[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2012 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

          Title 12

Banks and Banking


________________________

Parts 220 to 229

                         Revised as of January 1, 2012

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2012
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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As of January 1, 2012

Title 12, Part 200 to 299,

Revised as of January 1, 2011

Is Replaced by

Title 12, Parts 200 to 229

and

Title 12, Part 230 to 299



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                            Table of Contents



                                                                    Page
  Explanation.................................................     vii

  Title 12:
          Chapter II--Federal Reserve System (Continued)             3
  Finding Aids:
      Table of CFR Titles and Chapters........................    1031
      Alphabetical List of Agencies Appearing in the CFR......    1051
      List of CFR Sections Affected...........................    1061

[[Page vi]]





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

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

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

[[Page vii]]



                               EXPLANATION

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

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

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

LEGAL STATUS

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noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

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OMB CONTROL NUMBERS

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

[[Page viii]]

Many agencies have begun publishing numerous OMB control numbers as 
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OBSOLETE PROVISIONS

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that volume.

[[Page ix]]

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the revision dates of the 50 CFR titles.

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    Raymond A. Mosley,
    Director,
    Office of the Federal Register.
    January 1, 2012.







[[Page xi]]



                               THIS TITLE

    Title 12--Banks and Banking is composed of eight volumes. The parts 
in these volumes are arranged in the following order: Parts 1-199, 200-
219, 220-229, 230-299, 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, 
third and fourth volumes containing parts 200-299 are comprised of 
chapter II--Federal Reserve System. The fifth 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 
sixth volume containing parts 500-599 is comprised of chapter V--Office 
of Thrift Supervision, Department of the Treasury. The seventh 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 eighth 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, 2012.

    For this volume, Jonn Lilyea was Chief Editor. The Code of Federal 
Regulations publication program is under the direction of Michael L. 
White, assisted by Ann Worley.


[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                  (This book contains parts 220 to 229)

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

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

[[Page 3]]



             CHAPTER II--FEDERAL RESERVE SYSTEM (CONTINUED)




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

     SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Part                                                                Page
220             Credit by brokers and dealers (Regulation T)           5
221             Credit by banks and persons other than 
                    brokers or dealers for the purpose of 
                    purchasing or carrying margin stock 
                    (Regulation U)..........................          34
222             Fair credit reporting (Regulation V)........          55
223             Transactions between member banks and their 
                    affiliates (Regulation W)...............         116
224             Borrowers of securities credit (Regulation 
                    X)......................................         144
225             Bank holding companies and change in bank 
                    control (Regulation Y)..................         145
226             Truth in lending (Regulation Z).............         393
227             Unfair or deceptive acts or practices 
                    (Regulation AA).........................         870
228             Community reinvestment (Regulation BB)......         873
229             Availability of funds and collection of 
                    checks (Regulation CC)..................         895

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

[[Page 5]]



      SUBCHAPTER A_BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM



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



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

                             Interpretations

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

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

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



Sec. 220.1  Authority, purpose, and scope.

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

[[Page 6]]

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

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



Sec. 220.2  Definitions.

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

[[Page 7]]

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

[[Page 8]]

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

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



Sec. 220.3  General provisions.

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

[[Page 9]]

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

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



Sec. 220.4  Margin account.

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

[[Page 10]]

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

[[Page 11]]

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

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



Sec. 220.5  Special memorandum account.

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

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

[[Page 12]]



Sec. 220.6  Good faith account.

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

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



Sec. 220.7  Broker-dealer credit account.

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

[[Page 13]]

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

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



Sec. 220.8  Cash account.

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

[[Page 14]]

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

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



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

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

[[Page 15]]

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

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



Sec. 220.10  Borrowing and lending securities.

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

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



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

of foreign margin stocks.

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

[[Page 16]]

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

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

[[Page 17]]



Sec. 220.12  Supplement: margin requirements.

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

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

                             Interpretations



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

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

[11 FR 14155, Dec. 7, 1946]

[[Page 18]]



Sec. 220.102  [Reserved]



Sec. 220.103  Borrowing of securities.

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

[12 FR 5278, Aug. 2, 1947]



Sec. 220.104  [Reserved]



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

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

[[Page 19]]

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

[13 FR 2368, May 1, 1948]



Sec. Sec. 220.106-220.107  [Reserved]



Sec. 220.108  International Bank Securities.

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

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

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

[14 FR 5505, Sept. 7, 1949]



Sec. 220.109  [Reserved]



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

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

[[Page 20]]

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

[18 FR 4592, Aug. 5, 1953]



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

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

[[Page 21]]

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

[18 FR 5505, Sept. 15, 1953]



Sec. 220.112  [Reserved]



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

accounts.

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

[[Page 22]]

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

[22 FR 5954, July 27, 1957]



Sec. Sec. 220.114-220.116  [Reserved]



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

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


[[Page 23]]


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

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

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

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

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


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

[[Page 24]]

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

[27 FR 3511, Apr. 12, 1962]



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

cash account.

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

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


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

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

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

[[Page 25]]

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

[27 FR 10885, Nov. 8, 1962]



Sec. 220.119  Applicability of margin requirements to credit extended to 

corporation in connection with retirement of stock.

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

[[Page 26]]

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

[27 FR 12346, Dec. 13, 1962]



Sec. 220.120  [Reserved]



Sec. 220.121  Applicability of margin requirements to joint account between 

two creditors.

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

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


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

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


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

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


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

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

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

[[Page 27]]

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

[31 FR 7169, May 17, 1966]



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

credit.

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

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

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

[[Page 28]]

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

[[Page 29]]

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

[35 FR 3280, Feb. 21, 1970]



Sec. 220.123  Partial delayed issue contracts covering nonconvertible bonds.

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

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


[[Page 30]]


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

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


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

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


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

[36 FR 2777, Feb. 10, 1971]



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

credit.

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

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


[[Page 31]]


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

[37 FR 6568, Mar. 31, 1972]



Sec. 220.125-220.126  [Reserved]



Sec. 220.127  Independent broker/dealers arranging credit in connection with 

the sale of insurance premium funding programs.

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

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

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

[38 FR 11066, May 4, 1973]



Sec. 220.128  Treatment of simultaneous long and short positions in the same 

margin account when put or call options or combinations thereof on such stock 

are also outstanding in the account.

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

[[Page 32]]

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

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

                                * * * * *

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

                                * * * * *

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

                                * * * * *

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

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

[[Page 33]]

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

[38 FR 12098, May 9, 1973]



Sec. Sec. 220.129-220.130  [Reserved]



Sec. 220.131  Application of the arranging section to broker-dealer activities 

under SEC Rule 144A.

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

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

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

[[Page 34]]

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

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



Sec. 220.132  Credit to brokers and dealers.

    For text of this interpretation, see Sec. 221.125 of this 
subchapter.

[Reg. T, 61 FR 60167, Nov. 26, 1996, as amended at 72 FR 70486, Dec. 12, 
2007]



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

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

Contents



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

                             Interpretations

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

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

[[Page 35]]


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



Sec. 221.1  Authority, purpose, and scope.

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



Sec. 221.2  Definitions.

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

[[Page 36]]

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

[[Page 37]]

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



Sec. 221.3  General requirements.

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

[[Page 38]]

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

[[Page 39]]

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



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

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

[[Page 40]]



Sec. 221.5  Special purpose loans to brokers and dealers.

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

[[Page 41]]



Sec. 221.6  Exempted transactions.

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



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

collateral.

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

                             Interpretations



Sec. 221.101  Determination and effect of purpose of loan.

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

[[Page 42]]

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



Sec. 221.102  Application to committed credit where funds are disbursed 

thereafter.

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



Sec. 221.103  Loans to brokers or dealers.

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



Sec. 221.104  Federal credit unions.

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



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

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



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

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

[[Page 43]]

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



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

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



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

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

[[Page 44]]

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



Sec. 221.109  Loan to open-end investment company.

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



Sec. 221.110  Questions arising under this part.

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

[[Page 45]]

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



Sec. 221.111  Contribution to joint venture as extension of credit when the 

contribution is disproportionate to the contributor's share in the venture's 

profits or losses.

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



Sec. 221.112  Loans by bank in capacity as trustee.

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

[[Page 46]]

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



Sec. 221.113  Loan which is secured indirectly by stock.

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

[[Page 47]]

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



Sec. 221.114  Bank loans to purchase stock of American Telephone and Telegraph 

Company under Employees' Stock Plan.

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

[[Page 48]]

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



Sec. 221.115  Accepting a purpose statement through the mail without benefit 

of face-to-face interview.

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

[[Page 49]]

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



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

fund shares.

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

[[Page 50]]



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

collateral.

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



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

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

[[Page 51]]

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



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

options and stock purchase rights qualified or restricted under Internal 

Revenue Code.

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



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

to same customer.

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

[[Page 52]]

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



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

plans.

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



Sec. 221.122  Applicability of margin requirements to credit in connection 

with Insurance Premium Funding Programs.

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

[[Page 53]]

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



Sec. 221.123  Combined credit for exercising employee stock options and paying 

income taxes incurred as a result of such exercise.

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



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

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

[[Page 54]]

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

[[Page 55]]



Sec. 221.125  Credit to brokers and dealers.

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



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



                      Subpart A_General Provisions

Sec.
222.1 Purpose, scope, and effective dates.
222.2 Examples.
222.3 Definitions.

Subpart B [Reserved]

                      Subpart C_Affiliate Marketing

222.20 Coverage and definitions.
222.21 Affiliate marketing opt-out and exceptions.
222.22 Scope and duration of opt-out.
222.23 Contents of opt-out notice; consolidated and equivalent notices.
222.24 Reasonable opportunity to opt out.
222.25 Reasonable and simple methods of opting out.
222.26 Delivery of opt-out notices.
222.27 Renewal of opt-out.
222.28 Effective date, compliance date, and prospective application.

                      Subpart D_Medical Information

222.30 Obtaining or using medical information in connection with a 
          determination of eligibility for credit.
222.31 Limits on redisclosure of information.
222.32 Sharing medical information with affiliates.

              Subpart E_Duties of Furnishers of Information

222.40 Scope.
222.41 Definitions.
222.42 Reasonable policies and procedures concerning the accuracy and 
          integrity of furnished information.
222.43 Direct disputes.

Subpart F[Reserved]

         Subpart H_Duties of Users Regarding Risk-Based Pricing

222.70 Scope.
222.71 Definitions.
222.72 General requirements for risk-based pricing notices.
222.73 Content, form, and timing of risk-based pricing notices.
222.74 Exceptions.
222.75 Rules of construction.

    Subpart I_Duties of Users of Consumer Reports Regarding Address 
                   Discrepancies and Records Disposal

222.80-222.81 [Reserved]
222.82 Duties of users regarding address discrepancies.
222.83 Disposal of consumer information.

                   Subpart J_Identity Theft Red Flags

222.90 Duties regarding the detection, prevention, and mitigation of 
          identity theft.
222.91 Duties of card issuers regarding changes of address.

Appendix A to Part 222 [Reserved]
Appendix B to Part 222--Model Notices of Furnishing Negative Information
Appendix C to Part 222--Model Forms for Opt-Out Notices
Appendix D to Part 222 [Reserved]
Appendix E to Part 222--Interagency Guidelines Concerning the Accuracy 
          and Integrity of Information Furnished to Consumer Reporting 
          Agencies
Appendix F-G to Part 222 [Reserved]
Appendix H to Part 222--Model Forms for Risk-Based Pricing and Credit 
          Score Disclosure Exception Notices
AppendixI to Part 222 [Reserved]

[[Page 56]]

Appendix J to Part 222-- Interagency Guidelines on Identity Theft 
          Detection, Prevention, and Mitigation

    Authority: 15 U.S.C. 1681b, 1681c, 1681m and 1681s; Secs. 3, 214, 
and 216, Pub. L. 108-159, 117 Stat. 1952.

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



                      Subpart A_General Provisions



Sec. 222.1  Purpose, scope, and effective dates.

    (a) Purpose. The purpose of this part is to implement the Fair 
Credit Reporting Act. This part generally applies to persons that obtain 
and use information about consumers to determine the consumer's 
eligibility for products, services, or employment, share such 
information among affiliates, and furnish information to consumer 
reporting agencies.
    (b) Scope. (1) [Reserved]
    (2) Institutions covered. (i) Except as otherwise provided in this 
part, the regulations in this part apply to banks that are members of 
the Federal Reserve System (other than national banks) and their 
respective operating subsidiaries that are not functionally regulated 
within the meaning of section 5(c)(5) of the Bank Holding Company Act, 
as amended (12 U.S.C. 1844(c)(5)), branches and Agencies of foreign 
banks (other than Federal branches, Federal Agencies, and insured State 
branches of foreign banks), commercial lending companies owned or 
controlled by foreign banks, organizations operating under section 25 or 
25A of the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.), 
and bank holding companies and affiliates of such holding companies, but 
do not apply to affiliates of bank holding companies that are depository 
institutions regulated by another federal banking agency or to consumer 
reporting agencies.
    (ii) For purposes of appendix B to this part, financial institutions 
as defined in section 509 of the Gramm-Leach-Bliley Act (12 U.S.C. 
6809), may use the model notices in appendix B to this part to comply 
with the notice requirement in section 623(a)(7) of the Fair Credit 
Reporting Act (15 U.S.C. 1681s-2(a)(7)).
    (c) Effective dates. The applicable provisions of the Fair and 
Accurate Credit Transactions Act of 2003 (FACT Act), Pub. L. 108-159, 
117 Stat. 1952, shall be effective in accordance with the following 
schedule:
    (1) Provisions effective December 31, 2003. (i) Sections 151(a)(2), 
212(e), 214(c), 311(b), and 711, concerning the relation to state laws; 
and
    (ii) Each of the provisions of the FACT Act that authorizes an 
agency to issue a regulation or to take other action to implement the 
applicable provision of the FACT Act or the applicable provision of the 
Fair Credit Reporting Act, as amended by the FACT Act, but only with 
respect to that agency's authority to propose and adopt the implementing 
regulation or to take such other action.
    (2) Provisions effective March 31, 2004. (i) Section 111, concerning 
the definitions;
    (ii) Section 156, concerning the statute of limitations;
    (iii) Sections 312(d), (e), and (f), concerning the furnisher 
liability exception, liability and enforcement, and rule of 
construction, respectively;
    (iv) Section 313(a), concerning action regarding complaints;
    (v) Section 611, concerning communications for certain employee 
investigations; and
    (vi) Section 811, concerning clerical amendments.
    (3) Provisions effective December 1, 2004. (i) Section 112, 
concerning fraud alerts and active duty alerts;
    (ii) Section 114, concerning procedures for the identification of 
possible instances of identity theft;
    (iii) Section 115, concerning truncation of the social security 
number in a consumer report;
    (iv) Section 151(a)(1), concerning the summary of rights of identity 
theft victims;
    (v) Section 152, concerning blocking of information resulting from 
identity theft;
    (vi) Section 153, concerning the coordination of identity theft 
complaint investigations;
    (vii) Section 154, concerning the prevention of repollution of 
consumer reports;

[[Page 57]]

    (viii) Section 155, concerning notice by debt collectors with 
respect to fraudulent information;
    (ix) Section 211(c), concerning a summary of rights of consumers;
    (x) Section 212(a)-(d), concerning the disclosure of credit scores;
    (xi) Section 213(c), concerning enhanced disclosure of the means 
available to opt out of prescreened lists;
    (xii) Section 217(a), concerning the duty to provide notice to a 
consumer;
    (xiii) Section 311(a), concerning the risk-based pricing notice;
    (xiv) Section 312(a)-(c), concerning procedures to enhance the 
accuracy and integrity of information furnished to consumer reporting 
agencies;
    (xv) Section 314, concerning improved disclosure of the results of 
reinvestigation;
    (xvi) Section 315, concerning reconciling addresses;
    (xvii) Section 316, concerning notice of dispute through reseller; 
and
    (xviii) Section 317, concerning the duty to conduct a reasonable 
reinvestigation.

[68 FR 74469, Dec. 24, 2003, as amended at 69 FR 6530, Feb. 11, 2004; 69 
FR 33284, June 15, 2004; 69 FR 77618, Dec. 28, 2004; 72 FR 62954, Nov. 
7, 2007]



Sec. 222.2  Examples.

    The examples in this part are not exclusive. Compliance with an 
example, to the extent applicable, constitutes compliance with this 
part. Examples in a paragraph illustrate only the issue described in the 
paragraph and do not illustrate any other issue that may arise in this 
part.

[70 FR 70678, Nov. 22, 2005]



Sec. 222.3  Definitions.

