customer of <PRTPAGE P="13"/>the lender apart from the subordinated loan; or</P>
            <P>(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.</P>
            <P>(f) <E T="03">Omnibus credit</E> (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:</P>
            <P>(i) All securities will be for the account of customers of the broker or dealer; and</P>
            <P>(ii) Any short sales effected will be short sales made on behalf of the customers of the broker or dealer other than partners.</P>
            <P>(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.</P>
            <P>(g) <E T="03">Special purpose credit.</E> A creditor may extend the following types of credit with good faith margin:</P>
            <P>(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.</P>
            <P>(2) Credit to finance securities in transit or surrendered for transfer, if the credit is to be repaid upon completion of the transaction.</P>
            <P>(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.</P>
            <P>(4) Credit to an exempted borrower.</P>
            <P>(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.</P>
            <P>(6) Credit to a member of a national securities exchange or registered broker or dealer to finance its activities as an underwriter.</P>
            <CITA>[Reg. T, 63 FR 2824, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.8</SECTNO>
            <SUBJECT>Cash account.</SUBJECT>
            <P>(a) <E T="03">Permissible transactions.</E> In a cash account, a creditor, may:</P>
            <P>(1) Buy for or sell to any customer any security or other asset if:</P>
            <P>(i) There are sufficient funds in the account; or</P>
            <P>(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;</P>
            <P>(2) Buy from or sell for any customer any security or other asset if:</P>
            <P>(i) The security is held in the account; or</P>
            <P>(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;</P>
            <P>(3) Issue, endorse, or guarantee, or sell an option for any customer as part of a covered option transaction; and</P>
            <P>(4) Use an escrow agreement in lieu of the cash, cash equivalents or underlying asset position if:</P>
            <P>(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</P>
            <P>(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.</P>
            <P>(b) <E T="03">Time periods for payment; cancellation or liquidation.</E> (1) <E T="03">Full cash payment.</E> A creditor shall obtain full cash payment for customer purchases:</P>
            <P>(i) Within one payment period of the date:</P>
            <P>(A) Any nonexempted security was purchased;</P>
            <P>(B) Any when-issued security was made available by the issuer for delivery to purchasers;</P>
            <P>(C) Any “when distributed” security was distributed under a published plan;</P>

            <P>(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:<PRTPAGE P="14"/>
            </P>
            <P>(<E T="03">1</E>) The customer purchased the new security no more than 35 calendar days prior to the date of maturity or redemption of the old security;</P>
            <P>(<E T="03">2</E>) The customer is entitled to the proceeds of the redemption; and</P>
            <P>(<E T="03">3</E>) The delayed payment does not exceed 103 percent of the proceeds of the old security.</P>
            <P>(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.</P>
            <P>(2) <E T="03">Delivery against payment.</E> 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.</P>
            <P>(3) <E T="03">Shipment of securities, extension.</E> 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.</P>
            <P>(4) <E T="03">Cancellation; liquidation; minimum amount.</E> 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.</P>
            <P>(c) <E T="03">90 day freeze.</E> (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.</P>
            <P>(2) The 90 day freeze shall not apply if:</P>
            <P>(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</P>
            <P>(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.</P>
            <P>(d) <E T="03">Extension of time periods; transfers.</E> (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:</P>
            <P>(i) Extend any period specified in paragraph (b) of this section;</P>
            <P>(ii) Authorize transfer to another account of any transaction involving the purchase of a margin or exempted security; or</P>
            <P>(iii) Grant a waiver from the 90 day freeze.</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2825, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.9</SECTNO>
            <SUBJECT>Clearance of securities, options, and futures.</SUBJECT>
            <P>(a) <E T="03">Credit for clearance of securities.</E> 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.</P>
            <P>(b) <E T="03">Deposit of securities with a clearing agency.</E> 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:</P>
            <P>(1) The clearing agency:<PRTPAGE P="15"/>
            </P>
            <P>(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</P>
            <P>(ii) Guarantees performance of contracts for the purchase or sale of a commodity for future delivery or options on such contracts;</P>
            <P>(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</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2826, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.10</SECTNO>
            <SUBJECT>Borrowing and lending securities.</SUBJECT>
            <P>(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.</P>
            <P>(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.</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2826, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 220.11</SECTNO>
            <SUBJECT>Requirements for the list of marginable OTC stocks and the list of foreign margin stocks.</SUBJECT>
            <P>(a) <E T="03">Requirements for inclusion on the list of marginable OTC stocks.</E> Except as provided in paragraph (f) of this section, OTC margin stock shall meet the following requirements:</P>
            <P>(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;</P>
            <P>(2) The minimum average bid price of such stock, as determined by the Board, is at least $5 per share;</P>
            <P>(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;</P>
            <P>(4) Daily quotations for both bid and asked prices for the stock are continously available to the general public;</P>
            <P>(5) The stock has been publicly traded for at least six months;</P>
            <P>(6) The issuer has at least $4 million of capital, surplus, and undivided profits;</P>
            <P>(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;</P>
            <P>(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</P>
            <P>(9) The issuer or a predecessor in interest has been in existence for at least three years.</P>
            <P>(b) <E T="03">Requirements for continued inclusion on the list of marginable OTC stocks.</E> Except as provided in paragraph (f) of this section, OTC margin stock shall meet the following requirements:</P>

            <P>(1) Three or more dealers stand willing to, and do in fact, make a market in such stock and regularly submit <PRTPAGE P="16"/>bona fide bids and offers to an automated quotations system for their own accounts;</P>
            <P>(2) The minimum average bid price of such stocks, as determined by the Board, is at least $2 per share;</P>
            <P>(3) The stock is registered as specified in paragraph (a)(3) of this section;</P>
            <P>(4) Daily quotations for both bid and asked prices for the stock are continuously available to the general public;  ;</P>
            <P>(5) The issuer has at least $1 million of capital, surplus, and undivided profits;</P>
            <P>(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</P>
            <P>(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.</P>
            <P>(c) <E T="03">Requirements for inclusion on the list of foreign margin stocks.</E> Except as provided in paragraph (f) of this section, a foreign security shall meet the following requirements before being placed on the <E T="03">List of Foreign Margin Stocks:</E>
            </P>
            <P>(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;</P>
            <P>(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;</P>
            <P>(3) The aggregate market value of shares, the ownership of which is unrestricted, is not less than $1 billion;</P>
            <P>(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</P>
            <P>(5) The issuer or a predecessor in interest has been in existence for at least five years.</P>
            <P>(d) <E T="03">Requirements for continued inclusion on the list of foreign margin stocks.</E> Except as provided in paragraph (f) of this section, a foreign security shall meet the following requirements to remain on the <E T="03">List of Foreign Margin Stocks:</E>
            </P>
            <P>(1) The security continues to meet the requirements specified in paragraphs (c) (1) and (2) of this section;</P>
            <P>(2) The aggregate market value of shares, the ownership of which is unrestricted, is not less than $500 million; and</P>
            <P>(3) The average weekly trading volume of such security during the preceding six months is either at least 100,000 shares or $500,000.</P>
            <P>(e) <E T="03">Removal from the list.</E> The Board shall periodically remove from the lists any stock that:</P>
            <P>(1) Ceases to exist or of which the issuer ceases to exist; or</P>
            <P>(2) No longer substantially meets the provisions of paragraphs (b) or (d) of this section or the definition of OTC margin stock.</P>
            <P>(f) <E T="03">Discretionary authority of Board.</E> 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.</P>
            <P>(g) <E T="03">Unlawful representations.</E> 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.</P>
            <CITA>[Reg. T, 63 FR 2826, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <PRTPAGE P="17"/>
            <SECTNO>§ 220.12</SECTNO>
            <SUBJECT>Supplement: margin requirements.</SUBJECT>
            <P>The required margin for each security position held in a margin account shall be as follows:</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(c) Short sale of a nonexempted security, except for a non-equity security:</P>
            <P>(1) 150 percent of the current market value of the security; or</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(e) Nonmargin, nonexempted equity security: 100 percent of the current market value.</P>
            <P>(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:</P>
            <P>(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</P>
            <P>(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.</P>
            <CITA>[Reg. T, 63 FR 2827, Jan. 16, 1998]</CITA>
          </SECTION>
          <SUBJGRP>
            <HD SOURCE="HED">Interpretations</HD>
            <SECTION>
              <SECTNO>§ 220.101</SECTNO>
              <SUBJECT>Transactions of customers who are brokers or dealers.</SUBJECT>
              <P>The Board has recently considered certain questions regarding transactions of customers who are brokers or dealers.</P>
              <P>(a) The first question was whether delivery and payment under § 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.</P>
              <P>(b) The second question was, in effect, whether the limitations of § 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.</P>
              <P>(c) The third question was, in effect, whether a purchase and a sale of an unissued security under § 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.</P>
              <CITA>[11 FR 14155, Dec. 7, 1946]</CITA>
            </SECTION>
            <SECTION>
              <PRTPAGE P="18"/>
              <SECTNO>§ 220.102</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.103</SECTNO>
              <SUBJECT>Borrowing of securities.</SUBJECT>
              <P>(a) The Board of Governors has been asked for a ruling as to whether § 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.</P>
              <P>(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 § 220.6(h), however, it becomes especially important to bear in mind two limitations that are contained in the section.</P>
              <P>(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.</P>
              <P>(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 § 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 § 220.6(h) it must comply with other applicable provisions of the regulation.</P>
              <P>(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.</P>
              <P>(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.</P>
              <CITA>[12 FR 5278, Aug. 2, 1947]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.104</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.105</SECTNO>
              <SUBJECT>Ninety-day rule in special cash account.</SUBJECT>

              <P>(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 <PRTPAGE P="19"/>payment in such an account is withdrawn during the 90-day period.</P>
              <P>(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.</P>
              <P>(c) The Board expressed the view that the account becomes subject to the 90-day disqualification in § 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.</P>
              <CITA>[13 FR 2368, May 1, 1948]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§§ 220.106-220.107</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.108</SECTNO>
              <SUBJECT>International Bank Securities.</SUBJECT>

              <P>(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—
              </P>
              <EXTRACT>
                <P>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). * * *.</P>
              </EXTRACT>
              
              <P>(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 § 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.</P>
              <CITA>[14 FR 5505, Sept. 7, 1949]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.109</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.110</SECTNO>
              <SUBJECT>Assistance by Federal credit union to its members.</SUBJECT>
              <P>(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.</P>

              <P>(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, <PRTPAGE P="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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <CITA>[18 FR 4592, Aug. 5, 1953]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.111</SECTNO>
              <SUBJECT>Arranging for extensions of credit to be made by a bank.</SUBJECT>
              <P>(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.</P>
              <P>(b) The matter is treated generally in § 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.</P>

              <P>(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 <PRTPAGE P="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 § 221.101 of this subchapter.</P>
              <P>(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.</P>
              <P>(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.</P>
              <CITA>[18 FR 5505, Sept. 15, 1953]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.112</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.113</SECTNO>
              <SUBJECT>Necessity for prompt payment and delivery in special cash accounts.</SUBJECT>
              <P>(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 § 220.4(c).</P>
              <P>(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 § 220.4(c)(3), or any shipment of securities as described in § 220.4(c).</P>

              <P>(c) This part provides that a creditor subject thereto may not effect for a customer a purchase in a special cash account under § 220.4(c) unless the use of the account meets the limitations of § 220.4(a) and the purchase constitutes a “bona fide cash transaction” which complies with the eligibility requirements of § 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 <PRTPAGE P="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, § 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 § 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.”</P>
              <P>(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 § 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 § 220.4(c)(5).</P>
              <P>(e) Section 220.4(c)(5) provides that if the creditor, “acting in good faith in accordance with” § 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 § 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 § 220.4 (c)(5) is specifically conditioned on the creditor acting in good faith in accordance with § 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 § 220.4(c)(5) that the creditor “deliver the security promptly to the customer”.</P>
              <P>(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 (§ 220.4 (c)(5)) to allow additional time to customers for making payment. The ‘prompt delivery' described in (§ 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”.</P>
              <P>(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 § 220.4(c)(5) should not be regarded as permitting the transactions in question to be effected in a special cash account.</P>
              <CITA>[22 FR 5954, July 27, 1957]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§§ 220.114-220.116</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.117</SECTNO>
              <SUBJECT>Exception to 90-day rule in special cash account.</SUBJECT>
              <P>(a) The Board of Governors has recently interpreted certain of the provisions of § 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.</P>

              <P>(b) The specific factual situation presented may be summarized as follows:
              </P>
              <EXTRACT>
                <PRTPAGE P="23"/>
                <P>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.</P>
              </EXTRACT>
              

              <P>(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:
              </P>
              <EXTRACT>
                <P>* * * The creditor may disregard for the purposes of this subparagraph (§ 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. * * *</P>
              </EXTRACT>
              
              <P>(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?</P>
              <P>(2) The clear purpose of § 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 § 220.4(c)(8), until it has been honored by the drawee bank, indicating the sufficiency of his account to pay the check.</P>

              <P>(3) The phrase “final payment of any check” is interpreted as above notwithstanding § 220.6(f), which provides that:
              </P>
              <EXTRACT>
                <P>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; * * *</P>
              </EXTRACT>
              
              <FP>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 § 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 § 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.</FP>
              <P>(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 § 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.</P>

              <P>(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 <PRTPAGE P="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.</P>
              <P>(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 § 220.4(c)(8), as interpreted herein, only if the customer's check was paid by the drawee bank on “Day 8”.</P>
              <CITA>[27 FR 3511, Apr. 12, 1962]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.118</SECTNO>
              <SUBJECT>Time of payment for mutual fund shares purchased in a special cash account.</SUBJECT>
              <P>(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 § 220.4(c)(2) or that described in § 220.4(c)(3).</P>
              <P>(b) Section 220.4(c)(2) provides as follows:
              </P>
              <EXTRACT>
                <P>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.</P>
              </EXTRACT>
              
              <FP>Section 220.4(c)(3), one of the exceptions referred to, provides in relevant part as follows:</FP>
              
              <EXTRACT>
                <P>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.</P>
              </EXTRACT>
              
              <P>(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.</P>
              <P>(d) Under the general rule of § 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.</P>
              <P>(e) The purpose of § 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 § 220.4(c)(3) any more than it is under § 220.4(c)(2).</P>

              <P>(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 <PRTPAGE P="25"/>is not a purchase of an “unissued security” to which § 220.4(c)(3) applies, but is a transaction to which § 220.4(c)(2) applies.</P>
              <CITA>[27 FR 10885, Nov. 8, 1962]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.119</SECTNO>
              <SUBJECT>Applicability of margin requirements to credit extended to corporation in connection with retirement of stock.</SUBJECT>
              <P>(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.</P>
              <P>(b) If the transaction was of a kind that must be included in the corporation's “general account” with the dealer (§ 220.3), it would involve an excessive extension of credit in violation of § 220.3 (b)(1). However, the transaction would be permissible if the transaction came within the scope of § 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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>

              <P>(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 § 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.<PRTPAGE P="26"/>
              </P>
              <P>(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.</P>
              <P>(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.</P>
              <CITA>[27 FR 12346, Dec. 13, 1962]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.120</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.121</SECTNO>
              <SUBJECT>Applicability of margin requirements to joint account between two creditors.</SUBJECT>
              <P>(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.</P>
              <P>(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.</P>
              <P>(c) Section 220.3(a) provides that
              </P>
              <EXTRACT>
                <P>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, * * *.</P>
              </EXTRACT>
              
              <FP>and § 220.2(c) defines the term “customer” to include</FP>
              
              <EXTRACT>
                <P>* * * any person, or any group of persons acting jointly, * * * to or for whom a creditor is extending or maintaining any credit * * *</P>
              </EXTRACT>
              
              <FP>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.</FP>

              <P>(d) Section 220.6(b) provides, with respect to the account of a joint adventure in which a creditor participates, that
              </P>
              <EXTRACT>
                <P>* * * the adjusted debit balance of the account shall include, in addition to the items specified in § 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.</P>
              </EXTRACT>
              
              <FP>In addition, the final paragraph of § 220.2(c) states that the definition of “customer”</FP>
              
              <EXTRACT>
                <P>* * * 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.</P>
              </EXTRACT>
              

              <P>(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 <PRTPAGE P="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 § 220.4(f) (4), and the specialist's account under § 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.</P>
              <CITA>[31 FR 7169, May 17, 1966]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.122</SECTNO>
              <SUBJECT>“Deep in the money put and call options” as extensions of credit.</SUBJECT>

              <P>(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:
              </P>
              <EXTRACT>
                <P>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.</P>
              </EXTRACT>
              
              <P>(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.</P>
              <P>(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.</P>
              <P>(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 § 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 § 220.4. Accordingly, the writer, as a customer of the member firm, must make a deposit, which is included in his general account.</P>
              <P>(e) In order to prevent the deposit from being available against other margin purchases, and in effect counted twice, § 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.</P>

              <P>(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 <PRTPAGE P="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.</P>
              <P>(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.</P>
              <P>(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 § 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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>

              <P>(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 <PRTPAGE P="29"/>credit in an amount greater than the firm itself could extend, a practice that is prohibited by § 220.7(a).</P>
              <CITA>[35 FR 3280, Feb. 21, 1970]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.123</SECTNO>
              <SUBJECT>Partial delayed issue contracts covering nonconvertible bonds.</SUBJECT>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(g) However, § 220.4(c)(3) provides that:
              </P>
              <EXTRACT>
                <P>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.</P>
              </EXTRACT>
              
              <PRTPAGE P="30"/>

              <P>(h) In interpreting § 220.4(c)(3), the Board has stated that the purpose of the provision:
              </P>
              <EXTRACT>
                <P>* * * 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.)</P>
              </EXTRACT>
              
              <FP>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:</FP>
              
              <EXTRACT>
                <P>* * * 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.)</P>
              </EXTRACT>
              
              <FP>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.</FP>
              <P>(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.</P>
              <CITA>[36 FR 2777, Feb. 10, 1971]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.124</SECTNO>
              <SUBJECT>Installment sale of tax-shelter programs as “arranging” for credit.</SUBJECT>
              <P>(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.</P>
              <P>(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.</P>

              <P>(c) With an exception not applicable here, § 220.7(a) of Regulation T provides that:
              </P>
              <EXTRACT>
                <P>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 * * *</P>
              </EXTRACT>
              
              <PRTPAGE P="31"/>
              <P>(d) In the case of credit for the purpose of purchasing or carrying securities (purpose credit), § 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.</P>
              <P>(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.</P>
              <P>(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 §§ 220.7(a) and 220.8 of Regulation T.</P>
              <CITA>[37 FR 6568, Mar. 31, 1972]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.125-220.126</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.127</SECTNO>
              <SUBJECT>Independent broker/dealers arranging credit in connection with the sale of insurance premium funding programs.</SUBJECT>
              <P>(a) The Board's September 5, 1972, clarifying amendment to § 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 § 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.</P>
              <P>(b) The 1972 amendment eliminated from § 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.</P>

              <P>(c) In response to a specific view recently expressed, the Board agrees that under Regulation T:
              </P>
              <EXTRACT>
                <P>* * * 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.</P>
              </EXTRACT>
              
              <P>(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.</P>
              <CITA>[38 FR 11066, May 4, 1973]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.128</SECTNO>
              <SUBJECT>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.</SUBJECT>

              <P>(a) The Board was recently asked whether under Regulation T, “Credit by Brokers and Dealers” (12 CFR part <PRTPAGE P="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.</P>

              <P>(b) The applicable provisions of regulation T are § 220.3(d)(3) and (5) and § 220.3(g)(4) and (5) which provide as follows:
              </P>
              <EXTRACT>
                <P>(d) * * * the adjusted debit balance of a general account * * * shall be calculated by taking the sum of the following items:</P>
              </EXTRACT>
              
              <STARS/>
              
              <EXTRACT>
                <P>(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 § 220.8(d) (the supplement to regulation T) as the margin required for such short sales, except that such amount so prescribed in such § 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;</P>
              </EXTRACT>
              
              <STARS/>
              
              <EXTRACT>
                <P>(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;</P>
              </EXTRACT>
              
              <STARS/>
              
              <EXTRACT>
                <P>(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.</P>
                <P>(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 § 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.</P>
              </EXTRACT>
              
              <P>(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 § 220.3(d)(5).</P>
              <P>(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).</P>
              <P>(e) Generally speaking, a customer makes a short sale “against the box” for tax reasons. Regulation T, however, provides in § 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.</P>

              <P>(f) A similar conclusion obtains under § 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 § 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 <PRTPAGE P="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.</P>

              <P>(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 “<E T="03">contra</E>” 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.</P>
              <CITA>[38 FR 12098, May 9, 1973]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§§ 220.129-220.130</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.131</SECTNO>
              <SUBJECT>Application of the arranging section to broker-dealer activities under SEC Rule 144A.</SUBJECT>
              <P>(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) <SU>1</SU>
                <FTREF/> may be considered an arranging of credit permitted as an “investment banking service” under § 220.13(a) of Regulation T.</P>
              <FTNT>
                <P>

                  <SU>1</SU> Rule 144A, 17 CFR 230.144A, was originally published in the <E T="04">Federal Register</E> at 55 FR 17933, April 30, 1990.</P>
              </FTNT>

              <P>(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 <E T="03">qualified institutional buyers,</E> as defined in the rule. In general, a <E T="03">qualified institutional buyer</E> 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.</P>
              <P>(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.</P>

              <P>(d) Under § 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 <PRTPAGE P="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.</P>
              <P>(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 § 220.13(a) of Regulation T.</P>
              <CITA>[Reg. T, 55 FR 29566, July 20, 1990]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 220.132</SECTNO>
              <SUBJECT>Credit to brokers and dealers.</SUBJECT>
              <P>For text of this interpretation, see § 207.114 of this subchapter.</P>
              <CITA>[Reg. T, 61 FR 60167, Nov. 26, 1996]</CITA>
            </SECTION>
          </SUBJGRP>
        </PART>
        <PART>
          <EAR>Pt. 221</EAR>
          <HD SOURCE="HED">PART 221—CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)</HD>
          <CONTENTS>
            <SECHD>Sec.</SECHD>
            <SECTNO>221.1</SECTNO>
            <SUBJECT>Authority, purpose, and scope.</SUBJECT>
            <SECTNO>221.2</SECTNO>
            <SUBJECT>Definitions.</SUBJECT>
            <SECTNO>221.3</SECTNO>
            <SUBJECT>General requirements.</SUBJECT>
            <SECTNO>221.4</SECTNO>
            <SUBJECT>Employee stock option, purchase, and ownership plans.</SUBJECT>
            <SECTNO>221.5</SECTNO>
            <SUBJECT>Special purpose loans to brokers and dealers.</SUBJECT>
            <SECTNO>221.6</SECTNO>
            <SUBJECT>Exempted transactions.</SUBJECT>
            <SECTNO>221.7</SECTNO>
            <SUBJECT>Supplement: Maximum loan value of margin stock and other collateral.</SUBJECT>
            <SUBJGRP>
              <HD SOURCE="HED">Interpretations</HD>
              <SECTNO>221.101</SECTNO>
              <SUBJECT>Determination and effect of purpose of loan.</SUBJECT>
              <SECTNO>221.102</SECTNO>
              <SUBJECT>Application to committed credit where funds are disbursed thereafter.</SUBJECT>
              <SECTNO>221.103</SECTNO>
              <SUBJECT>Loans to brokers or dealers.</SUBJECT>
              <SECTNO>221.104</SECTNO>
              <SUBJECT>Federal credit unions.</SUBJECT>
              <SECTNO>221.105</SECTNO>
              <SUBJECT>Arranging for extensions of credit to be made by a bank.</SUBJECT>
              <SECTNO>221.106</SECTNO>
              <SUBJECT>Reliance in “good faith” on statement of purpose of loan.</SUBJECT>
              <SECTNO>221.107</SECTNO>
              <SUBJECT>Arranging loan to purchase open-end investment company shares.</SUBJECT>
              <SECTNO>221.108</SECTNO>
              <SUBJECT>Effect of registration of stock subsequent to making of loan.</SUBJECT>
              <SECTNO>221.109</SECTNO>
              <SUBJECT>Loan to open-end investment company.</SUBJECT>
              <SECTNO>221.110</SECTNO>
              <SUBJECT>Questions arising under this part.</SUBJECT>
              <SECTNO>221.111</SECTNO>
              <SUBJECT>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.</SUBJECT>
              <SECTNO>221.112</SECTNO>
              <SUBJECT>Loans by bank in capacity as trustee.</SUBJECT>
              <SECTNO>221.113</SECTNO>
              <SUBJECT>Loan which is secured indirectly by stock.</SUBJECT>
              <SECTNO>221.114</SECTNO>
              <SUBJECT>Bank loans to purchase stock of American Telephone and Telegraph Company under Employees' Stock Plan.</SUBJECT>
              <SECTNO>221.115</SECTNO>
              <SUBJECT>Accepting a purpose statement through the mail without benefit of face-to-face interview.</SUBJECT>
              <SECTNO>221.116</SECTNO>
              <SUBJECT>Bank loans to replenish working capital used to purchase mutual fund shares.</SUBJECT>
              <SECTNO>221.117</SECTNO>
              <SUBJECT>When bank in “good faith” has not relied on stock as collateral.</SUBJECT>
              <SECTNO>221.118</SECTNO>
              <SUBJECT>Bank arranging for extension of credit by corporation.</SUBJECT>
              <SECTNO>221.119</SECTNO>
              <SUBJECT>Applicability of plan-lender provisions to financing of stock options and stock purchase rights qualified or restricted under Internal Revenue Code.</SUBJECT>
              <SECTNO>221.120</SECTNO>
              <SUBJECT>Allocation of stock collateral to purpose and nonpurpose credits to same customer.</SUBJECT>
              <SECTNO>221.121</SECTNO>
              <SUBJECT>Extension of credit in certain stock option and stock purchase plans.</SUBJECT>
              <SECTNO>221.122</SECTNO>
              <SUBJECT>Applicability of margin requirements to credit in connection with Insurance Premium Funding Programs.</SUBJECT>
              <SECTNO>221.123</SECTNO>
              <SUBJECT>Combined credit for exercising employee stock options and paying income taxes incurred as a result of such exercise.</SUBJECT>
              <SECTNO>221.124</SECTNO>
              <SUBJECT>Purchase of debt securities to finance corporate takeovers.</SUBJECT>
              <SECTNO>221.125</SECTNO>
              <SUBJECT>Credit to brokers and dealers.</SUBJECT>
            </SUBJGRP>
          </CONTENTS>
          <AUTH>
            <HD SOURCE="HED">Authority:</HD>
            <P>15 U.S.C. 78c, 78g, 78q, and 78w.</P>
          </AUTH>
          <SOURCE>
            <PRTPAGE P="35"/>
            <HD SOURCE="HED">Source:</HD>
            <P>Reg. U, 63 FR 2827, Jan. 16, 1998, unless otherwise noted.</P>
          </SOURCE>
          <SECTION>
            <SECTNO>§ 221.1</SECTNO>
            <SUBJECT>Authority, purpose, and scope.</SUBJECT>
            <P>(a) <E T="03">Authority.</E> 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 <E T="03">et seq.</E>).</P>
            <P>(b) <E T="03">Purpose and scope.</E> (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 § 221.2) and other persons who are required to register with the Board under § 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 § 221.7 (the Supplement).</P>
            <P>(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:</P>
            <P>(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</P>
            <P>(ii) The guarantee of contracts for the purchase or sale of a commodity for future delivery or options on such contracts.</P>
            <P>(3) This part does not apply to credit extended to an exempted borrower.</P>
            <P>(c) <E T="03">Availability of forms.</E> The forms referenced in this part are available from the Federal Reserve Banks.</P>
          </SECTION>
          <SECTION>
            <SECTNO>§ 221.2</SECTNO>
            <SUBJECT>Definitions.</SUBJECT>
            <P>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:</P>
            <P>
              <E T="03">Affiliate</E> means:</P>
            <P>(1) For banks:</P>
            <P>(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));</P>
            <P>(ii) Any other subsidiary of such bank holding company; and</P>
            <P>(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));</P>
            <P>(2) For nonbank lenders, <E T="03">affiliate</E> 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.</P>
            <P>
              <E T="03">Bank.</E> (1) <E T="03">Bank.</E> Has the meaning given to it in section 3(a)(6) of the Act (15 U.S.C. 78c(a)(6)) and includes:</P>
            <P>(i) Any subsidiary of a bank;</P>
            <P>(ii) Any corporation organized under section 25(a) of the Federal Reserve Act (12 U.S.C. 611); and</P>
            <P>(iii) Any agency or branch of a foreign bank located within the United States.</P>
            <P>(2) <E T="03">Bank</E> does not include:</P>
            <P>(i) Any savings and loan association;</P>
            <P>(ii) Any credit union;</P>
            <P>(iii) Any lending institution that is an instrumentality or agency of the United States; or</P>
            <P>(iv) Any member of a national securities exchange.</P>
            <P>
              <E T="03">Carrying</E> 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.</P>
            <P>
              <E T="03">Current market value</E> of:</P>
            <P>(1) A security means:</P>
            <P>(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</P>
            <P>(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</P>
            <P>(iii) If the credit is used to finance the purchase of the security, the total cost of purchase, which may include any commissions charged.</P>
            <P>(2) Any other collateral means a value determined by any reasonable method.</P>
            <P>
              <E T="03">Customer</E> excludes an exempted borrower and includes any person or persons acting jointly, to or for whom a lender extends or maintains credit.<PRTPAGE P="36"/>
            </P>
            <P>
              <E T="03">Examining authority</E> means:</P>
            <P>(1) The national securities exchange or national securities association of which a broker or dealer is a member; or</P>
            <P>(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.</P>
            <P>
              <E T="03">Exempted borrower</E> 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:</P>
            <P>(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;</P>
            <P>(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</P>
            <P>(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.</P>
            <P>
              <E T="03">Good faith</E> with respect to:</P>
            <P>(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.</P>
            <P>(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;</P>
            <P>
              <E T="03">In the ordinary course of business</E> 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.</P>
            <P>
              <E T="03">Indirectly secured.</E> (1) Includes any arrangement with the customer under which:</P>
            <P>(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</P>
            <P>(ii) The exercise of such right is or may be cause for accelerating the maturity of the credit.</P>
            <P>(2) Does not include such an arrangement if:</P>
            <P>(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;</P>
            <P>(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;</P>
            <P>(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</P>
            <P>(iv) The lender, in good faith, has not relied upon the margin stock as collateral in extending or maintaining the particular credit.</P>
            <P>
              <E T="03">Lender</E> means:</P>
            <P>(1) Any bank; or</P>
            <P>(2) Any person subject to the registration requirements of this part.</P>
            <P>
              <E T="03">Margin stock</E> means:</P>
            <P>(1) Any equity security registered or having unlisted trading privileges on a national securities exchange;</P>
            <P>(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);</P>
            <P>(3) Any debt security convertible into a margin stock or carrying a warrant or right to subscribe to or purchase a margin stock;</P>
            <P>(4) Any warrant or right to subscribe to or purchase a margin stock; or</P>

            <P>(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:<PRTPAGE P="37"/>
            </P>
            <P>(i) A company licensed under the Small Business Investment Company Act of 1958, as amended (15 U.S.C. 661); or</P>
            <P>(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</P>
            <P>(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</P>
            <P>(iv) A company which is considered a money market fund under SEC Rule 2a-7 (17 CFR 270.2a-7).</P>
            <P>
              <E T="03">Maximum loan value</E> is the percentage of current market value assigned by the Board under § 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.</P>
            <P>
              <E T="03">Nonbank lender</E> means any person subject to the registration requirements of this part.</P>
            <P>
              <E T="03">Purpose credit</E> is any credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock.</P>
          </SECTION>
          <SECTION>
            <SECTNO>§ 221.3</SECTNO>
            <SUBJECT>General requirements.</SUBJECT>
            <P>(a) <E T="03">Extending, maintaining, and arranging credit—</E>(1) <E T="03">Extending credit.</E> No lender, except a plan-lender, as defined in § 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.</P>
            <P>(2) <E T="03">Maintaining credit.</E> A lender may continue to maintain any credit initially extended in compliance with this part, regardless of:</P>
            <P>(i) Reduction in the customer's equity resulting from change in market prices;</P>
            <P>(ii) Change in the maximum loan value prescribed by this part; or</P>
            <P>(iii) Change in the status of the security (from nonmargin to margin) securing an existing purpose credit.</P>
            <P>(3) <E T="03">Arranging credit.</E> 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.</P>
            <P>(b) <E T="03">Registration of nonbank lenders; termination of registration; annual report</E>—(1) <E T="03">Registration.</E> 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:</P>
            <P>(i) The amount of credit extended equals $200,000 or more; or</P>
            <P>(ii) The amount of credit outstanding at any time during that calendar quarter equals $500,000 or more.</P>
            <P>(2) <E T="03">Deregistration.</E> 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.</P>
            <P>(3) <E T="03">Annual report.</E> Every registered nonbank lender shall, within 30 days following June 30 of every year, file Form FR G-4 (OMB control number 7100-0011).</P>
            <P>(4) <E T="03">Where to register and file applications and reports.</E> 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.</P>
            <P>(c) <E T="03">Purpose statement</E>—(1) <E T="03">General rule</E>—(i) <E T="03">Banks.</E> 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.</P>
            <P>(ii) <E T="03">Nonbank lenders.</E> Except for credit extended under paragraph (c)(2) of this section or § 221.4, whenever a nonbank lender extends credit secured directly or indirectly by any margin stock, the <PRTPAGE P="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.</P>
            <P>(2) <E T="03">Purpose statement for revolving-credit or multiple-draw agreements or financing of securities purchases on a payment-against-delivery basis</E>—(i) <E T="03">Banks.</E> 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.</P>
            <P>(ii) <E T="03">Nonbank lenders.</E> 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.</P>
            <P>(iii) <E T="03">Collateral.</E> 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:</P>
            <P>(A) The maximum loan value of the collateral at least equals the aggregate amount of funds actually disbursed; or</P>
            <P>(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 § 221.7 (the Supplement).</P>
            <P>(iv) <E T="03">Amendment of purpose statement.</E> 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.</P>
            <P>(d) <E T="03">Single credit rule.</E> (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.</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(e) <E T="03">Exempted borrowers.</E> (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.</P>
            <P>(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.</P>
            <P>(f) <E T="03">Withdrawals and substitutions.</E> (1) A lender may permit any withdrawal or substitution of cash or collateral by the customer if the withdrawal or substitution would not:</P>
            <P>(i) Cause the credit to exceed the maximum loan value of the collateral; or</P>