    For purposes of this part, unless explicitly stated otherwise:
    (a) Act means the Fair Credit Reporting Act (15 U.S.C. 1681 et 
seq.).
    (b) Affiliate means any company that is related by common ownership 
or common corporate control with another company.
    (c) [Reserved]
    (d) Company means any corporation, limited liability company, 
business trust, general or limited partnership, association, or similar 
organization.
    (e) Consumer means an individual.
    (f)-(h) [Reserved]
    (i) Common ownership or common corporate control means a 
relationship between two companies under which:
    (1) One company has, with respect to the other company:
    (i) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting security of a company, 
directly or indirectly, or acting through one or more other persons;
    (ii) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of a company; or
    (iii) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of a company, as the Board 
determines; or
    (2) Any other person has, with respect to both companies, a 
relationship described in paragraphs (i)(1)(i) through (i)(1)(iii) of 
this section.
    (j) [Reserved]
    (k) Medical information means:
    (1) Information or data, whether oral or recorded, in any form or 
medium, created by or derived from a health care provider or the 
consumer, that relates to:
    (i) The past, present, or future physical, mental, or behavioral 
health or condition of an individual;
    (ii) The provision of health care to an individual; or
    (iii) The payment for the provision of health care to an individual.
    (2) The term does not include:
    (i) The age or gender of a consumer;
    (ii) Demographic information about the consumer, including a 
consumer's residence address or e-mail address;
    (iii) Any other information about a consumer that does not relate to 
the physical, mental, or behavioral health or condition of a consumer, 
including the existence or value of any insurance policy; or
    (iv) Information that does not identify a specific consumer.
    (l) Person means any individual, partnership, corporation, trust, 
estate cooperative, association, government or governmental subdivision 
or agency, or other entity.

[Reg. V, 70 FR 70678, Nov. 22, 2005, as amended at 72 FR 63756, Nov. 9, 
2007]

[[Page 58]]

Subpart B [Reserved]



                      Subpart C_Affiliate Marketing

    Source: Reg. V, 72 FR 62955, Nov. 7, 2007, unless otherwise noted.



Sec. 222.20  Coverage and definitions.

    (a) Coverage. Subpart C of this part applies to member banks of the 
Federal Reserve System (other than national banks) and their respective 
operating subsidiaries that are not functionally regulated within the 
meaning of section 5(c)(5) of the Bank Holding Company Act, as amended 
(12 U.S.C. 1844(c)(5)), branches and Agencies of foreign banks (other 
than Federal branches, Federal Agencies, and insured State branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25A of 
the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).
    (b) Definitions. For purposes of this subpart:
    (1) Clear and conspicuous. The term ``clear and conspicuous'' means 
reasonably understandable and designed to call attention to the nature 
and significance of the information presented.
    (2) Concise--(i) In general. The term ``concise'' means a reasonably 
brief expression or statement.
    (ii) Combination with other required disclosures. A notice required 
by this subpart may be concise even if it is combined with other 
disclosures required or authorized by federal or state law.
    (3) Eligibility information. The term ``eligibility information'' 
means any information the communication of which would be a consumer 
report if the exclusions from the definition of ``consumer report'' in 
section 603(d)(2)(A) of the Act did not apply. Eligibility information 
does not include aggregate or blind data that does not contain personal 
identifiers such as account numbers, names, or addresses.
    (4) Pre-existing business relationship--(i) In general. The term 
``pre-existing business relationship'' means a relationship between a 
person, or a person's licensed agent, and a consumer based on--
    (A) A financial contract between the person and the consumer which 
is in force on the date on which the consumer is sent a solicitation 
covered by this subpart;
    (B) The purchase, rental, or lease by the consumer of the person's 
goods or services, or a financial transaction (including holding an 
active account or a policy in force or having another continuing 
relationship) between the consumer and the person, during the 18-month 
period immediately preceding the date on which the consumer is sent a 
solicitation covered by this subpart; or
    (C) An inquiry or application by the consumer regarding a product or 
service offered by that person during the three-month period immediately 
preceding the date on which the consumer is sent a solicitation covered 
by this subpart.
    (ii) Examples of pre-existing business relationships. (A) If a 
consumer has a time deposit account, such as a certificate of deposit, 
at a depository institution that is currently in force, the depository 
institution has a pre-existing business relationship with the consumer 
and can use eligibility information it receives from its affiliates to 
make solicitations to the consumer about its products or services.
    (B) If a consumer obtained a certificate of deposit from a 
depository institution, but did not renew the certificate at maturity, 
the depository institution has a pre-existing business relationship with 
the consumer and can use eligibility information it receives from its 
affiliates to make solicitations to the consumer about its products or 
services for 18 months after the date of maturity of the certificate of 
deposit.
    (C) If a consumer obtains a mortgage, the mortgage lender has a pre-
existing business relationship with the consumer. If the mortgage lender 
sells the consumer's entire loan to an investor, the mortgage lender has 
a pre-existing business relationship with the consumer and can use 
eligibility information it receives from its affiliates to make 
solicitations to the consumer about its products or services for 18 
months after the date it sells the loan, and the investor has a pre-
existing

[[Page 59]]

business relationship with the consumer upon purchasing the loan. If, 
however, the mortgage lender sells a fractional interest in the 
consumer's loan to an investor but also retains an ownership interest in 
the loan, the mortgage lender continues to have a pre-existing business 
relationship with the consumer, but the investor does not have a pre-
existing business relationship with the consumer. If the mortgage lender 
retains ownership of the loan, but sells ownership of the servicing 
rights to the consumer's loan, the mortgage lender continues to have a 
pre-existing business relationship with the consumer. The purchaser of 
the servicing rights also has a pre-existing business relationship with 
the consumer as of the date it purchases ownership of the servicing 
rights, but only if it collects payments from or otherwise deals 
directly with the consumer on a continuing basis.
    (D) If a consumer applies to a depository institution for a product 
or service that it offers, but does not obtain a product or service from 
or enter into a financial contract or transaction with the institution, 
the depository institution has a pre-existing business relationship with 
the consumer and can therefore use eligibility information it receives 
from an affiliate to make solicitations to the consumer about its 
products or services for three months after the date of the application.
    (E) If a consumer makes a telephone inquiry to a depository 
institution about its products or services and provides contact 
information to the institution, but does not obtain a product or service 
from or enter into a financial contract or transaction with the 
institution, the depository institution has a pre-existing business 
relationship with the consumer and can therefore use eligibility 
information it receives from an affiliate to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (F) If a consumer makes an inquiry to a depository institution by e-
mail about its products or services, but does not obtain a product or 
service from or enter into a financial contract or transaction with the 
institution, the depository institution has a pre-existing business 
relationship with the consumer and can therefore use eligibility 
information it receives from an affiliate to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (G) If a consumer has an existing relationship with a depository 
institution that is part of a group of affiliated companies, makes a 
telephone call to the centralized call center for the group of 
affiliated companies to inquire about products or services offered by 
the insurance affiliate, and provides contact information to the call 
center, the call constitutes an inquiry to the insurance affiliate that 
offers those products or services. The insurance affiliate has a pre-
existing business relationship with the consumer and can therefore use 
eligibility information it receives from its affiliated depository 
institution to make solicitations to the consumer about its products or 
services for three months after the date of the inquiry.
    (iii) Examples where no pre-existing business relationship is 
created. (A) If a consumer makes a telephone call to a centralized call 
center for a group of affiliated companies to inquire about the 
consumer's existing account at a depository institution, the call does 
not constitute an inquiry to any affiliate other than the depository 
institution that holds the consumer's account and does not establish a 
pre-existing business relationship between the consumer and any 
affiliate of the account-holding depository institution.
    (B) If a consumer who has a deposit account with a depository 
institution makes a telephone call to an affiliate of the institution to 
ask about the affiliate's retail locations and hours, but does not make 
an inquiry about the affiliate's products or services, the call does not 
constitute an inquiry and does not establish a pre-existing business 
relationship between the consumer and the affiliate. Also, the 
affiliate's capture of the consumer's telephone number does not 
constitute an inquiry and does not establish a pre-existing business 
relationship between the consumer and the affiliate.

[[Page 60]]

    (C) If a consumer makes a telephone call to a depository institution 
in response to an advertisement that offers a free promotional item to 
consumers who call a toll-free number, but the advertisement does not 
indicate that the depository institution's products or services will be 
marketed to consumers who call in response, the call does not create a 
pre-existing business relationship between the consumer and the 
depository institution because the consumer has not made an inquiry 
about a product or service offered by the institution, but has merely 
responded to an offer for a free promotional item.
    (5) Solicitation--(i) In general. The term ``solicitation'' means 
the marketing of a product or service initiated by a person to a 
particular consumer that is--
    (A) Based on eligibility information communicated to that person by 
its affiliate as described in this subpart; and
    (B) Intended to encourage the consumer to purchase or obtain such 
product or service.
    (ii) Exclusion of marketing directed at the general public. A 
solicitation does not include marketing communications that are directed 
at the general public. For example, television, general circulation 
magazine, and billboard advertisements do not constitute solicitations, 
even if those communications are intended to encourage consumers to 
purchase products and services from the person initiating the 
communications.
    (iii) Examples of solicitations. A solicitation would include, for 
example, a telemarketing call, direct mail, e-mail, or other form of 
marketing communication directed to a particular consumer that is based 
on eligibility information received from an affiliate.
    (6) You means a person described in paragraph (a) of this section.



Sec. 222.21  Affiliate marketing opt-out and exceptions.

    (a) Initial notice and opt-out requirement--(1) In general. You may 
not use eligibility information about a consumer that you receive from 
an affiliate to make a solicitation for marketing purposes to the 
consumer, unless--
    (i) It is clearly and conspicuously disclosed to the consumer in 
writing or, if the consumer agrees, electronically, in a concise notice 
that you may use eligibility information about that consumer received 
from an affiliate to make solicitations for marketing purposes to the 
consumer;
    (ii) The consumer is provided a reasonable opportunity and a 
reasonable and simple method to ``opt out,'' or prohibit you from using 
eligibility information to make solicitations for marketing purposes to 
the consumer; and
    (iii) The consumer has not opted out.
    (2) Example. A consumer has a homeowner's insurance policy with an 
insurance company. The insurance company furnishes eligibility 
information about the consumer to its affiliated depository institution. 
Based on that eligibility information, the depository institution wants 
to make a solicitation to the consumer about its home equity loan 
products. The depository institution does not have a pre-existing 
business relationship with the consumer and none of the other exceptions 
apply. The depository institution is prohibited from using eligibility 
information received from its insurance affiliate to make solicitations 
to the consumer about its home equity loan products unless the consumer 
is given a notice and opportunity to opt out and the consumer does not 
opt out.
    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By an affiliate that has or has previously had a pre-existing 
business relationship with the consumer; or
    (ii) As part of a joint notice from two or more members of an 
affiliated group of companies, provided that at least one of the 
affiliates on the joint notice has or has previously had a pre-existing 
business relationship with the consumer.
    (b) Making solicitations--(1) In general. For purposes of this 
subpart, you make a solicitation for marketing purposes if--
    (i) You receive eligibility information from an affiliate;
    (ii) You use that eligibility information to do one or more of the 
following:

[[Page 61]]

    (A) Identify the consumer or type of consumer to receive a 
solicitation;
    (B) Establish criteria used to select the consumer to receive a 
solicitation; or
    (C) Decide which of your products or services to market to the 
consumer or tailor your solicitation to that consumer; and
    (iii) As a result of your use of the eligibility information, the 
consumer is provided a solicitation.
    (2) Receiving eligibility information from an affiliate, including 
through a common database. You may receive eligibility information from 
an affiliate in various ways, including when the affiliate places that 
information into a common database that you may access.
    (3) Receipt or use of eligibility information by your service 
provider. Except as provided in paragraph (b)(5) of this section, you 
receive or use an affiliate's eligibility information if a service 
provider acting on your behalf (whether an affiliate or a nonaffiliated 
third party) receives or uses that information in the manner described 
in paragraphs (b)(1)(i) or (b)(1)(ii) of this section. All relevant 
facts and circumstances will determine whether a person is acting as 
your service provider when it receives or uses an affiliate's 
eligibility information in connection with marketing your products and 
services.
    (4) Use by an affiliate of its own eligibility information. Unless 
you have used eligibility information that you receive from an affiliate 
in the manner described in paragraph (b)(1)(ii) of this section, you do 
not make a solicitation subject to this subpart if your affiliate:
    (i) Uses its own eligibility information that it obtained in 
connection with a pre-existing business relationship it has or had with 
the consumer to market your products or services to the consumer; or
    (ii) Directs its service provider to use the affiliate's own 
eligibility information that it obtained in connection with a pre-
existing business relationship it has or had with the consumer to market 
your products or services to the consumer, and you do not communicate 
directly with the service provider regarding that use.
    (5) Use of eligibility information by a service provider--(i) In 
general. You do not make a solicitation subject to Subpart C of this 
part if a service provider (including an affiliated or third-party 
service provider that maintains or accesses a common database that you 
may access) receives eligibility information from your affiliate that 
your affiliate obtained in connection with a pre-existing business 
relationship it has or had with the consumer and uses that eligibility 
information to market your products or services to the consumer, so long 
as--
    (A) Your affiliate controls access to and use of its eligibility 
information by the service provider (including the right to establish 
the specific terms and conditions under which the service provider may 
use such information to market your products or services);
    (B) Your affiliate establishes specific terms and conditions under 
which the service provider may access and use the affiliate's 
eligibility information to market your products and services (or those 
of affiliates generally) to the consumer, such as the identity of the 
affiliated companies whose products or services may be marketed to the 
consumer by the service provider, the types of products or services of 
affiliated companies that may be marketed, and the number of times the 
consumer may receive marketing materials, and periodically evaluates the 
service provider's compliance with those terms and conditions;
    (C) Your affiliate requires the service provider to implement 
reasonable policies and procedures designed to ensure that the service 
provider uses the affiliate's eligibility information in accordance with 
the terms and conditions established by the affiliate relating to the 
marketing of your products or services;
    (D) Your affiliate is identified on or with the marketing materials 
provided to the consumer; and
    (E) You do not directly use your affiliate's eligibility information 
in the manner described in paragraph (b)(1)(ii) of this section.
    (ii) Writing requirements. (A) The requirements of paragraphs 
(b)(5)(i)(A) and (C) of this section must be set forth in a written 
agreement between your affiliate and the service provider; and

[[Page 62]]

    (B) The specific terms and conditions established by your affiliate 
as provided in paragraph (b)(5)(i)(B) of this section must be set forth 
in writing.
    (6) Examples of making solicitations. (i) A consumer has a deposit 
account with a depository institution, which is affiliated with an 
insurance company. The insurance company receives eligibility 
information about the consumer from the depository institution. The 
insurance company uses that eligibility information to identify the 
consumer to receive a solicitation about insurance products, and, as a 
result, the insurance company provides a solicitation to the consumer 
about its insurance products. Pursuant to paragraph (b)(1) of this 
section, the insurance company has made a solicitation to the consumer.
    (ii) The same facts as in the example in paragraph (b)(6)(i) of this 
section, except that after using the eligibility information to identify 
the consumer to receive a solicitation about insurance products, the 
insurance company asks the depository institution to send the 
solicitation to the consumer and the depository institution does so. 
Pursuant to paragraph (b)(1) of this section, the insurance company has 
made a solicitation to the consumer because it used eligibility 
information about the consumer that it received from an affiliate to 
identify the consumer to receive a solicitation about its products or 
services, and, as a result, a solicitation was provided to the consumer 
about the insurance company's products.
    (iii) The same facts as in the example in paragraph (b)(6)(i) of 
this section, except that eligibility information about consumers that 
have deposit accounts with the depository institution is placed into a 
common database that all members of the affiliated group of companies 
may independently access and use. Without using the depository 
institution's eligibility information, the insurance company develops 
selection criteria and provides those criteria, marketing materials, and 
related instructions to the depository institution. The depository 
institution reviews eligibility information about its own consumers 
using the selection criteria provided by the insurance company to 
determine which consumers should receive the insurance company's 
marketing materials and sends marketing materials about the insurance 
company's products to those consumers. Even though the insurance company 
has received eligibility information through the common database as 
provided in paragraph (b)(2) of this section, it did not use that 
information to identify consumers or establish selection criteria; 
instead, the depository institution used its own eligibility 
information. Therefore, pursuant to paragraph (b)(4)(i) of this section, 
the insurance company has not made a solicitation to the consumer.
    (iv) The same facts as in the example in paragraph (b)(6)(iii) of 
this section, except that the depository institution provides the 
insurance company's criteria to the depository institution's service 
provider and directs the service provider to use the depository 
institution's eligibility information to identify depository institution 
consumers who meet the criteria and to send the insurance company's 
marketing materials to those consumers. The insurance company does not 
communicate directly with the service provider regarding the use of the 
depository institution's information to market its products to the 
depository institution's consumers. Pursuant to paragraph (b)(4)(ii) of 
this section, the insurance company has not made a solicitation to the 
consumer.
    (v) An affiliated group of companies includes a depository 
institution, an insurance company, and a service provider. Each 
affiliate in the group places information about its consumers into a 
common database. The service provider has access to all information in 
the common database. The depository institution controls access to and 
use of its eligibility information by the service provider. This control 
is set forth in a written agreement between the depository institution 
and the service provider. The written agreement also requires the 
service provider to establish reasonable policies and procedures 
designed to ensure that the service provider uses the depository 
institution's eligibility information in accordance with specific terms 
and conditions established by the depository institution

[[Page 63]]

relating to the marketing of the products and services of all 
affiliates, including the insurance company. In a separate written 
communication, the depository institution specifies the terms and 
conditions under which the service provider may use the depository 
institution's eligibility information to market the insurance company's 
products and services to the depository institution's consumers. The 
specific terms and conditions are: A list of affiliated companies 
(including the insurance company) whose products or services may be 
marketed to the depository institution's consumers by the service 
provider; the specific products or types of products that may be 
marketed to the depository institution's consumers by the service 
provider; the categories of eligibility information that may be used by 
the service provider in marketing products or services to the depository 
institution's consumers; the types or categories of the depository 
institution's consumers to whom the service provider may market products 
or services of depository institution affiliates; the number and/or 
types of marketing communications that the service provider may send to 
the depository institution's consumers; and the length of time during 
which the service provider may market the products or services of the 
depository institution's affiliates to its consumers. The depository 
institution periodically evaluates the service provider's compliance 
with these terms and conditions. The insurance company asks the service 
provider to market insurance products to certain consumers who have 
deposit accounts with the depository institution. Without using the 
depository institution's eligibility information, the insurance company 
develops selection criteria and provides those criteria, marketing 
materials, and related instructions to the service provider. The service 
provider uses the depository institution's eligibility information from 
the common database to identify the depository institution's consumers 
to whom insurance products will be marketed. When the insurance 
company's marketing materials are provided to the identified consumers, 
the name of the depository institution is displayed on the insurance 
marketing materials, an introductory letter that accompanies the 
marketing materials, an account statement that accompanies the marketing 
materials, or the envelope containing the marketing materials. The 
requirements of paragraph (b)(5) of this section have been satisfied, 
and the insurance company has not made a solicitation to the consumer.
    (vi) The same facts as in the example in paragraph (b)(6)(v) of this 
section, except that the terms and conditions permit the service 
provider to use the depository institution's eligibility information to 
market the products and services of other affiliates to the depository 
institution's consumers whenever the service provider deems it 
appropriate to do so. The service provider uses the depository 
institution's eligibility information in accordance with the discretion 
afforded to it by the terms and conditions. Because the terms and 
conditions are not specific, the requirements of paragraph (b)(5) of 
this section have not been satisfied.
    (c) Exceptions. The provisions of this subpart do not apply to you 
if you use eligibility information that you receive from an affiliate:
    (1) To make a solicitation for marketing purposes to a consumer with 
whom you have a pre-existing business relationship;
    (2) To facilitate communications to an individual for whose benefit 
you provide employee benefit or other services pursuant to a contract 
with an employer related to and arising out of the current employment 
relationship or status of the individual as a participant or beneficiary 
of an employee benefit plan;
    (3) To perform services on behalf of an affiliate, except that this 
subparagraph shall not be construed as permitting you to send 
solicitations on behalf of an affiliate if the affiliate would not be 
permitted to send the solicitation as a result of the election of the 
consumer to opt out under this subpart;
    (4) In response to a communication about your products or services 
initiated by the consumer;
    (5) In response to an authorization or request by the consumer to 
receive solicitations; or

[[Page 64]]

    (6) If your compliance with this subpart would prevent you from 
complying with any provision of State insurance laws pertaining to 
unfair discrimination in any State in which you are lawfully doing 
business.
    (d) Examples of exceptions--(1) Example of the pre-existing business 
relationship exception. A consumer has a deposit account with a 
depository institution. The consumer also has a relationship with the 
depository institution's securities affiliate for management of the 
consumer's securities portfolio. The depository institution receives 
eligibility information about the consumer from its securities affiliate 
and uses that information to make a solicitation to the consumer about 
the depository institution's wealth management services. The depository 
institution may make this solicitation even if the consumer has not been 
given a notice and opportunity to opt out because the depository 
institution has a pre-existing business relationship with the consumer.
    (2) Examples of service provider exception. (i) A consumer has an 
insurance policy issued by an insurance company. The insurance company 
furnishes eligibility information about the consumer to its affiliated 
depository institution. Based on that eligibility information, the 
depository institution wants to make a solicitation to the consumer 
about its deposit products. The depository institution does not have a 
pre-existing business relationship with the consumer and none of the 
other exceptions in paragraph (c) of this section apply. The consumer 
has been given an opt-out notice and has elected to opt out of receiving 
such solicitations. The depository institution asks a service provider 
to send the solicitation to the consumer on its behalf. The service 
provider may not send the solicitation on behalf of the depository 
institution because, as a result of the consumer's opt-out election, the 
depository institution is not permitted to make the solicitation.
    (ii) The same facts as in paragraph (d)(2)(i) of this section, 
except the consumer has been given an opt-out notice, but has not 
elected to opt out. The depository institution asks a service provider 
to send the solicitation to the consumer on its behalf. The service 
provider may send the solicitation on behalf of the depository 
institution because, as a result of the consumer's not opting out, the 
depository institution is permitted to make the solicitation.
    (3) Examples of consumer-initiated communications. (i) A consumer 
who has a deposit account with a depository institution initiates a 
communication with the depository institution's credit card affiliate to 
request information about a credit card. The credit card affiliate may 
use eligibility information about the consumer it obtains from the 
depository institution or any other affiliate to make solicitations 
regarding credit card products in response to the consumer-initiated 
communication.
    (ii) A consumer who has a deposit account with a depository 
institution contacts the institution to request information about how to 
save and invest for a child's college education without specifying the 
type of product in which the consumer may be interested. Information 
about a range of different products or services offered by the 
depository institution and one or more affiliates of the institution may 
be responsive to that communication. Such products or services may 
include the following: Mutual funds offered by the institution's mutual 
fund affiliate; section 529 plans offered by the institution, its mutual 
fund affiliate, or another securities affiliate; or trust services 
offered by a different financial institution in the affiliated group. 
Any affiliate offering investment products or services that would be 
responsive to the consumer's request for information about saving and 
investing for a child's college education may use eligibility 
information to make solicitations to the consumer in response to this 
communication.
    (iii) A credit card issuer makes a marketing call to the consumer 
without using eligibility information received from an affiliate. The 
issuer leaves a voice-mail message that invites the consumer to call a 
toll-free number to apply for the issuer's credit card. If the consumer 
calls the toll-free number to inquire about the credit card, the call is 
a consumer-initiated communication about a product or service and the 
credit card issuer may

[[Page 65]]

now use eligibility information it receives from its affiliates to make 
solicitations to the consumer.
    (iv) A consumer calls a depository institution to ask about retail 
locations and hours, but does not request information about products or 
services. The institution may not use eligibility information it 
receives from an affiliate to make solicitations to the consumer about 
its products or services because the consumer-initiated communication 
does not relate to the depository institution's products or services. 
Thus, the use of eligibility information received from an affiliate 
would not be responsive to the communication and the exception does not 
apply.
    (v) A consumer calls a depository institution to ask about retail 
locations and hours. The customer service representative asks the 
consumer if there is a particular product or service about which the 
consumer is seeking information. The consumer responds that the consumer 
wants to stop in and find out about certificates of deposit. The 
customer service representative offers to provide that information by 
telephone and mail additional information and application materials to 
the consumer. The consumer agrees and provides or confirms contact 
information for receipt of the materials to be mailed. The depository 
institution may use eligibility information it receives from an 
affiliate to make solicitations to the consumer about certificates of 
deposit because such solicitations would respond to the consumer-
initiated communication about products or services.
    (4) Examples of consumer authorization or request for solicitations. 
(i) A consumer who obtains a mortgage from a mortgage lender authorizes 
or requests information about homeowner's insurance offered by the 
mortgage lender's insurance affiliate. Such authorization or request, 
whether given to the mortgage lender or to the insurance affiliate, 
would permit the insurance affiliate to use eligibility information 
about the consumer it obtains from the mortgage lender or any other 
affiliate to make solicitations to the consumer about homeowner's 
insurance.
    (ii) A consumer completes an online application to apply for a 
credit card from a credit card issuer. The issuer's online application 
contains a blank check box that the consumer may check to authorize or 
request information from the credit card issuer's affiliates. The 
consumer checks the box. The consumer has authorized or requested 
solicitations from the card issuer's affiliates.
    (iii) A consumer completes an online application to apply for a 
credit card from a credit card issuer. The issuer's online application 
contains a pre-selected check box indicating that the consumer 
authorizes or requests information from the issuer's affiliates. The 
consumer does not deselect the check box. The consumer has not 
authorized or requested solicitations from the card issuer's affiliates.
    (iv) The terms and conditions of a credit card account agreement 
contain preprinted boilerplate language stating that by applying to open 
an account the consumer authorizes or requests to receive solicitations 
from the credit card issuer's affiliates. The consumer has not 
authorized or requested solicitations from the card issuer's affiliates.
    (e) Relation to affiliate-sharing notice and opt-out. Nothing in 
this subpart limits the responsibility of a person to comply with the 
notice and opt-out provisions of section 603(d)(2)(A)(iii) of the Act 
where applicable.



Sec. 222.22  Scope and duration of opt-out.

    (a) Scope of opt-out--(1) In general. Except as otherwise provided 
in this section, the consumer's election to opt out prohibits any 
affiliate covered by the opt-out notice from using eligibility 
information received from another affiliate as described in the notice 
to make solicitations to the consumer.
    (2) Continuing relationship--(i) In general. If the consumer 
establishes a continuing relationship with you or your affiliate, an 
opt-out notice may apply to eligibility information obtained in 
connection with--
    (A) A single continuing relationship or multiple continuing 
relationships that the consumer establishes with you or your affiliates, 
including continuing relationships established subsequent to delivery of 
the opt-out notice, so long

[[Page 66]]

as the notice adequately describes the continuing relationships covered 
by the opt-out; or
    (B) Any other transaction between the consumer and you or your 
affiliates as described in the notice.
    (ii) Examples of continuing relationships. A consumer has a 
continuing relationship with you or your affiliate if the consumer--
    (A) Opens a deposit or investment account with you or your 
affiliate;
    (B) Obtains a loan for which you or your affiliate owns the 
servicing rights;
    (C) Purchases an insurance product from you or your affiliate;
    (D) Holds an investment product through you or your affiliate, such 
as when you act or your affiliate acts as a custodian for securities or 
for assets in an individual retirement arrangement;
    (E) Enters into an agreement or understanding with you or your 
affiliate whereby you or your affiliate undertakes to arrange or broker 
a home mortgage loan for the consumer;
    (F) Enters into a lease of personal property with you or your 
affiliate; or
    (G) Obtains financial, investment, or economic advisory services 
from you or your affiliate for a fee.
    (3) No continuing relationship--(i) In general. If there is no 
continuing relationship between a consumer and you or your affiliate, 
and you or your affiliate obtain eligibility information about a 
consumer in connection with a transaction with the consumer, such as an 
isolated transaction or a credit application that is denied, an opt-out 
notice provided to the consumer only applies to eligibility information 
obtained in connection with that transaction.
    (ii) Examples of isolated transactions. An isolated transaction 
occurs if--
    (A) The consumer uses your or your affiliate's ATM to withdraw cash 
from an account at another financial institution; or
    (B) You or your affiliate sells the consumer a cashier's check or 
money order, airline tickets, travel insurance, or traveler's checks in 
isolated transactions.
    (4) Menu of alternatives. A consumer may be given the opportunity to 
choose from a menu of alternatives when electing to prohibit 
solicitations, such as by electing to prohibit solicitations from 
certain types of affiliates covered by the opt-out notice but not other 
types of affiliates covered by the notice, electing to prohibit 
solicitations based on certain types of eligibility information but not 
other types of eligibility information, or electing to prohibit 
solicitations by certain methods of delivery but not other methods of 
delivery. However, one of the alternatives must allow the consumer to 
prohibit all solicitations from all of the affiliates that are covered 
by the notice.
    (5) Special rule for a notice following termination of all 
continuing relationships--(i) In general. A consumer must be given a new 
opt-out notice if, after all continuing relationships with you or your 
affiliate(s) are terminated, the consumer subsequently establishes 
another continuing relationship with you or your affiliate(s) and the 
consumer's eligibility information is to be used to make a solicitation. 
The new opt-out notice must apply, at a minimum, to eligibility 
information obtained in connection with the new continuing relationship. 
Consistent with paragraph (b) of this section, the consumer's decision 
not to opt out after receiving the new opt-out notice would not override 
a prior opt-out election by the consumer that applies to eligibility 
information obtained in connection with a terminated relationship, 
regardless of whether the new opt-out notice applies to eligibility 
information obtained in connection with the terminated relationship.
    (ii) Example. A consumer has a checking account with a depository 
institution that is part of an affiliated group. The consumer closes the 
checking account. One year after closing the checking account, the 
consumer opens a savings account with the same depository institution. 
The consumer must be given a new notice and opportunity to opt out 
before the depository institution's affiliates may make solicitations to 
the consumer using eligibility information obtained by the depository 
institution in connection with the new savings account relationship, 
regardless of whether the consumer opted out

[[Page 67]]

in connection with the checking account.
    (b) Duration of opt-out. The election of a consumer to opt out must 
be effective for a period of at least five years (the ``opt-out 
period'') beginning when the consumer's opt-out election is received and 
implemented, unless the consumer subsequently revokes the opt-out in 
writing or, if the consumer agrees, electronically. An opt-out period of 
more than five years may be established, including an opt-out period 
that does not expire unless revoked by the consumer.
    (c) Time of opt-out. A consumer may opt out at any time.



Sec. 222.23  Contents of opt-out notice; consolidated and equivalent notices.

    (a) Contents of opt-out notice--(1) In general. A notice must be 
clear, conspicuous, and concise, and must accurately disclose:
    (i) The name of the affiliate(s) providing the notice. If the notice 
is provided jointly by multiple affiliates and each affiliate shares a 
common name, such as ``ABC,'' then the notice may indicate that it is 
being provided by multiple companies with the ABC name or multiple 
companies in the ABC group or family of companies, for example, by 
stating that the notice is provided by ``all of the ABC companies,'' 
``the ABC banking, credit card, insurance, and securities companies,'' 
or by listing the name of each affiliate providing the notice. But if 
the affiliates providing the joint notice do not all share a common 
name, then the notice must either separately identify each affiliate by 
name or identify each of the common names used by those affiliates, for 
example, by stating that the notice is provided by ``all of the ABC and 
XYZ companies'' or by ``the ABC banking and credit card companies and 
the XYZ insurance companies'';
    (ii) A list of the affiliates or types of affiliates whose use of 
eligibility information is covered by the notice, which may include 
companies that become affiliates after the notice is provided to the 
consumer. If each affiliate covered by the notice shares a common name, 
such as ``ABC,'' then the notice may indicate that it applies to 
multiple companies with the ABC name or multiple companies in the ABC 
group or family of companies, for example, by stating that the notice is 
provided by ``all of the ABC companies,'' ``the ABC banking, credit 
card, insurance, and securities companies,'' or by listing the name of 
each affiliate providing the notice. But if the affiliates covered by 
the notice do not all share a common name, then the notice must either 
separately identify each covered affiliate by name or identify each of 
the common names used by those affiliates, for example, by stating that 
the notice applies to ``all of the ABC and XYZ companies'' or to ``the 
ABC banking and credit card companies and the XYZ insurance companies'';
    (iii) A general description of the types of eligibility information 
that may be used to make solicitations to the consumer;
    (iv) That the consumer may elect to limit the use of eligibility 
information to make solicitations to the consumer;
    (v) That the consumer's election will apply for the specified period 
of time stated in the notice and, if applicable, that the consumer will 
be allowed to renew the election once that period expires;
    (vi) If the notice is provided to consumers who may have previously 
opted out, such as if a notice is provided to consumers annually, that 
the consumer who has chosen to limit solicitations does not need to act 
again until the consumer receives a renewal notice; and
    (vii) A reasonable and simple method for the consumer to opt out.
    (2) Joint relationships. (i) If two or more consumers jointly obtain 
a product or service, a single opt-out notice may be provided to the 
joint consumers. Any of the joint consumers may exercise the right to 
opt out.
    (ii) The opt-out notice must explain how an opt-out direction by a 
joint consumer will be treated. An opt-out direction by a joint consumer 
may be treated as applying to all of the associated joint consumers, or 
each joint consumer may be permitted to opt out separately. If each 
joint consumer is permitted to opt out separately, one of the joint 
consumers must be permitted

[[Page 68]]

to opt out on behalf of all of the joint consumers and the joint 
consumers must be permitted to exercise their separate rights to opt out 
in a single response.
    (iii) It is impermissible to require all joint consumers to opt out 
before implementing any opt-out direction.
    (3) Alternative contents. If the consumer is afforded a broader 
right to opt out of receiving marketing than is required by this 
subpart, the requirements of this section may be satisfied by providing 
the consumer with a clear, conspicuous, and concise notice that 
accurately discloses the consumer's opt-out rights.
    (4) Model notices. Model notices are provided in appendix C of this 
part.
    (b) Coordinated and consolidated notices. A notice required by this 
subpart may be coordinated and consolidated with any other notice or 
disclosure required to be issued under any other provision of law by the 
entity providing the notice, including but not limited to the notice 
described in section 603(d)(2)(A)(iii) of the Act and the Gramm-Leach-
Bliley Act privacy notice.
    (c) Equivalent notices. A notice or other disclosure that is 
equivalent to the notice required by this subpart, and that is provided 
to a consumer together with disclosures required by any other provision 
of law, satisfies the requirements of this section.