            <P>(ii) Increase the amount by which the credit exceeds the maximum loan value of the collateral.<PRTPAGE P="39"/>
            </P>
            <P>(2) For purposes of this section, the maximum loan value of the collateral on the day of the withdrawal or substitution shall be used.</P>
            <P>(g) <E T="03">Exchange offers.</E> 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.</P>
            <P>(h) <E T="03">Renewals and extensions of maturity.</E> 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.</P>
            <P>(i) <E T="03">Transfers of credit.</E> (1) A transfer of a credit between customers or between lenders shall not be considered a new extension of credit if:</P>
            <P>(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;</P>
            <P>(ii) The transfer is not made to evade this part;</P>
            <P>(iii) The amount of credit is not increased; and</P>
            <P>(iv) The collateral for the credit is not changed.</P>
            <P>(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.</P>
            <P>(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.</P>
            <P>(j) <E T="03">Action for lender's protection.</E> 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.</P>
            <P>(k) <E T="03">Mistakes in good faith.</E> A mistake in good faith in connection with the extension or maintenance of credit shall not be a violation of this part.</P>
          </SECTION>
          <SECTION>
            <SECTNO>§ 221.4</SECTNO>
            <SUBJECT>Employee stock option, purchase, and ownership plans.</SUBJECT>
            <P>(a) <E T="03">Plan-lender; eligible plan.</E> (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.</P>
            <P>(2) <E T="03">Eligible plan.</E> 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.</P>
            <P>(b) <E T="03">Credit to exercise rights under or finance an eligible plan.</E> (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.</P>
            <P>(2) Credit extended under this section shall be treated separately from credit extended under any other section of this part except § 221.3(b)(1) and (b)(3).</P>
            <P>(c) <E T="03">Credit to ESOPs.</E> A nonbank lender may extend and maintain purpose credit without regard to the provisions of this part, except for § 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).</P>
          </SECTION>
          <SECTION>
            <PRTPAGE P="40"/>
            <SECTNO>§ 221.5</SECTNO>
            <SUBJECT>Special purpose loans to brokers and dealers.</SUBJECT>
            <P>(a) <E T="03">Special purpose loans.</E> A lender may extend and maintain purpose credit to brokers and dealers without regard to the limitations set forth in §§ 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.</P>
            <P>(b) <E T="03">Written notice.</E> 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.</P>
            <P>(c) <E T="03">Types of special purpose credit.</E> The types of credit that may be extended and maintained on a good faith basis are as follows:</P>
            <P>(1) <E T="03">Hypothecation loans.</E> 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.</P>
            <P>(2) <E T="03">Temporary advances in payment-against-delivery transactions.</E> Credit to finance the purchase or sale of securities for prompt delivery, if the credit is to be repaid upon completion of the transaction.</P>
            <P>(3) <E T="03">Loans for securities in transit or transfer.</E> Credit to finance securities in transit or surrendered for transfer, if the credit is to be repaid upon completion of the transaction.</P>
            <P>(4) <E T="03">Intra-day loans.</E> 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.</P>
            <P>(5) <E T="03">Arbitrage loans.</E> Credit to finance proprietary or customer bona fide arbitrage transactions. For the purpose of this section bona fide arbitrage means:</P>
            <P>(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</P>
            <P>(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.</P>
            <P>(6) <E T="03">Market maker and specialist loans.</E> Credit to a member of a national securities exchange or registered broker or dealer to finance its activities as a market maker or specialist.</P>
            <P>(7) <E T="03">Underwriter loans.</E> Credit to a member of a national securities exchange or registered broker or dealer to finance its activities as an underwriter.</P>
            <P>(8) <E T="03">Emergency loans.</E> Credit that is essential to meet emergency needs of the broker-dealer business arising from exceptional circumstances.</P>
            <P>(9) <E T="03">Capital contribution loans.</E> Capital contribution loans include:</P>
            <P>(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</P>
            <P>(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:</P>
            <P>(A) The customer reduces the credit by the amount of any reduction in the loan or contribution to the broker or dealer; and</P>
            <P>(B) The credit is not used to purchase securities issued by the broker or dealer in a public distribution.</P>
            <P>(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.</P>
          </SECTION>
          <SECTION>
            <PRTPAGE P="41"/>
            <SECTNO>§ 221.6</SECTNO>
            <SUBJECT>Exempted transactions.</SUBJECT>
            <P>A bank may extend and maintain purpose credit without regard to the provisions of this part if such credit is extended:</P>
            <P>(a) To any bank;</P>
            <P>(b) To any foreign banking institution;</P>
            <P>(c) Outside the United States;</P>
            <P>(d) To an employee stock ownership plan (ESOP) qualified under section 401 of the Internal Revenue Code (26 U.S.C. 401);</P>
            <P>(e) To any plan lender as defined in § 221.4(a) to finance an eligible plan as defined in § 221.4(b), provided the bank has no recourse to any securities purchased pursuant to the plan;</P>
            <P>(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;</P>
            <P>(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</P>
            <P>(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.</P>
          </SECTION>
          <SECTION>
            <SECTNO>§ 221.7</SECTNO>
            <SUBJECT>Supplement: Maximum loan value of margin stock and other collateral.</SUBJECT>
            <P>(a) <E T="03">Maximum loan value of margin stock.</E> The maximum loan value of any margin stock is fifty per cent of its current market value.</P>
            <P>(b) <E T="03">Maximum loan value of nonmargin stock and all other collateral.</E>  The maximum loan value of nonmargin stock and all other collateral except puts, calls, or combinations thereof is their good faith loan value.</P>
            <P>(c) <E T="03">Maximum loan value of options.</E> Except for options that qualify as margin stock, puts, calls, and combinations thereof have no loan value.</P>
          </SECTION>
          <SUBJGRP>
            <HD SOURCE="HED">Interpretations</HD>
            <SECTION>
              <SECTNO>§ 221.101</SECTNO>
              <SUBJECT>Determination and effect of purpose of loan.</SUBJECT>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>

              <P>(d) Furthermore, the purpose of a loan means just that. It cannot be altered by some temporary application of <PRTPAGE P="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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.102</SECTNO>
              <SUBJECT>Application to committed credit where funds are disbursed thereafter.</SUBJECT>
              <P>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:</P>
              <P>(a) On that date the parties should be aware of law and facts surrounding the transaction; and</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.103</SECTNO>
              <SUBJECT>Loans to brokers or dealers.</SUBJECT>
              <P>Questions have arisen as to the adequacy of statements received by lending banks under § 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 §§ 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 § 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 § 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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.104</SECTNO>
              <SUBJECT>Federal credit unions.</SUBJECT>
              <P>For text of the interpretation on Federal credit unions, see 12 CFR 220.110.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.105</SECTNO>
              <SUBJECT>Arranging for extensions of credit to be made by a bank.</SUBJECT>
              <P>For text of the interpretation on Arranging for extensions of credit to be made by a bank, see 12 CFR 220.111.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.106</SECTNO>
              <SUBJECT>Reliance in “good faith” on statement of purpose of loan.</SUBJECT>
              <P>(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.</P>
              <P>(b) The use by a lending bank of a statement in determining the purpose of a particular loan is, of course, provided for by § 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 § 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.”</P>
              <P>(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.</P>

              <P>(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 <PRTPAGE P="43"/>known to the bank or to the officer who processes the loan.</P>
              <P>(e) The interpretation set forth in § 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”.</P>
              <P>(f) Moreover, and as also stated by the interpretation contained in § 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.</P>
              <P>(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.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.107</SECTNO>
              <SUBJECT>Arranging loan to purchase open-end investment company shares.</SUBJECT>
              <P>For text of the interpretation on Arranging loan to purchase open-end investment company shares, see 12 CFR 220.112.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.108</SECTNO>
              <SUBJECT>Effect of registration of stock subsequent to making of loan.</SUBJECT>
              <P>(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.</P>
              <P>(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.</P>

              <P>(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 <PRTPAGE P="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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.109</SECTNO>
              <SUBJECT>Loan to open-end investment company.</SUBJECT>
              <P>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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.110</SECTNO>
              <SUBJECT>Questions arising under this part.</SUBJECT>
              <P>(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.”</P>
              <P>(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:</P>
              <P>(1) <E T="03">Loan secured by stock.</E> 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:</P>

              <P>(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 (<E T="03">See,</E> § 221.106).</P>
              <P>(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.”</P>
              <P>(2) <E T="03">Loan to acquire controlling shares.</E> (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.</P>

              <P>(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 <PRTPAGE P="45"/>implies that transactions of the sort described are now subject to the general prohibition of § 221.3(a).</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.111</SECTNO>
              <SUBJECT>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.</SUBJECT>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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:</P>
              <P>(1) The joint venture involves an extension of credit by the corporation to the individual;</P>
              <P>(2) The extension of credit is to purchase or carry margin stock, and is collateralized by such margin stock; and</P>
              <P>(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 § 221.3(a).</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.112</SECTNO>
              <SUBJECT>Loans by bank in capacity as trustee.</SUBJECT>
              <P>(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.</P>

              <P>(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 <PRTPAGE P="46"/>mechanics of making the loan, the purpose being to avoid cumbersome procedures.</P>
              <P>(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.</P>
              <P>(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.</P>

              <P>(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 (<E T="03">See</E> 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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.113</SECTNO>
              <SUBJECT>Loan which is secured indirectly by stock.</SUBJECT>
              <P>(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 § 221.(3)(a), so that the loan should be treated as subject to this part.</P>
              <P>(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:</P>
              <P>(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.</P>
              <P>(2) Fund X agrees to maintain an “asset coverage” of at least 300 percent of its borrowings at all times.</P>
              <P>(3) Fund X agrees not to amend its custody agreement with Bank Y, or to substitute another custodian without Bank Y's consent.</P>
              <P>(4) Fund X agrees not to mortgage, pledge, or otherwise encumber any of its assets elsewhere than with Bank Y.</P>
              <P>(c) In § 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 * * *.”</P>

              <P>(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.<PRTPAGE P="47"/>
              </P>
              <P>(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 § 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”.</P>
              <P>(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:</P>

              <P>(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 <E T="03">indirectly secured</E> in § 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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.114</SECTNO>
              <SUBJECT>Bank loans to purchase stock of American Telephone and Telegraph Company under Employees' Stock Plan.</SUBJECT>

              <P>(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 <PRTPAGE P="48"/>American Telephone and Telegraph Company pursuant to its Employees' Stock Plan.</P>
              <P>(b) According to the current offering under the Plan, an employee of the AT&amp;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&amp;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.</P>
              <P>(c) Certain AT&amp;T employees, who wish to take advantage of the current offering under the Plan, are the owners of shares of AT&amp;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 § 221.7 (the Supplement).</P>
              <P>(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 (§ 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&amp;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.</P>
              <P>(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 § 221.7 (the Supplement).</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.115</SECTNO>
              <SUBJECT>Accepting a purpose statement through the mail without benefit of face-to-face interview.</SUBJECT>
              <P>(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 § 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.</P>

              <P>(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 <PRTPAGE P="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.</P>
              <P>(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.</P>
              <P>(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 § 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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.116</SECTNO>
              <SUBJECT>Bank loans to replenish working capital used to purchase mutual fund shares.</SUBJECT>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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 § 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.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <PRTPAGE P="50"/>
              <SECTNO>§ 221.117</SECTNO>
              <SUBJECT>When bank in “good faith” has not relied on stock as collateral.</SUBJECT>

              <P>(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 <E T="03">indirectly secured</E> in § 221.2.</P>

              <P>(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 <E T="03">indirectly secured</E> 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:</P>
              <P>(1) The bank had obtained a reasonably current financial statement of the borrower and this statement could reasonably support the loan; and</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.118</SECTNO>
              <SUBJECT>Bank arranging for extension of credit by corporation.</SUBJECT>
              <P>(a) The Board considered the questions whether:</P>
              <P>(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;</P>
              <P>(2) Such a guaranty is given “in the ordinary course of business” of the corporation, as defined in § 221.2; and</P>
              <P>(3) The bank involved took part in arranging for such credit on better terms than it could extend under the provisions of this part.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(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.</P>
              <P>(e) Under § 221.2, the term <E T="03">in the ordinary course of business means</E> “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 <PRTPAGE P="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.</P>
              <P>(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 § 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.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.119</SECTNO>
              <SUBJECT>Applicability of plan-lender provisions to financing of stock options and stock purchase rights qualified or restricted under Internal Revenue Code.</SUBJECT>
              <P>(a) The Board has been asked whether the plan-lender provisions of § 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.</P>
              <P>(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.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.120</SECTNO>
              <SUBJECT>Allocation of stock collateral to purpose and nonpurpose credits to same customer.</SUBJECT>
              <P>(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.</P>

              <P>(b) This part allows a bank to extend purpose and nonpurpose credits simultaneously or successively to the same customer. This rule is expressed in § 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 <PRTPAGE P="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 § 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.</P>
              <P>(c) The Board views § 221.3(d)(4), when read in conjunction with § 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 § 221.7 (the Supplement).</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.121</SECTNO>
              <SUBJECT>Extension of credit in certain stock option and stock purchase plans.</SUBJECT>
              <P>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 § 221.3(a) or the special “plan-lender” provisions set forth in § 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 § 221.3(b).</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.122</SECTNO>
              <SUBJECT>Applicability of margin requirements to credit in connection with Insurance Premium Funding Programs.</SUBJECT>
              <P>(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 × 50 percent loan value equals $300 the amount of the insurance premium which is also the amount of the credit extended).</P>
              <P>(b) The guidelines referenced in paragraph (a) of this section also:</P>

              <P>(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 <PRTPAGE P="53"/>credit throughout the day of the purchase of the fund shares; and</P>
              <P>(2) Relax a 1965 Board position in connection with accepting purpose statements by mail.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.123</SECTNO>
              <SUBJECT>Combined credit for exercising employee stock options and paying income taxes incurred as a result of such exercise.</SUBJECT>
              <P>(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 § 221.4(a) and (b).</P>

              <P>(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 § 221.4(a)(2) may be regarded as <E T="03">purpose credit</E> within the meaning of § 221.2.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 221.124</SECTNO>
              <SUBJECT>Purchase of debt securities to finance corporate takeovers.</SUBJECT>
              <P>(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.</P>
              <P>(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 § 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.</P>

              <P>(c) The purchase of the debt securities issued by the shell corporation to finance the acquisition clearly involves purpose credit (as defined in § 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. <E T="03">See</E> § 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.</P>

              <P>(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. <E T="03">See</E> § 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. <E T="03">See</E> § 221.2.</P>

              <P>(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. <E T="03">See</E> Federal Reserve Regulatory Service 5-917.12. (<E T="03">See</E> 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 <PRTPAGE P="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.</P>
              <P>(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.</P>
              <P>(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 § 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.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <PRTPAGE P="55"/>
              <SECTNO>§ 221.125</SECTNO>
              <SUBJECT>Credit to brokers and dealers.</SUBJECT>
              <P>(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.”</P>
              <P>(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.</P>
            </SECTION>
          </SUBJGRP>
        </PART>
        <PART>
          <EAR>Pt. 222</EAR>
          <HD SOURCE="HED">PART 222—FAIR CREDIT REPORTING (REGULATION V)</HD>
          <CONTENTS>
            <SUBPART>
              <HD SOURCE="HED">Subpart A—General Provisions</HD>
              <SECHD>Sec.</SECHD>
              <SECTNO>222.1</SECTNO>
              <SUBJECT>Purpose, scope, and effective dates.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <RESERVED>Subparts B-H[Reserved]</RESERVED>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart I—Duties of Users of Consumer Reports Regarding Identity Theft</HD>
              <SECTNO>222.80-82</SECTNO>
              <SUBJECT>[Reserved]</SUBJECT>
              <SECTNO>222.83</SECTNO>
              <SUBJECT>Disposal of consumer information.</SUBJECT>
              <APP>Appendix A to Part 222[Reserved]</APP>
              <APP>Appendix B to Part 222—Model Notices of Furnishing Negative Information</APP>
            </SUBPART>
          </CONTENTS>
          <AUTH>
            <HD SOURCE="HED">Authority:</HD>
            <P>15 U.S.C. 1681s; Secs. 3 and 217, Pub. L. 108-159; 117 Stat. 1953, 1986-88.</P>
            <EXT-XREF HREF="20041228" REFID="10">Link to an amendment published at 69 FR 77618, Dec. 28, 2004.</EXT-XREF>
          </AUTH>
          <EFFDNOTP>
            <HD SOURCE="HED">Effective Date Note:</HD>
            <P>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:</P>
            <REVTXT>
              <AUTH>
                <HD SOURCE="HED">Authority:</HD>
                <P>15 U.S.C. 1681, 1681b, 1681s, 1681s-2, and 1681w.</P>
              </AUTH>
            </REVTXT>
          </EFFDNOTP>
          <SOURCE>
            <HD SOURCE="HED">Source:</HD>
            <P>68 FR 74469, Dec. 24, 2003, unless otherwise noted.</P>
          </SOURCE>
          <SUBPART>
            <HD SOURCE="HED">Subpart A—General Provisions</HD>
            <SECTION>
              <SECTNO>§ 222.1</SECTNO>
              <SUBJECT>Purpose, scope, and effective dates.</SUBJECT>
              <EXT-XREF HREF="20041228" REFID="11">Link to an amendment published at 69 FR 77618, Dec. 28, 2004.</EXT-XREF>
              <P>(a) [Reserved]</P>
              <P>(b) <E T="03">Scope.</E> (1) [Reserved](2) <E T="03">Institutions covered.</E> (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 <E T="03">et seq.</E>, and 611 <E T="03">et seq.</E>), and bank holding companies and affiliates of such holding companies (other than depository institutions and consumer reporting agencies).</P>
              <P>(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)).</P>
              <P>(c) <E T="03">Effective dates.</E> 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:</P>
              <P>(1) <E T="03">Provisions effective December 31, 2003.</E>
              </P>
              <P>(i) Sections 151(a)(2), 212(e), 214(c), 311(b), and 711, concerning the relation to state laws; and</P>
              <P>(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.</P>
              <P>(2) <E T="03">Provisions effective March 31, 2004.</E>
                <PRTPAGE P="56"/>
              </P>
              <P>(i) Section 111, concerning the definitions;</P>
              <P>(ii) Section 156, concerning the statute of limitations;</P>
              <P>(iii) Sections 312(d), (e), and (f), concerning the furnisher liability exception, liability and enforcement, and rule of construction, respectively;</P>
              <P>(iv) Section 313(a), concerning action regarding complaints;</P>
              <P>(v) Section 611, concerning communications for certain employee investigations; and</P>
              <P>(vi) Section 811, concerning clerical amendments.</P>
              <P>(3) <E T="03">Provisions effective December 1, 2004.</E>
              </P>
              <P>(i) Section 112, concerning fraud alerts and active duty alerts;</P>
              <P>(ii) Section 114, concerning procedures for the identification of possible instances of identity theft;</P>
              <P>(iii) Section 115, concerning truncation of the social security number in a consumer report;</P>
              <P>(iv) Section 151(a)(1), concerning the summary of rights of identity theft victims;</P>
              <P>(v) Section 152, concerning blocking of information resulting from identity theft;</P>
              <P>(vi) Section 153, concerning the coordination of identity theft complaint investigations;</P>
              <P>(vii) Section 154, concerning the prevention of repollution of consumer reports;</P>
              <P>(viii) Section 155, concerning notice by debt collectors with respect to fraudulent information;</P>
              <P>(ix) Section 211(c), concerning a summary of rights of consumers;</P>
              <P>(x) Section 212(a)-(d), concerning the disclosure of credit scores;</P>
              <P>(xi) Section 213(c), concerning enhanced disclosure of the means available to opt out of prescreened lists;</P>
              <P>(xii) Section 217(a), concerning the duty to provide notice to a consumer;</P>
              <P>(xiii) Section 311(a), concerning the risk-based pricing notice;</P>
              <P>(xiv) Section 312(a)-(c), concerning procedures to enhance the accuracy and integrity of information furnished to consumer reporting agencies;</P>
              <P>(xv) Section 314, concerning improved disclosure of the results of reinvestigation;</P>
              <P>(xvi) Section 315, concerning reconciling addresses;</P>
              <P>(xvii) Section 316, concerning notice of dispute through reseller; and</P>
              <P>(xviii) Section 317, concerning the duty to conduct a reasonable reinvestigation.</P>
              <CITA>[68 FR 74469, Dec. 24, 2003, as amended at 69 FR 6530, Feb. 11, 2004; 69 FR 33284, June 15, 2004]</CITA>
              <EFFDNOTP>
                <HD SOURCE="HED">Effective Date Note:</HD>
                <P>At 69 FR 77618, Dec. 28, 2004, in § 222.1(b)(2)(i) remove the phrase “paragraph (b)(2)” and add in its place the word “part”, effective July 1, 2005.</P>
              </EFFDNOTP>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <RESERVED>Subparts B-H[Reserved]</RESERVED>
          </SUBPART>
          <SUBPART>
            <HD SOURCE="HED">Subpart I—Duties of Users of Consumer Reports Regarding Identity Theft</HD>
            <SOURCE>
              <HD SOURCE="HED">Source:</HD>
              <P>69 FR 77618, Dec. 28, 2004, unless otherwise noted.</P>
            </SOURCE>
            <EFFDNOT>
              <HD SOURCE="HED">Effective Date Note:</HD>
              <P>At 69 FR 77618, Dec. 28, 2004, subpart I was added, effective July 1, 2005.</P>
            </EFFDNOT>
            <SECTION>
              <SECTNO>§ 222.80-82</SECTNO>
              <RESERVED>[Reserved]</RESERVED>
            </SECTION>
            <SECTION>
              <SECTNO>§ 222.83</SECTNO>
              <SUBJECT>Disposal of consumer information.</SUBJECT>
              <P>(a) <E T="03">Definitions as used in this section.</E> (1) <E T="03">You</E> 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 <E T="03">et seq.</E>, 611 <E T="03">et seq.</E>).</P>
              <P>(b) <E T="03">In general.</E> 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.</P>
              <P>(c) <E T="03">Rule of construction.</E> Nothing in this section shall be construed to:</P>

              <P>(1) Require you to maintain or destroy any record pertaining to a consumer that is not imposed under any other law; or<PRTPAGE P="57"/>
              </P>
              <P>(2) Alter or affect any requirement imposed under any other provision of law to maintain or destroy such a record.</P>
            </SECTION>
            <APPENDIX>
              <RESERVED>Appendix A to Part 222 [Reserved]</RESERVED>
            </APPENDIX>
            <APPENDIX>
              <EAR>Pt. 222, App. B</EAR>
              <HD SOURCE="HED">Appendix B to Part 222—Model Notices of Furnishing Negative Information</HD>
              <P>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).</P>
              <P>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.</P>
              <P>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.</P>
              <P>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,</P>
              <P>1. Rearranging the order of the references to “late payment(s),” or “missed payment(s)”</P>
              <P>2. Pluralizing the terms “credit bureau,” “credit report,” and “account”</P>
              <P>3. Specifying the particular type of account on which information may be furnished, such as “credit card account”</P>
              <P>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.”</P>
              <HD SOURCE="HD2">Model Notice B-1</HD>
              <P>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.</P>
              <HD SOURCE="HD2">Model Notice B-2</HD>
              <P>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.</P>
              <CITA>[69 FR 33285, June 15, 2004]</CITA>
            </APPENDIX>
          </SUBPART>
        </PART>
        <PART>
          <EAR>Pt. 223</EAR>
          <HD SOURCE="HED">PART 223—TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W)</HD>
          <CONTENTS>
            <SUBPART>
              <HD SOURCE="HED">Subpart A—Introduction and Definitions</HD>
              <SECHD>Sec.</SECHD>
              <SECTNO>223.1</SECTNO>
              <SUBJECT>Authority, purpose, and scope.</SUBJECT>
              <SECTNO>223.2</SECTNO>
              <SUBJECT>What is an “affiliate” for purposes of sections 23A and 23B and this part?</SUBJECT>
              <SECTNO>223.3</SECTNO>
              <SUBJECT>What are the meanings of the other terms used in sections 23A and 23B and this part?</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart B—General Provisions of Section 23A</HD>
              <SECTNO>223.11</SECTNO>
              <SUBJECT>What is the maximum amount of covered transactions that a member bank may enter into with any single affiliate?</SUBJECT>
              <SECTNO>223.12</SECTNO>
              <SUBJECT>What is the maximum amount of covered transactions that a member bank may enter into with all affiliates?</SUBJECT>
              <SECTNO>223.13</SECTNO>
              <SUBJECT>What safety and soundness requirement applies to covered transactions?</SUBJECT>
              <SECTNO>223.14</SECTNO>
              <SUBJECT>What are the collateral requirements for a credit transaction with an affiliate?</SUBJECT>
              <SECTNO>223.15</SECTNO>
              <SUBJECT>May a member bank purchase a low-quality asset from an affiliate?</SUBJECT>
              <SECTNO>223.16</SECTNO>
              <SUBJECT>What transactions by a member bank with any person are treated as transactions with an affiliate?</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart C—Valuation and Timing Principles Under Section 23A</HD>
              <SECTNO>223.21</SECTNO>
              <SUBJECT>What valuation and timing principles apply to credit transactions?</SUBJECT>
              <SECTNO>223.22</SECTNO>
              <SUBJECT>What valuation and timing principles apply to asset purchases?</SUBJECT>
              <SECTNO>223.23</SECTNO>
              <SUBJECT>What valuation and timing principles apply to purchases of and investments in securities issued by an affiliate?</SUBJECT>
              <SECTNO>223.24</SECTNO>
              <SUBJECT>What valuation principles apply to extensions of credit secured by affiliate securities?</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart D—Other Requirements Under Section 23A</HD>
              <SECTNO>223.31</SECTNO>
              <SUBJECT>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?</SUBJECT>
              <SECTNO>223.32</SECTNO>
              <SUBJECT>What rules apply to financial subsidiaries of a member bank?</SUBJECT>
              <SECTNO>223.33</SECTNO>
              <SUBJECT>What rules apply to derivative transactions?</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart E—Exemptions from the Provisions of Section 23A</HD>
              <SECTNO>223.41</SECTNO>

              <SUBJECT>What covered transactions are exempt from the quantitative limits and collateral requirements?<PRTPAGE P="58"/>
              </SUBJECT>
              <SECTNO>223.42</SECTNO>
              <SUBJECT>What covered transactions are exempt from the quantitative limits, collateral requirements, and low-quality asset prohibition?</SUBJECT>
              <SECTNO>223.43</SECTNO>
              <SUBJECT>What are the standards under which the Board may grant additional exemptions from the requirements of section 23A?</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart F—General Provisions of Section 23B</HD>
              <SECTNO>223.51</SECTNO>
              <SUBJECT>What is the market terms requirement of section 23B?</SUBJECT>
              <SECTNO>223.52</SECTNO>
              <SUBJECT>What transactions with affiliates or others must comply with section 23B's market terms requirement?</SUBJECT>
              <SECTNO>223.53</SECTNO>
              <SUBJECT>What asset purchases are prohibited by section 23B?</SUBJECT>
              <SECTNO>223.54</SECTNO>
              <SUBJECT>What advertisements and statements are prohibited by section 23B?</SUBJECT>
              <SECTNO>223.55</SECTNO>
              <SUBJECT>What are the standards under which the Board may grant exemptions from the requirements of section 23B?</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart G—Application of Sections 23A and 23B to U.S. Branches and Agencies of Foreign Banks</HD>
              <SECTNO>223.61</SECTNO>
              <SUBJECT>How do sections 23A and 23B apply to U.S. branches and agencies of foreign banks?</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart H—Miscellaneous Interpretations</HD>
              <SECTNO>223.71</SECTNO>
              <SUBJECT>How do sections 23A and 23B apply to transactions in which a member bank purchases from one affiliate an asset relating to another affiliate? </SUBJECT>
            </SUBPART>
          </CONTENTS>
          <AUTH>
            <HD SOURCE="HED">Authority:</HD>
            <P>12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e), 1828(j), and 1468(a).</P>
          </AUTH>
          <SOURCE>
            <HD SOURCE="HED">Source:</HD>
            <P>67 FR 76604, Dec. 12, 2002, unless otherwise noted.</P>
          </SOURCE>
          <SUBPART>
            <HD SOURCE="HED">Subpart A—Introduction and Definitions</HD>
            <SECTION>
              <SECTNO>§ 223.1</SECTNO>
              <SUBJECT>Authority, purpose, and scope.</SUBJECT>
              <P>(a) <E T="03">Authority.</E> 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)).</P>
              <P>(b) <E T="03">Purpose.</E> 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.</P>
              <P>(c) <E T="03">Scope.</E> 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).</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.2</SECTNO>
              <SUBJECT>What is an “affiliate” for purposes of sections 23A and 23B and this part?</SUBJECT>
              <P>(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:</P>
              <P>(1) <E T="03">Parent companies.</E> Any company that controls the member bank;</P>
              <P>(2) <E T="03">Companies under common control by a parent company.</E> Any company, including any subsidiary of the member bank, that is controlled by a company that controls the member bank;</P>
              <P>(3) <E T="03">Companies under other common control.</E> 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;</P>
              <P>(4) <E T="03">Companies with interlocking directorates.</E> 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;</P>
              <P>(5) <E T="03">Sponsored and advised companies.</E> Any company, including a real estate investment trust, that is sponsored and advised on a contractual basis by the <PRTPAGE P="59"/>member bank or an affiliate of the member bank;</P>
              <P>(6) <E T="03">Investment companies.</E> (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</P>
              <P>(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;</P>
              <P>(7) <E T="03">Depository institution subsidiaries.</E> A depository institution that is a subsidiary of the member bank;</P>
              <P>(8) <E T="03">Financial subsidiaries.</E> A financial subsidiary of the member bank;</P>
              <P>(9) <E T="03">Companies held under merchant banking or insurance company investment authority</E>—(i) <E T="03">In general.</E> 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)).</P>
              <P>(ii) <E T="03">General exemption.</E> 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.</P>
              <P>(iii) <E T="03">Specific exemptions.</E> A company also will not be an affiliate under paragraph (a)(9)(i) of this section if:</P>
              <P>(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;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(iv) <E T="03">Application of rule to private equity funds.</E> 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).</P>
              <P>(v) <E T="03">Definition.</E> For purposes of this paragraph (a)(9), “<E T="03">holding company</E>” 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).</P>
              <P>(10) <E T="03">Partnerships associated with the member bank or an affiliate.</E> 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;</P>
              <P>(11) <E T="03">Subsidiaries of affiliates.</E> Any subsidiary of a company described in paragraphs (a)(1) through (10) of this section; and</P>
              <P>(12) <E T="03">Other companies.</E> 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.<PRTPAGE P="60"/>
              </P>
              <P>(b) “<E T="03">Affiliate</E>” with respect to a member bank does <E T="03">not</E> include:</P>
              <P>(1) <E T="03">Subsidiaries.</E> Any company that is a subsidiary of the member bank, unless the company is:</P>
              <P>(i) A depository institution;</P>
              <P>(ii) A financial subsidiary;</P>
              <P>(iii) Directly controlled by:</P>
              <P>(A) One or more affiliates (other than depository institution affiliates) of the member bank; or</P>
              <P>(B) A shareholder that controls the member bank or a group of shareholders that together control the member bank;</P>
              <P>(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</P>
              <P>(v) Any other company determined to be an affiliate under paragraph (a)(12) of this section;</P>
              <P>(2) <E T="03">Bank premises.</E> Any company engaged solely in holding the premises of the member bank;</P>
              <P>(3) <E T="03">Safe deposit.</E> Any company engaged solely in conducting a safe deposit business;</P>
              <P>(4) <E T="03">Government securities.</E> 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</P>
              <P>(5) <E T="03">Companies held DPC.</E> 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.</P>

              <P>(c) For purposes of subpart F (implementing section 23B), “affiliate” with respect to a member bank also does <E T="03">not</E> include any depository institution.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.3</SECTNO>
              <SUBJECT>What are the meanings of the other terms used in sections 23A and 23B and this part?</SUBJECT>
              <P>For purposes of this part:</P>
              <P>(a) <E T="03">Aggregate amount of covered transactions</E> means the amount of the covered transaction about to be engaged in added to the current amount of all outstanding covered transactions.</P>
              <P>(b) <E T="03">Appropriate Federal banking agency</E> 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).</P>
              <P>(c) “<E T="03">Bank holding company</E>” has the same meaning as in 12 CFR 225.2.</P>
              <P>(d) “<E T="03">Capital stock and surplus</E>” means the sum of:</P>
              <P>(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);</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(e) <E T="03">Carrying value</E> 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.</P>
              <P>(f) <E T="03">Company</E> 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.</P>
              <P>(g) <E T="03">Control.</E> (1) <E T="03">In general.</E> “<E T="03">Control</E>” by a company or shareholder over another company means that:</P>

              <P>(i) The company or shareholder, directly or indirectly, or acting through <PRTPAGE P="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;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(2) <E T="03">Ownership or control of shares as fiduciary.</E> 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 § 223.2 or if the company owning or controlling the shares is a business trust.</P>
              <P>(3) <E T="03">Ownership or control of securities by subsidiary.</E> 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.</P>
              <P>(4) <E T="03">Ownership or control of convertible instruments.</E> 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.</P>
              <P>(5) <E T="03">Ownership or control of nonvoting securities.</E> 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.</P>
              <P>(h) <E T="03">Covered transaction</E> with respect to an affiliate means:</P>
              <P>(1) An extension of credit to the affiliate;</P>
              <P>(2) A purchase of, or an investment in, a security issued by the affiliate;</P>
              <P>(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;</P>
              <P>(4) The acceptance of a security issued by the affiliate as collateral for an extension of credit to any person or company; and</P>
              <P>(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.</P>
              <P>(i) <E T="03">Credit transaction</E> with an affiliate means:</P>
              <P>(1) An extension of credit to the affiliate;</P>
              <P>(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</P>
              <P>(3) A cross-affiliate netting arrangement.</P>
              <P>(j) <E T="03">Cross-affiliate netting arrangement</E> 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:</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(k) “<E T="03">Depository institution</E>” 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.<PRTPAGE P="62"/>
              </P>
              <P>(l) “<E T="03">Derivative transaction</E>” 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.</P>
              <P>(m) “<E T="03">Eligible affiliated mutual fund securities</E>” has the meaning specified in paragraph (c)(2) of § 223.24.</P>
              <P>(n) “<E T="03">Equity capital</E>” means:</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(o) “<E T="03">Extension of credit</E>” 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:</P>
              <P>(1) An advance to an affiliate by means of an overdraft, cash item, or otherwise;</P>
              <P>(2) A sale of Federal funds to an affiliate;</P>
              <P>(3) A lease that is the functional equivalent of an extension of credit to an affiliate;</P>
              <P>(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;</P>
              <P>(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</P>
              <P>(6) Any other similar transaction as a result of which an affiliate becomes obligated to pay money (or its equivalent).</P>
              <P>(p) “<E T="03">Financial subsidiary</E>”</P>
              <P>(1) <E T="03">In general.</E> Except as provided in paragraph (p)(2) of this section, the term “<E T="03">financial subsidiary</E>” means any subsidiary of a member bank that:</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(2) <E T="03">Exceptions.</E> “<E T="03">Financial subsidiary</E>” does not include:</P>
              <P>(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</P>
              <P>(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:</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(3) <E T="03">Subsidiaries of financial subsidiaries.</E> 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.</P>
              <P>(q) “<E T="03">Foreign bank</E>” and an “<E T="03">agency,</E>” “<E T="03">branch,</E>” or “<E T="03">commercial lending company</E>” 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).</P>
              <P>(r) “<E T="03">GAAP</E>” means U.S. generally accepted accounting principles.</P>
              <P>(s) “<E T="03">General purpose credit card</E>” has the meaning specified in paragraph (c)(4)(ii) of § 223.16.<PRTPAGE P="63"/>
              </P>
              <P>(t) <E T="03">In contemplation.</E> A transaction between a member bank and a nonaffiliate is presumed to be “<E T="03">in contemplation</E>” 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.</P>
              <P>(u) “<E T="03">Intraday extension of credit</E>” has the meaning specified in paragraph (l)(2) of § 223.42.</P>
              <P>(v) “<E T="03">Low-quality asset</E>” means:</P>
              <P>(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);</P>
              <P>(2) An asset in a nonaccrual status;</P>
              <P>(3) An asset on which principal or interest payments are more than thirty days past due;</P>
              <P>(4) An asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligor; and</P>
              <P>(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.</P>
              <P>(w) “<E T="03">Member bank</E>” 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.</P>
              <P>(x) “<E T="03">Municipal securities</E>” has the same meaning as in section 3(a)(29) of the Securities Exchange Act of 1934 (17 U.S.C. 78c(a)(29)).</P>
              <P>(y) “<E T="03">Nonaffiliate</E>” with respect to a member bank means any person that is not an affiliate of the member bank.</P>
              <P>(z) “<E T="03">Obligations of, or fully guaranteed as to principal and interest by, the United States or its agencies</E>” 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.</P>
              <P>(aa) “<E T="03">Operating subsidiary</E>” 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 § 223.2.</P>
              <P>(bb) “<E T="03">Person</E>” means an individual, company, trust, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity.</P>
              <P>(cc) “<E T="03">Principal underwriter</E>” has the meaning specified in paragraph (c)(1) of § 223.53.</P>
              <P>(dd) “<E T="03">Purchase of an asset</E>” 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.</P>
              <P>(ee) <E T="03">Riskless principal.</E> A company is “<E T="03">acting exclusively as a riskless principal</E>” 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.</P>
              <P>(ff) “<E T="03">Securities</E>” means stocks, bonds, debentures, notes, or similar obligations (including commercial paper).</P>
              <P>(gg) “<E T="03">Securities affiliate</E>” with respect to a member bank means:</P>
              <P>(1) An affiliate of the member bank that is registered with the Securities and Exchange Commission as a broker or dealer; or</P>
              <P>(2) Any other securities broker or dealer affiliate of a member bank that is approved by the Board.</P>
              <P>(hh) “<E T="03">State bank</E>” has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).<PRTPAGE P="64"/>
              </P>
              <P>(ii) “<E T="03">Subsidiary</E>” with respect to a specified company means a company that is controlled by the specified company.</P>
              <P>(jj) “<E T="03">Voting securities</E>” has the same meaning as in 12 CFR 225.2.</P>
              <P>(kk) “<E T="03">Well capitalized</E>” 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, “<E T="03">well capitalized</E>” 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.</P>
              <P>(ll) “<E T="03">Well managed</E>” has the same meaning as in 12 CFR 225.2.</P>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <HD SOURCE="HED">Subpart B—General Provisions of Section 23A</HD>
            <SECTION>
              <SECTNO>§ 223.11</SECTNO>
              <SUBJECT>What is the maximum amount of covered transactions that a member bank may enter into with any single affiliate?</SUBJECT>
              <P>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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.12</SECTNO>
              <SUBJECT>What is the maximum amount of covered transactions that a member bank may enter into with all affiliates?</SUBJECT>
              <P>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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.13</SECTNO>
              <SUBJECT>What safety and soundness requirement applies to covered transactions?</SUBJECT>
              <P>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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.14</SECTNO>
              <SUBJECT>What are the collateral requirements for a credit transaction with an affiliate?</SUBJECT>
              <P>(a) <E T="03">Collateral required for extensions of credit and certain other covered transactions.</E> 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.</P>
              <P>(b) <E T="03">Amount of collateral required.</E> (1) <E T="03">The rule.</E> A credit transaction described in paragraph (a) of this section must be secured by collateral having a market value equal to at least:</P>
              <P>(i) 100 percent of the amount of the transaction, if the collateral is:</P>
              <P>(A) Obligations of the United States or its agencies;</P>
              <P>(B) Obligations fully guaranteed by the United States or its agencies as to principal and interest;</P>
              <P>(C) Notes, drafts, bills of exchange, or bankers' acceptances that are eligible for rediscount or purchase by a Federal Reserve Bank; or</P>
              <P>(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;</P>
              <P>(ii) 110 percent of the amount of the transaction, if the collateral is obligations of any State or political subdivision of any State;</P>
              <P>(iii) 120 percent of the amount of the transaction, if the collateral is other debt instruments, including loans and other receivables; or</P>
              <P>(iv) 130 percent of the amount of the transaction, if the collateral is stock, leases, or other real or personal property.</P>
              <P>(2) <E T="03">Example.</E> 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.<PRTPAGE P="65"/>
              </P>
              <P>(c) <E T="03">Ineligible collateral.</E> The following items are not eligible collateral for purposes of this section:</P>
              <P>(1) Low-quality assets;</P>
              <P>(2) Securities issued by any affiliate;</P>
              <P>(3) Equity securities issued by the member bank, and debt securities issued by the member bank that represent regulatory capital of the member bank;</P>
              <P>(4) Intangible assets (including servicing assets), unless specifically approved by the Board; and</P>
              <P>(5) Guarantees, letters of credit, and other similar instruments.</P>
              <P>(d) <E T="03">Perfection and priority requirements for collateral.</E> (1) <E T="03">Perfection.</E> 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.</P>
              <P>(2) <E T="03">Priority.</E> 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:</P>
              <P>(i) The amount of any security interest in the collateral that is senior to that of the member bank; or</P>
              <P>(ii) The amount of any credit secured by the collateral that is senior to that of the member bank.</P>
              <P>(3) <E T="03">Example.</E> 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 × 130 percent = $2,600).</P>
              <P>(e) <E T="03">Replacement requirement for retired or amortized collateral.</E> 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.</P>
              <P>(f) <E T="03">Inapplicability of the collateral requirements to certain transactions.</E> The collateral requirements of this section do not apply to the following transactions.</P>
              <P>(1) <E T="03">Acceptances.</E> 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.</P>
              <P>(2) <E T="03">The unused portion of certain extensions of credit.</E> 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.</P>
              <P>(3) <E T="03">Purchases of affiliate debt securities in the secondary market.</E> 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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.15</SECTNO>
              <SUBJECT>May a member bank purchase a low-quality asset from an affiliate?</SUBJECT>
              <P>(a) <E T="03">In general.</E> 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.</P>
              <P>(b) <E T="03">Exemption for renewals of loan participations involving problem loans.</E> 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:</P>