Sec. 222.24  Reasonable opportunity to opt out.

    (a) In general. You must not use eligibility information about a 
consumer that you receive from an affiliate to make a solicitation to 
the consumer about your products or services, unless the consumer is 
provided a reasonable opportunity to opt out, as required by Sec. 
222.21(a)(1)(ii) of this part.
    (b) Examples of a reasonable opportunity to opt out. The consumer is 
given a reasonable opportunity to opt out if:
    (1) By mail. The opt-out notice is mailed to the consumer. The 
consumer is given 30 days from the date the notice is mailed to elect to 
opt out by any reasonable means.
    (2) By electronic means. (i) The opt-out notice is provided 
electronically to the consumer, such as by posting the notice at an 
Internet Web site at which the consumer has obtained a product or 
service. The consumer acknowledges receipt of the electronic notice. The 
consumer is given 30 days after the date the consumer acknowledges 
receipt to elect to opt out by any reasonable means.
    (ii) The opt-out notice is provided to the consumer by e-mail where 
the consumer has agreed to receive disclosures by e-mail from the person 
sending the notice. The consumer is given 30 days after the e-mail is 
sent to elect to opt out by any reasonable means.
    (3) At the time of an electronic transaction. The opt-out notice is 
provided to the consumer at the time of an electronic transaction, such 
as a transaction conducted on an Internet Web site. The consumer is 
required to decide, as a necessary part of proceeding with the 
transaction, whether to opt out before completing the transaction. There 
is a simple process that the consumer may use to opt out at that time 
using the same mechanism through which the transaction is conducted.
    (4) At the time of an in-person transaction. The opt-out notice is 
provided to the consumer in writing at the time of an in-person 
transaction. The consumer is required to decide, as a necessary part of 
proceeding with the transaction, whether to opt out before completing 
the transaction, and is not permitted to complete the transaction 
without making a choice. There is a simple process that the consumer may 
use during the course of the in-person transaction to opt out, such as 
completing a form that requires consumers to write a ``yes'' or ``no'' 
to indicate their opt-out preference or that requires the consumer to 
check one of two blank check boxes--one that allows consumers to 
indicate that they want to opt out and one that allows consumers to 
indicate that they do not want to opt out.
    (5) By including in a privacy notice. The opt-out notice is included 
in a Gramm-Leach-Bliley Act privacy notice. The consumer is allowed to 
exercise the opt-out within a reasonable period of time and in the same 
manner as the opt-out under that privacy notice.

[[Page 69]]



Sec. 222.25  Reasonable and simple methods of opting out.

    (a) In general. You must not use eligibility information about a 
consumer that you receive from an affiliate to make a solicitation to 
the consumer about your products or services, unless the consumer is 
provided a reasonable and simple method to opt out, as required by Sec. 
222.21(a)(1)(ii) of this part.
    (b) Examples--(1) Reasonable and simple opt-out methods. Reasonable 
and simple methods for exercising the opt-out right include--
    (i) Designating a check-off box in a prominent position on the opt-
out form;
    (ii) Including a reply form and a self-addressed envelope together 
with the opt-out notice;
    (iii) Providing an electronic means to opt out, such as a form that 
can be electronically mailed or processed at an Internet Web site, if 
the consumer agrees to the electronic delivery of information;
    (iv) Providing a toll-free telephone number that consumers may call 
to opt out; or
    (v) Allowing consumers to exercise all of their opt-out rights 
described in a consolidated opt-out notice that includes the privacy 
opt-out under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., the 
affiliate sharing opt-out under the Act, and the affiliate marketing 
opt-out under the Act, by a single method, such as by calling a single 
toll-free telephone number.
    (2) Opt-out methods that are not reasonable and simple. Reasonable 
and simple methods for exercising an opt-out right do not include--
    (i) Requiring the consumer to write his or her own letter;
    (ii) Requiring the consumer to call or write to obtain a form for 
opting out, rather than including the form with the opt-out notice;
    (iii) Requiring the consumer who receives the opt-out notice in 
electronic form only, such as through posting at an Internet Web site, 
to opt out solely by paper mail or by visiting a different Web site 
without providing a link to that site.
    (c) Specific opt-out means. Each consumer may be required to opt out 
through a specific means, as long as that means is reasonable and simple 
for that consumer.



Sec. 222.26  Delivery of opt-out notices.

    (a) In general. The opt-out notice must be provided so that each 
consumer can reasonably be expected to receive actual notice. For opt-
out notices provided electronically, the notice may be provided in 
compliance with either the electronic disclosure provisions in this 
subpart or the provisions in section 101 of the Electronic Signatures in 
Global and National Commerce Act, 15 U.S.C. 7001 et seq.
    (b) Examples of reasonable expectation of actual notice. A consumer 
may reasonably be expected to receive actual notice if the affiliate 
providing the notice:
    (1) Hand-delivers a printed copy of the notice to the consumer;
    (2) Mails a printed copy of the notice to the last known mailing 
address of the consumer;
    (3) Provides a notice by e-mail to a consumer who has agreed to 
receive electronic disclosures by e-mail from the affiliate providing 
the notice; or
    (4) Posts the notice on the Internet Web site at which the consumer 
obtained a product or service electronically and requires the consumer 
to acknowledge receipt of the notice.
    (c) Examples of no reasonable expectation of actual notice. A 
consumer may not reasonably be expected to receive actual notice if the 
affiliate providing the notice:
    (1) Only posts the notice on a sign in a branch or office or 
generally publishes the notice in a newspaper;
    (2) Sends the notice via e-mail to a consumer who has not agreed to 
receive electronic disclosures by e-mail from the affiliate providing 
the notice; or
    (3) Posts the notice on an Internet Web site without requiring the 
consumer to acknowledge receipt of the notice.



Sec. 222.27  Renewal of opt-out.

    (a) Renewal notice and opt-out requirement--(1) In general. After 
the opt-out period expires, you may not make solicitations based on 
eligibility information you receive from an affiliate to a

[[Page 70]]

consumer who previously opted out, unless:
    (i) The consumer has been given a renewal notice that complies with 
the requirements of this section and Sec. Sec. 222.24 through 222.26 of 
this part, and a reasonable opportunity and a reasonable and simple 
method to renew the opt-out, and the consumer does not renew the opt-
out; or
    (ii) An exception in Sec. 222.21(c) of this part applies.
    (2) Renewal period. Each opt-out renewal must be effective for a 
period of at least five years as provided in Sec. 222.22(b) of this 
part.
    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By the affiliate that provided the previous opt-out notice, or 
its successor; or
    (ii) As part of a joint renewal notice from two or more members of 
an affiliated group of companies, or their successors, that jointly 
provided the previous opt-out notice.
    (b) Contents of renewal notice. The renewal notice must be clear, 
conspicuous, and concise, and must accurately disclose:
    (1) The name of the affiliate(s) providing the notice. If the notice 
is provided jointly by multiple affiliates and each affiliate shares a 
common name, such as ``ABC,'' then the notice may indicate that it is 
being provided by multiple companies with the ABC name or multiple 
companies in the ABC group or family of companies, for example, by 
stating that the notice is provided by ``all of the ABC companies,'' 
``the ABC banking, credit card, insurance, and securities companies,'' 
or by listing the name of each affiliate providing the notice. But if 
the affiliates providing the joint notice do not all share a common 
name, then the notice must either separately identify each affiliate by 
name or identify each of the common names used by those affiliates, for 
example, by stating that the notice is provided by ``all of the ABC and 
XYZ companies'' or by ``the ABC banking and credit card companies and 
the XYZ insurance companies'';
    (2) A list of the affiliates or types of affiliates whose use of 
eligibility information is covered by the notice, which may include 
companies that become affiliates after the notice is provided to the 
consumer. If each affiliate covered by the notice shares a common name, 
such as ``ABC,'' then the notice may indicate that it applies to 
multiple companies with the ABC name or multiple companies in the ABC 
group or family of companies, for example, by stating that the notice is 
provided by ``all of the ABC companies,'' ``the ABC banking, credit 
card, insurance, and securities companies,'' or by listing the name of 
each affiliate providing the notice. But if the affiliates covered by 
the notice do not all share a common name, then the notice must either 
separately identify each covered affiliate by name or identify each of 
the common names used by those affiliates, for example, by stating that 
the notice applies to ``all of the ABC and XYZ companies'' or to ``the 
ABC banking and credit card companies and the XYZ insurance companies'';
    (3) A general description of the types of eligibility information 
that may be used to make solicitations to the consumer;
    (4) That the consumer previously elected to limit the use of certain 
information to make solicitations to the consumer;
    (5) That the consumer's election has expired or is about to expire;
    (6) That the consumer may elect to renew the consumer's previous 
election;
    (7) If applicable, that the consumer's election to renew will apply 
for the specified period of time stated in the notice and that the 
consumer will be allowed to renew the election once that period expires; 
and
    (8) A reasonable and simple method for the consumer to opt out.
    (c) Timing of the renewal notice--(1) In general. A renewal notice 
may be provided to the consumer either--
    (i) A reasonable period of time before the expiration of the opt-out 
period; or
    (ii) Any time after the expiration of the opt-out period but before 
solicitations that would have been prohibited by the expired opt-out are 
made to the consumer.
    (2) Combination with annual privacy notice. If you provide an annual 
privacy

[[Page 71]]

notice under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., 
providing a renewal notice with the last annual privacy notice provided 
to the consumer before expiration of the opt-out period is a reasonable 
period of time before expiration of the opt-out in all cases.
    (d) No effect on opt-out period. An opt-out period may not be 
shortened by sending a renewal notice to the consumer before expiration 
of the opt-out period, even if the consumer does not renew the opt out.



Sec. 222.28  Effective date, compliance date, and prospective application.

    (a) Effective date. This subpart is effective January 1, 2008.
    (b) Mandatory compliance date. Compliance with this subpart is 
required not later than October 1, 2008.
    (c) Prospective application. The provisions of this subpart shall 
not prohibit you from using eligibility information that you receive 
from an affiliate to make solicitations to a consumer if you receive 
such information prior to October 1, 2008. For purposes of this section, 
you are deemed to receive eligibility information when such information 
is placed into a common database and is accessible by you.



                      Subpart D_Medical Information

    Source: 70 FR 70679, Nov. 22, 2005, unless otherwise noted.



Sec. 222.30  Obtaining or using medical information in connection with a 

determination of eligibility for credit.

    (a) Scope. This section applies to
    (1) Any of the following that participates as a creditor in a 
transaction--
    (i) A bank that is a member of the Federal Reserve System (other 
than national banks) and its subsidiaries;
    (ii) A branch or Agency of a foreign bank (other than Federal 
branches, Federal Agencies, and insured State branches of foreign banks) 
and its subsidiaries;
    (iii) A commercial lending company owned or controlled by foreign 
banks;
    (iv) An organization operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.);
    (v) A bank holding company and an affiliate of such holding company 
(other than depository institutions and consumer reporting agencies); or
    (2) Any other person that participates as a creditor in a 
transaction involving a person described in paragraph (a)(1) of this 
section.
    (b) General prohibition on obtaining or using medical information. 
(1) In general. A creditor may not obtain or use medical information 
pertaining to a consumer in connection with any determination of the 
consumer's eligibility, or continued eligibility, for credit, except as 
provided in this section.
    (2) Definitions. (i) Credit has the same meaning as in section 702 
of the Equal Credit Opportunity Act, 15 U.S.C. 1691a.
    (ii) Creditor has the same meaning as in section 702 of the Equal 
Credit Opportunity Act, 15 U.S.C. 1691a.
    (iii) Eligibility, or continued eligibility, for credit means the 
consumer's qualification or fitness to receive, or continue to receive, 
credit, including the terms on which credit is offered. The term does 
not include:
    (A) Any determination of the consumer's qualification or fitness for 
employment, insurance (other than a credit insurance product), or other 
non-credit products or services;
    (B) Authorizing, processing, or documenting a payment or transaction 
on behalf of the consumer in a manner that does not involve a 
determination of the consumer's eligibility, or continued eligibility, 
for credit; or
    (C) Maintaining or servicing the consumer's account in a manner that 
does not involve a determination of the consumer's eligibility, or 
continued eligibility, for credit.
    (c) Rule of construction for obtaining and using unsolicited medical 
information--(1) In general. A creditor does not obtain medical 
information in violation of the prohibition if it receives medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit without specifically requesting medical information.
    (2) Use of unsolicited medical information. A creditor that receives 
unsolicited medical information in the manner described in paragraph 
(c)(1) of this

[[Page 72]]

section may use that information in connection with any determination of 
the consumer's eligibility, or continued eligibility, for credit to the 
extent the creditor can rely on at least one of the exceptions in Sec. 
222.30(d) or (e).
    (3) Examples. A creditor does not obtain medical information in 
violation of the prohibition if, for example:
    (i) In response to a general question regarding a consumer's debts 
or expenses, the creditor receives information that the consumer owes a 
debt to a hospital.
    (ii) In a conversation with the creditor's loan officer, the 
consumer informs the creditor that the consumer has a particular medical 
condition.
    (iii) In connection with a consumer's application for an extension 
of credit, the creditor requests a consumer report from a consumer 
reporting agency and receives medical information in the consumer report 
furnished by the agency even though the creditor did not specifically 
request medical information from the consumer reporting agency.
    (d) Financial information exception for obtaining and using medical 
information--(1) In general. A creditor may obtain and use medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit so long as:
    (i) The information is the type of information routinely used in 
making credit eligibility determinations, such as information relating 
to debts, expenses, income, benefits, assets, collateral, or the purpose 
of the loan, including the use of proceeds;
    (ii) The creditor uses the medical information in a manner and to an 
extent that is no less favorable than it would use comparable 
information that is not medical information in a credit transaction; and
    (iii) The creditor does not take the consumer's physical, mental, or 
behavioral health, condition or history, type of treatment, or prognosis 
into account as part of any such determination.
    (2) Examples. (i) Examples of the types of information routinely 
used in making credit eligibility determinations. Paragraph (d)(1)(i) of 
this section permits a creditor, for example, to obtain and use 
information about:
    (A) The dollar amount, repayment terms, repayment history, and 
similar information regarding medical debts to calculate, measure, or 
verify the repayment ability of the consumer, the use of proceeds, or 
the terms for granting credit;
    (B) The value, condition, and lien status of a medical device that 
may serve as collateral to secure a loan;
    (C) The dollar amount and continued eligibility for disability 
income, workers' compensation income, or other benefits related to 
health or a medical condition that is relied on as a source of 
repayment; or
    (D) The identity of creditors to whom outstanding medical debts are 
owed in connection with an application for credit, including but not 
limited to, a transaction involving the consolidation of medical debts.
    (ii) Examples of uses of medical information consistent with the 
exception. (A) A consumer includes on an application for credit 
information about two $20,000 debts. One debt is to a hospital; the 
other debt is to a retailer. The creditor contacts the hospital and the 
retailer to verify the amount and payment status of the debts. The 
creditor learns that both debts are more than 90 days past due. Any two 
debts of this size that are more than 90 days past due would disqualify 
the consumer under the creditor's established underwriting criteria. The 
creditor denies the application on the basis that the consumer has a 
poor repayment history on outstanding debts. The creditor has used 
medical information in a manner and to an extent no less favorable than 
it would use comparable non-medical information.
    (B) A consumer indicates on an application for a $200,000 mortgage 
loan that she receives $15,000 in long-term disability income each year 
from her former employer and has no other income. Annual income of 
$15,000, regardless of source, would not be sufficient to support the 
requested amount of credit. The creditor denies the application on the 
basis that the projected debt-to-income ratio of the consumer does not 
meet the creditor's underwriting criteria. The creditor has used

[[Page 73]]

medical information in a manner and to an extent that is no less 
favorable than it would use comparable non-medical information.
    (C) A consumer includes on an application for a $10,000 home equity 
loan that he has a $50,000 debt to a medical facility that specializes 
in treating a potentially terminal disease. The creditor contacts the 
medical facility to verify the debt and obtain the repayment history and 
current status of the loan. The creditor learns that the debt is 
current. The applicant meets the income and other requirements of the 
creditor's underwriting guidelines. The creditor grants the application. 
The creditor has used medical information in accordance with the 
exception.
    (iii) Examples of uses of medical information inconsistent with the 
exception. (A) A consumer applies for $25,000 of credit and includes on 
the application information about a $50,000 debt to a hospital. The 
creditor contacts the hospital to verify the amount and payment status 
of the debt, and learns that the debt is current and that the consumer 
has no delinquencies in her repayment history. If the existing debt were 
instead owed to a retail department store, the creditor would approve 
the application and extend credit based on the amount and repayment 
history of the outstanding debt. The creditor, however, denies the 
application because the consumer is indebted to a hospital. The creditor 
has used medical information, here the identity of the medical creditor, 
in a manner and to an extent that is less favorable than it would use 
comparable non-medical information.
    (B) A consumer meets with a loan officer of a creditor to apply for 
a mortgage loan. While filling out the loan application, the consumer 
informs the loan officer orally that she has a potentially terminal 
disease. The consumer meets the creditor's established requirements for 
the requested mortgage loan. The loan officer recommends to the credit 
committee that the consumer be denied credit because the consumer has 
that disease. The credit committee follows the loan officer's 
recommendation and denies the application because the consumer has a 
potentially terminal disease. The creditor has used medical information 
in a manner inconsistent with the exception by taking into account the 
consumer's physical, mental, or behavioral health, condition, or 
history, type of treatment, or prognosis as part of a determination of 
eligibility or continued eligibility for credit.
    (C) A consumer who has an apparent medical condition, such as a 
consumer who uses a wheelchair or an oxygen tank, meets with a loan 
officer to apply for a home equity loan. The consumer meets the 
creditor's established requirements for the requested home equity loan 
and the creditor typically does not require consumers to obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product in connection with such loans. However, based on the consumer's 
apparent medical condition, the loan officer recommends to the credit 
committee that credit be extended to the consumer only if the consumer 
obtains a debt cancellation contract, debt suspension agreement, or 
credit insurance product from a nonaffiliated third party. The credit 
committee agrees with the loan officer's recommendation. The loan 
officer informs the consumer that the consumer must obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product from a nonaffiliated third party to qualify for the loan. The 
consumer obtains one of these products and the creditor approves the 
loan. The creditor has used medical information in a manner inconsistent 
with the exception by taking into account the consumer's physical, 
mental, or behavioral health, condition, or history, type of treatment, 
or prognosis in setting conditions on the consumer's eligibility for 
credit.
    (e) Specific exceptions for obtaining and using medical 
information--(1) In general. A creditor may obtain and use medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit--
    (i) To determine whether the use of a power of attorney or legal 
representative that is triggered by a medical condition or event is 
necessary and appropriate or whether the consumer has the

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legal capacity to contract when a person seeks to exercise a power of 
attorney or act as legal representative for a consumer based on an 
asserted medical condition or event;
    (ii) To comply with applicable requirements of local, state, or 
Federal laws;
    (iii) To determine, at the consumer's request, whether the consumer 
qualifies for a legally permissible special credit program or credit-
related assistance program that is--
    (A) Designed to meet the special needs of consumers with medical 
conditions; and
    (B) Established and administered pursuant to a written plan that--
    (1) Identifies the class of persons that the program is designed to 
benefit; and
    (2) Sets forth the procedures and standards for extending credit or 
providing other credit-related assistance under the program;
    (iv) To the extent necessary for purposes of fraud prevention or 
detection;
    (v) In the case of credit for the purpose of financing medical 
products or services, to determine and verify the medical purpose of a 
loan and the use of proceeds;
    (vi) Consistent with safe and sound practices, if the consumer or 
the consumer's legal representative specifically requests that the 
creditor use medical information in determining the consumer's 
eligibility, or continued eligibility, for credit, to accommodate the 
consumer's particular circumstances, and such request is documented by 
the creditor;
    (vii) Consistent with safe and sound practices, to determine whether 
the provisions of a forbearance practice or program that is triggered by 
a medical condition or event apply to a consumer;
    (viii) To determine the consumer's eligibility for, the triggering 
of, or the reactivation of a debt cancellation contract or debt 
suspension agreement if a medical condition or event is a triggering 
event for the provision of benefits under the contract or agreement; or
    (ix) To determine the consumer's eligibility for, the triggering of, 
or the reactivation of a credit insurance product if a medical condition 
or event is a triggering event for the provision of benefits under the 
product.
    (2) Example of determining eligibility for a special credit program 
or credit assistance program. A not-for-profit organization establishes 
a credit assistance program pursuant to a written plan that is designed 
to assist disabled veterans in purchasing homes by subsidizing the down 
payment for the home purchase mortgage loans of qualifying veterans. The 
organization works through mortgage lenders and requires mortgage 
lenders to obtain medical information about the disability of any 
consumer that seeks to qualify for the program, use that information to 
verify the consumer's eligibility for the program, and forward that 
information to the organization. A consumer who is a veteran applies to 
a creditor for a home purchase mortgage loan. The creditor informs the 
consumer about the credit assistance program for disabled veterans and 
the consumer seeks to qualify for the program. Assuming that the program 
complies with all applicable law, including applicable fair lending 
laws, the creditor may obtain and use medical information about the 
medical condition and disability, if any, of the consumer to determine 
whether the consumer qualifies for the credit assistance program.
    (3) Examples of verifying the medical purpose of the loan or the use 
of proceeds. (i) If a consumer applies for $10,000 of credit for the 
purpose of financing vision correction surgery, the creditor may verify 
with the surgeon that the procedure will be performed. If the surgeon 
reports that surgery will not be performed on the consumer, the creditor 
may use that medical information to deny the consumer's application for 
credit, because the loan would not be used for the stated purpose.
    (ii) If a consumer applies for $10,000 of credit for the purpose of 
financing cosmetic surgery, the creditor may confirm the cost of the 
procedure with the surgeon. If the surgeon reports that the cost of the 
procedure is $5,000, the creditor may use that medical information to 
offer the consumer only $5,000 of credit.
    (iii) A creditor has an established medical loan program for 
financing particular elective surgical procedures.

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The creditor receives a loan application from a consumer requesting 
$10,000 of credit under the established loan program for an elective 
surgical procedure. The consumer indicates on the application that the 
purpose of the loan is to finance an elective surgical procedure not 
eligible for funding under the guidelines of the established loan 
program. The creditor may deny the consumer's application because the 
purpose of the loan is not for a particular procedure funded by the 
established loan program.
    (4) Examples of obtaining and using medical information at the 
request of the consumer. (i) If a consumer applies for a loan and 
specifically requests that the creditor consider the consumer's medical 
disability at the relevant time as an explanation for adverse payment 
history information in his credit report, the creditor may consider such 
medical information in evaluating the consumer's willingness and ability 
to repay the requested loan to accommodate the consumer's particular 
circumstances, consistent with safe and sound practices. The creditor 
may also decline to consider such medical information to accommodate the 
consumer, but may evaluate the consumer's application in accordance with 
its otherwise applicable underwriting criteria. The creditor may not 
deny the consumer's application or otherwise treat the consumer less 
favorably because the consumer specifically requested a medical 
accommodation, if the creditor would have extended the credit or treated 
the consumer more favorably under the creditor's otherwise applicable 
underwriting criteria.
    (ii) If a consumer applies for a loan by telephone and explains that 
his income has been and will continue to be interrupted on account of a 
medical condition and that he expects to repay the loan by liquidating 
assets, the creditor may, but is not required to, evaluate the 
application using the sale of assets as the primary source of repayment, 
consistent with safe and sound practices, provided that the creditor 
documents the consumer's request by recording the oral conversation or 
making a notation of the request in the consumer's file.
    (iii) If a consumer applies for a loan and the application form 
provides a space where the consumer may provide any other information or 
special circumstances, whether medical or non-medical, that the consumer 
would like the creditor to consider in evaluating the consumer's 
application, the creditor may use medical information provided by the 
consumer in that space on that application to accommodate the consumer's 
application for credit, consistent with safe and sound practices, or may 
disregard that information.
    (iv) If a consumer specifically requests that the creditor use 
medical information in determining the consumer's eligibility, or 
continued eligibility, for credit and provides the creditor with medical 
information for that purpose, and the creditor determines that it needs 
additional information regarding the consumer's circumstances, the 
creditor may request, obtain, and use additional medical information 
about the consumer as necessary to verify the information provided by 
the consumer or to determine whether to make an accommodation for the 
consumer. The consumer may decline to provide additional information, 
withdraw the request for an accommodation, and have the application 
considered under the creditor's otherwise applicable underwriting 
criteria.
    (v) If a consumer completes and signs a credit application that is 
not for medical purpose credit and the application contains boilerplate 
language that routinely requests medical information from the consumer 
or that indicates that by applying for credit the consumer authorizes or 
consents to the creditor obtaining and using medical information in 
connection with a determination of the consumer's eligibility, or 
continued eligibility, for credit, the consumer has not specifically 
requested that the creditor obtain and use medical information to 
accommodate the consumer's particular circumstances.
    (5) Example of a forbearance practice or program. After an 
appropriate safety and soundness review, a creditor institutes a program 
that allows consumers who are or will be hospitalized to defer payments 
as needed for up to three months, without penalty, if the credit

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account has been open for more than one year and has not previously been 
in default, and the consumer provides confirming documentation at an 
appropriate time. A consumer is hospitalized and does not pay her bill 
for a particular month. This consumer has had a credit account with the 
creditor for more than one year and has not previously been in default. 
The creditor attempts to contact the consumer and speaks with the 
consumer's adult child, who is not the consumer's legal representative. 
The adult child informs the creditor that the consumer is hospitalized 
and is unable to pay the bill at that time. The creditor defers payments 
for up to three months, without penalty, for the hospitalized consumer 
and sends the consumer a letter confirming this practice and the date on 
which the next payment will be due. The creditor has obtained and used 
medical information to determine whether the provisions of a medically-
triggered forbearance practice or program apply to a consumer.



Sec. 222.31  Limits on redisclosure of information.

    (a) Scope. This section applies to banks that are members 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, organizations operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.), and bank 
holding companies and affiliates of such holding companies (other than 
depository institutions and consumer reporting agencies).
    (b) Limits on redisclosure. If a person described in paragraph (a) 
of this section receives medical information about a consumer from a 
consumer reporting agency or its affiliate, the person must not disclose 
that information to any other person, except as necessary to carry out 
the purpose for which the information was initially disclosed, or as 
otherwise permitted by statute, regulation, or order.



Sec. 222.32  Sharing medical information with affiliates.

    (a) Scope. This section applies to banks that are members 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, organizations operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).
    (b) In general. The exclusions from the term ``consumer report'' in 
section 603(d)(2) of the Act that allow the sharing of information with 
affiliates do not apply to a person described in paragraph (a) of this 
section if that person communicates to an affiliate:
    (1) Medical information;
    (2) An individualized list or description based on the payment 
transactions of the consumer for medical products or services; or
    (3) An aggregate list of identified consumers based on payment 
transactions for medical products or services.
    (c) Exceptions. A person described in paragraph (a) of this section 
may rely on the exclusions from the term ``consumer report'' in section 
603(d)(2) of the Act to communicate the information in paragraph (b) of 
this section to an affiliate:
    (1) In connection with the business of insurance or annuities 
(including the activities described in section 18B of the model Privacy 
of Consumer Financial and Health Information Regulation issued by the 
National Association of Insurance Commissioners, as in effect on January 
1, 2003);
    (2) For any purpose permitted without authorization under the 
regulations promulgated by the Department of Health and Human Services 
pursuant to the Health Insurance Portability and Accountability Act of 
1996 (HIPAA);
    (3) For any purpose referred to in section 1179 of HIPAA;
    (4) For any purpose described in section 502(e) of the Gramm-Leach-
Bliley Act;

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    (5) In connection with a determination of the consumer's 
eligibility, or continued eligibility, for credit consistent with Sec. 
222.30 of this part; or
    (6) As otherwise permitted by order of the Board.



              Subpart E_Duties of Furnishers of Information

    Source: 74 FR 31514, July 1, 2009, unless otherwise noted.



Sec. 222.40  Scope.

    Subpart E of this part applies to member banks of the Federal 
Reserve System (other than national banks) and their respective 
operating subsidiaries that are not functionally regulated within the 
meaning of section 5(c)(5) of the Bank Holding Company Act, as amended 
(12 U.S.C. 1844(c)(5)), branches and Agencies of foreign banks (other 
than Federal branches, Federal Agencies, and insured State branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25A of 
the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).



Sec. 222.41  Definitions.

    For purposes of this subpart and appendix E of this part, the 
following definitions apply:
    (a) Accuracy means that information that a furnisher provides to a 
consumer reporting agency about an account or other relationship with 
the consumer correctly:
    (1) Reflects the terms of and liability for the account or other 
relationship;
    (2) Reflects the consumer's performance and other conduct with 
respect to the account or other relationship; and
    (3) Identifies the appropriate consumer.
    (b) Direct dispute means a dispute submitted directly to a furnisher 
(including a furnisher that is a debt collector) by a consumer 
concerning the accuracy of any information contained in a consumer 
report and pertaining to an account or other relationship that the 
furnisher has or had with the consumer.
    (c) Furnisher means an entity that furnishes information relating to 
consumers to one or more consumer reporting agencies for inclusion in a 
consumer report. An entity is not a furnisher when it:
    (1) Provides information to a consumer reporting agency solely to 
obtain a consumer report in accordance with sections 604(a) and (f) of 
the Fair Credit Reporting Act;
    (2) Is acting as a ``consumer reporting agency'' as defined in 
section 603(f) of the Fair Credit Reporting Act;
    (3) Is a consumer to whom the furnished information pertains; or
    (4) Is a neighbor, friend, or associate of the consumer, or another 
individual with whom the consumer is acquainted or who may have 
knowledge about the consumer, and who provides information about the 
consumer's character, general reputation, personal characteristics, or 
mode of living in response to a specific request from a consumer 
reporting agency.
    (d) Identity theft has the same meaning as in 16 CFR 603.2(a).
    (e) Integrity means that information that a furnisher provides to a 
consumer reporting agency about an account or other relationship with 
the consumer:
    (1) Is substantiated by the furnisher's records at the time it is 
furnished;
    (2) Is furnished in a form and manner that is designed to minimize 
the likelihood that the information may be incorrectly reflected in a 
consumer report; and
    (3) Includes the information in the furnisher's possession about the 
account or other relationship that the Board has:
    (i) Determined that the absence of which would likely be materially 
misleading in evaluating a consumer's creditworthiness, credit standing, 
credit capacity, character, general reputation, personal 
characteristics, or mode of living; and
    (ii) Listed in section I.(b)(2)(iii) of appendix E of this part.



Sec. 222.42  Reasonable policies and procedures concerning the accuracy and 

integrity of furnished information.

    (a) Policies and procedures. Each furnisher must establish and 
implement reasonable written policies and procedures regarding the 
accuracy and integrity of the information relating to

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consumers that it furnishes to a consumer reporting agency. The policies 
and procedures must be appropriate to the nature, size, complexity, and 
scope of each furnisher's activities.
    (b) Guidelines. Each furnisher must consider the guidelines in 
appendix E of this part in developing its policies and procedures 
required by this section, and incorporate those guidelines that are 
appropriate.
    (c) Reviewing and updating policies and procedures. Each furnisher 
must review its policies and procedures required by this section 
periodically and update them as necessary to ensure their continued 
effectiveness.



Sec. 222.43  Direct disputes.