              <P>(1) The loan was not a low-quality asset at the time the member bank purchased its participation;<PRTPAGE P="66"/>
              </P>
              <P>(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:</P>
              <P>(i) An executive committee of the board of directors of the participating member bank; or</P>
              <P>(ii) One or more senior management officials of the participating member bank, if:</P>
              <P>(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;</P>
              <P>(B) Each renewal or extension of additional credit described in this paragraph (b) meets the standards; and</P>
              <P>(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;</P>
              <P>(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</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.16</SECTNO>
              <SUBJECT>What transactions by a member bank with any person are treated as transactions with an affiliate?</SUBJECT>
              <P>(a) <E T="03">In general.</E> 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.</P>
              <P>(b) <E T="03">Certain agency transactions.</E> (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:</P>
              <P>(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</P>
              <P>(ii) The asset purchased by the nonaffiliate is not issued, underwritten, or sold as principal by any affiliate of the member bank.</P>
              <P>(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.</P>
              <P>(c) <E T="03">Exemptions.</E> Notwithstanding paragraph (a) of this section, the following transactions are not subject to the quantitative limits of §§ 223.11 and 223.12 or the collateral requirements of § 223.14. The transactions are, however, subject to the safety and soundness requirement of § 223.13 and the market terms requirement and other provisions of subpart F (implementing section 23B).</P>
              <P>(1) <E T="03">Certain riskless principal transactions.</E> An extension of credit by a member bank to a nonaffiliate, if:</P>
              <P>(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;</P>
              <P>(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</P>

              <P>(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.<PRTPAGE P="67"/>
              </P>
              <P>(2) <E T="03">Brokerage commissions, agency fees, and riskless principal mark-ups.</E> 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 § 223.51.</P>
              <P>(3) <E T="03">Preexisting lines of credit.</E> An extension of credit by a member bank to a nonaffiliate, if:</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(4) <E T="03">General purpose credit card transactions.</E>
              </P>
              <P>(i) <E T="03">In general.</E> An extension of credit by a member bank to a nonaffiliate, if:</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(ii) <E T="03">Definition.</E> “<E T="03">General purpose credit card</E>” 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:</P>
              <P>(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;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(iii) <E T="03">Calculating compliance.</E> 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).</P>
              <P>(iv) <E T="03">Example of calculating compliance with the 25 percent test.</E> 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, <PRTPAGE P="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.</P>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <HD SOURCE="HED">Subpart C—Valuation and Timing Principles Under Section 23A</HD>
            <SECTION>
              <SECTNO>§ 223.21</SECTNO>
              <SUBJECT>What valuation and timing principles apply to credit transactions?</SUBJECT>
              <P>(a) <E T="03">Valuation.</E> (1) <E T="03">Initial valuation.</E> 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:</P>
              <P>(i) The principal amount of the transaction;</P>
              <P>(ii) The amount owed by the affiliate to the member bank under the transaction; or</P>
              <P>(iii) The sum of:</P>
              <P>(A) The amount provided to, or on behalf of, the affiliate in the transaction; and</P>
              <P>(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.</P>
              <P>(2) <E T="03">Initial valuation of certain acquisitions of a credit transaction.</E> 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:</P>
              <P>(i) The total amount of consideration given (including liabilities assumed) by the member bank in exchange for the credit transaction; and</P>
              <P>(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.</P>
              <P>(3) <E T="03">Debt securities.</E> 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 § 223.23.</P>
              <P>(4) <E T="03">Examples.</E> The following are examples of how to value a member bank's credit transactions with an affiliate.</P>
              <P>(i) <E T="03">Term loan.</E> 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.</P>
              <P>(ii) <E T="03">Revolving credit.</E> 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.</P>
              <P>(iii) <E T="03">Guarantee.</E> 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.</P>
              <P>(iv) <E T="03">Acquisition of a loan to an affiliate.</E> 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 § 223.14 at the time of its acquisition of the loan).</P>
              <P>(b) <E T="03">Timing.</E> (1) <E T="03">In general.</E> A member bank engages in a credit transaction with an affiliate at the time during the day that:</P>
              <P>(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;</P>
              <P>(ii) The member bank enters into a cross-affiliate netting arrangement; or</P>
              <P>(iii) The member bank acquires an extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of, an affiliate.</P>
              <P>(2) <E T="03">Credit transactions by a member bank with a nonaffiliate that becomes an affiliate of the member bank.</E>
              </P>
              <P>(i) <E T="03">In general.</E> 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 <PRTPAGE P="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 §§ 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 § 223.14 promptly after the nonaffiliate becomes an affiliate.</P>
              <P>(ii) <E T="03">Credit transactions by a member bank with a nonaffiliate in contemplation of the nonaffiliate becoming an affiliate of the member bank.</E> 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:</P>
              <P>(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 § 223.11 or 223.12 at the time the nonaffiliate becomes an affiliate; and</P>
              <P>(B) The credit transaction complies with the collateral requirements of § 223.14 at the time the nonaffiliate becomes an affiliate.</P>
              <P>(iii) <E T="03">Example.</E> 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 § 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 § 223.14 promptly after the stock acquisition.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.22</SECTNO>
              <SUBJECT>What valuation and timing principles apply to asset purchases?</SUBJECT>
              <P>(a) <E T="03">Valuation.</E> (1) <E T="03">In general.</E> 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.</P>
              <P>(2) <E T="03">Exceptions.</E> (i) <E T="03">Purchase of an extension of credit to an affiliate.</E> A purchase from an affiliate of an extension of credit to an affiliate must be valued in accordance with § 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 § 223.23).</P>
              <P>(ii) <E T="03">Purchase of a security issued by an affiliate.</E> A purchase from an affiliate of a security issued by an affiliate must be valued in accordance with § 223.23.</P>
              <P>(iii) <E T="03">Transfer of a subsidiary.</E> A transfer to a member bank of securities issued by an affiliate that is treated as a purchase of assets from an affiliate under § 223.31 must be valued in accordance with paragraph (b) of § 223.31.</P>
              <P>(iv) <E T="03">Purchase of a line of credit.</E> 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.</P>
              <P>(b) <E T="03">Timing.</E> (1) <E T="03">In general.</E> A purchase of an asset from an affiliate remains a <PRTPAGE P="70"/>covered transaction for a member bank for as long as the member bank holds the asset.</P>
              <P>(2) <E T="03">Asset purchases by a member bank from a nonaffiliate in contemplation of the nonaffiliate becoming an affiliate of the member bank.</E> 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 § 223.11 or 223.12 at the time the nonaffiliate becomes an affiliate.</P>
              <P>(c) <E T="03">Examples.</E> The following are examples of how to value a member bank's purchase of an asset from an affiliate.</P>
              <P>(1) <E T="03">Cash purchase of assets.</E> 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.</P>
              <P>(2) <E T="03">Purchase of assets through an assumption of liabilities.</E> 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).</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.23</SECTNO>
              <SUBJECT>What valuation and timing principles apply to purchases of and investments in securities issued by an affiliate?</SUBJECT>
              <P>(a) <E T="03">Valuation.</E> (1) <E T="03">In general.</E> Except as provided in paragraph (b) of § 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:</P>
              <P>(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</P>
              <P>(ii) The carrying value of the security.</P>
              <P>(2) <E T="03">Examples.</E> 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).</P>
              <P>(i) <E T="03">Purchase of the debt securities of an affiliate.</E> 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.</P>
              <P>(ii) <E T="03">Purchase of the shares of an affiliate.</E> 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.</P>
              <P>(iii) <E T="03">Contribution of the shares of an affiliate.</E> 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 <PRTPAGE P="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.</P>
              <P>(b) <E T="03">Timing.</E> (1) <E T="03">In general.</E> 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.</P>
              <P>(2) <E T="03">A member bank's purchase of or investment in a security issued by a nonaffiliate that becomes an affiliate of the member bank.</E> 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 § 223.21.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.24</SECTNO>
              <SUBJECT>What valuation principles apply to extensions of credit secured by affiliate securities?</SUBJECT>
              <P>(a) <E T="03">Valuation of extensions of credit secured exclusively by affiliate securities.</E> 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:</P>
              <P>(1) The total value of the extension of credit; or</P>
              <P>(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 § 223.42 or the standards set forth in paragraphs (f)(1) and (5) of § 223.42.</P>
              <P>(b) <E T="03">Valuation of extensions of credit secured by affiliate securities and other collateral.</E> 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:</P>
              <P>(1) The total value of the extension of credit less the fair market value of the nonaffiliate collateral; or</P>
              <P>(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 § 223.42 or the standards set forth in paragraphs (f)(1) and (5) of § 223.42.</P>
              <P>(c) <E T="03">Exclusion of eligible affiliated mutual fund securities.</E> (1) <E T="03">The exclusion.</E> 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.</P>
              <P>(2) <E T="03">Definition.</E> “<E T="03">Eligible affiliated mutual fund securities</E>” 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 <E T="03">et seq.</E>), if:</P>
              <P>(i) The securities issued by the investment company:</P>
              <P>(A) Meet the market quotation standard contained in paragraph (e) of § 223.42;</P>
              <P>(B) Meet the standards set forth in paragraphs (f)(1) and (5) of § 223.42; or</P>
              <P>(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</P>
              <P>(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).</P>
              <P>(3) <E T="03">Example.</E> 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 <PRTPAGE P="72"/>the eligible affiliated mutual fund securities that would serve as collateral for the loan. Under the attribution rule in § 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 § 223.14, the loan would not be in compliance with § 223.14.</P>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <HD SOURCE="HED">Subpart D—Other Requirements Under Section 23A</HD>
            <SECTION>
              <SECTNO>§ 223.31</SECTNO>
              <SUBJECT>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?</SUBJECT>
              <P>(a) <E T="03">Certain acquisitions by a member bank of securities issued by an affiliate are treated as a purchase of assets from an affiliate.</E> 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:</P>
              <P>(1) As a result of the transaction, the company becomes an operating subsidiary of the member bank; and</P>
              <P>(2) The company has liabilities, or the member bank gives cash or any other consideration in exchange for the security.</P>
              <P>(b) <E T="03">Valuation.</E> (1) <E T="03">Initial valuation.</E> A transaction described in paragraph (a) of this section must be valued initially at the greater of:</P>
              <P>(i) The sum of:</P>
              <P>(A) The total amount of consideration given by the member bank in exchange for the security; and</P>
              <P>(B) The total liabilities of the company whose security has been acquired by the member bank, as of the time of the acquisition; or</P>
              <P>(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.</P>
              <P>(2) <E T="03">Ongoing valuation.</E> The value of a transaction described in paragraph (a) of this section may be reduced after the initial transfer to reflect:</P>
              <P>(i) Amortization or depreciation of the assets of the transferred company, to the extent that such reductions are consistent with GAAP; and</P>
              <P>(ii) Sales of the assets of the transferred company.</P>
              <P>(c) <E T="03">Valuation example.</E> 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.</P>
              <P>(d) <E T="03">Exemption for step transactions.</E> 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 § 223.13 and the market terms requirement of § 223.51) if:</P>
              <P>(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;</P>

              <P>(2) The member bank acquires all the securities of the transferred company that were transferred in connection with the transaction that made the <PRTPAGE P="73"/>company an affiliate of the member bank;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(e) <E T="03">Example of step transaction.</E> 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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.32</SECTNO>
              <SUBJECT>What rules apply to financial subsidiaries of a member bank?</SUBJECT>
              <P>(a) <E T="03">Exemption from the 10 percent limit for covered transactions between a member bank and a single financial subsidiary.</E> The 10 percent quantitative limit contained in § 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 § 223.12 does apply to such transactions.</P>
              <P>(b) <E T="03">Valuation of purchases of or investments in the securities of a financial subsidiary.</E> (1) <E T="03">General rule.</E> 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:</P>
              <P>(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</P>
              <P>(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).</P>
              <P>(2) <E T="03">Carrying value of an investment in a consolidated financial subsidiary.</E> 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).</P>
              <P>(3) <E T="03">Examples of the valuation of purchases of and investments in the securities of a financial subsidiary.</E> 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.</P>
              <P>(i) <E T="03">Initial valuation.</E> (A) <E T="03">Direct acquisition by a member bank.</E> 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.</P>
              <P>(B) <E T="03">Contribution of a financial subsidiary to a member bank.</E> The parent <PRTPAGE P="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.</P>
              <P>(ii) <E T="03">Carrying value not adjusted for earnings and losses of the financial subsidiary.</E> 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.</P>
              <P>(c) <E T="03">Treatment of an affiliate's investments in, and extensions of credit to, a financial subsidiary of a member bank.</E> (1) <E T="03">Investments.</E> 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.</P>
              <P>(2) <E T="03">Extensions of credit that are treated as regulatory capital of the financial subsidiary.</E> 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.</P>
              <P>(3) <E T="03">Other extensions of credit.</E> 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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.33</SECTNO>
              <SUBJECT>What rules apply to derivative transactions?</SUBJECT>
              <P>(a) <E T="03">Market terms requirement.</E> Derivative transactions between a member bank and its affiliates (other than depository institutions) are subject to the market terms requirement of § 223.51.</P>
              <P>(b) <E T="03">Policies and procedures.</E> 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:</P>
              <P>(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</P>
              <P>(2) Ensuring that the member bank's derivative transactions with affiliates comply with the market terms requirement of § 223.51.</P>
              <P>(c) <E T="03">Credit derivatives.</E> 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:</P>
              <P>(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</P>

              <P>(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 <PRTPAGE P="75"/>over funding costs plus any depreciation in the value of the underlying obligation of the affiliate.</P>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <HD SOURCE="HED">Subpart E—Exemptions from the Provisions of Section 23A</HD>
            <SECTION>
              <SECTNO>§ 223.41</SECTNO>
              <SUBJECT>What covered transactions are exempt from the quantitative limits and collateral requirements?</SUBJECT>
              <P>The following transactions are not subject to the quantitative limits of §§ 223.11 and 223.12 or the collateral requirements of § 223.14. The transactions are, however, subject to the safety and soundness requirement of § 223.13 and the prohibition on the purchase of a low-quality asset of § 223.15.</P>
              <P>(a) <E T="03">Parent institution/subsidiary institution transactions.</E> 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.</P>
              <P>(b) <E T="03">Transactions between a member bank and a depository institution owned by the same holding company.</E> 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.</P>
              <P>(c) <E T="03">Certain loan purchases from an affiliated depository institution.</E> Purchasing a loan on a nonrecourse basis from an affiliated depository institution.</P>
              <P>(d) <E T="03">Internal corporate reorganization transactions.</E> 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 § 223.31), if:</P>
              <P>(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;</P>
              <P>(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;</P>
              <P>(3) The member bank's top-tier holding company commits to its appropriate Federal banking agency and the Board before consummation either:</P>
              <P>(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</P>
              <P>(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;</P>
              <P>(4) The member bank's top-tier holding company complies with the commitment made under paragraph (d)(3) of this section;</P>
              <P>(5) A majority of the member bank's directors reviews and approves the transaction before consummation;</P>
              <P>(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</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.42</SECTNO>
              <SUBJECT>What covered transactions are exempt from the quantitative limits, collateral requirements, and low-quality asset prohibition?</SUBJECT>

              <P>The following transactions are not subject to the quantitative limits of <PRTPAGE P="76"/>§§ 223.11 and 223.12, the collateral requirements of § 223.14, or the prohibition on the purchase of a low-quality asset of § 223.15. The transactions are, however, subject to the safety and soundness requirement of § 223.13.</P>
              <P>(a) <E T="03">Making correspondent banking deposits.</E> 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.</P>
              <P>(b) <E T="03">Giving credit for uncollected items.</E> Giving immediate credit to an affiliate for uncollected items received in the ordinary course of business.</P>
              <P>(c) <E T="03">Transactions secured by cash or U.S. government securities.</E>
              </P>
              <P>(1) <E T="03">In general.</E> Engaging in a credit transaction with an affiliate to the extent that the transaction is and remains secured by:</P>
              <P>(i) Obligations of the United States or its agencies;</P>
              <P>(ii) Obligations fully guaranteed by the United States or its agencies as to principal and interest; or</P>
              <P>(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.</P>
              <P>(2) <E T="03">Example.</E> 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.</P>
              <P>(d) <E T="03">Purchasing securities of a servicing affiliate.</E> 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)).</P>
              <P>(e) <E T="03">Purchasing certain liquid assets.</E> 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.</P>
              <P>(f) <E T="03">Purchasing certain marketable securities.</E> Purchasing a security from a securities affiliate, if:</P>
              <P>(1) The security has a “ready market,” as defined in 17 CFR 240.15c3-1(c)(11)(i);</P>
              <P>(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;</P>
              <P>(3) The security is not a low-quality asset;</P>
              <P>(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;</P>
              <P>(5) The security's price is quoted routinely on an unaffiliated electronic service that provides indicative data from real-time financial networks, provided that:</P>
              <P>(i) The price paid by the member bank is at or below the current market quotation for the security; and</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(g) <E T="03">Purchasing municipal securities.</E> Purchasing a municipal security from a securities affiliate if:</P>

              <P>(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;<PRTPAGE P="77"/>
              </P>
              <P>(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</P>
              <P>(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:</P>
              <P>(A) The price paid by the member bank is at or below the current market quotation for the security; and</P>
              <P>(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</P>
              <P>(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:</P>
              <P>(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</P>
              <P>(B) The price paid is no higher than the average of the price quotes; or</P>
              <P>(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:</P>
              <P>(A) Purchases the municipal security during the underwriting period at a price that is at or below that indicated in the summary; and</P>
              <P>(B) Obtains a copy of the summary from its securities affiliate and retains the summary for three years.</P>
              <P>(h) <E T="03">Purchasing an extension of credit subject to a repurchase agreement.</E> 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.</P>
              <P>(i) <E T="03">Asset purchases by a newly formed member bank.</E> 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.</P>
              <P>(j) <E T="03">Transactions approved under the Bank Merger Act.</E> 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)).</P>
              <P>(k) <E T="03">Purchasing an extension of credit from an affiliate.</E> Purchasing from an affiliate, on a nonrecourse basis, an extension of credit, if:</P>
              <P>(1) The extension of credit was originated by the affiliate;</P>
              <P>(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;</P>
              <P>(3) The member bank commits to purchase the extension of credit before the affiliate makes or commits to make the extension of credit;</P>
              <P>(4) The member bank does not make a blanket advance commitment to purchase extensions of credit from the affiliate; and</P>
              <P>(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.</P>
              <P>(l) <E T="03">Intraday extensions of credit.</E>
              </P>
              <P>(1) <E T="03">In general.</E> An intraday extension of credit to an affiliate, if the member bank:<PRTPAGE P="78"/>
              </P>
              <P>(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:</P>
              <P>(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</P>
              <P>(B) Ensuring that any intraday extension of credit by the member bank to an affiliate complies with the market terms requirement of § 223.51;</P>
              <P>(ii) Has no reason to believe that the affiliate will have difficulty repaying the extension of credit in accordance with its terms; and</P>
              <P>(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.</P>
              <P>(2) <E T="03">Definition. Intraday extension of credit</E> 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.</P>
              <P>(m) <E T="03">Riskless principal transactions.</E> Purchasing a security from a securities affiliate of the member bank if:</P>
              <P>(1) The member bank or the securities affiliate is acting exclusively as a riskless principal in the transaction; and</P>
              <P>(2) The security purchased is not issued, underwritten, or sold as principal (other than as riskless principal) by any affiliate of the member bank.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.43</SECTNO>
              <SUBJECT>What are the standards under which the Board may grant additional exemptions from the requirements of section 23A?</SUBJECT>
              <P>(a) <E T="03">The standards.</E> 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.</P>
              <P>(b) <E T="03">Procedure.</E> 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:</P>
              <P>(1) Describe in detail the transaction or relationship for which the member bank seeks exemption;</P>
              <P>(2) Explain why the Board should exempt the transaction or relationship; and</P>
              <P>(3) Explain how the exemption would be in the public interest and consistent with the purposes of section 23A.</P>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <HD SOURCE="HED">Subpart F—General Provisions of Section 23B</HD>
            <SECTION>
              <SECTNO>§ 223.51</SECTNO>
              <SUBJECT>What is the market terms requirement of section 23B?</SUBJECT>
              <P>A member bank may not engage in a transaction described in § 223.52 unless the transaction is:</P>
              <P>(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</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.52</SECTNO>
              <SUBJECT>What transactions with affiliates or others must comply with section 23B's market terms requirement?</SUBJECT>
              <P>(a) The market terms requirement of § 223.51 applies to the following transactions:</P>
              <P>(1) Any covered transaction with an affiliate, unless the transaction is exempt under paragraphs (a) through (c) of § 223.41 or paragraphs (a) through (e) or (h) through (j) of § 223.42;</P>
              <P>(2) The sale of a security or other asset to an affiliate, including an asset subject to an agreement to repurchase;</P>

              <P>(3) The payment of money or the furnishing of a service to an affiliate under contract, lease, or otherwise;<PRTPAGE P="79"/>
              </P>
              <P>(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</P>
              <P>(5) Any transaction or series of transactions with a nonaffiliate, if an affiliate:</P>
              <P>(i) Has a financial interest in the nonaffiliate; or</P>
              <P>(ii) Is a participant in the transaction or series of transactions.</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.53</SECTNO>
              <SUBJECT>What asset purchases are prohibited by section 23B?</SUBJECT>
              <P>(a) <E T="03">Fiduciary purchases of assets from an affiliate.</E> A member bank may not purchase as fiduciary any security or other asset from any affiliate unless the purchase is permitted:</P>
              <P>(1) Under the instrument creating the fiduciary relationship;</P>
              <P>(2) By court order; or</P>
              <P>(3) By law of the jurisdiction governing the fiduciary relationship.</P>
              <P>(b) <E T="03">Purchase of a security underwritten by an affiliate.</E> (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.</P>
              <P>(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.</P>
              <P>(3) The approval requirement of paragraph (b)(2) of this section may be met if:</P>
              <P>(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;</P>
              <P>(ii) Each acquisition described in paragraph (b)(1) of this section meets the standards; and</P>
              <P>(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.</P>
              <P>(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:</P>
              <P>(i) A majority of the directors of the foreign bank; or</P>
              <P>(ii) A majority of the senior executive officers of the foreign bank.</P>
              <P>(c) <E T="03">Special definitions.</E> For purposes of this section:</P>
              <P>(1) <E T="03">“Principal underwriter”</E> means any underwriter who, in connection with a primary distribution of securities:</P>
              <P>(i) Is in privity of contract with the issuer or an affiliated person of the issuer;</P>
              <P>(ii) Acting alone or in concert with one or more other persons, initiates or directs the formation of an underwriting syndicate; or</P>
              <P>(iii) Is allowed a rate of gross commission, spread, or other profit greater than the rate allowed another underwriter participating in the distribution.</P>
              <P>(2) <E T="03">“Security”</E> has the same meaning as in section 3(a)(10) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(10)).</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.54</SECTNO>
              <SUBJECT>What advertisements and statements are prohibited by section 23B?</SUBJECT>
              <P>(a) <E T="03">In general.</E> 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.<PRTPAGE P="80"/>
              </P>
              <P>(b) <E T="03">Guarantees, acceptances, letters of credit, and cross-affiliate netting arrangements subject to section 23A.</E> Paragraph (a) of this section does not prohibit a member bank from:</P>
              <P>(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 §§ 223.11 and 223.12 and the collateral requirements of § 223.14, and is otherwise permitted under this regulation; or</P>
              <P>(2) Making reference to such a guarantee, acceptance, letter of credit, or cross-affiliate netting arrangement if otherwise required by law.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 223.55</SECTNO>
              <SUBJECT>What are the standards under which the Board may grant exemptions from the requirements of section 23B?</SUBJECT>
              <P>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.</P>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <HD SOURCE="HED">Subpart G—Application of Sections 23A and 23B to U.S. Branches and Agencies of Foreign Banks</HD>
            <SECTION>
              <SECTNO>§ 223.61</SECTNO>
              <SUBJECT>How do sections 23A and 23B apply to U.S. branches and agencies of foreign banks?</SUBJECT>
              <P>(a) <E T="03">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.</E> 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.</P>
              <P>(b) <E T="03">Affiliate defined.</E> 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:</P>
              <P>(1) Directly engaged in the United States in any of the following activities:</P>
              <P>(i) Insurance underwriting pursuant to section 4(k)(4)(B) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(B));</P>
              <P>(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));</P>
              <P>(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);</P>
              <P>(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</P>
              <P>(v) Any other activity designated by the Board;</P>
              <P>(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 § 223.2 if such branch, agency, or commercial lending company were a member bank; or</P>
              <P>(3) A subsidiary of an affiliate described in paragraph (b)(1) or (2) of this section.</P>
              <P>(c) <E T="03">Capital stock and surplus.</E> For purposes of this subpart, the “<E T="03">capital stock and surplus</E>” 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.</P>
            </SECTION>
          </SUBPART>
          <SUBPART>
            <PRTPAGE P="81"/>
            <HD SOURCE="HED">Subpart H—Miscellaneous Interpretations</HD>
            <SECTION>
              <SECTNO>§ 223.71</SECTNO>
              <SUBJECT>How do sections 23A and 23B apply to transactions in which a member bank purchases from one affiliate an asset relating to another affiliate?</SUBJECT>
              <P>(a) <E T="03">In general.</E> 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 §§ 223.31(e), 223.41(a) through (d), and 223.42(e), (f), (i), (j), (k), and (m).</P>
              <P>(b) <E T="03">Examples.</E> (1) <E T="03">The (d)(6) exemption.</E> 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 § 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 § 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).</P>
              <P>(2) T<E T="03">he sister-bank exemption.</E> 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 § 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 § 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).</P>
            </SECTION>
          </SUBPART>
        </PART>
        <PART>
          <EAR>Pt. 224</EAR>
          <HD SOURCE="HED">PART 224—BORROWERS OF SECURITIES CREDIT (REGULATION X)</HD>
          <CONTENTS>
            <SECHD>Sec.</SECHD>
            <SECTNO>224.1</SECTNO>
            <SUBJECT>Authority, purpose, and scope.</SUBJECT>
            <SECTNO>224.2</SECTNO>
            <SUBJECT>Definitions.</SUBJECT>
            <SECTNO>224.3</SECTNO>
            <SUBJECT>Margin regulations to be applied by nonexempted borrowers.</SUBJECT>
          </CONTENTS>
          <AUTH>
            <HD SOURCE="HED">Authority:</HD>
            <P>15 U.S.C. 78g.</P>
          </AUTH>
          <SOURCE>
            <HD SOURCE="HED">Source:</HD>
            <P>Reg. X, 48 FR 56572, Dec. 22, 1983, unless otherwise noted.</P>
          </SOURCE>
          <EDNOTE>
            <HD SOURCE="HED">Editorial Note:</HD>
            <P>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.</P>
          </EDNOTE>
          <SECTION>
            <SECTNO>§ 224.1</SECTNO>
            <SUBJECT>Authority, purpose, and scope.</SUBJECT>
            <P>(a) <E T="03">Authority and purpose.</E> 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).</P>
            <P>(b) <E T="03">Scope and exemptions.</E> 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 <PRTPAGE P="82"/>securities (both types of credit are hereinafter referred to as purpose credit). The following borrowers are exempt from the Act and this part:</P>
            <P>(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.</P>
            <P>(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</P>
            <P>(3) Any borrower who is exempt by Order upon terms and conditions set by the Board.</P>
            <CITA>[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 224.2</SECTNO>
            <SUBJECT>Definitions.</SUBJECT>
            <P>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:</P>
            <P>(a) <E T="03">United States person</E> 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.</P>
            <P>(b) <E T="03">United States security</E> 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.</P>
            <P>(c) <E T="03">Foreign person controlled by a United States person</E> 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.</P>
            <CITA>[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839, Jan. 16, 1998]</CITA>
          </SECTION>
          <SECTION>
            <SECTNO>§ 224.3</SECTNO>
            <SUBJECT>Margin regulations to be applied by nonexempted borrowers.</SUBJECT>
            <P>(a) <E T="03">Credit transactions outside the United States.</E> No borrower shall obtain purpose credit from outside the United States unless it conforms to the following margin regulations:</P>
            <P>(1) Regulation T (12 CFR part 220) if the credit is obtained from a foreign branch of a broker-dealer;</P>
            <P>(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</P>
            <P>(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)).</P>
            <P>(b) <E T="03">Credit transactions within the United States.</E> 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 § 224.1(b)(1), must conform the credit to the margin regulation that applies to the lender.</P>
            <CITA>[Reg. X, 63 FR 2839, Jan. 16, 1998]</CITA>
          </SECTION>
        </PART>
        <PART>
          <EAR>Pt. 225</EAR>
          <HD SOURCE="HED">PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y)</HD>
          <CONTENTS>
            <SUBJGRP>
              <HD SOURCE="HED">Regulations</HD>
            </SUBJGRP>
            <SUBPART>
              <HD SOURCE="HED">Subpart A—General Provisions</HD>
              <SECHD>Sec.</SECHD>
              <SECTNO>225.1</SECTNO>
              <SUBJECT>Authority, purpose, and scope.</SUBJECT>
              <SECTNO>225.2</SECTNO>
              <SUBJECT>Definitions.</SUBJECT>
              <SECTNO>225.3</SECTNO>
              <SUBJECT>Administration.</SUBJECT>
              <SECTNO>225.4</SECTNO>
              <SUBJECT>Corporate practices.</SUBJECT>
              <SECTNO>225.5</SECTNO>
              <SUBJECT>Registration, reports, and inspections.</SUBJECT>
              <SECTNO>225.6</SECTNO>
              <SUBJECT>Penalties for violations.</SUBJECT>
              <SECTNO>225.7</SECTNO>
              <SUBJECT>Exceptions to tying restrictions.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <PRTPAGE P="83"/>
              <HD SOURCE="HED">Subpart B—Acquisition of Bank Securities or Assets</HD>
              <SECTNO>225.11</SECTNO>
              <SUBJECT>Transactions requiring Board approval.</SUBJECT>
              <SECTNO>225.12</SECTNO>
              <SUBJECT>Transactions not requiring Board approval.</SUBJECT>
              <SECTNO>225.13</SECTNO>
              <SUBJECT>Factors considered in acting on bank acquisition proposals.</SUBJECT>
              <SECTNO>225.14</SECTNO>
              <SUBJECT>Expedited action for certain bank acquisitions by well-run bank holding companies.</SUBJECT>
              <SECTNO>225.15</SECTNO>
              <SUBJECT>Procedures for other bank acquisition proposals.</SUBJECT>
              <SECTNO>225.16</SECTNO>
              <SUBJECT>Public notice, comments, hearings, and other provisions governing applications and notices.</SUBJECT>
              <SECTNO>225.17</SECTNO>
              <SUBJECT>Notice procedure for one-bank holding company formations.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart C—Nonbanking Activities and Acquisitions by Bank Holding Companies</HD>
              <SECTNO>225.21</SECTNO>
              <SUBJECT>Prohibited nonbanking activities and acquisitions; exempt bank holding companies.</SUBJECT>
              <SECTNO>225.22</SECTNO>
              <SUBJECT>Exempt nonbanking activities and acquisitions.</SUBJECT>
              <SECTNO>225.23</SECTNO>
              <SUBJECT>Expedited action for certain nonbanking proposals by well-run bank holding companies.</SUBJECT>
              <SECTNO>225.24</SECTNO>
              <SUBJECT>Procedures for other nonbanking proposals.</SUBJECT>
              <SECTNO>225.25</SECTNO>
              <SUBJECT>Hearings, alteration of activities, and other matters.</SUBJECT>
              <SECTNO>225.26</SECTNO>
              <SUBJECT>Factors considered in acting on nonbanking proposals.</SUBJECT>
              <SECTNO>225.27</SECTNO>
              <SUBJECT>Procedures for determining scope of nonbanking activities.</SUBJECT>
              <SECTNO>225.28</SECTNO>
              <SUBJECT>List of permissible nonbanking activities.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart D—Control and Divestiture Proceedings</HD>
              <SECTNO>225.31</SECTNO>
              <SUBJECT>Control proceedings.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart E—Change in Bank Control</HD>
              <SECTNO>225.41</SECTNO>
              <SUBJECT>Transactions requiring prior notice.</SUBJECT>
              <SECTNO>225.42</SECTNO>
              <SUBJECT>Transactions not requiring prior notice.</SUBJECT>
              <SECTNO>225.43</SECTNO>
              <SUBJECT>Procedures for filing, processing, publishing, and acting on notices.</SUBJECT>
              <SECTNO>225.44</SECTNO>
              <SUBJECT>Reporting of stock loans.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart F—Limitations on Nonbank Banks</HD>
              <SECTNO>225.52</SECTNO>
              <SUBJECT>Limitation on overdrafts.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart G—Appraisal Standards for Federally Related Transactions</HD>
              <SECTNO>225.61</SECTNO>
              <SUBJECT>Authority, purpose, and scope.</SUBJECT>
              <SECTNO>225.62</SECTNO>
              <SUBJECT>Definitions.</SUBJECT>
              <SECTNO>225.63</SECTNO>
              <SUBJECT>Appraisals required; transactions requiring a State certified or licensed appraiser.</SUBJECT>
              <SECTNO>225.64</SECTNO>
              <SUBJECT>Minimum appraisal standards.</SUBJECT>
              <SECTNO>225.65</SECTNO>
              <SUBJECT>Appraiser independence.</SUBJECT>
              <SECTNO>225.66</SECTNO>
              <SUBJECT>Professional association membership; competency.</SUBJECT>
              <SECTNO>225.67</SECTNO>
              <SUBJECT>Enforcement.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart H—Notice of Addition or Change of Directors and Senior Executive Officers</HD>
              <SECTNO>225.71</SECTNO>
              <SUBJECT>Definitions.</SUBJECT>
              <SECTNO>225.72</SECTNO>
              <SUBJECT>Director and officer appointments; prior notice requirement.</SUBJECT>
              <SECTNO>225.73</SECTNO>
              <SUBJECT>Procedures for filing, processing, and acting on notices; standards for disapproval; waiver of notice.</SUBJECT>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart I—Financial Holding Companies</HD>
              <SECTNO>225.81</SECTNO>
              <SUBJECT>What is a financial holding company?</SUBJECT>
              <SECTNO>225.82</SECTNO>
              <SUBJECT>How does a bank holding company elect to become a financial holding company?</SUBJECT>
              <SECTNO>225.83</SECTNO>
              <SUBJECT>What are the consequences of failing to continue to meet applicable capital and management requirements?</SUBJECT>
              <SECTNO>225.84</SECTNO>
              <SUBJECT>What are the consequences of failing to maintain a satisfactory or better rating under the Community Reinvestment Act at all insured depository institution subsidiaries?</SUBJECT>
              <SECTNO>225.85</SECTNO>
              <SUBJECT>Is notice to or approval from the Board required prior to engaging in a financial activity?</SUBJECT>
              <SECTNO>225.86</SECTNO>
              <SUBJECT>What activities are permissible for any financial holding company?</SUBJECT>
              <SECTNO>225.87</SECTNO>
              <SUBJECT>Is notice to the Board required after engaging in a financial activity?</SUBJECT>
              <SECTNO>225.88</SECTNO>
              <SUBJECT>How to request the Board to determine that an activity is financial in nature or incidental to a financial activity?</SUBJECT>
              <SECTNO>225.89</SECTNO>
              <SUBJECT>How to request approval to engage in an activity that is complementary to a financial activity?</SUBJECT>
              <SECTNO>225.90</SECTNO>
              <SUBJECT>What are the requirements for a foreign bank to be treated as a financial holding company?</SUBJECT>
              <SECTNO>225.91</SECTNO>
              <SUBJECT>How may a foreign bank elect to be treated as a financial holding company?</SUBJECT>
              <SECTNO>225.92</SECTNO>
              <SUBJECT>How does an election by a foreign bank become effective?</SUBJECT>
              <SECTNO>225.93</SECTNO>
              <SUBJECT>What are the consequences of a foreign bank failing to continue to meet applicable capital and management requirements?</SUBJECT>
              <SECTNO>225.94</SECTNO>
              <SUBJECT>What are the consequences of an insured branch or depository institution failing to maintain a satisfactory or better rating under the Community Reinvestment Act?</SUBJECT>
              <SUBJGRP>
                <HD SOURCE="HED">Interpretations</HD>
                <SECTNO>225.101</SECTNO>
                <SUBJECT>Bank holding company's subsidiary banks owning shares of nonbanking companies.</SUBJECT>
                <SECTNO>225.102</SECTNO>