    (a) General rule. Except as otherwise provided in this section, a 
furnisher must conduct a reasonable investigation of a direct dispute if 
it relates to:
    (1) The consumer's liability for a credit account or other debt with 
the furnisher, such as direct disputes relating to whether there is or 
has been identity theft or fraud against the consumer, whether there is 
individual or joint liability on an account, or whether the consumer is 
an authorized user of a credit account;
    (2) The terms of a credit account or other debt with the furnisher, 
such as direct disputes relating to the type of account, principal 
balance, scheduled payment amount on an account, or the amount of the 
credit limit on an open-end account;
    (3) The consumer's performance or other conduct concerning an 
account or other relationship with the furnisher, such as direct 
disputes relating to the current payment status, high balance, date a 
payment was made, the amount of a payment made, or the date an account 
was opened or closed; or
    (4) Any other information contained in a consumer report regarding 
an account or other relationship with the furnisher that bears on the 
consumer's creditworthiness, credit standing, credit capacity, 
character, general reputation, personal characteristics, or mode of 
living.
    (b) Exceptions. The requirements of paragraph (a) of this section do 
not apply to a furnisher if:
    (1) The direct dispute relates to:
    (i) The consumer's identifying information (other than a direct 
dispute relating to a consumer's liability for a credit account or other 
debt with the furnisher, as provided in paragraph (a)(1) of this 
section) such as name(s), date of birth, Social Security number, 
telephone number(s), or address(es);
    (ii) The identity of past or present employers;
    (iii) Inquiries or requests for a consumer report;
    (iv) Information derived from public records, such as judgments, 
bankruptcies, liens, and other legal matters (unless provided by a 
furnisher with an account or other relationship with the consumer);
    (v) Information related to fraud alerts or active duty alerts; or
    (vi) Information provided to a consumer reporting agency by another 
furnisher; or
    (2) The furnisher has a reasonable belief that the direct dispute is 
submitted by, is prepared on behalf of the consumer by, or is submitted 
on a form supplied to the consumer by, a credit repair organization, as 
defined in 15 U.S.C. 1679a(3), or an entity that would be a credit 
repair organization, but for 15 U.S.C. 1679a(3)(B)(i).
    (c) Direct dispute address. A furnisher is required to investigate a 
direct dispute only if a consumer submits a dispute notice to the 
furnisher at:
    (1) The address of a furnisher provided by a furnisher and set forth 
on a consumer report relating to the consumer;
    (2) An address clearly and conspicuously specified by the furnisher 
for submitting direct disputes that is provided to the consumer in 
writing or electronically (if the consumer has agreed to the electronic 
delivery of information from the furnisher); or
    (3) Any business address of the furnisher if the furnisher has not 
so specified and provided an address for submitting direct disputes 
under paragraphs (c)(1) or (2) of this section.
    (d) Direct dispute notice contents. A dispute notice must include:
    (1) Sufficient information to identify the account or other 
relationship that

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is in dispute, such as an account number and the name, address, and 
telephone number of the consumer, if applicable;
    (2) The specific information that the consumer is disputing and an 
explanation of the basis for the dispute; and
    (3) All supporting documentation or other information reasonably 
required by the furnisher to substantiate the basis of the dispute. This 
documentation may include, for example: a copy of the relevant portion 
of the consumer report that contains the allegedly inaccurate 
information; a police report; a fraud or identity theft affidavit; a 
court order; or account statements.
    (e) Duty of furnisher after receiving a direct dispute notice. After 
receiving a dispute notice from a consumer pursuant to paragraphs (c) 
and (d) of this section, the furnisher must:
    (1) Conduct a reasonable investigation with respect to the disputed 
information;
    (2) Review all relevant information provided by the consumer with 
the dispute notice;
    (3) Complete its investigation of the dispute and report the results 
of the investigation to the consumer before the expiration of the period 
under section 611(a)(1) of the Fair Credit Reporting Act (15 U.S.C. 
1681i(a)(1)) within which a consumer reporting agency would be required 
to complete its action if the consumer had elected to dispute the 
information under that section; and
    (4) If the investigation finds that the information reported was 
inaccurate, promptly notify each consumer reporting agency to which the 
furnisher provided inaccurate information of that determination and 
provide to the consumer reporting agency any correction to that 
information that is necessary to make the information provided by the 
furnisher accurate.
    (f) Frivolous or irrelevant disputes. (1) A furnisher is not 
required to investigate a direct dispute if the furnisher has reasonably 
determined that the dispute is frivolous or irrelevant. A dispute 
qualifies as frivolous or irrelevant if:
    (i) The consumer did not provide sufficient information to 
investigate the disputed information as required by paragraph (d) of 
this section;
    (ii) The direct dispute is substantially the same as a dispute 
previously submitted by or on behalf of the consumer, either directly to 
the furnisher or through a consumer reporting agency, with respect to 
which the furnisher has already satisfied the applicable requirements of 
the Act or this section; provided, however, that a direct dispute is not 
substantially the same as a dispute previously submitted if the dispute 
includes information listed in paragraph (d) of this section that had 
not previously been provided to the furnisher; or
    (iii) The furnisher is not required to investigate the direct 
dispute because one or more of the exceptions listed in paragraph (b) of 
this section applies.
    (2) Notice of determination. Upon making a determination that a 
dispute is frivolous or irrelevant, the furnisher must notify the 
consumer of the determination not later than five business days after 
making the determination, by mail or, if authorized by the consumer for 
that purpose, by any other means available to the furnisher.
    (3) Contents of notice of determination that a dispute is frivolous 
or irrelevant. A notice of determination that a dispute is frivolous or 
irrelevant must include the reasons for such determination and identify 
any information required to investigate the disputed information, which 
notice may consist of a standardized form describing the general nature 
of such information.

Subpart F [Reserved]



         Subpart H_Duties of Users Regarding Risk-Based Pricing

    Source: 75 FR 2752, January 15, 2010, unless otherwise noted.



Sec. 222.70  Scope.

    (a) Coverage--(1) In general. This subpart applies to any person 
that both--
    (i) Uses a consumer report in connection with an application for, or 
a grant, extension, or other provision of, credit to a consumer that is 
primarily for personal, family, or household purposes; and
    (ii) Based in whole or in part on the consumer report, grants, 
extends, or

[[Page 80]]

otherwise provides credit to the consumer on material terms that are 
materially less favorable than the most favorable material terms 
available to a substantial proportion of consumers from or through that 
person.
    (2) Business credit excluded. This subpart does not apply to an 
application for, or a grant, extension, or other provision of, credit to 
a consumer or to any other applicant primarily for a business purpose.
    (b) Relation to Federal Trade Commission rules. These rules are 
substantively identical to the Federal Trade Commission's (Commission's) 
risk-based pricing rules in 16 CFR 640. Both rules apply to the covered 
person described in paragraph (a) of this section. Compliance with 
either the Board's rules or the Commission's rules satisfies the 
requirements of the statute (15 U.S.C. 1681m(h)).
    (c) Enforcement. The provisions of this subpart will be enforced in 
accordance with the enforcement authority set forth in sections 621(a) 
and (b) of the FCRA.



Sec. 222.71  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Adverse action has the same meaning as in 15 U.S.C. 
1681a(k)(1)(A).
    (b) Annual percentage rate has the same meaning as in 12 CFR 
226.14(b) with respect to an open-end credit plan and as in 12 CFR 
226.22 with respect to closed-end credit.
    (c) Closed-end credit has the same meaning as in 12 CFR 
226.2(a)(10).
    (d) Consumer has the same meaning as in 15 U.S.C. 1681a(c).
    (e) Consummation has the same meaning as in 12 CFR 226.2(a)(13).
    (f) Consumer report has the same meaning as in 15 U.S.C. 1681a(d).
    (g) Consumer reporting agency has the same meaning as in 15 U.S.C. 
1681a(f).
    (h) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (i) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (j) Credit card has the same meaning as in 15 U.S.C. 1681a(r)(2).
    (k) Credit card issuer has the same meaning as in 15 U.S.C. 
1681a(r)(1)(A).
    (l) Credit score has the same meaning as in 15 U.S.C. 
1681g(f)(2)(A).
    (m) Firm offer of credit has the same meaning as in 15 U.S.C. 
1681a(l).
    (n) Material terms means--
    (1) (i) Except as otherwise provided in paragraphs (n)(1)(ii) and 
(n)(3) of this section, in the case of credit extended under an open-end 
credit plan, the annual percentage rate required to be disclosed under 
12 CFR 226.6(a)(1)(ii) or 12 CFR 226.6(b)(2)(i), excluding any temporary 
initial rate that is lower than the rate that will apply after the 
temporary rate expires, any penalty rate that will apply upon the 
occurrence of one or more specific events, such as a late payment or an 
extension of credit that exceeds the credit limit, and any fixed annual 
percentage rate option for a home equity line of credit;
    (ii) In the case of a credit card (other than a credit card that is 
used to access a home equity line of credit or a charge card), the 
annual percentage rate required to be disclosed under 12 CFR 
226.6(b)(2)(i) that applies to purchases (``purchase annual percentage 
rate'') and no other annual percentage rate, or in the case of a credit 
card that has no purchase annual percentage rate, the annual percentage 
rate that varies based on information in a consumer report and that has 
the most significant financial impact on consumers;
    (2) In the case of closed-end credit, the annual percentage rate 
required to be disclosed under 12 CFR 226.17(c) and 226.18(e); and
    (3) In the case of credit for which there is no annual percentage 
rate, the financial term that varies based on information in a consumer 
report and that has the most significant financial impact on consumers, 
such as a deposit required in connection with credit extended by a 
telephone company or utility or an annual membership fee for a charge 
card.
    (o) Materially less favorable means, when applied to material terms, 
that the terms granted, extended, or otherwise provided to a consumer 
differ from the terms granted, extended, or otherwise provided to 
another consumer from or through the same person such that the cost of 
credit to the first consumer would be significantly greater than the 
cost of credit granted, extended, or otherwise provided to the

[[Page 81]]

other consumer. For purposes of this definition, factors relevant to 
determining the significance of a difference in cost include the type of 
credit product, the term of the credit extension, if any, and the extent 
of the difference between the material terms granted, extended, or 
otherwise provided to the two consumers.
    (p) Open-end credit plan has the same meaning as in 15 U.S.C. 
1602(i), as interpreted by the Board of Governors of the Federal Reserve 
System in Regulation Z (12 CFR part 226) and the Official Staff 
Commentary to Regulation Z (Supplement I to 12 CFR Part 226).
    (q) Person has the same meaning as in 15 U.S.C. 1681a(b).



Sec. 222.72  General requirements for risk-based pricing notices.

    (a) In general. Except as otherwise provided in this subpart, a 
person must provide to a consumer a notice (``risk-based pricing 
notice'') in the form and manner required by this subpart if the person 
both--
    (1) Uses a consumer report in connection with an application for, or 
a grant, extension, or other provision of, credit to that consumer that 
is primarily for personal, family, or household purposes; and
    (2) Based in whole or in part on the consumer report, grants, 
extends, or otherwise provides credit to that consumer on material terms 
that are materially less favorable than the most favorable material 
terms available to a substantial proportion of consumers from or through 
that person.
    (b) Determining which consumers must receive a notice. A person may 
determine whether paragraph (a) of this section applies by directly 
comparing the material terms offered to each consumer and the material 
terms offered to other consumers for a specific type of credit product. 
For purposes of this section, a ``specific type of credit product'' 
means one or more credit products with similar features that are 
designed for similar purposes. Examples of a specific type of credit 
product include student loans, unsecured credit cards, secured credit 
cards, new automobile loans, used automobile loans, fixed-rate mortgage 
loans, and variable-rate mortgage loans. As an alternative to making 
this direct comparison, a person may make the determination by using one 
of the following methods:
    (1) Credit score proxy method--(i) In general. A person that sets 
the material terms of credit granted, extended, or otherwise provided to 
a consumer, based in whole or in part on a credit score, may comply with 
the requirements of paragraph (a) of this section by--
    (A) Determining the credit score (hereafter referred to as the 
``cutoff score'') that represents the point at which approximately 40 
percent of the consumers to whom it grants, extends, or provides credit 
have higher credit scores and approximately 60 percent of the consumers 
to whom it grants, extends, or provides credit have lower credit scores; 
and
    (B) Providing a risk-based pricing notice to each consumer to whom 
it grants, extends, or provides credit whose credit score is lower than 
the cutoff score.
    (ii) Alternative to the 40/60 cutoff score determination. In the 
case of credit that has been granted, extended, or provided on the most 
favorable material terms to more than 40 percent of consumers, a person 
may, at its option, set its cutoff score at a point at which the 
approximate percentage of consumers who historically have been granted, 
extended, or provided credit on material terms other than the most 
favorable terms would receive risk-based pricing notices under this 
section.
    (iii) Determining the cutoff score--(A) Sampling approach. A person 
that currently uses risk-based pricing with respect to the credit 
products it offers must calculate the cutoff score by considering the 
credit scores of all or a representative sample of the consumers to whom 
it has granted, extended, or provided credit for a specific type of 
credit product.
    (B) Secondary source approach in limited circumstances. A person 
that is a new entrant into the credit business, introduces new credit 
products, or starts to use risk-based pricing with respect to the credit 
products it currently offers may initially determine the cutoff score 
based on information

[[Page 82]]

derived from appropriate market research or relevant third-party sources 
for a specific type of credit product, such as research or data from 
companies that develop credit scores. A person that acquires a credit 
portfolio as a result of a merger or acquisition may determine the 
cutoff score based on information from the party which it acquired, with 
which it merged, or from which it acquired the portfolio.
    (C) Recalculation of cutoff scores. A person using the credit score 
proxy method must recalculate its cutoff score(s) no less than every two 
years in the manner described in paragraph (b)(1)(iii)(A) of this 
section. A person using the credit score proxy method using market 
research, third-party data, or information from a party which it 
acquired, with which it merged, or from which it acquired the portfolio 
as permitted by paragraph (b)(1)(iii)(B) of this section generally must 
calculate a cutoff score(s) based on the scores of its own consumers in 
the manner described in paragraph (b)(1)(iii)(A) of this section within 
one year after it begins using a cutoff score derived from market 
research, third-party data, or information from a party which it 
acquired, with which it merged, or from which it acquired the portfolio. 
If such a person does not grant, extend, or provide credit to new 
consumers during that one-year period such that it lacks sufficient data 
with which to recalculate a cutoff score based on the credit scores of 
its own consumers, the person may continue to use a cutoff score derived 
from market research, third-party data, or information from a party 
which it acquired, with which it merged, or from which it acquired the 
portfolio as provided in paragraph (b)(1)(iii)(B) until it obtains 
sufficient data on which to base the recalculation. However, the person 
must recalculate its cutoff score(s) in the manner described in 
paragraph (b)(1)(iii)(A) of this section within two years, if it has 
granted, extended, or provided credit to some new consumers during that 
two-year period.
    (D) Use of two or more credit scores. A person that generally uses 
two or more credit scores in setting the material terms of credit 
granted, extended, or provided to a consumer must determine the cutoff 
score using the same method the person uses to evaluate multiple scores 
when making credit decisions. These evaluation methods may include, but 
are not limited to, selecting the low, median, high, most recent, or 
average credit score of each consumer to whom it grants, extends, or 
provides credit. If a person that uses two or more credit scores does 
not consistently use the same method for evaluating multiple credit 
scores (e.g., if the person sometimes chooses the median score and other 
times calculates the average score), the person must determine the 
cutoff score using a reasonable means. In such cases, use of any one of 
the methods that the person regularly uses or the average credit score 
of each consumer to whom it grants, extends, or provides credit is 
deemed to be a reasonable means of calculating the cutoff score.
    (iv) Credit score not available. For purposes of this section, a 
person using the credit score proxy method who grants, extends, or 
provides credit to a consumer for whom a credit score is not available 
must assume that the consumer receives credit on material terms that are 
materially less favorable than the most favorable credit terms offered 
to a substantial proportion of consumers from or through that person and 
must provide a risk-based pricing notice to the consumer.
    (v) Examples. (A) A credit card issuer engages in risk-based pricing 
and the annual percentage rates it offers to consumers are based in 
whole or in part on a credit score. The credit card issuer takes a 
representative sample of the credit scores of consumers to whom it 
issued credit cards within the preceding three months. The credit card 
issuer determines that approximately 40 percent of the sampled consumers 
have a credit score at or above 720 (on a scale of 350 to 850) and 
approximately 60 percent of the sampled consumers have a credit score 
below 720. Thus, the card issuer selects 720 as its cutoff score. A 
consumer applies to the credit card issuer for a credit card. The card 
issuer obtains a credit score for the consumer. The consumer's credit 
score is 700. Since the consumer's 700 credit score falls below the 720 
cutoff score, the credit card issuer must provide a