                <SUBJECT>Bank holding company indirectly owning nonbanking company through subsidiaries.<PRTPAGE P="84"/>
                </SUBJECT>
                <SECTNO>225.103</SECTNO>
                <SUBJECT>Bank holding company acquiring stock by dividends, stock splits or exercise of rights.</SUBJECT>
                <SECTNO>225.104</SECTNO>
                <SUBJECT>“Services” under section 4(c)(1) of Bank Holding Company Act.</SUBJECT>
                <SECTNO>225.107</SECTNO>
                <SUBJECT>Acquisition of stock in small business investment company.</SUBJECT>
                <SECTNO>225.109</SECTNO>
                <SUBJECT>“Services” under section 4(c)(1) of Bank Holding Company Act.</SUBJECT>
                <SECTNO>225.111</SECTNO>
                <SUBJECT>Limit on investment by bank holding company system in stock of small business investment companies.</SUBJECT>
                <SECTNO>225.112</SECTNO>
                <SUBJECT>Indirect control of small business concern through convertible debentures held by small business investment company.</SUBJECT>
                <SECTNO>225.113</SECTNO>
                <SUBJECT>Services under section 4(a) of Bank Holding Company Act.</SUBJECT>
                <SECTNO>225.115</SECTNO>
                <SUBJECT>Applicability of Bank Service Corporation Act in certain bank holding company situations.</SUBJECT>
                <SECTNO>225.118</SECTNO>
                <SUBJECT>Computer services for customers of subsidiary banks.</SUBJECT>
                <SECTNO>225.121</SECTNO>
                <SUBJECT>Acquisition of Edge corporation affiliate by State member banks of registered bank holding company.</SUBJECT>
                <SECTNO>225.122</SECTNO>
                <SUBJECT>Bank holding company ownership of mortgage companies.</SUBJECT>
                <SECTNO>225.123</SECTNO>
                <SUBJECT>Activities closely related to banking.</SUBJECT>
                <SECTNO>225.124</SECTNO>
                <SUBJECT>Foreign bank holding companies.</SUBJECT>
                <SECTNO>225.125</SECTNO>
                <SUBJECT>Investment adviser activities.</SUBJECT>
                <SECTNO>225.126</SECTNO>
                <SUBJECT>Activities not closely related to banking.</SUBJECT>
                <SECTNO>225.127</SECTNO>
                <SUBJECT>Investment in corporations or projects designed primarily to promote community welfare.</SUBJECT>
                <SECTNO>225.129</SECTNO>
                <SUBJECT>Activities closely related to banking.</SUBJECT>
                <SECTNO>225.130</SECTNO>
                <SUBJECT>Issuance and sale of short-term debt obligations by bank holding companies.</SUBJECT>
                <SECTNO>225.131</SECTNO>
                <SUBJECT>Activities closely related to banking.</SUBJECT>
                <SECTNO>225.132</SECTNO>
                <SUBJECT>Acquisition of assets.</SUBJECT>
                <SECTNO>225.133</SECTNO>
                <SUBJECT>Computation of amount invested in foreign corporations under general consent procedures.</SUBJECT>
                <SECTNO>225.134</SECTNO>
                <SUBJECT>Escrow arrangements involving bank stock resulting in a violation of the Bank Holding Company Act.</SUBJECT>
                <SECTNO>225.136</SECTNO>
                <SUBJECT>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.</SUBJECT>
                <SECTNO>225.137</SECTNO>
                <SUBJECT>Acquisitions of shares pursuant to section 4(c)(6) of the Bank Holding Company Act.</SUBJECT>
                <SECTNO>225.138</SECTNO>
                <SUBJECT>Statement of policy concerning divestitures by bank holding companies.</SUBJECT>
                <SECTNO>225.139</SECTNO>
                <SUBJECT>Presumption of continued control under section (2)(g)(3) of the Bank Holding Company Act.</SUBJECT>
                <SECTNO>225.140</SECTNO>
                <SUBJECT>Disposition of property acquired in satisfaction of debts previously contracted.</SUBJECT>
                <SECTNO>225.141</SECTNO>
                <SUBJECT>Operations subsidiaries of a bank holding company.</SUBJECT>
                <SECTNO>225.142</SECTNO>
                <SUBJECT>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.</SUBJECT>
                <SECTNO>225.143</SECTNO>
                <SUBJECT>Policy statement on nonvoting equity investments by bank holding companies.</SUBJECT>
                <SECTNO>225.145</SECTNO>
                <SUBJECT>Limitations established by the Competitive Equality Banking Act of 1987 on the activities and growth of nonbank banks.</SUBJECT>
              </SUBJGRP>
            </SUBPART>
            <SUBPART>
              <HD SOURCE="HED">Subpart J—Merchant Banking Investments</HD>
              <SECTNO>225.170</SECTNO>
              <SUBJECT>What type of investments are permitted by this subpart, and under what conditions may they be made?</SUBJECT>
              <SECTNO>225.171</SECTNO>
              <SUBJECT>What are the limitations on managing or operating a portfolio company held as a merchant banking investment?</SUBJECT>
              <SECTNO>225.172</SECTNO>
              <SUBJECT>What are the holding periods permitted for merchant banking investments?</SUBJECT>
              <SECTNO>225.173</SECTNO>
              <SUBJECT>How are investments in private equity funds treated under this subpart?</SUBJECT>
              <SECTNO>225.174</SECTNO>
              <SUBJECT>What aggregate thresholds apply to merchant banking investments?</SUBJECT>
              <SECTNO>225.175</SECTNO>
              <SUBJECT>What risk management, record keeping and reporting policies are required to make merchant banking investments?</SUBJECT>
              <SECTNO>225.176</SECTNO>
              <SUBJECT>How do the statutory cross marketing and sections 23A and B limitations apply to merchant banking investments?</SUBJECT>
              <SECTNO>225.177</SECTNO>
              <SUBJECT>Definitions.</SUBJECT>
              <SUBJGRP>
                <HD SOURCE="HED">Conditions to Orders</HD>
                <SECTNO>225.200</SECTNO>
                <SUBJECT>Conditions to Board's section 20 orders.</SUBJECT>
                <APP>Appendix A to Part 225—Capital Adequacy Guidelines for Bank Holding Companies:  Risk-Based Measure</APP>
                <APP>Appendix B to Part 225—Capital Adequacy Guidelines for Bank Holding Companies and State Member Banks: Leverage Measure</APP>
                <APP>Appendix C to Part 225—Small Bank Holding Company Policy Statement</APP>
                <APP>Appendix D to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Tier 1 Leverage Measure</APP>
                <APP>Appendix E to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Market Risk Measure</APP>
                <APP>Appendix F to Part 225—Interagency Guidelines Establishing Standards For Safeguarding Customer Information</APP>
              </SUBJGRP>
            </SUBPART>
          </CONTENTS>
          <AUTH>
            <HD SOURCE="HED">Authority:</HD>
            <P>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.</P>
          </AUTH>
          <SOURCE>
            <PRTPAGE P="85"/>
            <HD SOURCE="HED">Source:</HD>
            <P>Reg. Y, 49 FR 818, Jan. 5, 1984, unless otherwise noted.</P>
          </SOURCE>
          <SUBJGRP>
            <HD SOURCE="HED">Regulations</HD>
          </SUBJGRP>
          <SUBPART>
            <HD SOURCE="HED">Subpart A—General Provisions</HD>
            <SOURCE>
              <HD SOURCE="HED">Source:</HD>
              <P>Reg. Y, 62 FR 9319, Feb. 28, 1997, unless otherwise noted.</P>
            </SOURCE>
            <SECTION>
              <SECTNO>§ 225.1</SECTNO>
              <SUBJECT>Authority, purpose, and scope.</SUBJECT>
              <P>(a) <E T="03">Authority.</E> This part <SU>1</SU>

                <FTREF/> (Regulation Y) is issued by the Board of Governors of the Federal Reserve System (<E T="03">Board</E>) under section 5(b) of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(b)) (<E T="03">BHC Act</E>); 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)) (<E T="03">Bank Control Act</E>); 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, <E T="03">et seq.</E>
              </P>
              <FTNT>
                <P>
                  <SU>1</SU> Code of Federal Regulations, title 12, chapter II, part 225.</P>
              </FTNT>
              <P>(b) <E T="03">Purpose.</E> The principal purposes of this part are to:</P>
              <P>(1) Regulate the acquisition of control of banks by companies and individuals;</P>
              <P>(2) Define and regulate the nonbanking activities in which bank holding companies and foreign banking organizations with United States operations may engage; and</P>
              <P>(3) Set forth the procedures for securing approval for these transactions and activities.</P>
              <P>(c) <E T="03">Scope</E>—(1) <E T="03">Subpart A</E> contains general provisions and definitions of terms used in this regulation.</P>
              <P>(2) <E T="03">Subpart B</E> 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.</P>
              <P>(3) <E T="03">Subpart C</E> 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).</P>
              <P>(4) <E T="03">Subpart D</E> 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.</P>
              <P>(5) <E T="03">Subpart E</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.</P>
              <P>(6) <E T="03">Subpart F</E> specifies the limitations that govern companies that control so-called nonbank banks and the activities of nonbank banks.</P>
              <P>(7) <E T="03">Subpart G</E> prescribes minimum standards that apply to the performance of real estate appraisals and identifies transactions that require state certified appraisers.</P>
              <P>(8) <E T="03">Subpart H</E> 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.</P>

              <P>(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 <PRTPAGE P="86"/>approval to engage in an activity that is complementary to a financial activity.</P>
              <P>(10) <E T="03">Subpart J</E> 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)).</P>
              <P>(11) <E T="03">Appendix A</E> to the regulation contains the Board's Risk-Based Capital Adequacy Guidelines for bank holding companies.</P>
              <P>(12) <E T="03">Appendix B</E> contains the Board's Capital Adequacy Guidelines for measuring leverage for bank holding companies and state member banks.</P>
              <P>(13) <E T="03">Appendix C</E> contains the Board's policy statement governing small bank holding companies.</P>
              <P>(14) <E T="03">Appendix D</E> contains the Board's Capital Adequacy Guidelines for measuring tier 1 leverage for bank holding companies.</P>
              <P>(15) <E T="03">Appendix E</E> contains the Board's Capital Adequacy Guidelines for measuring market risk of bank holding companies.</P>
              <P>(16) <E T="03">Appendix F</E> contains the Interagency Guidelines Establishing Standards for Safeguarding Customer Information.</P>
              <CITA>[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]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 225.2</SECTNO>
              <SUBJECT>Definitions.</SUBJECT>
              <P>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.</P>
              <P>(a) <E T="03">Affiliate</E> means any company that controls, is controlled by, or is under common control with, another company.</P>
              <P>(b)(1) <E T="03">Bank</E> means:</P>
              <P>(i) An insured bank as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)); or</P>
              <P>(ii) An institution organized under the laws of the United States which both:</P>
              <P>(A) Accepts demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others; and</P>
              <P>(B) Is engaged in the business of making commercial loans.</P>
              <P>(2) <E T="03">Bank</E> 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)).</P>
              <P>(c)(1) <E T="03">Bank holding company</E> 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:</P>
              <P>(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;</P>
              <P>(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;</P>
              <P>(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;</P>
              <P>(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</P>
              <P>(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.</P>

              <P>(2) Except for the purposes of § 225.4(b) of this subpart and subpart E of this part, or as otherwise provided in this regulation, <E T="03">bank holding company</E> includes a foreign banking organization. For the purposes of subpart B of this part, <E T="03">bank holding company</E> includes a foreign banking organization only if it owns or controls a bank in the United States.</P>
              <P>(d)(1) <E T="03">Company</E> 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.<PRTPAGE P="87"/>
              </P>
              <P>(2) <E T="03">Company</E> does not include any organization, the majority of the voting securities of which are owned by the United States or any state.</P>
              <P>(3) <E T="03">Testamentary trusts exempt.</E> 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:</P>
              <P>(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;</P>
              <P>(ii) Is a testamentary or <E T="03">inter vivos</E> 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;</P>
              <P>(iii) Contains only assets previously owned by the individual or individuals who established the trust;</P>
              <P>(iv) Is not a Massachusetts business trust; and</P>
              <P>(v) Does not issue shares, certificates, or any other evidence of ownership.</P>
              <P>(4) <E T="03">Qualified limited partnerships exempt.</E> Company does not include a qualified limited partnership, as defined in section 2(o)(10) of the BHC Act.</P>
              <P>(e)(1) <E T="03">Control</E> of a bank or other company means (except for the purposes of subpart E of this part):</P>
              <P>(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;</P>
              <P>(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;</P>
              <P>(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 § 225.31 of subpart D of this part; or</P>
              <P>(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.</P>
              <P>(2) A bank or other company is deemed to control voting securities or assets owned, controlled, or held, directly or indirectly:</P>
              <P>(i) By any subsidiary of the bank or other company;</P>
              <P>(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</P>
              <P>(iii) In a fiduciary capacity for the benefit of the bank or other company or any of its subsidiaries.</P>
              <P>(f) <E T="03">Foreign banking organization</E> and <E T="03">qualifying foreign banking organization</E> have the same meanings as provided in § 211.21(n) and § 211.23 of the Board's Regulation K (12 CFR 211.21(n) and 211.23).</P>
              <P>(g) <E T="03">Insured depository institution</E> 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.</P>
              <P>(h) <E T="03">Lead insured depository institution</E> 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.</P>
              <P>(i) <E T="03">Management official</E> 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.</P>
              <P>(j) <E T="03">Nonbank bank</E> means any institution that:</P>
              <P>(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</P>

              <P>(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).<PRTPAGE P="88"/>
              </P>
              <P>(k) <E T="03">Outstanding shares</E> means any voting securities, but does not include securities owned by the United States or by a company wholly owned by the United States.</P>
              <P>(l) Person includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity.</P>
              <P>(m) <E T="03">Savings association</E> means:</P>
              <P>(1) Any federal savings association or federal savings bank;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(n) <E T="03">Shareholder</E>—(1) <E T="03">Controlling shareholder</E> 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.</P>
              <P>(2) <E T="03">Principal shareholder</E> 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.</P>
              <P>(o) <E T="03">Subsidiary</E> 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>
              <P>(p) <E T="03">United States</E> 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.</P>
              <P>(q)(1) <E T="03">Voting securities</E> 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:</P>
              <P>(i) To vote for or to select directors, trustees, or partners (or persons exercising similar functions of the issuing company); or</P>
              <P>(ii) To vote on or to direct the conduct of the operations or other significant policies of the issuing company.</P>
              <P>(2) <E T="03">Nonvoting shares.</E> Preferred shares, limited partnership shares or interests, or similar interests are not <E T="03">voting securities</E> if:</P>
              <P>(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;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(3)<E T="03"> Class of voting shares.</E> 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.</P>
              <P>(r)<E T="03"> Well-capitalized—</E>(1)<E T="03"> Bank holding company.</E> In the case of a bank holding company,<SU>2</SU>
                <FTREF/>
                <E T="03">well-capitalized</E> means that:</P>
              <FTNT>
                <P>
                  <SU>2</SU> 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 <PRTPAGE/>requirements for expedited/waived processing in Appendix C.</P>
              </FTNT>
              <PRTPAGE P="89"/>
              <P>(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;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(2) <E T="03">Insured and uninsured depository institution</E>—(i) <E T="03">Insured depository institution.</E> 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).</P>
              <P>(ii) <E T="03">Uninsured depository institution.</E> 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.</P>
              <P>(3)<E T="03"> Foreign banks—</E>(i)<E T="03"> Standards applied.</E> For purposes of determining whether a foreign banking organization qualifies under paragraph (r)(1) of this section:</P>
              <P>(A) A foreign banking organization whose home country supervisor, as defined in § 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</P>
              <P>(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.</P>
              <P>(ii)<E T="03"> Branches and agencies.</E> 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.</P>
              <P>(s) <E T="03">Well managed</E>—(1) <E T="03">In general.</E> Except as otherwise provided in this part, a company or depository institution is well managed if:</P>
              <P>(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:</P>
              <P>(A) At least a satisfactory composite rating; and</P>
              <P>(B) At least a satisfactory rating for management, if such rating is given.</P>
              <P>(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.</P>
              <P>(2) <E T="03">Merged depository institutions</E>—(i) <E T="03">Merger involving well managed institutions.</E> 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.</P>
              <P>(ii) <E T="03">Merger involving a poorly rated institution.</E> A depository institution that results from the merger of a depository institution that is well managed with one or more depository institutions <PRTPAGE P="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.</P>
              <P>(3) <E T="03">Foreign banking organizations.</E> 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.</P>
              <P>(t) <E T="03">Depository institution.</E> 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)).</P>
              <CITA>[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]</CITA>
            </SECTION>
            <SECTION>
              <SECTNO>§ 225.3</SECTNO>
              <SUBJECT>Administration.</SUBJECT>
              <P>(a) <E T="03">Delegation of authority.</E> 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).</P>
              <P>(b) <E T="03">Appropriate Federal Reserve Bank.</E> In administering this regulation, unless a different Federal Reserve Bank is designated by the Board, the appropriate Federal Reserve Bank is as follows:</P>
              <P>(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;</P>
              <P>(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;</P>
              <P>(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.</P>
            </SECTION>
            <SECTION>
              <SECTNO>§ 225.4</SECTNO>
              <SUBJECT>Corporate practices.</SUBJECT>
              <EXT-XREF HREF="20041228" REFID="13">Link to an amendment published at 69 FR 77618, Dec. 28, 2004.</EXT-XREF>
              <P>(a) <E T="03">Bank holding company policy and operations.</E> (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.</P>

              <P>(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) <E T="03">et seq.</E>), 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.</P>
              <P>(b) <E T="03">Purchase or redemption by bank holding company of its own securities—</E>(1)<E T="03"> Filing notice.</E> 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 <PRTPAGE P="91"/>gross consideration received for all of its equity securities sold during the period.</P>
              <P>(2) <E T="03">Contents of notice.</E> Any notice under this section shall be filed with the appropriate Reserve Bank and shall contain the following information:</P>
              <P>(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;</P>
              <P>(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</P>

              <P>(iii) (A) If the bank holding company has consolidated assets of $150 million or more, consolidated <E T="03">pro forma</E> 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 <E T="03">pro forma</E> balance sheet as of the most recent quarter; or</P>

              <P>(B) If the bank holding company has consolidated assets of less than $150 million, a <E T="03">pro forma</E> 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.</P>
              <P>(3) <E T="03">Acting on notice.</E> 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.</P>
              <P>(4) <E T="03">Factors considered in acting on notice.</E> (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.</P>
              <P>(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).</P>
              <P>(5) <E T="03">Disapproval and hearing.</E> (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.</P>
              <P>(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).</P>
              <P>(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.</P>
              <P>(6)<E T="03"> Exception for well-capitalized bank holding companies.</E> 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:</P>
              <P>(i) Both before and immediately after the redemption, the bank holding company is well-capitalized;</P>
              <P>(ii) The bank holding company is well-managed; and</P>
              <P>(iii) The bank holding company is not the subject of any unresolved supervisory issues.</P>
              <P>(c) <E T="03">Deposit insurance.</E> 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 <E T="03">insured bank</E> as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).</P>
              <P>(d) <E T="03">Acting as transfer agent or clearing agent.</E> 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 <PRTPAGE P="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 §§ 208.31-208.33 of the Board's Regulation H (12 CFR 208.31-208.33) as if it were a state member bank.</P>
              <P>(e) <E T="03">Reporting requirement for credit secured by certain bank holding company stock.</E> 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 § 215.2 of Regulation O (12 CFR 215.2).</P>
              <P>(f) <E T="03">Suspicious activity report.</E> 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 § 208.62 of the Board's Regulation H (12 CFR 208.62).</P>
              <P>(g) <E T="03">Requirements for financial holding companies engaged in securities underwriting, dealing, or market-making activities.</E> (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).</P>
              <P>(2) A foreign bank that is or is treated as a financial holding company under this part shall ensure that:</P>
              <P>(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;</P>
              <P>(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</P>
              <P>(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.</P>
              <P>(h) <E T="03">Protection of nonpublic personal information.</E> 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).</P>
              <CITA>[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]</CITA>
              <EFFDNOTP>
                <HD SOURCE="HED">Effective Date Note:</HD>
                <P>At 69 FR 77618, Dec. 28, 2004, § 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:</P>
                <REVTXT>
                  <SECTION>
                    <SECTNO>§ 225.4</SECTNO>
                    <SUBJECT>Corporate practices.</SUBJECT>
                    <STARS/>
                    <P>(h) <E T="03">Protection of customer information and consumer information.</E> 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.<STARS/>
                    </P>
                  </SECTION>
                  <SECTION>
                    <PRTPAGE P="93"/>
                    <SECTNO>§ 225.5</SECTNO>
                    <SUBJECT>Registration, reports, and inspections.</SUBJECT>
                    <P>(a) <E T="03">Registration of bank holding companies.</E> 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.</P>
                    <P>(b) <E T="03">Reports of bank holding companies.</E> 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.</P>
                    <P>(c) <E T="03">Examinations and inspections.</E> 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.</P>
                  </SECTION>
                  <SECTION>
                    <SECTNO>§ 225.6</SECTNO>
                    <SUBJECT>Penalties for violations.</SUBJECT>
                    <P>(a) <E T="03">Criminal and civil penalties.</E> (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.</P>
                    <P>(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).</P>
                    <P>(b) <E T="03">Cease-and-desist proceedings.</E> 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) <E T="03">et seq.</E>).</P>
                  </SECTION>
                  <SECTION>
                    <SECTNO>§ 225.7</SECTNO>
                    <SUBJECT>Exceptions to tying restrictions.</SUBJECT>
                    <P>(a) <E T="03">Purpose.</E> 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.</P>
                    <P>(b) <E T="03">Exceptions to statute.</E> Subject to the limitations of paragraph (c) of this section, a bank may:</P>
                    <P>(1) <E T="03">Extension to affiliates of statutory exceptions preserving traditional banking relationships.</E> 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:</P>
                    <P>(i) Obtain a loan, discount, deposit, or trust service from an affiliate of the bank; or</P>
                    <P>(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)).</P>
                    <P>(2) <E T="03">Safe harbor for combined-balance discounts.</E> 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:</P>

                    <P>(i) The bank offers deposits, and all such deposits are eligible products; and<PRTPAGE P="94"/>
                    </P>
                    <P>(ii) Balances in deposits count at least as much as nondeposit products toward the minimum balance.</P>
                    <P>(3) <E T="03">Safe harbor for foreign transactions.</E> Engage in any transaction with a customer if that customer is:</P>
                    <P>(i) A corporation, business, or other person (other than an individual) that:</P>
                    <P>(A) Is incorporated, chartered, or otherwise organized outside the United States; and</P>
                    <P>(B) Has its principal place of business outside the United States; or</P>
                    <P>(ii) An individual who is a citizen of a foreign country and is not resident in the United States.</P>
                    <P>(c) <E T="03">Limitations on exceptions.</E> 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.</P>
                    <P>(d) <E T="03">Extension of statute to electronic benefit transfer services.</E> 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)).</P>
                    <P>(e) For purposes of this section, <E T="03">bank</E> 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.</P>
                  </SECTION>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart B—Acquisition of Bank Securities or Assets</HD>
                    <SOURCE>
                      <HD SOURCE="HED">Source:</HD>
                      <P>Reg. Y, 62 FR 9324, Feb. 28, 1997, unless otherwise noted.</P>
                    </SOURCE>
                    <SECTION>
                      <SECTNO>§ 225.11</SECTNO>
                      <SUBJECT>Transactions requiring Board approval.</SUBJECT>
                      <P>The following transactions require the Board's prior approval under section 3 of the Bank Holding Company Act except as exempted under § 225.12 or as otherwise covered by § 225.17 of this subpart:</P>
                      <P>(a) <E T="03">Formation of bank holding company.</E> Any action that causes a bank or other company to become a bank holding company.</P>
                      <P>(b) <E T="03">Acquisition of subsidiary bank.</E> Any action that causes a bank to become a subsidiary of a bank holding company.</P>
                      <P>(c) <E T="03">Acquisition of control of bank or bank holding company securities.</E>
                      </P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(d) <E T="03">Acquisition of bank assets.</E> 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.</P>
                      <P>(e) <E T="03">Merger of bank holding companies.</E> The merger or consolidation of bank holding companies, including a merger through the purchase of assets and assumption of liabilities.</P>
                      <P>(f) <E T="03">Transactions by foreign banking organization.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <PRTPAGE P="95"/>
                      <SECTNO>§ 225.12</SECTNO>
                      <SUBJECT>Transactions not requiring Board approval.</SUBJECT>
                      <P>The following transactions do <E T="03">not</E> require the Board's approval under § 225.11 of this subpart:</P>
                      <P>(a) <E T="03">Acquisition of securities in fiduciary capacity.</E> 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:</P>
                      <P>(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</P>
                      <P>(2) The acquisition is for the benefit of the acquiring bank or other company, or its shareholders, employees, or subsidiaries.</P>
                      <P>(b) <E T="03">Acquisition of securities in satisfaction of debts previously contracted.</E> 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.</P>
                      <P>(c) <E T="03">Acquisition of securities by bank holding company with majority control.</E> 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.</P>
                      <P>(d) <E T="03">Acquisitions involving bank mergers and internal corporate reorganizations</E>—(1) <E T="03">Transactions subject to Bank Merger Act.</E> 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:</P>
                      <P>(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</P>
                      <P>(ii) Any transaction requiring the Board's prior approval under § 225.11(e) of this subpart.</P>
                      <P>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.</P>
                      <P>(2) <E T="03">Certain acquisitions subject to Bank Merger Act.</E> 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:</P>
                      <P>(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;</P>
                      <P>(ii) The transaction requires the prior approval of a federal supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));</P>
                      <P>(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);</P>
                      <P>(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);</P>

                      <P>(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:<PRTPAGE P="96"/>
                      </P>
                      <P>(A) A copy of the filing made to the appropriate federal banking agency under the Bank Merger Act; and</P>
                      <P>(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</P>
                      <P>(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 § 225.11 is required.</P>
                      <P>(3) <E T="03">Internal corporate reorganizations.</E> (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:</P>
                      <P>(A) The merger of holding companies that are subsidiaries of the bank holding company;</P>
                      <P>(B) The formation of a subsidiary holding company; <SU>1</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>1</SU> 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 § 225.5.</P>
                      </FTNT>
                      <P>(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.</P>
                      <P>(ii) A transaction described in paragraph (d)(3)(i) of this section qualifies for this exception if:</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(C) The bank holding company is not organized in mutual form; and</P>
                      <P>(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).</P>
                      <P>(e) <E T="03">Holding securities in escrow.</E> 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.</P>
                      <P>(f) <E T="03">Acquisition of foreign banking organization.</E> 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 § 225.11(f) of this subpart.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.13</SECTNO>
                      <SUBJECT>Factors considered in acting on bank acquisition proposals.</SUBJECT>
                      <P>(a) <E T="03">Factors requiring denial.</E> As specified in section 3(c) of the BHC Act, the Board may not approve any application under this subpart if:</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(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</P>

                      <P>(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 <PRTPAGE P="97"/>§ 211.24(c)(1)(ii) of the Board's Regulation K (12 CFR 211.24(c)(1)(ii)).</P>
                      <P>(b) <E T="03">Other factors.</E> 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:</P>
                      <P>(1) <E T="03">Financial condition.</E> 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.</P>
                      <P>(2) <E T="03">Managerial resources.</E> 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.</P>
                      <P>(3) <E T="03">Convenience and needs of community.</E> 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 <E T="03">et seq.</E>) and regulations issued thereunder, including the Board's Regulation BB (12 CFR part 228).</P>
                      <P>(c) <E T="03">Interstate transactions.</E> 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)).</P>
                      <P>(d) <E T="03">Conditional approvals.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.14</SECTNO>
                      <SUBJECT>Expedited action for certain bank acquisitions by well-run bank holding companies.</SUBJECT>
                      <P>(a) <E T="03">Filing of notice</E>—(1) <E T="03">Information required and public notice.</E> As an alternative to the procedure provided in § 225.15, a bank holding company that meets the requirements of paragraph (c) of this section may satisfy the prior approval requirements of § 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:</P>
                      <P>(i) A certification that all of the criteria in paragraph (c) of this section are met;</P>
                      <P>(ii) A description of the transaction that includes identification of the companies and insured depository institutions involved in the transaction <SU>2</SU>
                        <FTREF/> and identification of each banking market affected by the transaction;</P>
                      <FTNT>
                        <P>
                          <SU>2</SU> 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 § 225.41, the person or group of persons may fulfill the notice requirements of the Bank Control Act and § 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 § 225.43.</P>
                      </FTNT>
                      <P>(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;</P>
                      <P>(iv) Evidence that notice of the proposal has been published in accordance with § 225.16(b)(1);</P>

                      <P>(v)(A) If the bank holding company has consolidated assets of $150 million or more, an abbreviated consolidated <E T="03">pro forma</E> balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed <PRTPAGE P="98"/>transaction, consolidated <E T="03">pro forma</E> 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;</P>

                      <P>(B) If the bank holding company has consolidated assets of less than $150 million, a <E T="03">pro forma</E> 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;</P>
                      <P>(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;</P>

                      <P>(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 <E T="03">pro forma</E> basis; and</P>

                      <P>(viii) The market indexes for each relevant banking market reflecting the <E T="03">pro forma</E> effect of the transaction.</P>
                      <P>(2) <E T="03">Waiver of unnecessary information.</E> The Reserve Bank may reduce the information requirements in paragraph (a)(1)(v) through (viii) of this section as appropriate.</P>
                      <P>(b)(1) <E T="03">Action on proposals under this section.</E> 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 § 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.</P>
                      <P>(2) <E T="03">Acceptance of notice in event expedited procedure not available.</E> 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 § 225.15, the application shall be deemed accepted for purposes of § 225.15 as of the date that the notice was filed under this section.</P>
                      <P>(c) <E T="03">Criteria for use of expedited procedure.</E> The procedure in this section is available only if:</P>
                      <P>(1) <E T="03">Well-capitalized organization</E>—(i) <E T="03">Bank holding company.</E> Both at the time of and immediately after the proposed transaction, the acquiring bank holding company is well-capitalized;</P>
                      <P>(ii) <E T="03">Insured depository institutions.</E> Both at the time of and immediately after the proposed transaction:</P>
                      <P>(A) The lead insured depository institution of the acquiring bank holding company is well-capitalized;</P>
                      <P>(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</P>
                      <P>(C) No insured depository institution controlled by the acquiring bank holding company is undercapitalized;</P>
                      <P>(2) <E T="03">Well managed organization</E>—(i) <E T="03">Satisfactory examination ratings.</E> 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;</P>
                      <P>(ii) <E T="03">No poorly managed institutions.</E> 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;<PRTPAGE P="99"/>
                      </P>
                      <P>(iii) <E T="03">Recently acquired institutions excluded.</E> 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 :</P>
                      <P>(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</P>
                      <P>(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;</P>
                      <P>(3) <E T="03">Convenience and needs criteria</E>—(i) <E T="03">Effect on the community.</E> The record indicates that the proposed transaction would meet the convenience and needs of the community standard in the BHC Act; and</P>
                      <P>(ii) <E T="03">Established CRA performance record.</E> 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;</P>
                      <P>(4) <E T="03">Public comment.</E> No comment that is timely and substantive as provided in § 225.16 is received by the Board or the appropriate Reserve Bank other than a comment that supports approval of the proposal;</P>
                      <P>(5) <E T="03">Competitive criteria</E>—(i) <E T="03">Competitive screen.</E> Without regard to any divestitures proposed by the acquiring bank holding company, the acquisition does not cause:</P>
                      <P>(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</P>
                      <P>(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</P>
                      <P>(ii) <E T="03">Department of Justice.</E> 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;</P>
                      <P>(6) <E T="03">Size of acquisition</E>—(i) <E T="03">In general</E>—(A) <E T="03">Limited Growth.</E> 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 <E T="03">other qualifying transactions</E> means any transaction approved under this section or § 225.23 during the 12 months prior to filing the notice under this section; and</P>
                      <P>(B) <E T="03">Individual size limitation.</E> The total risk-weighted assets to be acquired do not exceed $7.5 billion;</P>
                      <P>(ii) <E T="03">Small bank holding companies.</E> 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;</P>
                      <P>(7) <E T="03">Supervisory actions.</E> 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;</P>
                      <P>(8) <E T="03">Interstate acquisitions.</E> Board-approval of the transaction is not prohibited under section 3(d) of the BHC Act;</P>
                      <P>(9) <E T="03">Other supervisory considerations.</E> Board approval of the transaction is not prohibited under the informational <PRTPAGE P="100"/>sufficiency or comprehensive home country supervision standards set forth in section 3(c)(3) of the BHC Act; and</P>
                      <P>(10) <E T="03">Notification.</E> 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 § 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.</P>
                      <P>(d) <E T="03">Comment by primary banking supervisor</E>—(1) <E T="03">Notice.</E> 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.</P>
                      <P>(2) <E T="03">Comment period.</E> 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.</P>
                      <P>(3) <E T="03">Action subject to supervisor's comment.</E> 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.</P>
                      <P>(4) <E T="03">Emergencies.</E> 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.</P>
                      <P>(5) <E T="03">Primary banking supervisor.</E> For purposes of this section and § 225.15(b), <E T="03">the primary banking supervisor</E> for an institution is:</P>
                      <P>(i) The Office of the Comptroller of the Currency, in the case of a national banking association or District bank;</P>
                      <P>(ii) The appropriate supervisory authority for the State in which the bank is chartered, in the case of a State bank;</P>
                      <P>(iii) The Director of the Office of Thrift Supervision, in the case of a savings association.</P>
                      <P>(e) <E T="03">Branches and agencies of foreign banking organizations.</E> 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).</P>
                      <CITA>[Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 2001]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.15</SECTNO>
                      <SUBJECT>Procedures for other bank acquisition proposals.</SUBJECT>
                      <P>(a) <E T="03">Filing application.</E> Except as provided in § 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.</P>
                      <P>(b) <E T="03">Notice to primary banking supervisor.</E> 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.</P>
                      <P>(c) <E T="03">Accepting application for processing.</E> 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 <PRTPAGE P="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.</P>
                      <P>(d) <E T="03">Action on applications</E>—(1) <E T="03">Action under delegated authority.</E> 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.</P>
                      <P>(2) <E T="03">Board action.</E> 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 § 225.16(f). The Board may, at any time, request additional information that it believes is necessary for its decision.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.16</SECTNO>
                      <SUBJECT>Public notice, comments, hearings, and other provisions governing applications and notices.</SUBJECT>
                      <P>(a) <E T="03">In general.</E> The provisions of this section apply to all notices and applications filed under § 225.14 and § 225.15.</P>
                      <P>(b) <E T="03">Public notice</E>—(1) <E T="03">Newspaper publication</E>—(i) <E T="03">Location of publication.</E> In the case of each notice or application submitted under § 225.14 or § 225.15, the applicant shall publish a notice in a newspaper of general circulation, in the form and at the locations specified in § 262.3 of the Rules of Procedure (12 CFR 262.3);</P>
                      <P>(ii) <E T="03">Contents of notice.</E> 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;</P>
                      <P>(iii) <E T="03">Timing of publication.</E> 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.</P>
                      <P>(2) <E T="04">Federal Register</E>
                        <E T="03"> notice.</E> (i) <E T="03">Publication by Board.</E> Upon receipt of a notice or application under § 225.14 or § 225.15, the Board shall promptly publish notice of the proposal in the <E T="04">Federal Register</E> and shall provide an opportunity for interested persons to comment on the proposal for a period of no more than 30 days;</P>
                      <P>(ii) <E T="03">Request for advance publication.</E> A bank holding company may request that, during the 15-day period prior to filing a notice or application under § 225.14 or § 225.15, the Board publish notice of a proposal in the <E T="04">Federal Register.</E> A request for advance <E T="04">Federal Register</E> publication shall be made in writing to the appropriate Reserve Bank and shall contain the identifying information prescribed by the Board for <E T="04">Federal Register</E> publication;</P>
                      <P>(3) <E T="03">Waiver or shortening of notice.</E> 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.</P>
                      <P>(c) <E T="03">Public comment</E>—(1) <E T="03">Timely comments.</E> 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.</P>
                      <P>(2) <E T="03">Extension of comment period</E>—(i) <E T="03">In general.</E> The Board may, in its discretion, extend the public comment period regarding any proposal submitted under this subpart.</P>
                      <P>(ii) <E T="03">Requests in connection with obtaining application or notice.</E> 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.<PRTPAGE P="102"/>
                      </P>
                      <P>(iii) <E T="03">Joint requests by interested person and acquiring company.</E> 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.</P>
                      <P>(3) <E T="03">Substantive comment.</E> 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.</P>
                      <P>(d) <E T="03">Notice to Attorney General.</E> The Board or Reserve Bank shall immediately notify the United States Attorney General of approval of any notice or application under § 225.14 or § 225.15.</P>
                      <P>(e) <E T="03">Hearings.</E> As provided in section 3(b) of the BHC Act, the Board shall order a hearing on any application or notice under § 225.15 if the Board receives from the primary supervisor of the bank to be acquired, within the 30-day period specified in § 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 § 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 § 262.3(e) of the Rules of Procedure (12 CFR 262.3(e)).</P>
                      <P>(f) <E T="03">Approval through failure to act</E>—(1) <E T="03">Ninety-one day rule.</E> An application or notice under § 225.14 or § 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.</P>
                      <P>(2) <E T="03">Complete record.</E> For the purpose of computing the commencement of the 91-day period, the record is complete on the latest of:</P>
                      <P>(i) The date of receipt by the Board of an application or notice that has been accepted by the Reserve Bank;</P>
                      <P>(ii) The last day provided in any notice for receipt of comments and hearing requests on the application or notice;</P>
                      <P>(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</P>
                      <P>(iv) The date of completion of any hearing or other proceeding.</P>
                      <P>(g) <E T="03">Exceptions to notice and hearing requirements</E>—(1) <E T="03">Probable bank failure.</E> 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.</P>
                      <P>(2) <E T="03">Emergency.</E> 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.</P>
                      <P>(h) <E T="03">Waiting period.</E> A transaction approved under § 225.14 or § 225.15 shall not be consummated until 30 days after the date of approval of the application, except that a transaction may be consummated:</P>
                      <P>(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;</P>
                      <P>(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</P>
                      <P>(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.</P>
                    </SECTION>
                    <SECTION>
                      <PRTPAGE P="103"/>
                      <SECTNO>§ 225.17</SECTNO>
                      <SUBJECT>Notice procedure for one-bank holding company formations.</SUBJECT>
                      <P>(a) <E T="03">Transactions that qualify under this section.</E> 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:</P>
                      <P>(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; <SU>3</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>

                          <SU>3</SU> 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 <E T="03">pro rata</E> 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.</P>
                      </FTNT>
                      <P>(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; <SU>4</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>4</SU> 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.</P>
                      </FTNT>
                      <P>(3) The bank is adequately capitalized (as defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o));</P>
                      <P>(4) The bank received at least a composite “satisfactory” rating at its most recent examination, in the event that the bank was examined;</P>
                      <P>(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;</P>

                      <P>(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 <E T="03">pro forma</E> basis; <SU>5</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>

                          <SU>5</SU> For a banking organization with consolidated assets, on a <E T="03">pro forma basis,</E> of less than $150 million (other than a banking organization that will control a <E T="03">de novo</E> 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).</P>
                      </FTNT>
                      <P>(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</P>
                      <P>(8) During this period, neither the appropriate Reserve Bank nor the Board objected to the proposal or required the filing of an application under § 225.15 of this subpart.</P>
                      <P>(b) <E T="03">Contents of notice.</E> A notice filed under this paragraph shall include:</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(3) A description of the resulting management of the proposed bank holding company and its subsidiary bank, including:</P>
                      <P>(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</P>

                      <P>(ii) A detailed history of the involvement of any officer, director, or principal shareholder of the resulting bank <PRTPAGE P="104"/>holding company in any administrative or criminal proceeding; and</P>
                      <P>(4) <E T="03">Pro forma</E> 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.</P>
                      <P>(c) <E T="03">Acknowledgment of notice.</E> 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.</P>
                      <P>(d) <E T="03">Application required upon objection.</E> 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 § 225.15 of this subpart.</P>
                    </SECTION>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart C—Nonbanking Activities and Acquisitions by Bank Holding Companies</HD>
                    <SOURCE>
                      <HD SOURCE="HED">Source:</HD>
                      <P>Reg. Y, 62 FR 9329, Feb. 28, 1997, unless otherwise noted.</P>
                    </SOURCE>
                    <SECTION>
                      <SECTNO>§ 225.21</SECTNO>
                      <SUBJECT>Prohibited nonbanking activities and acquisitions; exempt bank holding companies.</SUBJECT>
                      <P>(a) <E T="03">Prohibited nonbanking activities and acquisitions.</E> Except as provided in § 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:</P>
                      <P>(1) Banking or managing or controlling banks and other subsidiaries authorized under the BHC Act; and</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Exempt bank holding companies.</E> The following bank holding companies are exempt from the provisions of this subpart:</P>
                      <P>(1) <E T="03">Family-owned companies.</E> 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.</P>
                      <P>(2) <E T="03">Labor, agricultural, and horticultural organizations.</E> 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)).</P>
                      <P>(3) <E T="03">Companies granted hardship exemption.</E> 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.</P>
                      <P>(4) <E T="03">Companies granted exemption on other grounds.</E> 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 <E T="03">demand deposit</E> or <E T="03">commercial loan,</E> if the Board has determined that:</P>
                      <P>(i) Coverage of the company as a bank holding company under this subpart would be unfair or represent an unreasonable hardship; and</P>
                      <P>(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 § 225.4 of subpart A of this part do not apply to a company exempt under this paragraph.</P>
                    </SECTION>
                    <SECTION>
                      <PRTPAGE P="105"/>
                      <SECTNO>§ 225.22</SECTNO>
                      <SUBJECT>Exempt nonbanking activities and acquisitions.</SUBJECT>
                      <P>(a) <E T="03">Certain de novo activities.</E> A bank holding company may, either directly or indirectly, engage <E T="03">de novo</E> in any nonbanking activity listed in § 225.28(b) (other than operation of an insured depository institution) without obtaining the Board's prior approval if the bank holding company:</P>
                      <P>(1) Meets the requirements of paragraphs (c) (1), (2), and (6) of § 225.23;</P>
                      <P>(2) Conducts the activity in compliance with all Board orders and regulations governing the activity; and</P>
                      <P>(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 § 225.23.</P>
                      <P>(b) <E T="03">Servicing activities.</E> 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:</P>
                      <P>(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</P>
                      <P>(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:</P>
                      <P>(i) Accounting, auditing, and appraising;</P>
                      <P>(ii) Advertising and public relations;</P>
                      <P>(iii) Data processing and data transmission services, data bases, or facilities;</P>
                      <P>(iv) Personnel services;</P>
                      <P>(v) Courier services;</P>
                      <P>(vi) Holding or operating property used wholly or substantially by a subsidiary in its operations or for its future use;</P>
                      <P>(vii) Liquidating property acquired from a subsidiary;</P>
                      <P>(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</P>
                      <P>(ix) Selling, purchasing, or underwriting insurance, such as blanket bond insurance, group insurance for employees, and property and casualty insurance.</P>
                      <P>(c) <E T="03">Safe deposit business.</E> 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.</P>
                      <P>(d) <E T="03">Nonbanking acquisitions not requiring prior Board approval.</E> The Board's prior approval is not required under this subpart for the following acquisitions:</P>
                      <P>(1) <E T="03">DPC acquisitions.</E> (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.</P>
                      <P>(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.</P>
                      <P>(iii) Transfers of DPC property within the bank holding company system do not extend any period for divestiture of the property.</P>
                      <P>(2) <E T="03">Securities or assets required to be divested by subsidiary.</E> Voting securities or assets required to be divested by a subsidiary at the request of an examining federal or state authority (except <PRTPAGE P="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.</P>
                      <P>(3) <E T="03">Fiduciary investments.</E> 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:</P>
                      <P>(i) Held in the ordinary course of business; and</P>
                      <P>(ii) Not acquired for the benefit of the company or its shareholders, employees, or subsidiaries.</P>
                      <P>(4) <E T="03">Securities eligible for investment by national bank.</E> 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)).</P>
                      <P>(5) <E T="03">Securities or property representing 5 percent or less of a company.</E> 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.</P>
                      <P>(6) <E T="03">Securities of investment company.</E> 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.</P>
                      <P>(7) <E T="03">Assets acquired in ordinary course of business.</E> 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.</P>
                      <P>(8) <E T="03">Asset acquisitions by lending company or industrial bank.</E> Assets of an office(s) of a company, all or substantially all of which relate to making, acquiring, or servicing loans if:</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(iv) The acquiring company notifies the Reserve Bank of the acquisition within 30 days after the acquisition; and</P>
                      <P>(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.</P>
                      <P>(e) <E T="03">Acquisition of securities by subsidiary banks—</E>(1) <E T="03">National bank.</E> 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.</P>
                      <P>(2) <E T="03">State bank.</E> A state-chartered bank or its subsidiary may, insofar as federal law is concerned, and without the Board's prior approval under this subpart:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(f) <E T="03">Activities and securities of new bank holding companies.</E> A company that becomes a bank holding company may, <PRTPAGE P="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.</P>
                      <P>(g) <E T="03">Grandfathered activities and securities.</E> 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:</P>
                      <P>(1) Retain voting securities or assets and engage in activities that it has lawfully held or engaged in continuously since June 30, 1968; and</P>
                      <P>(2) Acquire voting securities of any newly formed company to engage in such activities.</P>
                      <P>(h) <E T="03">Securities or activities exempt under Regulation K.</E> A bank holding company may acquire voting securities or assets and engage in activities as authorized in Regulation K (12 CFR part 211).</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.23</SECTNO>
                      <SUBJECT>Expedited action for certain nonbanking proposals by well-run bank holding companies.</SUBJECT>
                      <P>(a) <E T="03">Filing of notice</E>—(1) <E T="03">Information required.</E> 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),<SU>1</SU>
                        <FTREF/> or a proposal to engage <E T="03">de novo,</E> 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:</P>
                      <FTNT>
                        <P>
                          <SU>1</SU> 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 § 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.</P>
                      </FTNT>
                      <P>(i) A certification that all of the criteria in paragraph (c) of this section are met;</P>
                      <P>(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;</P>
                      <P>(iii) If the proposal involves an acquisition of a going concern:</P>

                      <P>(A) If the bank holding company has consolidated assets of $150 million or more, an abbreviated consolidated <E T="03">pro forma</E> 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 <E T="03">pro forma</E> 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;</P>

                      <P>(B) If the bank holding company has consolidated assets of less than $150 million, a <E T="03">pro forma</E> 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;</P>

                      <P>(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 <E T="03">pro forma</E> basis;</P>

                      <P>(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 <PRTPAGE P="108"/>requested, the market indexes for the relevant market; and</P>
                      <P>(v) A description of the public benefits that can reasonably be expected to result from the transaction.</P>
                      <P>(2) <E T="03">Waiver of unnecessary information.</E> The Reserve Bank may reduce the information requirements in paragraphs (a)(1) (iii) and (iv) of this section as appropriate.</P>
                      <P>(b)(1) <E T="03">Action on proposals under this section.</E> 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 § 225.24, within 12 business days following the filing of all of the information required in paragraph (a) of this section.</P>
                      <P>(2) <E T="03">Acceptance of notice if expedited procedure not available.</E> 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 § 225.24, the notice shall be deemed accepted for purposes of § 225.24 as of the date that the notice was filed under this section.</P>
                      <P>(c) <E T="03">Criteria for use of expedited procedure.</E> The procedure in this section is available only if:</P>
                      <P>(1) <E T="03">Well-capitalized organization</E>—(i) <E T="03">Bank holding company.</E> Both at the time of and immediately after the proposed transaction, the acquiring bank holding company is well-capitalized;</P>
                      <P>(ii) <E T="03">Insured depository institutions.</E> Both at the time of and immediately after the transaction:</P>
                      <P>(A) The lead insured depository institution of the acquiring bank holding company is well-capitalized;</P>
                      <P>(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</P>
                      <P>(C) No insured depository institution controlled by the acquiring bank holding company is undercapitalized;</P>
                      <P>(2) <E T="03">Well managed organization</E>—(i) <E T="03">Satisfactory examination ratings.</E> 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;</P>
                      <P>(ii) <E T="03">No poorly managed institutions.</E> 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.</P>
                      <P>(iii) <E T="03">Recently acquired institutions excluded.</E> 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:</P>
                      <P>(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</P>
                      <P>(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;</P>
                      <P>(3) <E T="03">Permissible activity.</E> (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</P>
                      <P>(ii) The Board has not indicated that proposals to engage in the activity are subject to the notice procedure provided in § 225.24;</P>
                      <P>(4) <E T="03">Competitive criteria</E>—(i) <E T="03">Competitive screen.</E> 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:</P>

                      <P>(A) The acquiring bank holding company to control in excess of 35 percent of the market share in any relevant market; or<PRTPAGE P="109"/>
                      </P>
                      <P>(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</P>
                      <P>(ii) <E T="03">Other competitive factors.</E> The Board has not indicated that the transaction is subject to close scrutiny on competitive grounds;</P>
                      <P>(5) <E T="03">Size of acquisition</E>—(i) <E T="03">In general—</E>(A) <E T="03">Limited growth.</E> 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 § 225.14 during the 12 months prior to filing the notice under this section;</P>
                      <P>(B) <E T="03">Consideration paid.</E> 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</P>
                      <P>(C) <E T="03">Individual size limitation.</E> The total risk-weighted assets to be acquired do not exceed $7.5 billion;</P>
                      <P>(ii) <E T="03">Small bank holding companies.</E> 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;</P>
                      <P>(6) <E T="03">Supervisory actions.</E> 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</P>
                      <P>(7) <E T="03">Notification.</E> 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 § 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.</P>
                      <P>(d) <E T="03">Branches and agencies of foreign banking organizations.</E> 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.</P>
                      <CITA>[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 2001]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.24</SECTNO>
                      <SUBJECT>Procedures for other nonbanking proposals.</SUBJECT>
                      <P>(a) <E T="03">Notice required for nonbanking activities.</E> Except as provided in § 225.22 and § 225.23, a notice for the Board's prior approval under § 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).</P>
                      <P>(1) <E T="03">Engaging de novo in listed activities.</E> A bank holding company seeking to commence or to engage <E T="03">de novo,</E> either directly or through a subsidiary, in a nonbanking activity listed in § 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.</P>
                      <P>(2) <E T="03">Acquiring company engaged in listed activities.</E> A bank holding company seeking to acquire or control voting securities or assets of a company engaged in a nonbanking activity listed in § 225.28 shall file a notice containing the following:</P>
                      <P>(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;</P>

                      <P>(ii) The identity of any entity involved in the proposal, and, if the <PRTPAGE P="110"/>notificant proposes to conduct the activity through an existing subsidiary, a description of the existing activities of the subsidiary;</P>
                      <P>(iii) A statement of the public benefits that can reasonably be expected to result from the proposal;</P>
                      <P>(iv) If the bank holding company has consolidated assets of $150 million or more:</P>
                      <P>(A) Parent company and consolidated <E T="03">pro forma</E> balance sheets for the acquiring bank holding company as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction;</P>
                      <P>(B) Consolidated <E T="03">pro forma</E> risk-based capital and leverage ratio calculations for the acquiring bank holding company as of the most recent quarter; and</P>
                      <P>(C) A description of the purchase price and the terms and sources of funding for the transaction;</P>
                      <P>(v) If the bank holding company has consolidated assets of less than $150 million:</P>
                      <P>(A) A <E T="03">pro forma</E> parent-only balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction; and</P>
                      <P>(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;</P>

                      <P>(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 <E T="03">pro forma</E> basis; and</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Notice provided to Board.</E> 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.</P>
                      <P>(c) <E T="03">Notice to public</E>—(1) <E T="03">Listed activities and activities approved by order</E>—(i) In a case involving an activity listed in § 225.28 or previously approved by the Board by order, the Reserve Bank shall notify the Board for publication in the <E T="04">Federal Register</E> immediately upon receipt by the Reserve Bank of:</P>
                      <P>(A) A notice under this section; or</P>

                      <P>(B) A written request that notice of a proposal under this section or § 225.23 be published in the <E T="04">Federal Register.</E> Such a request may request that <E T="04">Federal Register</E> publication occur up to 15 calendar days prior to submission of a notice under this subpart.</P>
                      <P>(ii) The <E T="04">Federal Register</E> notice published under this paragraph shall invite public comment on the proposal, generally for a period of 15 days.</P>
                      <P>(2) <E T="03">New activities—</E>(i) <E T="03">In general.</E> In the case of a notice under this subpart involving an activity that is not listed in § 225.28 and that has not been previously approved by the Board by order, the Board shall send notice of the proposal to the <E T="04">Federal Register</E> 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 <E T="04">Federal Register</E> notice shall invite public comment on the proposal for a reasonable period of time, generally for 30 days.</P>
                      <P>(ii) <E T="03">Time for publication.</E> The Board shall send the notice required under this paragraph to the <E T="04">Federal Register</E> 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.</P>
                      <P>(d) <E T="03">Action on notices</E>—(1) <E T="03">Reserve Bank action</E>—(i) <E T="03">In general.</E> 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:</P>
                      <P>(A) Approve the notice; or<PRTPAGE P="111"/>
                      </P>
                      <P>(B) Refer the notice to the Board for decision because action under delegated authority is not appropriate.</P>
                      <P>(ii) <E T="03">Return of incomplete notice.</E> 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.</P>
                      <P>(iii) <E T="03">Notice of action.</E> The Reserve Bank shall promptly notify the bank holding company of any action or referral under this paragraph.</P>
                      <P>(iv) <E T="03">Close of public comment period.</E> 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.</P>
                      <P>(2) <E T="03">Board action; internal schedule.</E> 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.</P>
                      <P>(3)(i) <E T="03">Required time limit for System action.</E> The Board or the Reserve Bank shall act on any notice under this section within 60 days after the submission of a complete notice.</P>
                      <P>(ii) <E T="03">Extension of required period for action</E>  (A) <E T="03">In general.</E>—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.</P>
                      <P>(B) <E T="03">Unlisted activities.</E> If a notice involves a proposal to engage in an activity that is not listed in § 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.</P>
                      <P>(4) <E T="03">Requests for additional information.</E> 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.</P>
                      <P>(5) <E T="03">Tolling of period.</E> 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.</P>
                      <CITA>[Reg. Y, 62 FR 9332, Feb. 28, 1997, as amended at  62 FR 60640, Nov. 12, 1997; 65 FR 14438, Mar. 17, 2000]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.25</SECTNO>
                      <SUBJECT>Hearings, alteration of activities, and other matters.</SUBJECT>
                      <P>(a) <E T="03">Hearings</E>—(1) <E T="03">Procedure to request hearing.</E> Any request for a hearing on a notice under this subpart shall comply with the provisions of 12 CFR 262.3(e).</P>
                      <P>(2) <E T="03">Determination to hold hearing.</E> 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.</P>
                      <P>(3) <E T="03">Extension of period for hearing.</E> 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 § 225.16(f) apply to notices under this subpart that involve hearings.</P>
                      <P>(b) <E T="03">Approval through failure to act.</E> (1) Except as provided in paragraph (a) of this section or § 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.</P>
                      <P>(2) <E T="03">Complete notice.</E> 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.<PRTPAGE P="112"/>
                      </P>
                      <P>(c) <E T="03">Notice to expand or alter nonbanking activities</E>—(1) <E T="03">De novo expansion.</E> 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:</P>
                      <P>(i) The Board's prior approval was limited geographically;</P>
                      <P>(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</P>
                      <P>(iii) The Board or appropriate Reserve Bank has notified the company that a notice under this subpart is required.</P>
                      <P>(2) <E T="03">Activities outside United States.</E> 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.</P>
                      <P>(3) <E T="03">Alteration of nonbanking activity.</E> 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.</P>
                      <P>(d) <E T="03">Emergency savings association acquisitions.</E> 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.</P>
                      <CITA>[Reg. Y, 62 FR 9333, Feb. 28, 1997, as amended by Reg. Y, 62 FR 60640, Nov. 12, 1997]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.26</SECTNO>
                      <SUBJECT>Factors considered in acting on nonbanking proposals.</SUBJECT>
                      <P>(a) <E T="03">In general.</E> In evaluating a notice under § 225.23 or § 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).</P>
                      <P>(b) <E T="03">Financial and managerial resources.</E> 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.</P>
                      <P>(c) <E T="03">Competitive effect of de novo proposals.</E> Unless the record demonstrates otherwise, the commencement or expansion of a nonbanking activity <E T="03">de novo</E> is presumed to result in benefits to the public through increased competition.</P>
                      <P>(d) <E T="03">Denial for lack of information.</E> 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.</P>
                      <P>(e) <E T="03">Conditional approvals.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.27</SECTNO>
                      <SUBJECT>Procedures for determining scope of nonbanking activities.</SUBJECT>
                      <P>(a) <E T="03">Advisory opinions regarding scope of previously approved nonbanking activities</E>—(1) <E T="03">Request for advisory opinion.</E> 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 <PRTPAGE P="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.</P>
                      <P>(2) <E T="03">Response to request.</E> The Board shall provide an advisory opinion within 45 days of receiving a written request under this paragraph.</P>
                      <P>(b) <E T="03">Procedure for consideration of new activities</E>—(1) <E T="03">Initiation of proceeding.</E> 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.</P>
                      <P>(2) <E T="03">Requests for determination.</E> 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.</P>
                      <P>(3) <E T="03">Publication.</E> The Board shall publish in the <E T="04">Federal Register</E> 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.</P>
                      <P>(4) <E T="03">Comments and hearing requests.</E> Any comment and any request for a hearing regarding a proposal under this section shall comply with the provisions of § 262.3(e) of the Board's Rules of Procedure (12 CFR 262.3(e)).</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.28</SECTNO>
                      <SUBJECT>List of permissible nonbanking activities.</SUBJECT>
                      <P>(a) <E T="03">Closely related nonbanking activities.</E> 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.</P>
                      <P>(b) <E T="03">Activities determined by regulation to be permissible</E>—(1) <E T="03">Extending credit and servicing loans.</E> 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.</P>
                      <P>(2) <E T="03">Activities related to extending credit.</E> 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:</P>
                      <P>(i) <E T="03">Real estate and personal property appraising.</E> Performing appraisals of real estate and tangible and intangible personal property, including securities.</P>
                      <P>(ii) <E T="03">Arranging commercial real estate equity financing.</E> 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.</P>
                      <P>(iii) <E T="03">Check-guaranty services.</E> 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.</P>
                      <P>(iv) <E T="03">Collection agency services.</E> Collecting overdue accounts receivable, either retail or commercial.</P>
                      <P>(v) <E T="03">Credit bureau services.</E> Maintaining information related to the credit history of consumers and providing the information to a credit grantor who is considering a borrower's application <PRTPAGE P="114"/>for credit or who has extended credit to the borrower.</P>
                      <P>(vi) <E T="03">Asset management, servicing, and collection activities.</E> Engaging under contract with a third party in asset management, servicing, and collection <SU>2</SU>
                        <FTREF/> 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.</P>
                      <FTNT>
                        <P>
                          <SU>2</SU> 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.</P>
                      </FTNT>
                      <P>(vii) <E T="03">Acquiring debt in default.</E> Acquiring debt that is in default at the time of acquisition, if the company:</P>
                      <P>(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 § 225.12(b); <SU>3</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>3</SU> 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.</P>
                      </FTNT>
                      <P>(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</P>
                      <P>(C) Does not acquire debt in default secured by shares of a bank or bank holding company.</P>
                      <P>(viii) <E T="03">Real estate settlement servicing.</E> Providing real estate settlement services.<SU>4</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>4</SU> For purposes of this section, real estate settlement services do not include providing title insurance as principal, agent, or broker.</P>
                      </FTNT>
                      <P>(3) <E T="03">Leasing personal or real property.</E> Leasing personal or real property or acting as agent, broker, or adviser in leasing such property if:</P>
                      <P>(i) The lease is on a nonoperating basis; <SU>5</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>5</SU> 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.</P>
                      </FTNT>
                      <P>(ii) The initial term of the lease is at least 90 days;</P>
                      <P>(iii) In the case of leases involving real property:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(4) <E T="03">Operating nonbank depository institutions—</E>(i) <E T="03">Industrial banking.</E> Owning, controlling, or operating an industrial bank, Morris Plan bank, or industrial loan company, so long as the institution is not a bank.</P>
                      <P>(ii) <E T="03">Operating savings association.</E> 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.</P>
                      <P>(5) <E T="03">Trust company functions.</E> 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.<PRTPAGE P="115"/>
                      </P>
                      <P>(6) <E T="03">Financial and investment advisory activities.</E> Acting as investment or financial advisor to any person, including (without, in any way, limiting the foregoing):</P>
                      <P>(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;</P>
                      <P>(ii) Furnishing general economic information and advice, general economic statistical forecasting services, and industry studies;</P>
                      <P>(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;<SU>6</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>6</SU> Feasibility studies do not include assisting management with the planning or marketing for a given project or providing general operational or management advice.</P>
                      </FTNT>
                      <P>(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;</P>
                      <P>(v) Providing educational courses, and instructional materials to consumers on individual financial management matters; and</P>
                      <P>(vi) Providing tax-planning and tax-preparation services to any person.</P>
                      <P>(7) <E T="03">Agency transactional services for customer investments—</E>(i) <E T="03">Securities brokerage.</E> 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.</P>
                      <P>(ii) <E T="03">Riskless principal transactions.</E> 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:</P>
                      <P>(A) Selling bank-ineligible securities <SU>7</SU>
                        <FTREF/> 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</P>
                      <FTNT>
                        <P>
                          <SU>7</SU> 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.</P>
                      </FTNT>
                      <P>(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.<SU>8</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>8</SU> 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.</P>
                      </FTNT>
                      <P>(iii) <E T="03">Private placement services.</E> 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.</P>
                      <P>(iv) <E T="03">Futures commission merchant.</E> 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:<PRTPAGE P="116"/>
                      </P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(v) <E T="03">Other transactional services.</E> 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.</P>
                      <P>(8) <E T="03">Investment transactions as principal</E>—(i) <E T="03">Underwriting and dealing in government obligations and money market instruments.</E> 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.</P>
                      <P>(ii) <E T="03">Investing and trading activities.</E> Engaging as principal in:</P>
                      <P>(A) Foreign exchange;</P>
                      <P>(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,<SU>9</SU>
                        <FTREF/> if:</P>
                      <FTNT>
                        <P>
                          <SU>9</SU> 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.</P>
                      </FTNT>
                      <P>(<E T="03">1</E>) A state member bank is authorized to invest in the asset underlying the contract;</P>
                      <P>(<E T="03">2</E>) The contract requires cash settlement;</P>
                      <P>(<E T="03">3</E>) The contract allows for assignment, termination, or offset prior to delivery or expiration, and the company—</P>
                      <P>(<E T="03">i</E>) Makes every reasonable effort to avoid taking or making delivery of the asset underlying the contract; or</P>
                      <P>(<E T="03">ii</E>) Receives and instantaneously transfers title to the underlying asset, by operation of contract and without taking or making physical delivery of the asset; or</P>
                      <P>(<E T="03">4</E>) 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—</P>
                      <P>(<E T="03">i</E>) Makes every reasonable effort to avoid taking or making delivery of the asset underlying the contract; or</P>
                      <P>(<E T="03">ii</E>) Receives and instantaneously transfers title to the underlying asset, by operation of contract and without taking or making physical delivery of the asset.</P>
                      <P>(C) Forward contracts, options,<SU>10</SU>

                        <FTREF/> 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 <PRTPAGE P="117"/>group of assets, if the contract requires cash settlement.</P>
                      <FTNT>
                        <P>
                          <SU>10</SU> 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.</P>
                      </FTNT>
                      <P>(iii) <E T="03">Buying and selling bullion, and related activities.</E> 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.</P>
                      <P>(9) <E T="03">Management consulting and counseling activities—</E>(i) <E T="03">Management consulting.</E> (A) Providing management consulting advice: <SU>11</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>11</SU> 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).</P>
                      </FTNT>
                      <P>(<E T="03">1</E>) 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;</P>
                      <P>(<E T="03">2</E>) On any financial, economic, accounting, or audit matter to any other company.</P>
                      <P>(B) A company conducting management consulting activities under this subparagraph and any affiliate of such company may not:</P>
                      <P>(<E T="03">1</E>) Own or control, directly or indirectly, more than 5 percent of the voting securities of the client institution; and</P>
                      <P>(<E T="03">2</E>) 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.</P>

                      <P>(C) A company conducting management consulting activities may provide management consulting services to customers not described in paragraph (b)(9)(i)(A)(<E T="03">1</E>) of this section or regarding matters not described in paragraph (b)(9)(i)(A)(<E T="03">2</E>) 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.</P>
                      <P>(ii) <E T="03">Employee benefits consulting services.</E> 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.</P>
                      <P>(iii) <E T="03">Career counseling services.</E> Providing career counseling services to:</P>
                      <P>(A) A financial organization <SU>12</SU>
                        <FTREF/> and individuals currently employed by, or recently displaced from, a financial organization;</P>
                      <FTNT>
                        <P>
                          <SU>12</SU>
                          <E T="03">Financial organization</E> 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)).</P>
                      </FTNT>
                      <P>(B) Individuals who are seeking employment at a financial organization; and</P>
                      <P>(C) Individuals who are currently employed in or who seek positions in the finance, accounting, and audit departments of any company.</P>
                      <P>(10) <E T="03">Support services—</E>(i) <E T="03">Courier services.</E> Providing courier services for:</P>
                      <P>(A) Checks, commercial papers, documents, and written instruments (excluding currency or bearer-type negotiable instruments) that are exchanged among banks and financial institutions; and</P>
                      <P>(B) Audit and accounting media of a banking or financial nature and other business records and documents used in processing such media.<SU>13</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>13</SU> 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.</P>
                      </FTNT>
                      <P>(ii) <E T="03">Printing and selling MICR-encoded items.</E> Printing and selling checks and related documents, including corporate image checks, cash tickets, voucher checks, deposit slips, savings withdrawal packages, and other forms that <PRTPAGE P="118"/>require Magnetic Ink Character Recognition (MICR) encoding.</P>
                      <P>(11) <E T="03">Insurance agency and underwriting—</E>(i) <E T="03">Credit insurance.</E> Acting as principal, agent, or broker for insurance (including home mortgage redemption insurance) that is:</P>
                      <P>(A) Directly related to an extension of credit by the bank holding company or any of its subsidiaries; and</P>
                      <P>(B) Limited to ensuring the repayment of the outstanding balance due on the extension of credit <SU>14</SU>
                        <FTREF/> in the event of the death, disability, or involuntary unemployment of the debtor.</P>
                      <FTNT>
                        <P>
                          <SU>14</SU>
                          <E T="03">Extension of credit</E> 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.</P>
                      </FTNT>
                      <P>(ii) <E T="03">Finance company subsidiary.</E> Acting as agent or broker for insurance directly related to an extension of credit by a finance company <SU>15</SU>
                        <FTREF/> that is a subsidiary of a bank holding company, if:</P>
                      <FTNT>
                        <P>
                          <SU>15</SU>
                          <E T="03">Finance company</E> 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.</P>
                      </FTNT>
                      <P>(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</P>
                      <P>(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 <SU>16</SU>
                        <FTREF/> and the credit is secured by the home; and</P>
                      <FTNT>
                        <P>
                          <SU>16</SU> 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.</P>
                      </FTNT>
                      <P>(C) The applicant commits to notify borrowers in writing that:</P>
                      <P>(<E T="03">1</E>) They are not required to purchase such insurance from the applicant;</P>
                      <P>(<E T="03">2</E>) Such insurance does not insure any interest of the borrower in the collateral; and</P>
                      <P>(<E T="03">3</E>) The applicant will accept more comprehensive property insurance in place of such single-interest insurance.</P>
                      <P>(iii) <E T="03">Insurance in small towns.</E> 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:</P>
                      <P>(A) Has a population not exceeding 5,000 (as shown in the preceding decennial census); or</P>
                      <P>(B) Has inadequate insurance agency facilities, as determined by the Board, after notice and opportunity for hearing.</P>
                      <P>(iv) <E T="03">Insurance-agency activities conducted on May 1, 1982.</E> Engaging in any specific insurance-agency activity <SU>17</SU>
                        <FTREF/> 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.<SU>18</SU>
                        <FTREF/> A bank holding company or subsidiary engaging in a specific insurance agency activity under this clause may:</P>
                      <FTNT>
                        <P>
                          <SU>17</SU> 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.</P>
                      </FTNT>
                      <FTNT>
                        <P>
                          <SU>18</SU> 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.</P>
                      </FTNT>
                      <P>(A) Engage in such specific insurance agency activity only at locations:</P>
                      <P>(<E T="03">1</E>) In the state in which the bank holding company has its principal place of business (as defined in 12 U.S.C. 1842(d));</P>
                      <P>(<E T="03">2</E>) In any state or states immediately adjacent to such state; and</P>
                      <P>(<E T="03">3</E>) 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 <PRTPAGE P="119"/>subsidiary of such bank holding company on May 1, 1982; and</P>
                      <P>(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.</P>
                      <P>(v) <E T="03">Supervision of retail insurance agents.</E> Supervising on behalf of insurance underwriters the activities of retail insurance agents who sell:</P>
                      <P>(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</P>
                      <P>(B) Group insurance that protects the employees of the bank holding company or its subsidiaries.</P>
                      <P>(vi) <E T="03">Small bank holding companies.</E> 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.</P>
                      <P>(vii) <E T="03">Insurance-agency activities conducted before 1971.</E> 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.</P>
                      <P>(12) <E T="03">Community development activities</E>—(i) <E T="03">Financing and investment activities.</E> 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.</P>
                      <P>(ii) <E T="03">Advisory activities.</E> Providing advisory and related services for programs designed primarily to promote community welfare.</P>
                      <P>(13) <E T="03">Money orders, savings bonds, and traveler's checks.</E> 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.</P>
                      <P>(14) <E T="03">Data processing.</E> (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:</P>
                      <P>(A) The data to be processed, stored or furnished are financial, banking or economic; and</P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <CITA>[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]</CITA>
                    </SECTION>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart D—Control and Divestiture Proceedings</HD>
                    <SECTION>
                      <SECTNO>§ 225.31</SECTNO>
                      <SUBJECT>Control proceedings.</SUBJECT>
                      <P>(a) <E T="03">Preliminary determination of control.</E> (1) The Board may issue a preliminary determination of control under the procedures set forth in this section in any case in which:</P>