[[Page 83]]

risk-based pricing notice to the consumer.
    (B) A credit card issuer engages in risk-based pricing, and the 
annual percentage rates it offers to consumers are based in whole or in 
part on a credit score. The credit card issuer takes a representative 
sample of the consumers to whom it issued credit cards over the 
preceding six months. The credit card issuer determines that 
approximately 80 percent of the sampled consumers received credit at its 
lowest annual percentage rate, and 20 percent received credit at a 
higher annual percentage rate. Approximately 80 percent of the sampled 
consumers have a credit score at or above 750 (on a scale of 350 to 
850), and 20 percent have a credit score below 750. Thus, the card 
issuer selects 750 as its cutoff score. A consumer applies to the credit 
card issuer for a credit card. The card issuer obtains a credit score 
for the consumer. The consumer's credit score is 740. Since the 
consumer's 740 credit score falls below the 750 cutoff score, the credit 
card issuer must provide a risk-based pricing notice to the consumer.
    (C) An auto lender engages in risk-based pricing, obtains credit 
scores from one of the nationwide consumer reporting agencies, and uses 
the credit score proxy method to determine which consumers must receive 
a risk-based pricing notice. A consumer applies to the auto lender for 
credit to finance the purchase of an automobile. A credit score about 
that consumer is not available from the consumer reporting agency from 
which the lender obtains credit scores. The lender nevertheless grants, 
extends, or provides credit to the consumer. The lender must provide a 
risk-based pricing notice to the consumer.
    (2) Tiered pricing method--(i) In general. A person that sets the 
material terms of credit granted, extended, or provided to a consumer by 
placing the consumer within one of a discrete number of pricing tiers 
for a specific type of credit product, based in whole or in part on a 
consumer report, may comply with the requirements of paragraph (a) of 
this section by providing a risk-based pricing notice to each consumer 
who is not placed within the top pricing tier or tiers, as described 
below.
    (ii) Four or fewer pricing tiers. If a person using the tiered 
pricing method has four or fewer pricing tiers, the person complies with 
the requirements of paragraph (a) of this section by providing a risk-
based pricing notice to each consumer to whom it grants, extends, or 
provides credit who does not qualify for the top tier (that is, the 
lowest-priced tier). For example, a person that uses a tiered pricing 
structure with annual percentage rates of 8, 10, 12, and 14 percent 
would provide the risk-based pricing notice to each consumer to whom it 
grants, extends, or provides credit at annual percentage rates of 10, 
12, and 14 percent.
    (iii) Five or more pricing tiers. If a person using the tiered 
pricing method has five or more pricing tiers, the person complies with 
the requirements of paragraph (a) of this section by providing a risk-
based pricing notice to each consumer to whom it grants, extends, or 
provides credit who does not qualify for the top two tiers (that is, the 
two lowest-priced tiers) and any other tier that, together with the top 
tiers, comprise no less than the top 30 percent but no more than the top 
40 percent of the total number of tiers. Each consumer placed within the 
remaining tiers must receive a risk-based pricing notice. For example, 
if a person has nine pricing tiers, the top three tiers (that is, the 
three lowest-priced tiers) comprise no less than the top 30 percent but 
no more than the top 40 percent of the tiers. Therefore, a person using 
this method would provide a risk-based pricing notice to each consumer 
to whom it grants, extends, or provides credit who is placed within the 
bottom six tiers.
    (c) Application to credit card issuers--(1) In general. A credit 
card issuer subject to the requirements of paragraph (a) of this section 
may use one of the methods set forth in paragraph (b) of this section to 
identify consumers to whom it must provide a risk-based pricing notice. 
Alternatively, a credit card issuer may satisfy its obligations under 
paragraph (a) of this section by providing a risk-based pricing notice 
to a consumer when--
    (i) A consumer applies for a credit card either in connection with 
an application program, such as a direct-

[[Page 84]]

mail offer or a take-one application, or in response to a solicitation 
under 12 CFR 226.5a, and more than a single possible purchase annual 
percentage rate may apply under the program or solicitation; and
    (ii) Based in whole or in part on a consumer report, the credit card 
issuer provides a credit card to the consumer with an annual percentage 
rate referenced in Sec. 222.71(n)(1)(ii) that is greater than the 
lowest annual percentage rate referenced in Sec. 222.71(n)(1)(ii) 
available in connection with the application or solicitation.
    (2) No requirement to compare different offers. A credit card issuer 
is not subject to the requirements of paragraph (a) of this section and 
is not required to provide a risk-based pricing notice to a consumer 
if--
    (i) The consumer applies for a credit card for which the card issuer 
provides a single annual percentage rate referenced in Sec. 
222.71(n)(1)(ii), excluding a temporary initial rate that is lower than 
the rate that will apply after the temporary rate expires and a penalty 
rate that will apply upon the occurrence of one or more specific events, 
such as a late payment or an extension of credit that exceeds the credit 
limit; or
    (ii) The credit card issuer offers the consumer the lowest annual 
percentage rate referenced in Sec. 222.71(n)(1)(ii) available under the 
credit card offer for which the consumer applied, even if a lower annual 
percentage rate referenced in Sec. 222.71(n)(1)(ii) is available under 
a different credit card offer issued by the card issuer.
    (3) Examples. (i) A credit card issuer sends a solicitation to the 
consumer that discloses several possible purchase annual percentage 
rates that may apply, such as 10, 12, or 14 percent, or a range of 
purchase annual percentage rates from 10 to 14 percent. The consumer 
applies for a credit card in response to the solicitation. The card 
issuer provides a credit card to the consumer with a purchase annual 
percentage rate of 12 percent based in whole or in part on a consumer 
report. Unless an exception applies under Sec. 222.74, the card issuer 
may satisfy its obligations under paragraph (a) of this section by 
providing a risk-based pricing notice to the consumer because the 
consumer received credit at a purchase annual percentage rate greater 
than the lowest purchase annual percentage rate available under that 
solicitation.
    (ii) The same facts as in the example in paragraph (c)(3)(i) of this 
section, except that the card issuer provides a credit card to the 
consumer at a purchase annual percentage rate of 10 percent. The card 
issuer is not required to provide a risk-based pricing notice to the 
consumer even if, under a different credit card solicitation, that 
consumer or other consumers might qualify for a purchase annual 
percentage rate of 8 percent.
    (d) Account review--(1) In general. Except as otherwise provided in 
this subpart, a person is subject to the requirements of paragraph (a) 
of this section and must provide a risk-based pricing notice to a 
consumer in the form and manner required by this subpart if the person--
    (i) Uses a consumer report in connection with a review of credit 
that has been extended to the consumer; and
    (ii) Based in whole or in part on the consumer report, increases the 
annual percentage rate (the annual percentage rate referenced in Sec. 
222.71(n)(1)(ii) in the case of a credit card).
    (2) Example. A credit card issuer periodically obtains consumer 
reports for the purpose of reviewing the terms of credit it has extended 
to consumers in connection with credit cards. As a result of this 
review, the credit card issuer increases the purchase annual percentage 
rate applicable to a consumer's credit card based in whole or in part on 
information in a consumer report. The credit card issuer is subject to 
the requirements of paragraph (a) of this section and must provide a 
risk-based pricing notice to the consumer.



Sec. 222.73  Content, form, and timing of risk-based pricing notices.

    (a) Content of the notice--(1) In general. The risk-based pricing 
notice required by Sec. 222.72(a) or (c) must include:
    (i) A statement that a consumer report (or credit report) includes 
information about the consumer's credit history and the type of 
information included in that history;

[[Page 85]]

    (ii) A statement that the terms offered, such as the annual 
percentage rate, have been set based on information from a consumer 
report;
    (iii) A statement that the terms offered may be less favorable than 
the terms offered to consumers with better credit histories;
    (iv) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the credit decision;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from the consumer reporting agency or 
agencies identified in the notice without charge for 60 days after 
receipt of the notice;
    (vii) A statement informing the consumer how to obtain a consumer 
report from the consumer reporting agency or agencies identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency or agencies;
    (viii) A statement directing consumers to the Web sites of the 
Federal Reserve Board and Federal Trade Commission to obtain more 
information about consumer reports; and
    (ix) If a credit score of the consumer to whom a person grants, 
extends, or otherwise provides credit is used in setting the material 
terms of credit:
    (A) A statement that a credit score is a number that takes into 
account information in a consumer report, that the consumer's credit 
score was used to set the terms of credit offered, and that a credit 
score can change over time to reflect changes in the consumer's credit 
history;
    (B) The credit score used by the person in making the credit 
decision;
    (C) The range of possible credit scores under the model used to 
generate the credit score;
    (D) All of the key factors that adversely affected the credit score, 
which shall not exceed four key factors, except that if one of the key 
factors is the number of enquiries made with respect to the consumer 
report, the number of key factors shall not exceed five;
    (E) The date on which the credit score was created; and
    (F) The name of the consumer reporting agency or other person that 
provided the credit score.
    (2) Account review. The risk-based pricing notice required by Sec. 
222.72(d) must include:
    (i) A statement that a consumer report (or credit report) includes 
information about the consumer's credit history and the type of 
information included in that credit history;
    (ii) A statement that the person has conducted a review of the 
account using information from a consumer report;
    (iii) A statement that as a result of the review, the annual 
percentage rate on the account has been increased based on information 
from a consumer report;
    (iv) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;
    (v) The identity of each consumer reporting agency that furnished a 
consumer report used in the account review;
    (vi) A statement that federal law gives the consumer the right to 
obtain a copy of a consumer report from the consumer reporting agency or 
agencies identified in the notice without charge for 60 days after 
receipt of the notice;
    (vii) A statement informing the consumer how to obtain a consumer 
report from the consumer reporting agency or agencies identified in the 
notice and providing contact information (including a toll-free 
telephone number, where applicable) specified by the consumer reporting 
agency or agencies;
    (viii) A statement directing consumers to the Web sites of the 
Federal Reserve Board and Federal Trade Commission to obtain more 
information about consumer reports; and
    (ix) If a credit score of the consumer whose extension of credit is 
under review is used in increasing the annual percentage rate:

[[Page 86]]

    (A) A statement that a credit score is a number that takes into 
account information in a consumer report, that the consumer's credit 
score was used to set the terms of credit offered, and that a credit 
score can change over time to reflect changes in the consumer's credit 
history;
    (B) The credit score used by the person in making the credit 
decision;
    (C) The range of possible credit scores under the model used to 
generate the credit score;
    (D) All of the key factors that adversely affected the credit score, 
which shall not exceed four key factors, except that if one of the key 
factors is the number of enquires made with respect to the consumer 
report, the number of key factors shall not exceed five;
    (E) The date on which the credit score was created; and
    (F) The name of the consumer reporting agency or other person that 
provided the credit score.
    (b) Form of the notice--(1) In general. The risk-based pricing 
notice required by Sec. 222.72(a), (c), or (d) must be:
    (i) Clear and conspicuous; and
    (ii) Provided to the consumer in oral, written, or electronic form.
    (2) Model forms. Model forms of the risk-based pricing notice 
required by Sec. 222.72(a) and (c) are contained in Appendices H-1 and 
H-6 of this part. Appropriate use of Model Form H-1 or H-6 is deemed to 
comply with the requirements of Sec. 222.72(a) and (c). Model forms of 
the risk-based pricing notice required by Sec. 222.72(d) are contained 
in Appendices H-2 and H-7 of this part. Appropriate use of Model Form H-
2 or H-7 is deemed to comply with the requirements of Sec. 222.72(d). 
Use of the model forms is optional.
    (c) Timing--(1) General. Except as provided in paragraph (c)(3) of 
this section, a risk-based pricing notice must be provided to the 
consumer--
    (i) In the case of a grant, extension, or other provision of closed-
end credit, before consummation of the transaction, but not earlier than 
the time the decision to approve an application for, or a grant, 
extension, or other provision of, credit, is communicated to the 
consumer by the person required to provide the notice;
    (ii) In the case of credit granted, extended, or provided under an 
open-end credit plan, before the first transaction is made under the 
plan, but not earlier than the time the decision to approve an 
application for, or a grant, extension, or other provision of, credit is 
communicated to the consumer by the person required to provide the 
notice; or
    (iii) In the case of a review of credit that has been extended to 
the consumer, at the time the decision to increase the annual percentage 
rate (annual percentage rate referenced in Sec. 222.71(n)(1)(ii) in the 
case of a credit card) based on a consumer report is communicated to the 
consumer by the person required to provide the notice, or if no notice 
of the increase in the annual percentage rate is provided to the 
consumer prior to the effective date of the change in the annual 
percentage rate (to the extent permitted by law), no later than five 
days after the effective date of the change in the annual percentage 
rate.
    (2) Application to certain automobile lending transactions. When a 
person to whom a credit obligation is initially payable grants, extends, 
or provides credit to a consumer for the purpose of financing the 
purchase of an automobile from an auto dealer or other party that is not 
affiliated with the person, any requirement to provide a risk-based 
pricing notice pursuant to this subpart is satisfied if the person:
    (i) Provides a notice described in Sec. Sec. 222.72(a), 222.74(e), 
or 222.74(f) to the consumer within the time periods set forth in 
paragraph (c)(1)(i) of this section, Sec. 222.74(e)(3), or Sec. 
222.74(f)(4), as applicable; or
    (ii) Arranges to have the auto dealer or other party provide a 
notice described in Sec. Sec. 222.72(a), 222.74(e), or 222.74(f) to the 
consumer on its behalf within the time periods set forth in paragraph 
(c)(1)(i) of this section, Sec. 222.74(e)(3), or Sec. 222.74(f)(4), as 
applicable, and maintains reasonable policies and procedures to verify 
that the auto dealer or other party provides such notice to the consumer 
within the applicable time periods. If the person arranges to have the 
auto dealer or other party provide a notice described in Sec. 
222.74(e), the person's obligation is

[[Page 87]]

satisfied if the consumer receives a notice containing a credit score 
obtained by the dealer or other party, even if a different credit score 
is obtained and used by the person on whose behalf the notice is 
provided.
    (3) Timing requirements for contemporaneous purchase credit. When 
credit under an open-end credit plan is granted, extended, or provided 
to a consumer in person or by telephone for the purpose of financing the 
contemporaneous purchase of goods or services, any risk-based pricing 
notice required to be provided pursuant to this subpart (or the 
disclosures permitted under Sec. 222.74(e) or (f)) may be provided at 
the earlier of:
    (i) The time of the first mailing by the person to the consumer 
after the decision is made to approve the grant, extension, or other 
provision of open-end credit, such as in a mailing containing the 
account agreement or a credit card; or
    (ii) Within 30 days after the decision to approve the grant, 
extension, or other provision of credit.
    (d) Multiple credit scores--(1) In general. When a person obtains or 
creates two or more credit scores and uses one of those credit scores in 
setting the material terms of credit, for example, by using the low, 
middle, high, or most recent score, the notices described in paragraphs 
(a)(1) and (2) of this section must include that credit score and 
information relating to that credit score required by paragraphs 
(a)(1)(ix) and (a)(2)(ix). When a person obtains or creates two or more 
credit scores and uses multiple credit scores in setting the material 
terms of credit by, for example, computing the average of all the credit 
scores obtained or created, the notices described in paragraphs (a)(1) 
and (2) of this section must include one of those credit scores and 
information relating to credit scores required by paragraphs (a)(1)(ix) 
and (a)(2)(ix). The notice may, at the person's option, include more 
than one credit score, along with the additional information specified 
in paragraphs (a)(1)(ix) and (a)(2)(ix) of this section for each credit 
score disclosed.
    (2) Examples. (i) A person that uses consumer reports to set the 
material terms of credit cards granted, extended, or provided to 
consumers regularly requests credit scores from several consumer 
reporting agencies and uses the low score when determining the material 
terms it will offer to the consumer. That person must disclose the low 
score in the notices described in paragraphs (a)(1) and (2) of this 
section.
    (ii) A person that uses consumer reports to set the material terms 
of automobile loans granted, extended, or provided to consumers 
regularly requests credit scores from several consumer reporting 
agencies, each of which it uses in an underwriting program in order to 
determine the material terms it will offer to the consumer. That person 
may choose one of these scores to include in the notices described in 
paragraph (a)(1) and (2) of this section.

[75 FR 2752, January 15, 2010, as amended at 76 FR 41616, July 15, 2011]



Sec. 222.74  Exceptions.