                      <P>(i) Any of the presumptions of control set forth in paragraph (d) of this section is present; or<PRTPAGE P="120"/>
                      </P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Response to preliminary determination of control.</E> 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:</P>
                      <P>(1) Submit for the Board's approval a specific plan for the prompt termination of the control relationship;</P>
                      <P>(2) File an application under subpart B or C of this regulation to retain the control relationship; or</P>
                      <P>(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.</P>
                      <P>(c) <E T="03">Hearing and final determination.</E> (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.</P>
                      <P>(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).</P>
                      <P>(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.</P>
                      <P>(d) <E T="03">Rebuttable presumptions of control.</E> The following rebuttable presumptions shall be used in any proceeding under this section:</P>
                      <P>(1) <E T="03">Control of voting securities—</E>(i) <E T="03">Securities convertible into voting securities.</E> 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.</P>
                      <P>(ii) <E T="03">Option or restriction on voting securities.</E> 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:</P>
                      <P>(A) Is a mutual agreement among shareholders granting to each other a right of first refusal with respect to their shares;</P>
                      <P>(B) Is incident to a <E T="03">bona fide</E> loan transaction; or</P>
                      <P>(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.</P>
                      <P>(2) <E T="03">Control over company—</E>(i) <E T="03">Management agreement.</E> 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.</P>
                      <P>(ii) <E T="03">Shares controlled by company and associated individuals.</E> A company that, together with its management officials <PRTPAGE P="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.</P>
                      <P>(iii) <E T="03">Common management officials.</E> 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.</P>
                      <P>(iv) <E T="03">Shares held as fiduciary.</E> 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.</P>
                      <P>(e) <E T="03">Presumption of non-control—</E>(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.</P>
                      <P>(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.</P>
                      <CITA>[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]</CITA>
                    </SECTION>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart E—Change in Bank Control</HD>
                    <SOURCE>
                      <HD SOURCE="HED">Source:</HD>
                      <P>Reg. Y, 62 FR 9338, Feb. 28, 1997, unless otherwise noted.</P>
                    </SOURCE>
                    <SECTION>
                      <SECTNO>§ 225.41</SECTNO>
                      <SUBJECT>Transactions requiring prior notice.</SUBJECT>
                      <P>(a) <E T="03">Prior notice requirement.</E> 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 § 225.43 of this subpart, before acquiring control of a state member bank or bank holding company, unless the acquisition is exempt under § 225.42.</P>
                      <P>(b) <E T="03">Definitions.</E> For purposes of this subpart:</P>
                      <P>(1) <E T="03">Acquisition</E> 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.</P>
                      <P>(2) <E T="03">Acting in concert</E> 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.</P>
                      <P>(3) <E T="03">Immediate family</E> 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.</P>
                      <P>(c) <E T="03">Acquisitions requiring prior notice</E>—(1) <E T="03">Acquisition of control.</E> 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 <PRTPAGE P="122"/>power to vote 25 percent or more of any class of voting securities of the institution.</P>
                      <P>(2) <E T="03">Rebuttable presumption of control.</E> 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:</P>
                      <P>(i) The institution has registered securities under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l); or</P>
                      <P>(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.<SU>1</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>1</SU> 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.</P>
                      </FTNT>
                      <P>(d) <E T="03">Rebuttable presumption of concerted action.</E> The following persons shall be presumed to be acting in concert for purposes of this subpart:</P>
                      <P>(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;</P>
                      <P>(2) An individual and the individual's immediate family;</P>
                      <P>(3) Companies under common control;</P>
                      <P>(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 § 225.42(a)(5) of this subpart;</P>
                      <P>(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</P>
                      <P>(6) A person and any trust for which the person serves as trustee.</P>
                      <P>(e) <E T="03">Acquisitions of loans in default.</E> 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.</P>
                      <P>(f) <E T="03">Other transactions.</E> 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.</P>
                      <P>(g) <E T="03">Rebuttal of presumptions.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.42</SECTNO>
                      <SUBJECT>Transactions not requiring prior notice.</SUBJECT>
                      <P>(a) <E T="03">Exempt transactions.</E> The following transactions do not require notice to the Board under this subpart:</P>
                      <P>(1) <E T="03">Existing control relationships.</E> The acquisition of additional voting securities of a state member bank or bank holding company by a person who:</P>
                      <P>(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</P>

                      <P>(ii) Is presumed, under § 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;<PRTPAGE P="123"/>
                      </P>
                      <P>(2) <E T="03">Increase of previously authorized acquisitions.</E> 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 § 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; § 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));</P>
                      <P>(3) <E T="03">Acquisitions subject to approval under BHC Act or Bank Merger Act.</E> Any acquisition of voting securities subject to approval under section 3 of the BHC Act (12 U.S.C. 1842; § 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));</P>
                      <P>(4) <E T="03">Transactions exempt under BHC Act.</E> 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;</P>
                      <P>(5) <E T="03">Proxy solicitation.</E> 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;</P>
                      <P>(6) <E T="03">Stock dividends.</E> 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</P>
                      <P>(7) <E T="03">Acquisition of foreign banking organization.</E> 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 § 225.44 of this subpart.)</P>
                      <P>(b) <E T="03">Prior notice exemption.</E> (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:</P>
                      <P>(i) Acquisition of voting securities through inheritance;</P>
                      <P>(ii) Acquisition of voting securities as a <E T="03">bona fide</E> gift; and</P>
                      <P>(iii) Acquisition of voting securities in satisfaction of a debt previously contracted (DPC) in good faith.</P>
                      <P>(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:</P>
                      <P>(i) Acquisition of voting securities resulting from a redemption of voting securities by the issuing bank or bank holding company; and</P>
                      <P>(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.</P>
                      <P>(3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits the authority of the Board to disapprove a notice pursuant to § 225.43(h) of this subpart.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.43</SECTNO>
                      <SUBJECT>Procedures for filing, processing, publishing, and acting on notices.</SUBJECT>
                      <P>(a) <E T="03">Filing notice.</E> (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.<PRTPAGE P="124"/>
                      </P>
                      <P>(2) The Board may waive any of the informational requirements of the notice if the Board determines that it is in the public interest.</P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Acceptance of notice.</E> The 60-day notice period specified in § 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.</P>
                      <P>(c) <E T="03">Publication—</E>(1) <E T="03">Newspaper Announcement.</E> 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.</P>
                      <P>(2) <E T="03">Contents of newspaper announcement.</E> The newspaper announcement shall state:</P>
                      <P>(i) The name of each person identified in the notice as a proposed acquiror of the bank or bank holding company;</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(3) <E T="04">Federal Register</E>
                        <E T="03"> announcement.</E> The Board shall, upon filing of a notice under this subpart, publish announcement in the <E T="04">Federal Register</E> of receipt of the notice. The <E T="04">Federal Register</E> 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 <E T="04">Federal Register,</E> if the Board determines that such action is appropriate.</P>
                      <P>(4) <E T="03">Delay of publication.</E> 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.</P>
                      <P>(5) <E T="03">Shortening or waiving notice.</E> 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.<PRTPAGE P="125"/>
                      </P>
                      <P>(6) <E T="03">Consideration of public comments.</E> 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 <E T="04">Federal Register</E> announcement, whichever is later. At the Board's option, comments received after this period may, but need not, be considered.</P>
                      <P>(7) <E T="03">Standing.</E> 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.</P>
                      <P>(d) <E T="03">Time period for Board action—</E>(1) <E T="03">Consummation of acquisition —</E>(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.</P>
                      <P>(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.</P>
                      <P>(2) <E T="03">Extensions of time period.</E> (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).</P>
                      <P>(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:</P>
                      <P>(A) Any acquiring person has not furnished all the information required under paragraph (a) of this section;</P>
                      <P>(B) Any material information submitted is substantially inaccurate;</P>
                      <P>(C) The Board is unable to complete the investigation of an acquiring person because of inadequate cooperation or delay by that person; or</P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(e) <E T="03">Advice to bank supervisory agencies.</E> (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.</P>
                      <P>(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.</P>
                      <P>(f) <E T="03">Investigation and report.</E> (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.</P>
                      <P>(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.</P>
                      <P>(g) <E T="03">Factors considered in acting on notices.</E> In reviewing a notice filed under this subpart, the Board shall consider <PRTPAGE P="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.</P>
                      <P>(h) <E T="03">Disapproval and hearing—</E>(1) <E T="03">Disapproval of notice.</E> 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)) (<E T="03">i.e.,</E> competitive, financial, managerial, banking, or incompleteness of information).</P>
                      <P>(2) <E T="03">Disapproval notification.</E> 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.</P>
                      <P>(3) <E T="03">Hearing.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.44</SECTNO>
                      <SUBJECT>Reporting of stock loans.</SUBJECT>
                      <P>(a) <E T="03">Requirements.</E> (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.</P>
                      <P>(2) The foreign bank or its affiliate also shall file a copy of the report with its appropriate Federal banking agency.</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Definitions.</E> For purposes of paragraph (a) of this section:</P>
                      <P>(1) <E T="03">Foreign bank</E> shall have the same meaning as in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).</P>
                      <P>(2) <E T="03">Credit outstanding</E> 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.</P>
                      <P>(3) <E T="03">Group of persons</E> includes any number of persons that the foreign bank or any affiliate of a foreign bank has reason to believe:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(c) <E T="03">Exceptions.</E> Compliance with paragraph (a) of this section is not required if:</P>
                      <P>(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 § 225.41 of this subpart, or another application filed with the Board or Reserve Bank as a substitute for a notice under § 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</P>

                      <P>(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.<PRTPAGE P="127"/>
                      </P>
                      <P>(d) <E T="03">Report requirements.</E> (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.</P>
                      <P>(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.</P>
                      <P>(e) <E T="03">Other reporting requirements.</E> 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.</P>
                    </SECTION>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart F—Limitations on Nonbank Banks</HD>
                    <SECTION>
                      <SECTNO>§ 225.52</SECTNO>
                      <SUBJECT>Limitation on overdrafts.</SUBJECT>
                      <P>(a) <E T="03">Definitions.</E> For purposes of this section—</P>
                      <P>(1) <E T="03">Account</E> 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.</P>
                      <P>(2) <E T="03">Cash item</E> 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.</P>
                      <P>(3) <E T="03">Discount window loan</E> 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).</P>
                      <P>(4) <E T="03">Industrial bank</E> means an institution as defined in section 2(c)(2)(H) of the BHC Act (12 U.S.C. 1841(c)(2)(H)).</P>
                      <P>(5) <E T="03">Noncash item</E> means an item handled by a Reserve Bank as a noncash item under the Reserve Bank's “Collection of Noncash Items Operating Circular” (<E T="03">e.g.,</E> 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).</P>
                      <P>(6) <E T="03">Other nonelectronic transactions</E> 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 T="03">e.g.,</E> original issue of securities or redemption of securities).</P>
                      <P>(7) An <E T="03">overdraft</E> 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.</P>
                      <P>(8) <E T="03">Transfer item</E> means an item as defined in subpart B of Regulation J (12 CFR 210.25 <E T="03">et seq</E>).</P>
                      <P>(b) <E T="03">Restriction on overdrafts</E>—(1) <E T="03">Affiliates.</E> 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.</P>
                      <P>(2) <E T="03">Nonbank banks or industrial banks.</E> (i) No nonbank bank or industrial bank shall incur any overdraft in its account at a Federal Reserve Bank on behalf of an affiliate.</P>
                      <P>(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:</P>
                      <P>(A) A nonbank bank or industrial bank holds an account for an affiliate from which third-party payments can be made; and</P>

                      <P>(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.<PRTPAGE P="128"/>
                      </P>
                      <P>(c) <E T="03">Permissible overdrafts.</E> The following are permissible overdrafts not subject to paragraph (b) of this section:</P>
                      <P>(1) <E T="03">Inadvertent error.</E> 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</P>
                      <P>(2) <E T="03">Fully secured primary dealer affiliate overdrafts.</E> (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; <E T="03">provided:</E> 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.</P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(d) <E T="03">Posting by Federal Reserve Banks.</E> 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:</P>
                      <P>(1) <E T="03">Funds transfers.</E> Transfer items shall be posted:</P>
                      <P>(i) To the transferor's account at the time the transfer is actually made by the transferor's Federal Reserve Bank; and</P>
                      <P>(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.</P>
                      <P>(2) <E T="03">Book-entry securities transfers against payment.</E> 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.</P>
                      <P>(3) <E T="03">Discount window loans.</E> 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.</P>
                      <P>(4) <E T="03">Other transactions.</E> 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 <PRTPAGE P="129"/>bank as of the close of business on settlement day.</P>
                      <P>(e) <E T="03">Posting by nonbank banks and industrial banks.</E> 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:</P>
                      <P>(1) <E T="03">Funds transfers.</E> (i) Fedwire transfer items shall be posted:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(2) <E T="03">Book-entry securities transfers against payment.</E> (i) A book-entry securities transfer against payment shall be posted:</P>
                      <P>(A) To the transferor affiliate's account not earlier than the time the entry is made by the transferor's Reserve Bank; and</P>
                      <P>(B) To the transferee affiliate's account not later than the time the entry is made by the transferee's Reserve Bank.</P>
                      <P>(ii) For book-entry securities transfers against payment that are not sent or received through Federal Reserve Banks, entries shall be posted:</P>
                      <P>(A) To the buyer-affiliate's account not later than the time the nonbank bank or industrial bank becomes obligated on the transfer; and</P>
                      <P>(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.</P>
                      <P>(3) <E T="03">Other transactions</E>—(i) <E T="03">Credits.</E> 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 (<E T="03">i.e.,</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.</P>
                      <P>(ii) <E T="03">Debits.</E> 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 T="03">e.g.,</E> 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.</P>
                      <CITA>[Reg. Y, 53 FR 37744, Sept. 28, 1988]</CITA>
                    </SECTION>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart G—Appraisal Standards for Federally Related Transactions</HD>
                    <SOURCE>
                      <HD SOURCE="HED">Source:</HD>
                      <P>Reg. Y, 55 FR 27771, July 5, 1990, unless otherwise noted.</P>
                    </SOURCE>
                    <SECTION>
                      <SECTNO>§ 225.61</SECTNO>
                      <SUBJECT>Authority, purpose, and scope.</SUBJECT>
                      <P>(a) <E T="03">Authority.</E> This subpart is issued by the Board of Governors of the Federal Reserve System (the <E T="03">Board</E>) under title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (<E T="03">FlRREA</E>) (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).</P>
                      <P>(b) <E T="03">Purpose and scope.</E> (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 <PRTPAGE P="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 (<E T="03">regulated institutions</E>).</P>
                      <P>(2) This subpart:</P>
                      <P>(i) Identifies which real estate-related financial transactions require the services of an appraiser;</P>
                      <P>(ii) Prescribes which categories of federally related transactions shall be appraised by a State certified appraiser and which by a State licensed appraiser; and</P>
                      <P>(iii) Prescribes minimum standards for the performance of real estate appraisals in connection with federally related transactions under the jurisdiction of the Board.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.62</SECTNO>
                      <SUBJECT>Definitions.</SUBJECT>
                      <P>(a) <E T="03">Appraisal</E> 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.</P>
                      <P>(b) <E T="03">Appraisal Foundation</E> means the Appraisal Foundation established on November 30, 1987, as a not-for-profit corporation under the laws of Illinois.</P>
                      <P>(c) <E T="03">Appraisal Subcommittee</E> means the Appraisal Subcommittee of the Federal Financial Institutions Examination Council.</P>
                      <P>(d) <E T="03">Business loan</E> 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.</P>
                      <P>(e) <E T="03">Complex 1-to-4 family residential property appraisal</E> means one in which the property to be appraised, the form of ownership, or market conditions are atypical.</P>
                      <P>(f) <E T="03">Federally related transaction</E> means any real estate-related financial transaction entered into on or after August 9, 1990, that:</P>
                      <P>(1) The Board or any regulated institution engages in or contracts for; and</P>
                      <P>(2) Requires the services of an appraiser.</P>
                      <P>(g) <E T="03">Market value</E> 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:</P>
                      <P>(1) Buyer and seller are typically motivated;</P>
                      <P>(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;</P>
                      <P>(3) A reasonable time is allowed for exposure in the open market;</P>
                      <P>(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and</P>
                      <P>(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.</P>
                      <P>(h) <E T="03">Real estate</E> or <E T="03">real property</E> 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.</P>
                      <P>(i) <E T="03">Real estate-related financial transaction</E> means any transaction involving:</P>
                      <P>(1) The sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; or</P>
                      <P>(2) The refinancing of real property or interests in real property; or</P>
                      <P>(3) The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.</P>
                      <P>(j) <E T="03">State certified appraiser</E> means any individual who has satisfied the requirements for certification in a State <PRTPAGE P="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.</P>
                      <P>(k) <E T="03">State licensed appraiser</E> 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.</P>
                      <P>(l) <E T="03">Tract development</E> means a project of five units or more that is constructed or is to be constructed as a single development.</P>
                      <P>(m) <E T="03">Transaction value</E> means:</P>
                      <P>(1) For loans or other extensions of credit, the amount of the loan or extension of credit;</P>
                      <P>(2) For sales, leases, purchases, and investments in or exchanges of real property, the market value of the real property interest involved; and</P>
                      <P>(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.</P>
                      <CITA>[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29500, June 7, 1994]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.63</SECTNO>
                      <SUBJECT>Appraisals required; transactions requiring a State certified or licensed appraiser.</SUBJECT>
                      <P>(a) <E T="03">Appraisals required.</E> An appraisal performed by a State certified or licensed appraiser is required for all real estate-related financial transactions except those in which:</P>
                      <P>(1) The transaction value is $250,000 or less;</P>
                      <P>(2) A lien on real estate has been taken as collateral in an abundance of caution;</P>
                      <P>(3) The transaction is not secured by real estate;</P>
                      <P>(4) A lien on real estate has been taken for purposes other than the real estate's value;</P>
                      <P>(5) The transaction is a business loan that:</P>
                      <P>(i) Has a transaction value of $1 million or less; and</P>
                      <P>(ii) Is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment;</P>
                      <P>(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;</P>
                      <P>(7) The transaction involves an existing extension of credit at the lending institution, provided that:</P>
                      <P>(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</P>
                      <P>(ii) There is no advancement of new monies, other than funds necessary to cover reasonable closing costs;</P>
                      <P>(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;</P>

                      <P>(9) The transaction is wholly or partially insured or guaranteed by a <PRTPAGE P="132"/>United States government agency or United States government sponsored agency;</P>
                      <P>(10) The transaction either:</P>
                      <P>(i) Qualifies for sale to a United States government agency or United States government sponsored agency; or</P>
                      <P>(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;</P>
                      <P>(11) The regulated institution is acting in a fiduciary capacity and is not required to obtain an appraisal under other law;</P>
                      <P>(12) The transaction involves underwriting or dealing in mortgage-backed securities; or</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Evaluations required.</E> 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.</P>
                      <P>(c) <E T="03">Appraisals to address safety and soundness concerns.</E> 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.</P>
                      <P>(d) <E T="03">Transactions requiring a State certified appraiser—</E>(1) <E T="03">All transactions of $1,000,000 or more.</E> All federally related transactions having a transaction value of $1,000,000 or more shall require an appraisal prepared by a State certified appraiser.</P>
                      <P>(2) <E T="03">Nonresidential transactions of $250,000 or more.</E> 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.</P>
                      <P>(3) <E T="03">Complex residential transactions of $250,000 or more.</E> 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:</P>
                      <P>(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</P>
                      <P>(ii) The institution may engage a certified appraiser to complete the appraisal.</P>
                      <P>(e) <E T="03">Transactions requiring either a State certified or licensed appraiser.</E> 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.</P>
                      <CITA>[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]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.64</SECTNO>
                      <SUBJECT>Minimum appraisal standards.</SUBJECT>
                      <P>For federally related transactions, all appraisals shall, at a minimum:</P>
                      <P>(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;</P>
                      <P>(b) Be written and contain sufficient information and analysis to support the institution's decision to engage in the transaction;</P>

                      <P>(c) Analyze and report appropriate deductions and discounts for proposed construction or renovation, partially <PRTPAGE P="133"/>leased buildings, non-market lease terms, and tract developments with unsold units;</P>
                      <P>(d) Be based upon the definition of market value as set forth in this subpart; and</P>
                      <P>(e) Be performed by State licensed or certified appraisers in accordance with requirements set forth in this subpart.</P>
                      <CITA>[Reg. Y, 59 FR 29501, June 7, 1994]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.65</SECTNO>
                      <SUBJECT>Appraiser independence.</SUBJECT>
                      <P>(a) <E T="03">Staff appraisers.</E> 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.</P>
                      <P>(b) <E T="03">Fee appraisers.</E> (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.</P>
                      <P>(2) A regulated institution also may accept an appraisal that was prepared by an appraiser engaged directly by another financial services institution, if:</P>
                      <P>(i) The appraiser has no direct or indirect interest, financial or otherwise, in the property or the transaction; and</P>
                      <P>(ii) The regulated institution determines that the appraisal conforms to the requirements of this subpart and is otherwise acceptable.</P>
                      <CITA>[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29501, June 7, 1994]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.66</SECTNO>
                      <SUBJECT>Professional association membership; competency.</SUBJECT>
                      <P>(a) <E T="03">Membership in appraisal organizations.</E> 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.</P>
                      <P>(b) <E T="03">Competency.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.67</SECTNO>
                      <SUBJECT>Enforcement.</SUBJECT>

                      <P>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 <E T="03">et seq.,</E> as amended, or other applicable law.</P>
                    </SECTION>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart H—Notice of Addition or Change of Directors and Senior Executive Officers</HD>
                    <SOURCE>
                      <HD SOURCE="HED">Source:</HD>
                      <P>Reg. Y, 62 FR 9341, Feb. 28, 1997, unless otherwise noted.</P>
                    </SOURCE>
                    <SECTION>
                      <SECTNO>§ 225.71</SECTNO>
                      <SUBJECT>Definitions.</SUBJECT>
                      <P>(a) <E T="03">Director</E> 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:</P>
                      <P>(1) Is not elected by the shareholders of the regulated institution;</P>
                      <P>(2) Is not authorized to vote on any matters before the board of directors or any committee thereof;</P>

                      <P>(3) Solely provides general policy advice to the board of directors and any committee thereof; and<PRTPAGE P="134"/>
                      </P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Regulated institution</E> means a state member bank or a bank holding company.</P>
                      <P>(c) <E T="03">Senior executive officer</E> 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. <E T="03">Senior executive officer</E> 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.</P>
                      <P>(d) <E T="03">Troubled condition</E> for a regulated institution means an institution that:</P>
                      <P>(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;</P>
                      <P>(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</P>
                      <P>(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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.72</SECTNO>
                      <SUBJECT>Director and officer appointments; prior notice requirement.</SUBJECT>
                      <P>(a) <E T="03">Prior notice by regulated institution.</E> A regulated institution shall give the Board 30 days' written notice, as specified in § 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:</P>
                      <P>(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;</P>
                      <P>(2) The regulated institution is in troubled condition; or</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Prior notice by individual.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.73</SECTNO>
                      <SUBJECT>Procedures for filing, processing, and acting on notices; standards for disapproval; waiver of notice.</SUBJECT>
                      <P>(a) <E T="03">Filing notice</E>—(1) <E T="03">Content.</E> The notice required in § 225.72 shall be filed with the appropriate Reserve Bank and shall contain:</P>
                      <P>(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;</P>
                      <P>(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</P>
                      <P>(iii) Such other information as may be required by the Board or Reserve Bank.</P>
                      <P>(2) <E T="03">Modification.</E> The Reserve Bank may modify or accept other information in place of the requirements of § 225.73(a)(1) for a notice filed under this subpart.</P>
                      <P>(3) <E T="03">Acceptance and processing of notice.</E> The 30-day notice period specified in § 225.72 shall begin on the date all information required to be submitted by the notificant pursuant to § 225.73(a)(1) is received by the appropriate Reserve <PRTPAGE P="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.</P>
                      <P>(b) <E T="03">Commencement of service</E>—(1) <E T="03">At expiration of period.</E> 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.</P>
                      <P>(2) <E T="03">Prior to expiration of period.</E> 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.</P>
                      <P>(c) <E T="03">Notice of disapproval.</E> The Board or Reserve Bank shall disapprove a notice under § 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.</P>
                      <P>(d) <E T="03">Appeal of a notice of disapproval.</E> (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.</P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(e) <E T="03">Informal hearing.</E> (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.</P>
                      <P>(2) An informal hearing shall be held within 30 days of a request, if granted, unless the requesting party agrees to a later date.</P>
                      <P>(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.</P>
                      <P>(f) <E T="03">Waiver of notice</E>—(1) <E T="03">Waiver requests.</E> 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:</P>
                      <P>(i) Delay would threaten the safety or soundness of the regulated institution or a bank controlled by a bank holding company;</P>
                      <P>(ii) Delay would not be in the public interest; or</P>
                      <P>(iii) Other extraordinary circumstances exist that justify waiver of prior notice.</P>
                      <P>(2) <E T="03">Automatic waiver.</E> An individual may serve as a director upon election <PRTPAGE P="136"/>to the board of directors of a regulated institution before the notice required under this subpart is provided if the individual:</P>
                      <P>(i) Is not proposed by the management of the regulated institution;</P>
                      <P>(ii) Is elected as a new member of the board of directors at a meeting of the regulated institution; and</P>
                      <P>(iii) Provides to the appropriate Reserve Bank all the information required in § 225.73(a) within two (2) business days after the individual's election.</P>
                      <P>(3) <E T="03">Effect on disapproval authority.</E> 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.</P>
                    </SECTION>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart I—Financial Holding Companies</HD>
                    <SOURCE>
                      <HD SOURCE="HED">Source:</HD>
                      <P>Reg. Y, 66 FR 415, Jan. 3, 2001, unless otherwise noted.</P>
                    </SOURCE>
                    <SECTION>
                      <SECTNO>§ 225.81</SECTNO>
                      <SUBJECT>What is a financial holding company?</SUBJECT>
                      <P>(a) <E T="03">Definition.</E> A financial holding company is a bank holding company that meets the requirements of this section.</P>
                      <P>(b) <E T="03">Requirements to be a financial holding company.</E> In order to be a financial holding company:</P>
                      <P>(1) All depository institutions controlled by the bank holding company must be and remain well capitalized;</P>
                      <P>(2) All depository institutions controlled by the bank holding company must be and remain well managed; and</P>
                      <P>(3) The bank holding company must have made an effective election to become a financial holding company.</P>
                      <P>(c) <E T="03">Requirements for foreign banks that are or are owned by bank holding companies</E>—(1) <E T="03">Foreign banks with U.S. branches or agencies that also own U.S. banks.</E> A foreign bank that is a bank holding company and that operates a branch or agency or owns or controls a commercial lending company in the United States must comply with the requirements of this section, § 225.82, and §§ 225.90 through 225.92 in order to be a financial holding company. After it becomes a financial holding company, a foreign bank described in this paragraph will be subject to the provisions of §§ 225.83, 225.84, 225.93, and 225.94.</P>
                      <P>(2) <E T="03">Bank holding companies that own foreign banks with U.S. branches or agencies.</E> A bank holding company that owns a foreign bank that operates a branch or agency or owns or controls a commercial lending company in the United States must comply with the requirements of this section, § 225.82, and §§ 225.90 through 225.92 in order to be a financial holding company. After it becomes a financial holding company, a bank holding company described in this paragraph will be subject to the provisions of §§ 225.83, 225.84, 225.93, and 225.94.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.82</SECTNO>
                      <SUBJECT>How does a bank holding company elect to become a financial holding company?</SUBJECT>
                      <P>(a) <E T="03">Filing requirement.</E> 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.</P>
                      <P>(b) <E T="03">Contents of declaration.</E> To be deemed complete, a declaration must:</P>
                      <P>(1) State that the bank holding company elects to be a financial holding company;</P>
                      <P>(2) Provide the name and head office address of the bank holding company and of each depository institution controlled by the bank holding company;</P>
                      <P>(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;</P>

                      <P>(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<PRTPAGE P="137"/>
                      </P>
                      <P>(5) Certify that each depository institution controlled by the company is well managed as of the date the company submits its declaration.</P>
                      <P>(c) <E T="03">Effectiveness of election.</E> 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:</P>
                      <P>(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</P>
                      <P>(2) Any depository institution controlled by the bank holding company is not both well capitalized and well managed.</P>
                      <P>(d) <E T="03">Consideration of the CRA performance of a recently acquired insured depository institution.</E> 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:</P>
                      <P>(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;</P>
                      <P>(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</P>
                      <P>(3) The appropriate Federal banking agency for the institution has accepted the plan described in paragraph (d)(2) of this section.</P>
                      <P>(e) <E T="03">Effective date of election</E>—(1) <E T="03">In general.</E> 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.</P>
                      <P>(2) <E T="03">Earlier notification that an election is effective.</E> 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.</P>
                      <P>(f) <E T="03">Requests to become a financial holding company submitted as part of an application to become a bank holding company</E>—(1) <E T="03">In general.</E> 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.</P>
                      <P>(2) <E T="03">Contents of request.</E> A request to become a financial holding company submitted as part of an application to become a bank holding company must:</P>
                      <P>(i) State that the company seeks to become a financial holding company on consummation of its proposal to become a bank holding company; and</P>
                      <P>(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.</P>
                      <P>(3) <E T="03">Request becomes a declaration and an effective election on date of consummation of bank holding company proposal.</E> A complete request submitted by a company under this paragraph (f) becomes a complete declaration by a bank holding company for purposes of section 4(l) of the BHC Act (12 U.S.C. 1843(l)) and becomes an effective election for purposes of § 225.81(b) on the date that the company lawfully consummates its proposal under section 3 of the BHC Act (12 U.S.C. 1842), unless the Board notifies the company at any time prior to consummation of the proposal and that:</P>

                      <P>(i) Any depository institution that would be controlled by the company on consummation of the proposal will not <PRTPAGE P="138"/>be both well capitalized and well managed on the date of consummation; or</P>
                      <P>(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.</P>
                      <P>(4) <E T="03">Limited exclusion for recently acquired institutions not available.</E> 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.</P>
                      <P>(g) <E T="03">Board's authority to exercise supervisory authority over a financial holding company.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.83</SECTNO>
                      <SUBJECT>What are the consequences of failing to continue to meet applicable capital and management requirements?</SUBJECT>
                      <P>(a) <E T="03">Notice by the Board.</E> 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.</P>
                      <P>(b) <E T="03">Notification by a financial holding company required</E>—(1) <E T="03">Notice to Board.</E> 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.</P>
                      <P>(2) <E T="03">Triggering events for notice to the Board</E>—(i) <E T="03">Well capitalized.</E> 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). <E T="03">See</E> 12 CFR 6.3(b)-(c), 208.42(b)-(c), and 325.102(b)-(c).</P>
                      <P>(ii) <E T="03">Well managed.</E> 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.</P>
                      <P>(c) <E T="03">Execution of agreement acceptable to the Board</E>—(1) <E T="03">Agreement required; time period.</E> 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.</P>
                      <P>(2) <E T="03">Extension of time for executing agreement.</E> 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.</P>
                      <P>(3) <E T="03">Agreement requirements.</E> An agreement required by paragraph (c)(1) of this section to correct a capital or management deficiency must:</P>
                      <P>(i) Explain the specific actions that the company will take to correct all areas of noncompliance;</P>
                      <P>(ii) Provide a schedule within which each action will be taken;</P>
                      <P>(iii) Provide any other information that the Board may require; and</P>
                      <P>(iv) Be acceptable to the Board.<PRTPAGE P="139"/>
                      </P>
                      <P>(d) <E T="03">Limitations during period of noncompliance</E>—Until the Board determines that a company has corrected the conditions described in a notice under paragraph (a) of this section:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(e) <E T="03">Consequences of failure to correct conditions within 180 days</E>—(1) <E T="03">Divestiture of depository institutions.</E> 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.</P>
                      <P>(2) <E T="03">Alternative method of complying with a divestiture order.</E> 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.</P>
                      <P>(f) <E T="03">Consultation with other agencies.</E> In taking any action under this section, the Board will consult with the relevant Federal and state regulatory authorities.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.84</SECTNO>
                      <SUBJECT>What are the consequences of failing to maintain a satisfactory or better rating under the Community Reinvestment Act at all insured depository institution subsidiaries?</SUBJECT>
                      <P>(a) <E T="03">Limitations on activities</E>—(1) <E T="03">In general.</E> 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:</P>
                      <P>(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</P>
                      <P>(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)).</P>
                      <P>(2) <E T="03">Notification.</E> 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.</P>
                      <P>(b) <E T="03">Exceptions for certain activities</E>—(1) <E T="03">Continuation of investment activities.</E> 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:</P>
                      <P>(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</P>

                      <P>(ii) The Board has not, in the exercise of its supervisory authority, advised the financial holding company that these activities must be restricted.<PRTPAGE P="140"/>
                      </P>
                      <P>(2) <E T="03">Activities that are closely related to banking.</E> 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)).</P>
                      <P>(c) <E T="03">Duration of prohibitions.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.85</SECTNO>
                      <SUBJECT>Is notice to or approval from the Board required prior to engaging in a financial activity?</SUBJECT>
                      <P>(a) <E T="03">No prior approval required generally</E>—(1) <E T="03">In general.</E> A financial holding company and any subsidiary (other than a depository institution or subsidiary of a depository institution) of the financial holding company may engage in any activity listed in § 225.86, or acquire shares or control of a company engaged exclusively in activities listed in § 225.86, without providing prior notice to or obtaining prior approval from the Board unless required under paragraph (c) of this section.</P>
                      <P>(2) <E T="03">Acquisitions by a financial holding company of a company engaged in other permissible activities.</E> In addition to the activities listed in § 225.86, a company acquired or to be acquired by a financial holding company under paragraph (a)(1) of this section may engage in activities otherwise permissible for a financial holding company under this part in accordance with any applicable notice, approval, or other requirement.</P>
                      <P>(3) <E T="03">Acquisition by a financial holding company of a company engaged in limited nonfinancial activities</E>—(i) <E T="03">Mixed acquisitions generally permitted.</E> 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:</P>
                      <P>(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));</P>
                      <P>(B) The financial holding company complies with the notice requirements of § 225.87, if applicable; and</P>
                      <P>(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.</P>
                      <P>(ii) <E T="03">Definition of “substantially engaged.”</E> 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)).</P>
                      <P>(b) <E T="03">Locations in which a financial holding company may conduct financial activities.</E> A financial holding company may conduct any activity listed in § 225.86 at any location in the United States or at any location outside of the United States subject to the laws of the jurisdiction in which the activity is conducted.</P>
                      <P>(c) <E T="03">Circumstances under which prior notice to the Board is required</E>—(1) <E T="03">Acquisition of more than 5 percent of the shares of a savings association.</E> A financial holding company must obtain Board approval in accordance with section 4(j) of the BHC Act (12 U.S.C. 1843(j)) <PRTPAGE P="141"/>and either § 225.14 or § 225.24, as appropriate, prior to acquiring control or more than 5 percent of the outstanding shares of any class of voting securities of a savings association or of a company that owns, operates, or controls a savings association.</P>
                      <P>(2) <E T="03">Supervisory actions.</E> The Board may, if appropriate in the exercise of its supervisory or other authority, including under § 225.82(g) or § 225.83(d) or other relevant authority, require a financial holding company to provide notice to or obtain approval from the Board prior to engaging in any activity or acquiring shares or control of any company.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.86</SECTNO>
                      <SUBJECT>What activities are permissible for any financial holding company?</SUBJECT>
                      <P>The following activities are financial in nature or incidental to a financial activity:</P>
                      <P>(a) <E T="03">Activities determined to be closely related to banking.</E> (1) Any activity that the Board had determined by regulation prior to November 12, 1999, to be so closely related to banking as to be a proper incident thereto, subject to the terms and conditions contained in this part, unless modified by the Board. These activities are listed in § 225.28.</P>
                      <P>(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:</P>

                      <P>(i) Providing administrative and other services to mutual funds (<E T="03">Societe Generale,</E> 84 Federal Reserve Bulletin 680 (1998));</P>
                      <P>(ii) Owning shares of a securities exchange (<E T="03">J.P. Morgan &amp; Co, Inc., and UBS AG,</E> 86 Federal Reserve Bulletin 61 (2000));</P>

                      <P>(iii) Acting as a certification authority for digital signatures and authenticating the identity of persons conducting financial and nonfinancial transactions (<E T="03">Bayerische Hypo- und Vereinsbank AG, et al.,</E> 86 Federal Reserve Bulletin 56 (2000));</P>

                      <P>(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 (<E T="03">Norwest Corporation,</E> 81 Federal Reserve Bulletin 732 (1995));</P>

                      <P>(v) Check cashing and wire transmission services (<E T="03">Midland Bank, PLC,</E> 76 Federal Reserve Bulletin 860 (1990) (check cashing); <E T="03">Norwest Corporation,</E> 81 Federal Reserve Bulletin 1130 (1995) (money transmission));</P>

                      <P>(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 (<E T="03">Popular, Inc.,</E> 84 Federal Reserve Bulletin 481 (1998)); and</P>
                      <P>(vii) Real estate title abstracting (<E T="03">The First National Company,</E> 81 Federal Reserve Bulletin 805 (1995)).</P>
                      <P>(b) <E T="03">Activities determined to be usual in connection with the transaction of banking abroad.</E> 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 (<E T="03">see</E> § 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:</P>
                      <P>(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;</P>
                      <P>(2) Operating a travel agency in connection with financial services offered by the financial holding company or others; and</P>
                      <P>(3) Organizing, sponsoring, and managing a mutual fund, so long as:</P>
                      <P>(i) The fund does not exercise managerial control over the entities in which the fund invests; and</P>

                      <P>(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.<PRTPAGE P="142"/>
                      </P>
                      <P>(c) <E T="03">Activities permitted under section 4(k)(4) of the BHC Act</E> (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)).</P>
                      <P>(d) <E T="03">Activities determined to be financial in nature or incidental to financial activities by the Board</E>—(1) <E T="03">Acting as a finder</E>—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.</P>
                      <P>(i) <E T="03">What is the scope of finder activities?</E> Acting as a finder includes providing any or all of the following services through any means—</P>
                      <P>(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;</P>
                      <P>(B) Conveying between interested parties expressions of interest, bids, offers, orders and confirmations relating to a transaction; and</P>
                      <P>(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.</P>
                      <P>(ii) <E T="03">What are some examples of finder services?</E> 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.</P>
                      <P>(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.</P>
                      <P>(B) Hosting on the financial holding company's servers the Internet web site of—</P>
                      <P>(<E T="03">1</E>) 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</P>
                      <P>(<E T="03">2</E>) 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.</P>
                      <P>(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.</P>
                      <P>(D) Operating a telephone call center that provides permissible finder services.</P>
                      <P>(iii) <E T="03">What limitations are applicable to a financial holding company acting as a finder</E>?</P>
                      <P>(A) A finder may act only as an intermediary between a buyer and a seller.</P>
                      <P>(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—</P>
                      <P>(<E T="03">1</E>) 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</P>
                      <P>(<E T="03">2</E>) Establish rules of general applicability governing the use and operation of the finder service, including rules that—</P>
                      <P>(<E T="03">i</E>) 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</P>
                      <P>(<E T="03">ii</E>) Govern the manner in which buyers and sellers may bind themselves to the terms of a specific transaction.</P>
                      <P>(C) A finder may not—</P>
                      <P>(<E T="03">1</E>) Take title to or acquire or hold an ownership interest in any product or service offered or sold through the finder service;<PRTPAGE P="143"/>
                      </P>
                      <P>(<E T="03">2</E>) Provide distribution services for physical products or services offered or sold through the finder service;</P>
                      <P>(<E T="03">3</E>) 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</P>
                      <P>(<E T="03">4</E>) 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.</P>
                      <P>(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.</P>
                      <P>(iv) <E T="03">What disclosures are required?</E> 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.</P>
                      <P>(2) [Reserved]</P>
                      <P>(e) <E T="03">Activities permitted under section 4(k)(5) of the Bank Holding Company Act (12 U.S.C. 1843(k)(5)).</E>
                      </P>
                      <P>(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:</P>
                      <P>(i) Lending, exchanging, transferring, investing for others, or safeguarding financial assets other than money or securities;</P>
                      <P>(ii) Providing any device or other instrumentality for transferring money or other financial assets; and</P>
                      <P>(iii) Arranging, effecting, or facilitating financial transactions for the account of third parties.</P>
                      <P>(2) <E T="03">Review of specific activities.</E>
                      </P>
                      <P>(i) <E T="03">Is a specific request required?</E> 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).</P>
                      <P>(ii) <E T="03">Consultation with the Secretary of the Treasury.</E> 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)).</P>
                      <P>(iii) <E T="03">Board action on requests.</E> 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.</P>
                      <P>(3) <E T="03">What factors will the Board consider?</E> 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.</P>
                      <P>(4) <E T="03">What information must the request contain?</E> Any request by a financial holding company under this section must be in writing and must:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <CITA>[Reg. Y, 66 FR 415, Jan. 3, 2001, as amended at 66 FR 19081, Apr. 13, 2001]</CITA>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.87</SECTNO>
                      <SUBJECT>Is notice to the Board required after engaging in a financial activity?</SUBJECT>
                      <P>(a) <E T="03">Post-transaction notice generally required to engage in a financial activity.</E> A financial holding company that commences an activity or acquires shares of a company engaged in an activity listed in § 225.86 must notify the appropriate Reserve Bank in writing within 30 calendar days after commencing the activity or consummating the acquisition by using the appropriate form.</P>
                      <P>(b) <E T="03">Cases in which notice to the Board is not required</E>—(1) <E T="03">Acquisitions that do not involve control of a company.</E> A notice under paragraph (a) of this section <PRTPAGE P="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.</P>
                      <P>(2) <E T="03">No additional notice required to engage</E>
                        <E T="03">de novo</E> in an activity for which a financial holding company already has provided notice. After a financial holding company provides the appropriate Reserve Bank with notice that the company is engaged in an activity listed in § 225.86, a financial holding company may, unless otherwise notified by the Board, commence the activity <E T="03">de novo</E> through any subsidiary that the financial holding company is authorized to control without providing additional notice under paragraph (a) of this section.</P>
                      <P>(3) <E T="03">Conduct of certain investment activities.</E> 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.</P>
                      <P>(4) <E T="03">Notice of large merchant banking or insurance company investments.</E> Notwithstanding paragraph (b)(1) or (b)(3) of this section, a financial holding company must provide notice under paragraph (a) of the section if:</P>
                      <P>(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;</P>
                      <P>(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</P>
                      <P>(iii) The Board in the exercise of its supervisory authority notifies the financial holding company that a notice is necessary.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.88</SECTNO>
                      <SUBJECT>How to request the Board to determine that an activity is financial in nature or incidental to a financial activity?</SUBJECT>
                      <P>(a) <E T="03">Requests regarding activities that may be financial in nature or incidental to a financial activity.</E> A financial holding company or other interested party may request a determination from the Board that an activity not listed in § 225.86 is financial in nature or incidental to a financial activity.</P>
                      <P>(b) <E T="03">Required information.</E> A request submitted under this section must be in writing and must:</P>
                      <P>(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;</P>
                      <P>(2) Explain in detail why the activity should be considered financial in nature or incidental to a financial activity; and</P>
                      <P>(3) Provide information supporting the requested determination and any other information required by the Board concerning the proposed activity.</P>
                      <P>(c) <E T="03">Board procedures for reviewing requests</E>—(1) <E T="03">Consultation with the Secretary of the Treasury.</E> 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)).</P>
                      <P>(2) <E T="03">Public notice.</E> The Board may, as appropriate and after consultation with the Secretary, publish a description of the proposal in the <E T="04">Federal <PRTPAGE P="145"/>Register</E> with a request for public comment.</P>
                      <P>(d) <E T="03">Board action.</E> 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.</P>
                      <P>(e) <E T="03">Advisory opinions regarding scope of financial activities</E>—(1) <E T="03">Written request.</E> A financial holding company or other interested party may request an advisory opinion from the Board about whether a specific proposed activity falls within the scope of an activity listed in § 225.86 as financial in nature or incidental to a financial activity. The request must be submitted in writing and must contain:</P>
                      <P>(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;</P>
                      <P>(ii) An explanation supporting an interpretation regarding the scope of the permissible financial activity; and</P>
                      <P>(iii) Any additional information requested by the Board regarding the activity.</P>
                      <P>(2) <E T="03">Board response.</E> The Board will provide an advisory opinion within 45 calendar days of receiving a complete written request under paragraph (e)(1) of this section.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.89</SECTNO>
                      <SUBJECT>How to request approval to engage in an activity that is complementary to a financial activity?</SUBJECT>
                      <P>(a) <E T="03">Prior Board approval is required.</E> 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:</P>
                      <P>(1) Identify and define the proposed complementary activity, specifically describing what the activity would involve and how the activity would be conducted;</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(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</P>
                      <P>(7) Provide any information about the financial and managerial resources of the financial holding company and any other information requested by the Board.</P>
                      <P>(b) <E T="03">Factors for consideration by the Board.</E> In evaluating a notice to engage in a complementary activity, the Board must consider whether:</P>
                      <P>(1) The proposed activity is complementary to a financial activity;</P>
                      <P>(2) The proposed activity would pose a substantial risk to the safety or soundness of depository institutions or the financial system generally; and</P>
                      <P>(3) The proposal could be expected to produce benefits to the public that outweigh possible adverse effects.</P>
                      <P>(c) <E T="03">Board action.</E> 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)).</P>
                    </SECTION>
                    <SECTION>
                      <PRTPAGE P="146"/>
                      <SECTNO>§ 225.90</SECTNO>
                      <SUBJECT>What are the requirements for a foreign bank to be treated as a financial holding company?</SUBJECT>
                      <P>(a) <E T="03">Foreign banks as financial holding companies.</E> 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:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">Standards for “well capitalized.”</E> A foreign bank will be considered “well capitalized” if either:</P>
                      <P>(1)(i) Its home country supervisor, as defined in § 211.21 of the Board's Regulation K (12 CFR 211.21), has adopted risk-based capital standards consistent with the Capital Accord of the Basel Committee on Banking Supervision (Basel Accord);</P>
                      <P>(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</P>
                      <P>(iii) The foreign bank's capital is comparable to the capital required for a U.S. bank owned by a financial holding company; or</P>
                      <P>(2) The foreign bank has obtained a determination from the Board under § 225.91(c) that the foreign bank's capital is otherwise comparable to the capital that would be required of a U.S. bank owned by a financial holding company.</P>
                      <P>(c) <E T="03">Standards for “well managed.”</E> A foreign bank will be considered “well managed” if:</P>
                      <P>(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;</P>
                      <P>(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</P>
                      <P>(3) The management of the foreign bank meets standards comparable to those required of a U.S. bank owned by a financial holding company.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.91</SECTNO>
                      <SUBJECT>How may a foreign bank elect to be treated as a financial holding company?</SUBJECT>
                      <P>(a) <E T="03">Filing requirement.</E> 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.</P>
                      <P>(b) <E T="03">Contents of declaration.</E> The declaration must:</P>
                      <P>(1) State that the foreign bank or the company elects to be treated as a financial holding company;</P>
                      <P>(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;</P>
                      <P>(3) Certify that the foreign bank, and each foreign bank that maintains a U.S. branch, agency, or commercial lending company and is controlled by the foreign bank or company, meets the standards of well capitalized set out in § 225.90(b)(1)(i) and (ii) or § 225.90(b)(2) as of the date the foreign bank or company files its election;</P>
                      <P>(4) Certify that the foreign bank, and each foreign bank that maintains a U.S. branch, agency, or commercial lending company and is controlled by the foreign bank or company, is well managed as defined in § 225.90(c)(1) as of the date the foreign bank or company files its election;</P>

                      <P>(5) Certify that all U.S. depository institution subsidiaries of the foreign <PRTPAGE P="147"/>bank or company are well capitalized and well managed as of the date the foreign bank or company files its election; and</P>
                      <P>(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.</P>
                      <P>(c) <E T="03">Pre-clearance process.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.92</SECTNO>
                      <SUBJECT>How does an election by a foreign bank become effective?</SUBJECT>
                      <P>(a) <E T="03">In general.</E> An election described in § 225.91 is effective on the 31st day after the date that an election was received by the appropriate Federal Reserve Bank, unless the Board notifies the foreign bank or company prior to that time that:</P>
                      <P>(1) The election is ineffective; or</P>
                      <P>(2) The period is extended with the consent of the foreign bank or company making the election.</P>
                      <P>(b) <E T="03">Earlier notification that an election is effective.</E> 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.</P>
                      <P>(c) <E T="03">Under what circumstances will the Board find an election to be ineffective?</E> 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:</P>
                      <P>(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;</P>
                      <P>(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;</P>
                      <P>(3) Any U.S. depository institution subsidiary of the foreign bank or company is not both well capitalized and well managed; or</P>
                      <P>(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.</P>
                      <P>(d) <E T="03">How is CRA performance of recently acquired insured depository institutions considered?</E> An insured depository institution will be excluded for purposes of the review of CRA ratings described in paragraph (c)(2) of this section consistent with the provisions of § 225.82(d).</P>
                      <P>(e) <E T="03">Factors used in the Board's determination regarding comparability of capital and management.</E>—(1) <E T="03">In general.</E> 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, <PRTPAGE P="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.</P>
                      <P>(2) <E T="03">Assessment of consolidated supervision.</E> 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:</P>
                      <P>(i) The home country has made significant progress in establishing arrangements for comprehensive supervision on a consolidated basis; and</P>
                      <P>(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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.93</SECTNO>
                      <SUBJECT>What are the consequences of a foreign bank failing to continue to meet applicable capital and management requirements?</SUBJECT>
                      <P>(a) <E T="03">Notice by the Board.</E> 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.</P>
                      <P>(b) <E T="03">Notification by a financial holding company required.</E>—(1) <E T="03">Notice to Board.</E> 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.</P>
                      <P>(2) <E T="03">Triggering events for notice to the Board</E>—(i) <E T="03">Well capitalized.</E> 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.</P>
                      <P>(ii) <E T="03">Well managed.</E> 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.</P>
                      <P>(c) <E T="03">Execution of agreement acceptable to the Board</E>—(1) <E T="03">Agreement required; time period.</E> 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.</P>
                      <P>(2) <E T="03">Extension of time for executing agreement.</E> 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.</P>
                      <P>(3) <E T="03">Agreement requirements.</E> An agreement required by paragraph (c)(1) of this section to correct a capital or management deficiency must:</P>
                      <P>(i) Explain the specific actions that the foreign bank or company will take to correct all areas of noncompliance;</P>
                      <P>(ii) Provide a schedule within which each action will be taken;</P>
                      <P>(iii) Provide any other information that the Board may require; and</P>
                      <P>(iv) Be acceptable to the Board.</P>
                      <P>(d) <E T="03">Limitations during period of noncompliance</E>—Until the Board determines that a foreign bank or company has corrected the conditions described in a notice under paragraph (a) of this section:<PRTPAGE P="149"/>
                      </P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(e) <E T="03">Consequences of failure to correct conditions within 180 days—</E>(1) <E T="03">Termination of Offices and Divestiture.</E> 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.</P>
                      <P>(2) <E T="03">Alternative method of complying with a divestiture order.</E> 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.</P>
                      <P>(f) <E T="03">Consultation with Other Agencies.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.94</SECTNO>
                      <SUBJECT>What are the consequences of an insured branch or depository institution failing to maintain a satisfactory or better rating under the Community Reinvestment Act?</SUBJECT>
                      <P>(a) <E T="03">Insured branch as an “insured depository institution.”</E> A U.S. branch of a foreign bank that is insured by the Federal Deposit Insurance Corporation shall be treated as an “insured depository institution” for purposes of § 225.84.</P>
                      <P>(b) <E T="03">Applicability.</E> The provisions of § 225.84, with the modifications contained in this section, shall apply to a foreign bank that operates an insured branch referred to in paragraph (a) of this section or an insured depository institution in the United States, and any company that owns or controls such a foreign bank, that has made an effective election under § 225.92 in the same manner and to the same extent as they apply to a financial holding company.</P>
                    </SECTION>
                    <SUBJGRP>
                      <HD SOURCE="HED">Interpretations</HD>
                      <SECTION>
                        <SECTNO>§ 225.101</SECTNO>
                        <SUBJECT>Bank holding company's subsidiary banks owning shares of nonbanking companies.</SUBJECT>
                        <P>(a) The Board's opinion has been requested on the following related matters under the Bank Holding Company Act of 1956.</P>
                        <P>(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.</P>

                        <P>(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 <PRTPAGE P="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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[21 FR 10472, Dec. 29, 1956. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.102</SECTNO>
                        <SUBJECT>Bank holding company indirectly owning nonbanking company through subsidiaries.</SUBJECT>

                        <P>(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.<PRTPAGE P="151"/>
                        </P>
                        <P>(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.</P>
                        <P>(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.</P>

                        <P>(d) In § 225.101, the Board expressed the opinion that the first exemption in section 4(c)(5):
                        </P>
                        <EXTRACT>
                          <P>* * * 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.</P>
                        </EXTRACT>
                        
                        <P>(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.</P>
                        <CITA>[22 FR 2533, Apr. 13, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.103</SECTNO>
                        <SUBJECT>Bank holding company acquiring stock by dividends, stock splits or exercise of rights.</SUBJECT>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[22 FR 7461, Sept. 19, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <PRTPAGE P="152"/>
                        <SECTNO>§ 225.104</SECTNO>
                        <SUBJECT>“Services” under section 4(c)(1) of Bank Holding Company Act.</SUBJECT>
                        <P>(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.</P>
                        <P>(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:</P>
                        <P>(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.</P>
                        <P>(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.</P>

                        <P>(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, <PRTPAGE P="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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[23 FR 2675, May 23, 1958. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.107</SECTNO>
                        <SUBJECT>Acquisition of stock in small business investment company.</SUBJECT>
                        <P>(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.</P>

                        <P>(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.<PRTPAGE P="154"/>
                        </P>

                        <P>(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:
                        </P>
                        <EXTRACT>
                          <FP>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.</FP>
                        </EXTRACT>
                        
                        <FP>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.</FP>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[25 FR 7485, Aug. 9, 1960. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.109</SECTNO>
                        <SUBJECT>“Services” under section 4(c)(1) of Bank Holding Company Act.</SUBJECT>
                        <P>(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.</P>
                        <P>(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.</P>

                        <P>(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 <PRTPAGE P="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.</P>
                        <P>(d) As indicated in § 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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[23 FR 9017, Nov. 20, 1958. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.111</SECTNO>
                        <SUBJECT>Limit on investment by bank holding company system in stock of small business investment companies.</SUBJECT>
                        <P>(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.</P>
                        <P>(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:</P>
                        <P>(1) The total direct and indirect investments of a bank holding company in stock of SBICs may not exceed:</P>
                        <P>(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;</P>
                        <P>(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</P>
                        <P>(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</P>

                        <P>(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.<PRTPAGE P="156"/>
                        </P>

                        <P>(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: <E T="03">Provided,</E> That such action does not result in the bank holding company acquiring control of a percentage greater than that controlled by such bank.</P>
                        <SECAUTH>(12 U.S.C. 248. Interprets 12 U.S.C. 1843, 15 U.S.C. 682)</SECAUTH>
                        <CITA>[33 FR 6967, May 9, 1968. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.112</SECTNO>
                        <SUBJECT>Indirect control of small business concern through convertible debentures held by small business investment company.</SUBJECT>
                        <P>(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”).</P>
                        <P>(b) As indicated in the interpretation of the Board (§ 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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[24 FR 1584, Mar. 4, 1959. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.113</SECTNO>
                        <SUBJECT>Services under section 4(a) of Bank Holding Company Act.</SUBJECT>
                        <P>(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.</P>

                        <P>(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) <PRTPAGE P="157"/>selection and training of officer personnel; (4) establishment and enforcement of operating policies; and (5) general supervision over all policies and practices.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.”</P>
                        <P>(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.</P>
                        <P>(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.”</P>
                        <P>(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).</P>
                        <P>(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.</P>
                        <CITA>[25 FR 281, Jan. 14, 1960. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <PRTPAGE P="158"/>
                        <SECTNO>§ 225.115</SECTNO>
                        <SUBJECT>Applicability of Bank Service Corporation Act in certain bank holding company situations.</SUBJECT>
                        <P>(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.</P>
                        <P>(b) <E T="03">Holding company-owned corporation serving only subsidiary banks.</E> (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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(c) <E T="03">Bank service corporation owned by holding company subsidiaries and serving also other banks.</E> (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.</P>

                        <P>(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 <PRTPAGE P="159"/>for banks. Section 5, mentioned previously and relating to “assurances”, also is applicable in this case.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(d) <E T="03">Limit on investment by bank holding company system in stock of bank service corporation.</E> (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.</P>
                        <P>(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”.</P>
                        <P>(3) The Board's view is that this aspect of the matter should be determined in accordance with the principles set forth in § 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”.</P>

                        <P>(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 <PRTPAGE P="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 § 222.111.</P>
                        <CITA>[27 FR 12918, Dec. 29, 1962. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.118</SECTNO>
                        <SUBJECT>Computer services for customers of subsidiary banks.</SUBJECT>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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 (§ 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.</P>
                        <P>(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.</P>
                        <P>(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).</P>
                        <CITA>[29 FR 12361, Aug. 28, 1964. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <PRTPAGE P="161"/>
                        <SECTNO>§ 225.121</SECTNO>
                        <SUBJECT>Acquisition of Edge corporation affiliate by State member banks of registered bank holding company.</SUBJECT>
                        <P>(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.</P>
                        <P>(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 (§ 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.</P>
                        <P>(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.</P>
                        <SECAUTH>(12 U.S.C. 24, 248, 335, 371c, 611, 618)</SECAUTH>
                        <CITA>[31 FR 10263, July 29, 1966. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.122</SECTNO>
                        <SUBJECT>Bank holding company ownership of mortgage companies.</SUBJECT>
                        <P>(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.</P>
                        <P>(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).</P>

                        <P>(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 <PRTPAGE P="162"/>company on the basis of the section 4(c)(5) exemption.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.<SU>1</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>1</SU> 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.</P>
                        </FTNT>
                        <P>(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.</P>
                        <SECAUTH>(12 U.S.C. 248)</SECAUTH>
                        <CITA>[32 FR 15004, Oct. 3, 1967, as amended at 35 FR 19662, Dec. 29, 1970. Redesignated at 36 FR 21666, Nov. 12, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.123</SECTNO>
                        <SUBJECT>Activities closely related to banking.</SUBJECT>
                        <P>(a) Effective June 15, 1971, the Board of Governors has amended § 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.</P>

                        <P>(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 <PRTPAGE P="163"/>to engage, for example, in activities specified in § 225.4(a) and also in activities that fall within the scope of section 4(c)(1)(C) of the Act—the “servicing” exemption.</P>
                        <P>(c) The amendments to § 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 § 225.4(a) may be shifted in a corporate reorganization to another company within the holding company system without complying with the procedures of § 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.</P>
                        <P>(d) Under the procedures in § 225.4(a)(c), a holding company that wishes to change the location at which it engages in activities authorized pursuant to § 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.</P>
                        <P>(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 § 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:</P>
                        <P>(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:</P>
                        <P>(A) Equipment is not purchased solely for the purpose of creating excess capacity;</P>
                        <P>(B) Hardware is not offered in connection therewith; and</P>
                        <P>(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.</P>
                        <P>(2) Providing by-products of permissible data processing and data transmission activities, where not designed, or appreciably enhanced, for the purpose of marketability.</P>
                        <P>(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</P>
                        <FP>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.</FP>
                        <SECAUTH>(Interprets and applies 12 U.S.C. 1843 (c)(8))</SECAUTH>
                        <CITA>[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]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.124</SECTNO>
                        <SUBJECT>Foreign bank holding companies.</SUBJECT>

                        <P>(a) Effective December 1, 1971, the Board of Governors has added a new § 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 § 225.4(g) are set forth in paragraphs (b) through (g) of this section.<PRTPAGE P="164"/>
                        </P>
                        <P>(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.</P>
                        <P>(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:</P>
                        <P>(1) A factory,</P>
                        <P>(2) A wholesale distributor or purchasing agency,</P>
                        <P>(3) A distribution center,</P>
                        <P>(4) A retail sales or service outlet,</P>
                        <P>(5) A network of franchised dealers,</P>
                        <P>(6) A financing agency, or</P>
                        <P>(7) Similar facility for the manufacture, distribution, purchasing, furnishing, or financing of goods or services locally in the United States.</P>
                        <FP>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.</FP>
                        <P>(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 § 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.</P>
                        <P>(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.</P>
                        <P>(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.</P>

                        <P>(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 <PRTPAGE P="165"/>such shares by the bank holding company.</P>
                        <SECAUTH>(Interprets and applies 12 U.S.C. 1843 (a) (1), (2), and (c)(9))</SECAUTH>
                        <CITA>[36 FR 21808, Nov. 16, 1971]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.125</SECTNO>
                        <SUBJECT>Investment adviser activities.</SUBJECT>
                        <P>(a) Effective February 1, 1972, the Board of Governors amended § 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.</P>
                        <P>(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.</P>
                        <P>(c) Under § 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 § 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.</P>
                        <P>(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.</P>
                        <P>(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.</P>

                        <P>(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 <PRTPAGE P="166"/>name as the name of the holding company or any of its subsidiary banks, or a name that contains the word “bank.”</P>
                        <P>(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.</P>

                        <P>(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. <E T="03">See Securities Industry Ass'n</E> v. <E T="03">Board of Governors,</E> 468 U.S. 207 (1984); <E T="03">see also Securities Industry Ass'n</E> v. <E T="03">Board of Governors,</E> 821 F.2d 810 (D.C. Cir. 1987), <E T="03">cert. denied,</E> 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 <PRTPAGE P="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.</P>
                        <P>(i) Acting in such capacities as registrar, transfer agent, or custodian for an investment company is not a selling activity and is permitted under § 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.</P>
                        <CITA>[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]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.126</SECTNO>
                        <SUBJECT>Activities not closely related to banking.</SUBJECT>
                        <P>Pursuant to section 4(c)(8) of the Bank Holding Company Act and § 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:</P>
                        <P>(a) Insurance premium funding—that is, the combined sale of mutual funds and insurance.</P>
                        <P>(b) Underwriting life insurance that is not sold in connection with a credit transaction by a bank holding company, or a subsidiary thereof.</P>
                        <P>(c) Real estate brokerage (see 1972 Fed. Res. Bulletin 428).</P>
                        <P>(d) Land development (see 1972 Fed. Res. Bulletin 429).</P>
                        <P>(e) Real estate syndication.</P>
                        <P>(f) Management consulting (see 1972 Fed. Res. Bulletin 571).</P>
                        <P>(g) Property management (see 1972 Fed. Res. Bulletin 652).</P>
                        <CITA>[Reg. Y, 37 FR 20329, Sept. 29, 1972; 37 FR 21938, Oct. 17, 1972, as amended at 54 FR 37302, Sept. 8, 1989]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.127</SECTNO>
                        <SUBJECT>Investment in corporations or projects designed primarily to promote community welfare.</SUBJECT>
                        <P>(a) Under § 225.25(b)(6) of Regulation Y, a bank holding company may, in accordance with the provisions of § 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 § 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 § 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.</P>
                        <P>(b) Under the authority of § 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.</P>

                        <P>(c) Within the category of permissible investments under § 225.25(b)(6) <PRTPAGE P="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).</P>
                        <P>(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 § 225.23 should be accompanied by a memorandum which demonstrates that such projects meet the objectives of § 225.25(b)(6).</P>
                        <P>(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.</P>
                        <P>(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 § 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:</P>
                        <P>(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);</P>
                        <P>(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));</P>

                        <P>(3) Invest in and provide financing to a community development financial institution pursuant to section 103(5) of the Community Development Banking <PRTPAGE P="169"/>and Financial Institutions Act of 1994 (12 U.S.C. 4702(5));</P>
                        <P>(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));</P>
                        <P>(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;</P>
                        <P>(6) Invest in and provide financing to one or more small businesses located in a low- or moderate-income area to stimulate economic development;</P>
                        <P>(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;</P>
                        <P>(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</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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)).</P>
                        <CITA>[37 FR 11316, June 7, 1972; 37 FR 13336, July 7, 1972, as amended at Reg. Y, 59 FR 63713, Dec. 9, 1994]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.129</SECTNO>
                        <SUBJECT>Activities closely related to banking.</SUBJECT>
                        <P>
                          <E T="03">Courier activities.</E> The Board's amendment of § 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.</P>

                        <P>During the course of the Board's proceedings pertaining to courier services, <PRTPAGE P="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:</P>
                        <P>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.</P>
                        <P>b. As such, the subsidiary should exist as a separate, profit-oriented operation and should not be subsidized by the holding company system.</P>
                        <P>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.</P>
                        <FP>Accordingly, entry of holding companies into courier activities on the basis of section 4(c)(8) will be conditioned as follows:</FP>
                        <P>1. <E T="03">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.</E> The Board may regard operating losses sustained over an extended period as being inconsistent with continued authority to engage in courier activities.</P>
                        <P>2. <E T="03">Courier services performed on behalf of an affiliate's customer</E> (<E T="03">such as the carriage of incoming cash letters</E>) <E T="03">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.</E> 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:</P>
                        <P>3. <E T="03">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</E> 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.</P>
                        <CITA>[38 FR 32126, Nov. 21, 1973, as amended at 40 FR 36309, Aug. 20, 1975]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.130</SECTNO>
                        <SUBJECT>Issuance and sale of short-term debt obligations by bank holding companies.</SUBJECT>
                        <P>For text of interpretation, see § 250.221 of this chapter.</P>
                        <CITA>[38 FR 35231, Dec. 26, 1973]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.131</SECTNO>
                        <SUBJECT>Activities closely related to banking.</SUBJECT>
                        <P>(a) <E T="03">Bank management consulting advice.</E> The Board's amendment of § 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.</P>

                        <P>(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 § 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, <PRTPAGE P="171"/>including recruiting, training, evaluation and compensation; and security measures and procedures.</P>
                        <P>(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 (§ 250.141 of this chapter).</P>

                        <P>(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: <E T="03">Provided,</E> 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.</P>
                        <CITA>[39 FR 8318, Mar. 5, 1974; 39 FR 21120, June 19, 1974]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.132</SECTNO>
                        <SUBJECT>Acquisition of assets.</SUBJECT>
                        <P>(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)).</P>
                        <P>(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 <SU>1</SU>
                          <FTREF/> or (b) whether it constitutes the acquisition, in whole or in part, of a going concern.<SU>2</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>1</SU> 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.</P>
                        </FTNT>
                        <FTNT>
                          <P>
                            <SU>2</SU> In accordance with the provisions of section 4(c)(8) of the Act and § 225.4(b) of Regulation Y, the acquisition of a going concern requires prior Board approval.</P>
                        </FTNT>
                        <P>(c) The following examples illustrate transactions where prior Board approval will generally be required:</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>

                        <P>(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 <PRTPAGE P="172"/>business of the company being acquired.</P>
                        <P>(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.</P>
                        <CITA>[39 FR 35128, Sept. 30, 1974, as amended at Reg. Y, 57 FR 28779, June 29, 1992]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.133</SECTNO>
                        <SUBJECT>Computation of amount invested in foreign corporations under general consent procedures.</SUBJECT>
                        <P>For text of this interpretation, see § 211.111 of this subchapter.</P>
                        <CITA>[40 FR 43199, Sept. 19, 1975]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.134</SECTNO>
                        <SUBJECT>Escrow arrangements involving bank stock resulting in a violation of the Bank Holding Company Act.</SUBJECT>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[41 FR 9859, Mar. 8, 1976. Correctly designated at 41 FR 12009, Mar. 23, 1976]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.136</SECTNO>
                        <SUBJECT>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.</SUBJECT>
                        <P>For text of this interpretation, see § 211.112 of this subchapter.</P>
                        <CITA>[42 FR 752, Jan. 4, 1977]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.137</SECTNO>
                        <SUBJECT>Acquisitions of shares pursuant to section 4(c)(6) of the Bank Holding Company Act.</SUBJECT>

                        <P>(a) The Board has received a request for an interpretation of section 4(c)(6) of the Bank Holding Company Act <PRTPAGE P="173"/>(“Act”) <SU>1</SU>
                          <FTREF/> 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.</P>
                        <FTNT>
                          <P>
                            <SU>1</SU> It should be noted that every Board Order granting approval under section 4(c)(8) of the Act contains the following paragraph:</P>
                          <P>“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.”</P>
                          <P>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.</P>
                        </FTNT>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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:</P>
                        <P>(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.</P>

                        <FP>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 <PRTPAGE P="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.</FP>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <CITA>[42 FR 1263, Jan. 6, 1977; 42 FR 2951, Jan. 14, 1977]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.138</SECTNO>
                        <SUBJECT>Statement of policy concerning divestitures by bank holding companies.</SUBJECT>

                        <P>(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 <PRTPAGE P="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.</P>
                        <P>(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.</P>
                        <P>(1) <E T="03">Avoidance of delays in divestitures.</E> 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.</P>
                        <P>(2) <E T="03">Submissions and approval of divestiture plans.</E> 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.</P>
                        <P>(3) <E T="03">Periodic progress reports.</E> 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 <PRTPAGE P="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.</P>
                        <P>(4) <E T="03">Extensions of divestiture periods.</E> 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.</P>
                        <P>(5) <E T="03">Use of trustees.</E> 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.</P>
                        <P>(6) <E T="03">Presumptions of control.</E> 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 § 225.2 of Regulation Y, which sets forth certain additional control presumptions. Where one of these presumptions has <PRTPAGE P="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.</P>
                        <P>(7) <E T="03">Role of the Reserve Banks.</E> 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.</P>
                        <CITA>[42 FR 10969, Feb. 25, 1977]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.139</SECTNO>
                        <SUBJECT>Presumption of continued control under section 2(g)(3) of the Bank Holding Company Act.</SUBJECT>
                        <P>(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.<SU>1</SU>
                          <FTREF/> 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.” <SU>2</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>1</SU> 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.”</P>
                        </FTNT>
                        <FTNT>
                          <P>
                            <SU>2</SU> The Board has delegated to its General Counsel the authority to issue such determinations, 12 CFR 265.2(b)(1).</P>
                        </FTNT>
                        <P>(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.<SU>3</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>3</SU> 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.)</P>
                        </FTNT>
                        <PRTPAGE P="178"/>
                        <P>(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):</P>
                        <P>(1) The terms <E T="03">transferor</E> and <E T="03">transferee,</E> 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 <E T="03">subsidiary</E> of the transferee or group of transferees.</P>
                        <P>(2) The terms <E T="03">officers, directors,</E> and <E T="03">trustees,</E> 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 <E T="03">in common with</E> the transferor, but where the transferee himself holds such a position with the transferor. <SU>4</SU>

                          <FTREF/> It should be noted that where a transfer takes the form of a pro-rata distribution, or <E T="03">spin-off,</E> 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 <E T="03">spinoff</E> 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 <E T="03">divested</E> 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.<SU>5</SU>
                          <FTREF/> 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.</P>
                        <FTNT>
                          <P>

                            <SU>4</SU> It has been suggested that the words <E T="03">in common with</E> in section 2(g)(3) evidence an intent to make the presumption applicable only where the transferee is a <E T="03">company</E> 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.</P>
                        </FTNT>
                        <FTNT>
                          <P>
                            <SU>5</SU> 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.</P>
                        </FTNT>

                        <P>(3) Although section 2(g)(3) refers to transfers of <E T="03">shares</E> 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 <E T="03">shares.</E> 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 <PRTPAGE P="179"/>of a separate activity of the company, is deemed by the Board to involve a transfer of <E T="03">shares</E> of that company.</P>
                        <P>(4) The term <E T="03">indebtedness</E> 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:</P>
                        <P>(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.</P>

                        <P>(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 <E T="04">Federal Register</E> 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 <E T="04">Federal Register</E> notice of such applications has not served a useful purpose, the Board has decided to alter its procedures in such cases. In the future, <E T="04">Federal Register</E> 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.<SU>6</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>6</SU> 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.</P>
                          <P>Orders issued under section 2(g)(3) are published in the Federal Reserve “Bulletin.”</P>
                        </FTNT>
                        <SECAUTH>(12 U.S.C. 1841, 1844)</SECAUTH>
                        <CITA>[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]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.140</SECTNO>
                        <SUBJECT>Disposition of property acquired in satisfaction of debts previously contracted.</SUBJECT>

                        <P>(a) The Board recently considered the permissibility, under section 4 of the <PRTPAGE P="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.</P>
                        <P>(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.</P>

                        <P>(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 <E T="03">shares</E> “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.<SU>1</SU>

                          <FTREF/> 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” <E T="03">assets.</E> 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.</P>
                        <FTNT>
                          <P>
                            <SU>1</SU> 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.</P>
                        </FTNT>

                        <P>(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 <PRTPAGE P="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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <SECAUTH>(12 U.S.C. 1843 (c)(1)(d), (c)(2), (c)(8), and 1844 (b); 12 U.S.C. 1818)</SECAUTH>
                        <CITA>[45 FR 49905, July 28, 1980]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.141</SECTNO>
                        <SUBJECT>Operations subsidiaries of a bank holding company.</SUBJECT>

                        <P>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. (<E T="03">Northwestern Financial Corporation,</E> 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 <E T="03">banking</E> 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)</P>
                        <SECAUTH>(12 U.S.C. 1843(a)(2) and 1844(b))</SECAUTH>
                        <CITA>[45 FR 54326, July 15, 1980]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.142</SECTNO>
                        <SUBJECT>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.</SUBJECT>
                        <P>(a) <E T="03">Purpose of financial contract positions.</E> 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.</P>
                        <P>(b) <E T="03">Establishment of prudent written policies, appropriate limitations and internal controls and audit programs.</E> If the parent organization or nonbank subsidiary is taking or intends to take positions in financial contracts, that <PRTPAGE P="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.</P>
                        <P>(c) <E T="03">Formulating policies and recording financial contracts.</E> 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.</P>
                        <P>(d) <E T="03">Accounting.</E> 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.</P>
                        <P>(e) <E T="03">Board to monitor bank holding company transactions in financial contracts.</E> 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.</P>
                        <P>(f) <E T="03">Federal Reserve Bank notification.</E> 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.</P>
                        <SECAUTH>(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))</SECAUTH>
                        <CITA>[48 FR 7720, Feb. 24, 1983]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.143</SECTNO>
                        <SUBJECT>Policy statement on nonvoting equity investments by bank holding companies.</SUBJECT>
                        <P>(a) <E T="03">Introduction.</E> (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.</P>

                        <P>(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 <PRTPAGE P="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.</P>
                        <P>(b) <E T="03">Statutory and regulatory provisions.</E> (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:</P>
                        <P>(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;</P>
                        <P>(ii) The company controls in any manner the election of a majority of the board of directors of the bank; or</P>
                        <P>(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)).</P>
                        <P>(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)).</P>
                        <P>(c) <E T="03">Review of agreements.</E> (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:</P>
                        <P>(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);</P>
                        <P>(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;</P>
                        <P>(iii) Provisions that limit or restrict major policies, operations or decisions of the acquiree; and</P>
                        <P>(iv) Provisions that make acquisition of the acquiree or its subsidiary bank(s) by a third party either impossible or economically impracticable.</P>
                        <FP>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.</FP>
                        <P>(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.</P>

                        <P>(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 <PRTPAGE P="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.</P>
                        <P>(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.</P>
                        <P>(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)).</P>
                        <P>(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.<SU>1</SU>
                          <FTREF/> 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.</P>
                        <FTNT>
                          <P>
                            <SU>1</SU>
                            <E T="03"> See</E> Board letter dated March 18, 1982, to C. A. Cavendes, Sociedad Financiera.</P>
                        </FTNT>
                        <P>(d) <E T="03">Provisions that avoid control.</E> (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.</P>
                        <P>(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.</P>
                        <P>(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.</P>

                        <P>(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.<PRTPAGE P="185"/>
                        </P>
                        <P>(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.</P>
                        <P>(6) Finally, certain arrangements should clearly be avoided regardless of other provisions in the agreement that are designed to avoid control. These are:</P>
                        <P>(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;</P>
                        <P>(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</P>
                        <P>(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.</P>
                        <P>(e) <E T="03">Review by the Board.</E> 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.</P>
                        <CITA>[47 FR 30966, July 16, 1982]</CITA>
                      </SECTION>
                      <SECTION>
                        <SECTNO>§ 225.145</SECTNO>
                        <SUBJECT>Limitations established by the Competitive Equality Banking Act of 1987 on the activities and growth of nonbank banks.</SUBJECT>
                        <P>(a) <E T="03">Introduction.</E> 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.<SU>1</SU>
                          <FTREF/> 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).<SU>2</SU>
                          <FTREF/> The Board's views regarding <PRTPAGE P="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).</P>
                        <FTNT>
                          <P>

                            <SU>1</SU> 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 <E T="03">et seq.</E>) 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.</P>
                        </FTNT>
                        <FTNT>
                          <P>
                            <SU>2</SU> 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).</P>
                        </FTNT>
                        <P>(b) <E T="03">Congressional findings.</E> (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). <E T="03">See also</E> H. Rep. No. 100-261, 100th Cong., 1st Sess. 124 (1987) (the “Conference Report”).</P>

                        <P>(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. <E T="03">See</E> Conference Report at 125-126. The basic and stated purpose of the restrictions on grandfathered nonbank banks is to minimize these potential anticompetitive effects.</P>
                        <P>(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.<SU>3</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>3</SU>
                            <E T="03">E.g., Maryland National Corporation,</E> 73 Federal Reserve Bulletin 310, 313-314 (1987). <E T="03">Cf., Spokane &amp; Inland Empire Railroad Co.</E> v. <E T="03">United States,</E> 241 U.S. 344, 350 (1915).</P>
                        </FTNT>
                        <P>(c) <E T="03">Activity limitation</E>—(1) <E T="03">Scope of activity.</E> (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 <E T="03">activity</E> 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 <PRTPAGE P="187"/>to the term generally. First, it is clear that the term <E T="03">activity</E> 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.</P>
                        <P>(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.<SU>4</SU>
                          <FTREF/> 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.</P>
                        <FTNT>
                          <P>
                            <SU>4</SU> 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).</P>
                        </FTNT>

                        <P>(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, <E T="03">i.e.,</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. <E T="03">See</E> 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.<SU>5</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>5</SU> Conference Report at 124-125; S. Rep. No. 100-19 at 32.</P>
                        </FTNT>

                        <P>(iv) Finally, additional guidance as to the meaning of the term <E T="03">activity</E> 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 <E T="03">activity</E> 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.</P>

                        <P>(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 <PRTPAGE P="188"/>of activities, not to discrete products and services.</P>

                        <P>(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 <E T="03">activity</E> 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.</P>
                        <P>(2) <E T="03">Deposit-taking activities.</E> (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 <E T="03">bank</E> 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.</P>
                        <P>(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.</P>

                        <P>(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:
                        </P>
                        <EXTRACT>
                          <P>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. <SU>6</SU>
                            <FTREF/>
                          </P>
                        </EXTRACT>
                        <FTNT>
                          <P>
                            <SU>6</SU> H. Rep. No. 99-175, 99th Cong., 1st Sess. 13 (1985).</P>
                        </FTNT>

                        <P>(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 <E T="03">bank</E> 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. <SU>7</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>7</SU> See 12 U.S.C. 1841(c)(2) (D), (F), (H), and (I).</P>
                        </FTNT>
                        <P>(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.</P>
                        <P>(3) <E T="03">Lending.</E> 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 <E T="03">bank</E> in the BHC Act in effect both prior to <PRTPAGE P="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.</P>
                        <P>(i) <E T="03">Commercial lending.</E> For purposes of the activity limitation, a commercial loan is defined in accordance with the Supreme Court's decision in <E T="03">Board of Governors</E> v. <E T="03">Dimension Financial Corporation,</E> 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 <E T="03">Dimension</E> decision to that transaction. Thus, certain transactions of the type mentioned in the Board's ruling at issue in <E T="03">Dimension</E> and in the Senate and Conference Reports in the CEBA legislation <SU>8</SU>

                          <FTREF/> would be commercial loans if they meet the test for commercial loans established in <E T="03">Dimension.</E> 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.</P>
                        <FTNT>
                          <P>
                            <SU>8</SU> S. Rep. No. 100-19 at 31; Conference Report at 123.</P>
                        </FTNT>
                        <P>(ii) <E T="03">Other lending.</E> 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.</P>
                        <P>(4) <E T="03">Trust activities.</E> 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. <E T="03">See</E> 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).</P>
                        <P>(5) <E T="03">Other activities.</E> 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, <PRTPAGE P="190"/>to apply the activity limitation in section 4(f)(3) as the term <E T="03">activity</E> 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,<SU>9</SU>
                          <FTREF/> real estate development, real estate brokerage, real estate syndication, insurance underwriting, management consulting, futures commission merchant, or activities of the general type listed in § 225.25(b) of Regulation Y.</P>
                        <FTNT>
                          <P>
                            <SU>9</SU> 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).</P>
                        </FTNT>
                        <P>(6) <E T="03">Meaning of engaged in.</E> In order to be <E T="03">engaged in</E> 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.</P>
                        <P>(7) <E T="03">Meaning of as of</E> 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 <E T="03">as of</E> 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 <E T="03">bank</E> definition in the Act, the nonbank bank could not recommence that activity after enactment of CEBA.</P>
                        <P>(d) <E T="03">Cross-marketing limitation—</E>(1) <E T="03">In general.</E> 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.</P>
                        <P>(2) <E T="03">Examples of impermissible cross-marketing.</E> 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 <PRTPAGE P="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. <E T="03">Id.</E>
                        </P>
                        <P>(3) <E T="03">Permissible cross-marketing.</E> 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.</P>
                        <P>(4) <E T="03">Product approach to cross-marketing restriction.</E> (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.</P>
                        <P>(ii) The Board believes that the term <E T="03">product or service</E> 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 T="03">e.g.,</E> certificates of deposit) and differences in versions of the product (<E T="03">e.g.,</E> a one-year certificate of deposit) simply represent a difference in the terms of the product.<SU>10</SU>
                          <FTREF/> 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.<SU>11</SU>
                          <FTREF/>
                        </P>
                        <FTNT>
                          <P>
                            <SU>10</SU> American Bankers Association, <E T="03">Banking Terminology</E> (1981).</P>
                        </FTNT>
                        <FTNT>
                          <P>
                            <SU>11</SU> 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:</P>
                          <P>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).</P>
                        </FTNT>

                        <P>(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 T="03">e.g.</E> automobile, boat or home appliance loans), or second mortgage loans.<SU>12</SU>
                          <FTREF/> 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.</P>
                        <FTNT>
                          <P>

                            <SU>12</SU> In this regard, the Supreme Court in <E T="03">United States</E> v. <E T="03">Philadelphia National Bank,</E> 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).</P>
                        </FTNT>

                        <P>(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 <E T="03">product or service</E> 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 <PRTPAGE P="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.</P>
                        <P>(5) <E T="03">Change in terms and conditions permitted.</E> (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. <E T="03">See</E> 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.</P>
                        <P>(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.</P>
                        <P>(6) <E T="03">Meaning of offer or market.</E> In the Board's opinion, the terms <E T="03">offer or market</E> 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.</P>
                        <P>(7) <E T="03">Limitations on cross-marketing to in the same manner.</E> (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.</P>
                        <P>(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.</P>
                        <P>(8) <E T="03">Eligibility for cross-marketing grandfather exemption.</E> The Conference Report also clarifies that entitlement to <PRTPAGE P="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. <E T="03">Id.</E>; <E T="03">see also</E> S. Rep. No. 100-19 at 33-34.</P>
                        <P>(e) <E T="03">Eligibility for grandfathered nonbank bank status.</E> 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 <E T="03">bank</E> 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.</P>
                        <CITA>[Reg. Y, 53 FR 37746, Sept. 28, 1988, as amended by Reg. Y, 62 FR 9343, Feb. 28, 1997]</CITA>
                      </SECTION>
                    </SUBJGRP>
                  </SUBPART>
                  <SUBPART>
                    <HD SOURCE="HED">Subpart J—Merchant Banking Investments</HD>
                    <SOURCE>
                      <HD SOURCE="HED">Source:</HD>
                      <P>Reg. Y, 66 FR 8484, Jan. 31, 2001, unless otherwise noted.</P>
                    </SOURCE>
                    <SECTION>
                      <SECTNO>§ 225.170</SECTNO>
                      <SUBJECT>What type of investments are permitted by this subpart, and under what conditions may they be made?</SUBJECT>
                      <P>(a) <E T="03">What types of investments are permitted by this subpart?</E> 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.</P>
                      <P>(b) <E T="03">Must the investment be a bona fide merchant banking investment?</E> 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.</P>
                      <P>(c) <E T="03">What types of ownership interests may be acquired?</E> 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.</P>
                      <P>(d) <E T="03">Where in a financial holding company may merchant banking investments be made?</E> 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.</P>
                      <P>(e) <E T="03">May assets other than shares be held directly?</E> A financial holding company may not under this subpart acquire or <PRTPAGE P="194"/>control assets, other than debt or equity securities or other ownership interests in a company, unless:</P>
                      <P>(1) The assets are held by or promptly transferred to a portfolio company;</P>
                      <P>(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</P>
                      <P>(3) The portfolio company has management that is separate from the financial holding company to the extent required by § 225.171.</P>
                      <P>(f) <E T="03">What type of affiliate is required for a financial holding company to make merchant banking investments?</E> 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:</P>
                      <P>(1) <E T="03">Securities affiliate.</E> 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:</P>
                      <P>(i) A broker or dealer; or</P>
                      <P>(ii) A municipal securities dealer, including a separately identifiable department or division of a bank that is registered as a municipal securities dealer.</P>
                      <P>(2) <E T="03">Insurance affiliate with an investment adviser affiliate.</E> The financial holding company controls:</P>
                      <P>(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</P>
                      <P>(ii) A company that:</P>

                      <P>(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 <E T="03">et seq.</E>); and</P>
                      <P>(B) Provides investment advice to an insurance company.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.171</SECTNO>
                      <SUBJECT>What are the limitations on managing or operating a portfolio company held as a merchant banking investment?</SUBJECT>
                      <P>(a) <E T="03">May a financial holding company routinely manage or operate a portfolio company?</E> Except as permitted in paragraph (e) of this section, a financial holding company may not routinely manage or operate any portfolio company.</P>
                      <P>(b) <E T="03">When does a financial holding company routinely manage or operate a company?</E>
                      </P>
                      <P>(1) <E T="03">Examples of routine management or operation</E>—(i) <E T="03">Executive officer interlocks at the portfolio company.</E> 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.</P>
                      <P>(ii) Interlocks by executive officers of the financial holding company.—</P>
                      <P>(A) <E T="03">Prohibition.</E> 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.</P>
                      <P>(B) <E T="03">Definition.</E> 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:</P>
                      <P>(<E T="03">1</E>) A securities broker or dealer registered under the Securities Exchange Act of 1934;</P>
                      <P>(<E T="03">2</E>) A depository institution;</P>
                      <P>(<E T="03">3</E>) 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));</P>
                      <P>(<E T="03">4</E>) 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<PRTPAGE P="195"/>
                      </P>
                      <P>(<E T="03">5</E>) 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.</P>
                      <P>(iii) <E T="03">Covenants regarding ordinary course of business.</E> 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.</P>
                      <P>(2) <E T="03">Presumptions of routine management or operation.</E> A financial holding company is presumed to routinely manage or operate a portfolio company if:</P>
                      <P>(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</P>
                      <P>(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).</P>
                      <P>(c) <E T="03">How may a financial holding company rebut a presumption that it is routinely managing or operating a portfolio company?</E> 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.</P>
                      <P>(d) <E T="03">What arrangements do not involve routinely managing or operating a portfolio company?</E>—(1) <E T="03">Director representation at portfolio companies.</E> 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:</P>
                      <P>(i) The portfolio company employs officers and employees responsible for routinely managing and operating the company; and</P>
                      <P>(ii) The financial holding company does not routinely manage or operate the portfolio company, except as permitted in paragraph (e) of this section.</P>
                      <P>(2) <E T="03">Covenants or other provisions regarding extraordinary events.</E> 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:</P>
                      <P>(i) The acquisition of significant assets or control of another company by the portfolio company or any of its subsidiaries;</P>
                      <P>(ii) Removal or selection of an independent accountant or auditor or investment banker by the portfolio company;</P>
                      <P>(iii) Significant changes to the business plan or accounting methods or policies of the portfolio company;</P>
                      <P>(iv) Removal or replacement of any or all of the executive officers of the portfolio company;</P>
                      <P>(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;</P>
                      <P>(vi) The amendment of the articles of incorporation or by-laws (or similar governing documents) of the portfolio company; and</P>
                      <P>(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.</P>
                      <P>(3) <E T="03">Providing advisory and underwriting services to, and having consultations with, a portfolio company.</E> A financial holding company may:</P>

                      <P>(i) Provide financial, investment and management consulting advice to a <PRTPAGE P="196"/>portfolio company in a manner consistent with and subject to any restrictions on such activities contained in §§ 225.28(b)(6) or 225.86(b)(1) of this part (12 CFR 225.28(b)(6) and 225.86(b)(1));</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(e) <E T="03">When may a financial holding company routinely manage or operate a portfolio company?</E>—(1) <E T="03">Special circumstances required.</E> 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.</P>
                      <P>(2) <E T="03">Duration Limited.</E> 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.</P>
                      <P>(3) <E T="03">Notice required for extended involvement.</E> 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.</P>
                      <P>(4) <E T="03">Documentation required.</E> 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.</P>
                      <P>(f) <E T="03">May a depository institution or its subsidiary routinely manage or operate a portfolio company?</E>—(1) <E T="03">In general.</E> 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.</P>
                      <P>(2) <E T="03">Definition applying provisions governing routine management or operation.</E> For purposes of this section other than paragraph (e) and for purposes of § 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.</P>
                      <P>(3) <E T="03">Exception for certain subsidiaries of depository institutions.</E> 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 <E T="03">et seq.</E>), 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.172</SECTNO>
                      <SUBJECT>What are the holding periods permitted for merchant banking investments?</SUBJECT>
                      <P>(a) <E T="03">Must investments be made for resale?</E> 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.</P>
                      <P>(b) <E T="03">What period of time is generally permitted for holding merchant banking investments?</E>—(1) <E T="03">In general.</E> Except as provided in this section or § 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.</P>
                      <P>(2) <E T="03">Ownership interests acquired from or transferred to companies held under this subpart.</E> For purposes of paragraph <PRTPAGE P="197"/>(b)(1) of this section, shares, assets or ownership interests—</P>
                      <P>(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</P>
                      <P>(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—</P>
                      <P>(A) The financial holding company held the share, asset, or ownership interest under this subpart; and</P>
                      <P>(B) The financial holding company holds an interest in the acquiring company under this subpart.</P>
                      <P>(3) <E T="03">Interests previously held by a financial holding company under limited authority.</E> 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.</P>
                      <P>(4) <E T="03">Approval required to hold interests held in excess of time limit.</E> 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:</P>
                      <P>(i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time period;</P>
                      <P>(ii) Provide the reasons for the request, including information that addresses the factors in paragraph (b)(5) of this section; and</P>
                      <P>(iii) Explain the financial holding company's plan for divesting the shares, assets or ownership interests.</P>
                      <P>(5) <E T="03">Factors governing Board determinations.</E> 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:</P>
                      <P>(i) The cost to the financial holding company of disposing of the investment within the applicable period;</P>
                      <P>(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;</P>
                      <P>(iii) Market conditions;</P>
                      <P>(iv) The nature of the portfolio company's business;</P>
                      <P>(v) The extent and history of involvement by the financial holding company in the management and operations of the company; and</P>
                      <P>(vi) The average holding period of the financial holding company's merchant banking investments.</P>
                      <P>(6) <E T="03">Restrictions applicable to investments held beyond time period.</E> 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—</P>
                      <P>(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:</P>

                      <P>(A) Higher than the maximum marginal Tier 1 capital charge applicable under the Board's capital adequacy rules or guidelines (<E T="03">see</E> 12 CFR 225 Appendix A) to merchant banking investments held by that financial holding company; and</P>

                      <P>(B) In no event less than 25 percent of the adjusted carrying value of the investment; and<PRTPAGE P="198"/>
                      </P>
                      <P>(ii) Abide by any other restrictions that the Board may impose in connection with granting approval under paragraph (b)(4) of this section.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.173</SECTNO>
                      <SUBJECT>How are investments in private equity funds treated under this subpart?</SUBJECT>
                      <P>(a) <E T="03">What is a private equity fund?</E> For purposes of this subpart, a “private equity fund” is any company that:</P>
                      <P>(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;</P>
                      <P>(2) Is not an operating company;</P>
                      <P>(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;</P>
                      <P>(4) Has a maximum term of not more than 15 years; and</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">What form may a private equity fund take?</E> A private equity fund may be a corporation, partnership, limited liability company or other type of company that issues ownership interests in any form.</P>
                      <P>(c) <E T="03">What is the holding period permitted for interests in private equity funds?</E>
                      </P>
                      <P>(1) <E T="03">In general.</E> 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.</P>
                      <P>(2) <E T="03">Request to hold interest for longer period.</E> 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 § 225.172(b) of this subpart.</P>
                      <P>(3) <E T="03">Application of rules.</E> The rules described in § 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.</P>
                      <P>(d) <E T="03">How do the restrictions on routine management and operation apply to private equity funds and investments held through a private equity fund?</E>—(1) <E T="03">Portfolio companies held through a private equity fund.</E> 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 § 225.171(e).</P>
                      <P>(2) <E T="03">Private equity funds controlled by a financial holding company.</E> 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 § 225.171(e).</P>
                      <P>(3) <E T="03">Private equity funds that are not controlled by a financial holding company.</E> 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 § 225.171(e).</P>
                      <P>(4) <E T="03">When does a financial holding company control a private equity fund?</E> 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:</P>
                      <P>(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);</P>
                      <P>(ii) Owns or controls 25 percent or more of any class of voting shares or similar interests in the private equity fund;</P>

                      <P>(iii) In any manner selects, controls or constitutes a majority of the directors, trustees or management of the private equity fund; or<PRTPAGE P="199"/>
                      </P>
                      <P>(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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.174</SECTNO>
                      <SUBJECT>What aggregate thresholds apply to merchant banking investments?</SUBJECT>
                      <P>(a) <E T="03">In general.</E> 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:</P>
                      <P>(1) 30 percent of the Tier 1 capital of the financial holding company; or</P>
                      <P>(2) After excluding interests in private equity funds, 20 percent of the Tier 1 capital of the financial holding company.</P>
                      <P>(b) <E T="03">How do these thresholds apply to a private equity fund?</E> 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.</P>
                      <P>(c) <E T="03">How long do these thresholds remain in effect?</E> This § 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.175</SECTNO>
                      <SUBJECT>What risk management, record keeping and reporting policies are required to make merchant banking investments?</SUBJECT>
                      <P>(a) <E T="03">What internal controls and records are necessary?</E>—(1) <E T="03">General.</E> 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:</P>
                      <P>(i) Monitor and assess the carrying value, market value and performance of each investment and the aggregate portfolio;</P>
                      <P>(ii) Identify and manage the market, credit, concentration and other risks associated with such investments;</P>
                      <P>(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;</P>
                      <P>(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</P>

                      <P>(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 T="03">e.g.,</E> fiduciary principles or sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c, 371c-1), if applicable).</P>
                      <P>(2) <E T="03">Availability of records.</E> 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.</P>
                      <P>(b) <E T="03">What periodic reports must be filed?</E> A financial holding company must provide reports to the appropriate Reserve Bank in such format and at such times as the Board may prescribe.</P>
                      <P>(c) <E T="03">Is notice required for the acquisition of companies?—</E>(1) <E T="03">Fulfillment of statutory notice requirement.</E> 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 <PRTPAGE P="200"/>made under this subpart if the financial holding company has previously filed a notice under § 225.87 indicating that it had commenced merchant banking investment activities under this subpart.</P>
                      <P>(2) <E T="03">Notice of large individual investments.</E> 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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.176</SECTNO>
                      <SUBJECT>How do the statutory cross marketing and sections 23A and B limitations apply to merchant banking investments?</SUBJECT>
                      <P>(a) <E T="03">Are cross marketing activities prohibited?</E>—(1) <E T="03">In general.</E> A depository institution, including a subsidiary of a depository institution, controlled by a financial holding company may not:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(2) <E T="03">How are certain subsidiaries treated?</E> 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 <E T="03">et seq.</E>; 12 U.S.C. 611 <E T="03">et seq.</E>), 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 <E T="03">et seq.</E>).</P>
                      <P>(3) <E T="03">How do the cross marketing restrictions apply to private equity funds?</E> The restriction contained in paragraph (a)(1) of this section does not apply to:</P>
                      <P>(i) Portfolio companies held by a private equity fund that the financial holding company does not control; or</P>
                      <P>(ii) The sale, offer or marketing of any interest in a private equity fund, whether or not controlled by the financial holding company.</P>
                      <P>(b) <E T="03">When are companies held under section 4(k)(4)(H) affiliates under sections 23A and B?—</E>(1) <E T="03">Rebuttable presumption of control.</E> 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.</P>
                      <P>(2) <E T="03">Request to rebut presumption.</E> 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.</P>
                      <P>(3) <E T="03">Presumptions that control does not exist.</E> 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:</P>
                      <P>(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;</P>

                      <P>(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 <PRTPAGE P="201"/>(or individual exercising similar functions) of the company; or</P>
                      <P>(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.</P>
                      <P>(4) <E T="03">Convertible instruments.</E> For purposes of paragraph (b)(1) of this section, equity capital includes options, warrants and any other instrument convertible into equity capital.</P>
                      <P>(5) <E T="03">Application of presumption to private equity funds.</E> 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 § 225.173(d)(4).</P>
                      <P>(6) <E T="03">Application of sections 23A and B to U.S. branches and agencies of foreign banks.</E> 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—</P>
                      <P>(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</P>
                      <P>(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.</P>
                    </SECTION>
                    <SECTION>
                      <SECTNO>§ 225.177</SECTNO>
                      <SUBJECT>Definitions.</SUBJECT>
                      <P>(a) <E T="03">What do references to a financial holding company include?—</E>(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.</P>
                      <P>(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.</P>
                      <P>(b) <E T="03">What do references to a depository institution include?</E> For purposes of this subpart, the term “depository institution” includes a U.S. branch or agency of a foreign bank.</P>
                      <P>(c) <E T="03">What is a portfolio company?</E> A portfolio company is any company or entity:</P>
                      <P>(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</P>
                      <P>(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.</P>
                      <P>(d) <E T="03">Who are the executive officers of a company?—</E>(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.</P>
                      <P>(2) The term “executive officer” does not include—</P>

                      <P>(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<PRTPAGE P="202"/>
                      </P>
                      <P>(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.</P>
                    </SECTION>
                    <SUBJGRP>
                      <HD SOURCE="HED">Conditions to Orders</HD>
                      <SECTION>
                        <SECTNO>§ 225.200</SECTNO>
                        <SUBJECT>Conditions to Board's section 20 orders.</SUBJECT>
                        <P>(a) <E T="03">Introduction.</E> 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.</P>
                        <P>(b) <E T="03">Conditions.</E> As a condition of each order approving establishment of a section 20 subsidiary, a bank holding company shall comply with the following conditions.</P>
                        <P>(1) <E T="03">Capital.</E> (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.</P>
                        <P>(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,<SU>1</SU>
                          <FTREF/> or order the bank holding company to divest the section 20 subsidiary.</P>
                        <FTNT>
                          <P>

                            <SU>1</SU> Firewalls 5-8, 19, 21 and 22 of <E T="03">J.P. Morgan &amp; Co., The Chase Manhattan Corp., Bankers Trust New York Corp., Citicorp, and Security Pacific Corp.,</E> 75 Federal Reserve Bulletin 192, 214-16 (1989).</P>
                        </FTNT>
                        <P>(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,<SU>2</SU>
                          <FTREF/> or order the foreign bank to divest the section 20 subsidiary.</P>
                        <FTNT>
                          <P>

                            <SU>2</SU> Firewalls 5-8, 19, 21 and 22 of <E T="03">Canadian Imperial Bank of Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank PLC,</E> 76 Federal Reserve Bulletin 158, (1990).</P>
                        </FTNT>
                        <P>(2) <E T="03">Internal controls.</E> (i) Each bank holding company or foreign bank shall cause its subsidiary banks, thrifts, branches or agencies <SU>3</SU>
                          <FTREF/> to adopt policies and procedures, including appropriate limits on exposure, to govern their participation in transactions underwritten or arranged by a section 20 affiliate.</P>
                        <FTNT>
                          <P>
                            <SU>3</SU> The terms “branch” and “agency” refer to a U.S. branch and agency of a foreign bank.</P>
                        </FTNT>

                        <P>(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 <PRTPAGE P="203"/>that evaluation is maintained for review by examiners of the appropriate federal banking agency and the Federal Reserve.</P>
                        <P>(3) <E T="03">Interlocks restriction.</E> (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.</P>
                        <P>(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.</P>
                        <P>(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.</P>
                        <P>(4) <E T="03">Customer disclosure</E>—(i) <E T="03">Disclosure to section 20 customers.</E> A section 20 subsidiary shall provide, in writing, to each of its retail customers,<SU>4</SU>
                          <FTREF/> 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.</P>
                        <FTNT>
                          <P>
                            <SU>4</SU> 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).</P>
                        </FTNT>
                        <P>(ii) <E T="03">Disclosures accompanying investment advice.</E> 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.</P>
                        <P>(5) <E T="03">Intra-day credit.</E> 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.</P>
                        <P>(6) <E T="03">Restriction on funding purchases of securities during underwriting period.</E> 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:</P>
                        <P>(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</P>
                        <P>(ii) The extension of credit is made in connection with clearing transactions for the section 20 affiliate.</P>
                        <P>(7) <E T="03">Reporting requirement.</E> (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.</P>
                        <P>(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.</P>
                        <P>(8) <E T="03">Foreign banks.</E> 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.</P>
                        <CITA>[62 FR 45306, Aug. 27, 1997, as amended by Reg. Y, 63 FR 14804, Mar. 27, 1998]</CITA>
                      </SECTION>
                    </SUBJGRP>
                    <APPENDIX>
                      <PRTPAGE P="204"/>
                      <EAR>Pt. 225, App. A</EAR>
                      <HD SOURCE="HED">Appendix A to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure</HD>
                      <HD SOURCE="HD1">I. Overview</HD>

                      <P>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 (<E T="03">banking organizations</E>).<SU>1</SU>
                        <FTREF/> 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.<SU>2</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>1</SU> Supervisory ratios that relate capital to total assets for bank holding companies are outlined in appendices B and D of this part.</P>
                      </FTNT>
                      <FTNT>
                        <P>
                          <SU>2</SU> 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.</P>
                      </FTNT>
                      <P>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).<SU>3</SU>
                        <FTREF/> 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.</P>
                      <FTNT>
                        <P>
                          <SU>3</SU> 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.</P>
                      </FTNT>
                      <P>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.</P>
                      <P>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.</P>
                      <P>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;<SU>4</SU>
                        <FTREF/> or (b) the parent company has a significant amount of outstanding debt that is held by the general public.</P>
                      <FTNT>
                        <P>
                          <SU>4</SU> 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.</P>
                      </FTNT>
                      <P>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.</P>

                      <P>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.<PRTPAGE P="205"/>
                      </P>
                      <P>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.</P>
                      <P>The risk-based capital guidelines establish <E T="03">minimum</E> 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.</P>
                      <P>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.</P>
                      <HD SOURCE="HD1">II. Definition of Qualifying Capital for the Risk Based Capital Ratio</HD>
                      <P>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.</P>
                      <P>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.</P>
                      <P>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.<SU>5</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>5</SU> 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.</P>
                      </FTNT>
                      <HD SOURCE="HD2">A. The Components of Qualifying Capital</HD>
                      <P>1. <E T="03">Core capital elements (tier 1 capital).</E> 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:</P>
                      <P>(i) Common stockholders' equity;</P>
                      <P>(ii) Qualifying noncumulative perpetual preferred stock (including related surplus);</P>
                      <P>(iii) Qualifying cumulative perpetual preferred stock (including related surplus), subject to certain limitations described below; and</P>
                      <P>(iv) Minority interest in the equity accounts of consolidated subsidiaries.</P>
                      <P>Tier 1 capital is generally defined as the sum of core capital elements <SU>6</SU>

                        <FTREF/> 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.<E T="03">B.</E> of this appendix A.</P>
                      <FTNT>
                        <P>
                          <SU>6</SU> [Reserved]</P>
                      </FTNT>
                      <P>a. <E T="03">Common stockholders' equity.</E> 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 <PRTPAGE P="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.</P>
                      <P>b. <E T="03">Perpetual preferred stock.</E> 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) <E T="03">and</E> only if the issuer has the ability and legal right to defer or eliminate preferred dividends.</P>
                      <P>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.<SU>7</SU>
                        <FTREF/> Such instruments, however, qualify for inclusion in Tier 2 capital.</P>
                      <FTNT>
                        <P>
                          <SU>7</SU> 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.</P>
                      </FTNT>
                      <P>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).</P>
                      <P>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.</P>
                      <P>c. <E T="03">Minority interest in equity accounts of consolidated subsidiaries</E>. 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.</P>
                      <P>2. <E T="03">Supplementary capital elements (tier 2 capital).</E> The tier 2 component of an institution's qualifying capital may consist of the following items that are defined as supplementary capital elements:</P>
                      <P>(i) Allowance for loan and lease losses (subject to limitations discussed below);</P>
                      <P>(ii) Perpetual preferred stock and related surplus (subject to conditions discussed below);</P>
                      <P>(iii) Hybrid capital instruments (as defined below), perpetual debt, and mandatory convertible debt securities;</P>
                      <P>(iv) Term subordinated debt and intermediate-term preferred stock, including related surplus (subject to limitations discussed below);</P>
                      <P>(v) Unrealized holding gains on equity securities (subject to limitations discussed in section II.A.2.e. of this appendix).</P>

                      <P>The maximum amount of tier 2 capital that may be included in an institution's <PRTPAGE P="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.<E T="03">B.</E> of this appendix A).</P>
                      <P>The elements of supplementary capital are discussed in greater detail below.<SU>8</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>8</SU> [Reserved]</P>
                      </FTNT>
                      <P>a. <E T="03">Allowance for loan and lease losses.</E> 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,” <SU>9</SU>
                        <FTREF/> and reserves created against identified losses.</P>
                      <FTNT>
                        <P>
                          <SU>9</SU> 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.</P>
                      </FTNT>
                      <P>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.<SU>10</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>10</SU> 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.</P>
                      </FTNT>
                      <P>b. <E T="03">Perpetual preferred stock.</E> 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.<SU>11</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>11</SU> 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.</P>
                      </FTNT>
                      <P>c. <E T="03">Hybrid capital instruments, perpetual debt, and mandatory convertible debt securities.</E> 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:</P>
                      <P>(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.</P>
                      <P>(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.)</P>
                      <P>(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.</P>

                      <P>(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), <E T="03">and</E> b) the issuer eliminates cash dividends on common and preferred stock.</P>
                      <P>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.</P>
                      <P>d. <E T="03">Subordinated debt and intermediate-term preferred stock.</E> (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.<PRTPAGE P="208"/>
                      </P>
                      <P>(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.<SU>12</SU>
                        <FTREF/> (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.) <SU>13</SU>
                        <FTREF/> 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.</P>
                      <FTNT>
                        <P>
                          <SU>12</SU> 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.</P>
                      </FTNT>
                      <FTNT>
                        <P>
                          <SU>13</SU> 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.</P>
                      </FTNT>
                      <P>e. <E T="03">Unrealized gains on equity securities and unrealized gains (losses) on other assets.</E> 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.</P>
                      <P>f. <E T="03">Revaluation reserves.</E> 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.</P>
                      <P>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.</P>
                      <HD SOURCE="HD2">B. Deductions from Capital and Other Adjustments</HD>
                      <P>Certain assets are deducted from an organization's capital for the purpose of calculating the risk-based capital ratio.<SU>14</SU>
                        <FTREF/> These assets include:</P>
                      <FTNT>
                        <P>
                          <SU>14</SU> 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.</P>
                      </FTNT>
                      <P>(i)(a) Goodwill—deducted from the sum of core capital elements.</P>
                      <P>(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.</P>
                      <P>(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.</P>
                      <P>(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).</P>
                      <P>(iii) Reciprocal holdings of capital instruments of banking organizations—deducted from total capital components.</P>
                      <P>(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.</P>

                      <P>(v) Nonfinancial equity investments—portions are deducted from the sum of core capital elements in accordance with section II.<E T="03">B.</E>5 of this appendix A.</P>
                      <P>1. <E T="03">Goodwill and other intangible assets</E>—a. <E T="03">Goodwill.</E> Goodwill is an intangible asset that represents the excess of the purchase price <PRTPAGE P="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.</P>
                      <P>b. <E T="03">Other intangible assets.</E> 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.</P>
                      <P>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.</P>
                      <P>c. <E T="03">Credit-enhancing interest-only strips receivables (I/Os)</E> 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 <E T="03">pro rata</E> 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.</P>
                      <P>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.</P>
                      <P>d. <E T="03">Fair value limitation.</E> 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.</P>
                      <P>e. <E T="03">Tier 1 capital limitation.</E> 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.<SU>15</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>15</SU> 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.</P>
                      </FTNT>

                      <P>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 <PRTPAGE P="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.</P>
                      <P>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.</P>
                      <P>f. <E T="03">Valuation.</E> 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.</P>
                      <P>g. <E T="03">Growing organizations.</E> 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.</P>
                      <P>2. <E T="03">Investments in certain subsidiaries—</E> a. <E T="03">Unconsolidated banking or finance subsidiaries.</E> The aggregate amount of investments in banking or finance subsidiaries <SU>16</SU>
                        <FTREF/> 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.<SU>17</SU>
                        <FTREF/> 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.</P>
                      <FTNT>
                        <P>
                          <SU>16</SU> 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.</P>
                      </FTNT>
                      <FTNT>
                        <P>
                          <SU>17</SU> 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.</P>
                      </FTNT>
                      <P>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.</P>
                      <P>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.</P>
                      <P>b. <E T="03">Other subsidiaries and investments.</E> 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 <PRTPAGE P="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.<SU>18</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>18</SU> 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.</P>
                      </FTNT>
                      <P>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.<SU>19</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>19</SU> In assessing the overall capital adequacy of a banking organization, the Federal Reserve may also consider the organization's fully consolidated capital position.</P>
                      </FTNT>
                      <P>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.<SU>20</SU>
                        <FTREF/>
                      </P>
                      <FTNT>
                        <P>
                          <SU>20</SU> 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.</P>
                      </FTNT>
                      <P>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.</P>
                      <P>The Federal Reserve will not automatically deduct investments in other unconsolidated subsidiaries or investments in joint ventures and associated companies.<SU>21</SU>
                        <FTREF/> 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.</P>
                      <FTNT>
                        <P>
                          <SU>21</SU> 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.</P>
                      </FTNT>
                      <P>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.</P>
                      <P>In considering the appropriateness of such adjustments or actions, the Federal Reserve will generally take into account whether:</P>

                      <P>(1) The parent banking organization has significant influence over the financial or <PRTPAGE P="212"/>managerial policies or operations of the subsidiary, joint venture, or associated company;</P>
                      <P>(2) The banking organization is the largest investor in the affiliated company; or</P>
                      <P>(3) Other circumstances prevail that appear to closely tie the activities of the affiliated company to the parent banking organization.</P>
                      <P>3. <E T="03">Reciprocal holdings of banking organizations' capital instruments.</E> Reciprocal holdings of banking organizations' capital instruments (that i