    (a) Application for specific terms--(1) In general. A person is not 
required to provide a risk-based pricing notice to the consumer under 
Sec. 222.72(a) or (c) if the consumer applies for specific material 
terms and is granted those terms, unless those terms were specified by 
the person using a consumer report after the consumer applied for or 
requested credit and after the person obtained the consumer report. For 
purposes of this section, ``specific material terms'' means a single 
material term, or set of material terms, such as an annual percentage 
rate of 10 percent, and not a range of alternatives, such as an annual 
percentage rate that may be 8, 10, or 12 percent, or between 8 and 12 
percent.
    (2) Example. A consumer receives a firm offer of credit from a 
credit card issuer. The terms of the firm offer are based in whole or in 
part on information from a consumer report that the credit card issuer 
obtained under the FCRA's firm offer of credit provisions. The 
solicitation offers the consumer a credit card with a single purchase 
annual percentage rate of 12 percent. The consumer applies for and 
receives a credit card with an annual percentage rate of 12 percent. 
Other customers

[[Page 88]]

with the same credit card have a purchase annual percentage rate of 10 
percent. The exception applies because the consumer applied for specific 
material terms and was granted those terms. Although the credit card 
issuer specified the annual percentage rate in the firm offer of credit 
based in whole or in part on a consumer report, the credit card issuer 
specified that material term before, not after, the consumer applied for 
or requested credit.
    (b) Adverse action notice. A person is not required to provide a 
risk-based pricing notice to the consumer under Sec. 222.72(a), (c), or 
(d) if the person provides an adverse action notice to the consumer 
under section 615(a) of the FCRA.
    (c) Prescreened solicitations--(1) In general. A person is not 
required to provide a risk-based pricing notice to the consumer under 
Sec. 222.72(a) or (c) if the person:
    (i) Obtains a consumer report that is a prescreened list as 
described in section 604(c)(2) of the FCRA; and
    (ii) Uses the consumer report for the purpose of making a firm offer 
of credit to the consumer.
    (2) More favorable material terms. This exception applies to any 
firm offer of credit offered by a person to a consumer, even if the 
person makes other firm offers of credit to other consumers on more 
favorable material terms.
    (3) Example. A credit card issuer obtains two prescreened lists from 
a consumer reporting agency. One list includes consumers with high 
credit scores. The other list includes consumers with low credit scores. 
The issuer mails a firm offer of credit to the high credit score 
consumers with a single purchase annual percentage rate of 10 percent. 
The issuer also mails a firm offer of credit to the low credit score 
consumers with a single purchase annual percentage rate of 14 percent. 
The credit card issuer is not required to provide a risk-based pricing 
notice to the low credit score consumers who receive the 14 percent 
offer because use of a consumer report to make a firm offer of credit 
does not trigger the risk-based pricing notice requirement.
    (d) Loans secured by residential real property--credit score 
disclosure. (1) In general. A person is not required to provide a risk-
based pricing notice to a consumer under Sec. 222.72(a) or (c) if:
    (i) The consumer requests from the person an extension of credit 
that is or will be secured by one to four units of residential real 
property; and
    (ii) The person provides to each consumer described in paragraph 
(d)(1)(i) of this section a notice that contains the following--
    (A) A statement that a consumer report (or credit report) is a 
record of the consumer's credit history and includes information about 
whether the consumer pays his or her obligations on time and how much 
the consumer owes to creditors;
    (B) A statement that a credit score is a number that takes into 
account information in a consumer report and that a credit score can 
change over time to reflect changes in the consumer's credit history;
    (C) A statement that the consumer's credit score can affect whether 
the consumer can obtain credit and what the cost of that credit will be;
    (D) The information required to be disclosed to the consumer 
pursuant to section 609(g) of the FCRA;
    (E) The distribution of credit scores among consumers who are scored 
under the same scoring model that is used to generate the consumer's 
credit score using the same scale as that of the credit score that is 
provided to the consumer, presented in the form of a bar graph 
containing a minimum of six bars that illustrates the percentage of 
consumers with credit scores within the range of scores reflected in 
each bar or by other clear and readily understandable graphical means, 
or a clear and readily understandable statement informing the consumer 
how his or her credit score compares to the scores of other consumers. 
Use of a graph or statement obtained from the person providing the 
credit score that meets the requirements of this paragraph (d)(1)(ii)(E) 
is deemed to comply with this requirement;
    (F) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;

[[Page 89]]

    (G) A statement that federal law gives the consumer the right to 
obtain copies of his or her consumer reports directly from the consumer 
reporting agencies, including a free report from each of the nationwide 
consumer reporting agencies once during any 12-month period;
    (H) Contact information for the centralized source from which 
consumers may obtain their free annual consumer reports; and
    (I) A statement directing consumers to the Web sites of the Federal 
Reserve Board and Federal Trade Commission to obtain more information 
about consumer reports.
    (2) Form of the notice. The notice described in paragraph (d)(1)(ii) 
of this section must be:
    (i) Clear and conspicuous;
    (ii) Provided on or with the notice required by section 609(g) of 
the FCRA;
    (iii) Segregated from other information provided to the consumer, 
except for the notice required by section 609(g) of the FCRA; and
    (iv) Provided to the consumer in writing and in a form that the 
consumer may keep.
    (3) Timing. The notice described in paragraph (d)(1)(ii) of this 
section must be provided to the consumer at the time the disclosure 
required by section 609(g) of the FCRA is provided to the consumer, but 
in any event at or before consummation in the case of closed-end credit 
or before the first transaction is made under an open-end credit plan.
    (4) Multiple credit scores--(i) In General. When a person obtains 
two or more credit scores from consumer reporting agencies and uses one 
of those credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by using the 
low, middle, high, or most recent score, the notice described in 
paragraph (d)(1)(ii) of this section must include that credit score and 
the other information required by that paragraph. When a person obtains 
two or more credit scores from consumer reporting agencies and uses 
multiple credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by computing 
the average of all the credit scores obtained, the notice described in 
paragraph (d)(1)(ii) of this section must include one of those credit 
scores and the other information required by that paragraph. The notice 
may, at the person's option, include more than one credit score, along 
with the additional information specified in paragraph (d)(1)(ii) of 
this section for each credit score disclosed.
    (ii) Examples. (A) A person that uses consumer reports to set the 
material terms of mortgage credit granted, extended, or provided to 
consumers regularly requests credit scores from several consumer 
reporting agencies and uses the low score when determining the material 
terms it will offer to the consumer. That person must disclose the low 
score in the notice described in paragraph (d)(1)(ii) of this section.
    (B) A person that uses consumer reports to set the material terms of 
mortgage credit granted, extended, or provided to consumers regularly 
requests credit scores from several consumer reporting agencies, each of 
which it uses in an underwriting program in order to determine the 
material terms it will offer to the consumer. That person may choose one 
of these scores to include in the notice described in paragraph 
(d)(1)(ii) of this section.
    (5) Model form. A model form of the notice described in paragraph 
(d)(1)(ii) of this section consolidated with the notice required by 
section 609(g) of the FCRA is contained in Appendix H-3 of this part. 
Appropriate use of Model Form H-3 is deemed to comply with the 
requirements of Sec. 222.74(d). Use of the model form is optional.
    (e) Other extensions of credit--credit score disclosure--(1) In 
general. A person is not required to provide a risk-based pricing notice 
to a consumer under Sec. 222.72(a) or (c) if:
    (i) The consumer requests from the person an extension of credit 
other than credit that is or will be secured by one to four units of 
residential real property; and
    (ii) The person provides to each consumer described in paragraph 
(e)(1)(i) of this section a notice that contains the following--
    (A) A statement that a consumer report (or credit report) is a 
record of the

[[Page 90]]

consumer's credit history and includes information about whether the 
consumer pays his or her obligations on time and how much the consumer 
owes to creditors;
    (B) A statement that a credit score is a number that takes into 
account information in a consumer report and that a credit score can 
change over time to reflect changes in the consumer's credit history;
    (C) A statement that the consumer's credit score can affect whether 
the consumer can obtain credit and what the cost of that credit will be;
    (D) The current credit score of the consumer or the most recent 
credit score of the consumer that was previously calculated by the 
consumer reporting agency for a purpose related to the extension of 
credit;
    (E) The range of possible credit scores under the model used to 
generate the credit score;
    (F) The distribution of credit scores among consumers who are scored 
under the same scoring model that is used to generate the consumer's 
credit score using the same scale as that of the credit score that is 
provided to the consumer, presented in the form of a bar graph 
containing a minimum of six bars that illustrates the percentage of 
consumers with credit scores within the range of scores reflected in 
each bar, or by other clear and readily understandable graphical means, 
or a clear and readily understandable statement informing the consumer 
how his or her credit score compares to the scores of other consumers. 
Use of a graph or statement obtained from the person providing the 
credit score that meets the requirements of this paragraph (e)(1)(ii)(F) 
is deemed to comply with this requirement;
    (G) The date on which the credit score was created;
    (H) The name of the consumer reporting agency or other person that 
provided the credit score;
    (I) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the report;
    (J) A statement that federal law gives the consumer the right to 
obtain copies of his or her consumer reports directly from the consumer 
reporting agencies, including a free report from each of the nationwide 
consumer reporting agencies once during any 12-month period;
    (K) Contact information for the centralized source from which 
consumers may obtain their free annual consumer reports; and
    (L) A statement directing consumers to the web sites of the Federal 
Reserve Board and Federal Trade Commission to obtain more information 
about consumer reports.
    (2) Form of the notice. The notice described in paragraph (e)(1)(ii) 
of this section must be:
    (i) Clear and conspicuous;
    (ii) Segregated from other information provided to the consumer; and
    (iii) Provided to the consumer in writing and in a form that the 
consumer may keep.
    (3) Timing. The notice described in paragraph (e)(1)(ii) of this 
section must be provided to the consumer as soon as reasonably 
practicable after the credit score has been obtained, but in any event 
at or before consummation in the case of closed-end credit or before the 
first transaction is made under an open-end credit plan.
    (4) Multiple credit scores--(i) In General. When a person obtains 
two or more credit scores from consumer reporting agencies and uses one 
of those credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by using the 
low, middle, high, or most recent score, the notice described in 
paragraph (e)(1)(ii) of this section must include that credit score and 
the other information required by that paragraph. When a person obtains 
two or more credit scores from consumer reporting agencies and uses 
multiple credit scores in setting the material terms of credit granted, 
extended, or otherwise provided to a consumer, for example, by computing 
the average of all the credit scores obtained, the notice described in 
paragraph (e)(1)(ii) of this section must include one of those credit 
scores and the other information required by that paragraph. The notice 
may, at the person's option, include more than one credit score,

[[Page 91]]

along with the additional information specified in paragraph (e)(1)(ii) 
of this section for each credit score disclosed.
    (ii) Examples. The manner in which multiple credit scores are to be 
disclosed under this section are substantially identical to the manner 
set forth in the examples contained in paragraph (d)(4)(ii) of this 
section.
    (5) Model form. A model form of the notice described in paragraph 
(e)(1)(ii) of this section is contained in Appendix H-4 of this part. 
Appropriate use of Model Form H-4 is deemed to comply with the 
requirements of Sec. 222.74(e). Use of the model form is optional.
    (f) Credit score not available--(1) In general. A person is not 
required to provide a risk-based pricing notice to a consumer under 
Sec. 222.72(a) or (c) if the person:
    (i) Regularly obtains credit scores from a consumer reporting agency 
and provides credit score disclosures to consumers in accordance with 
paragraphs (d) or (e) of this section, but a credit score is not 
available from the consumer reporting agency from which the person 
regularly obtains credit scores for a consumer to whom the person 
grants, extends, or provides credit;
    (ii) Does not obtain a credit score from another consumer reporting 
agency in connection with granting, extending, or providing credit to 
the consumer; and
    (iii) Provides to the consumer a notice that contains the 
following--
    (A) A statement that a consumer report (or credit report) includes 
information about the consumer's credit history and the type of 
information included in that history;
    (B) A statement that a credit score is a number that takes into 
account information in a consumer report and that a credit score can 
change over time in response to changes in the consumer's credit 
history;
    (C) A statement that credit scores are important because consumers 
with higher credit scores generally obtain more favorable credit terms;
    (D) A statement that not having a credit score can affect whether 
the consumer can obtain credit and what the cost of that credit will be;
    (E) A statement that a credit score about the consumer was not 
available from a consumer reporting agency, which must be identified by 
name, generally due to insufficient information regarding the consumer's 
credit history;
    (F) A statement that the consumer is encouraged to verify the 
accuracy of the information contained in the consumer report and has the 
right to dispute any inaccurate information in the consumer report;
    (G) A statement that federal law gives the consumer the right to 
obtain copies of his or her consumer reports directly from the consumer 
reporting agencies, including a free consumer report from each of the 
nationwide consumer reporting agencies once during any 12-month period;
    (H) The contact information for the centralized source from which 
consumers may obtain their free annual consumer reports; and
    (I) A statement directing consumers to the web sites of the Federal 
Reserve Board and Federal Trade Commission to obtain more information 
about consumer reports.
    (2) Example. A person that uses consumer reports to set the material 
terms of non-mortgage credit granted, extended, or provided to consumers 
regularly requests credit scores from a particular consumer reporting 
agency and provides those credit scores and additional information to 
consumers to satisfy the requirements of paragraph (e) of this section. 
That consumer reporting agency provides to the person a consumer report 
on a particular consumer that contains one trade line, but does not 
provide the person with a credit score on that consumer. If the person 
does not obtain a credit score from another consumer reporting agency 
and, based in whole or in part on information in a consumer report, 
grants, extends, or provides credit to the consumer, the person may 
provide the notice described in paragraph (f)(1)(iii) of this section. 
If, however, the person obtains a credit score from another consumer 
reporting agency, the person may not rely upon the exception in 
paragraph (f) of this section, but may satisfy the requirements of 
paragraph (e) of this section.

[[Page 92]]

    (3) Form of the notice. The notice described in paragraph 
(f)(1)(iii) of this section must be:
    (i) Clear and conspicuous;
    (ii) Segregated from other information provided to the consumer; and
    (iii) Provided to the consumer in writing and in a form that the 
consumer may keep.
    (4) Timing. The notice described in paragraph (f)(1)(iii) of this 
section must be provided to the consumer as soon as reasonably 
practicable after the person has requested the credit score, but in any 
event not later than consummation of a transaction in the case of 
closed-end credit or when the first transaction is made under an open-
end credit plan.
    (5) Model form. A model form of the notice described in paragraph 
(f)(1)(iii) of this section is contained in Appendix H-5 of this part. 
Appropriate use of Model Form H-5 is deemed to comply with the 
requirements of Sec. 222.74(f). Use of the model form is optional.



Sec. 222.75  Rules of construction.

    For purposes of this subpart, the following rules of construction 
apply:
    (a) One notice per credit extension. A consumer is entitled to no 
more than one risk-based pricing notice under Sec. 222.72(a) or (c), or 
one notice under Sec. 222.74(d), (e), or (f), for each grant, 
extension, or other provision of credit. Notwithstanding the foregoing, 
even if a consumer has previously received a risk-based pricing notice 
in connection with a grant, extension, or other provision of credit, 
another risk-based pricing notice is required if the conditions set 
forth in Sec. 222.72(d) have been met.
    (b) Multi-party transactions--(1) Initial creditor. The person to 
whom a credit obligation is initially payable must provide the risk-
based pricing notice described in Sec. 222.72(a) or (c), or satisfy the 
requirements for and provide the notice required under one of the 
exceptions in Sec. 222.74(d), (e), or (f), even if that person 
immediately assigns the credit agreement to a third party and is not the 
source of funding for the credit.
    (2) Purchasers or assignees. A purchaser or assignee of a credit 
contract with a consumer is not subject to the requirements of this 
subpart and is not required to provide the risk-based pricing notice 
described in Sec. 222.72(a) or (c), or satisfy the requirements for and 
provide the notice required under one of the exceptions in Sec. 
222.74(d), (e), or (f).
    (3) Examples. (i) A consumer obtains credit to finance the purchase 
of an automobile. If the auto dealer is the person to whom the loan 
obligation is initially payable, such as where the auto dealer is the 
original creditor under a retail installment sales contract, the auto 
dealer must provide the risk-based pricing notice to the consumer (or 
satisfy the requirements for and provide the notice required under one 
of the exceptions noted above), even if the auto dealer immediately 
assigns the loan to a bank or finance company. The bank or finance 
company, which is an assignee, has no duty to provide a risk-based 
pricing notice to the consumer.
    (ii) A consumer obtains credit to finance the purchase of an 
automobile. If a bank or finance company is the person to whom the loan 
obligation is initially payable, the bank or finance company must 
provide the risk-based pricing notice to the consumer (or satisfy the 
requirements for and provide the notice required under one of the 
exceptions noted above) based on the terms offered by that bank or 
finance company only. The auto dealer has no duty to provide a risk-
based pricing notice to the consumer. However, the bank or finance 
company may comply with this rule if the auto dealer has agreed to 
provide notices to consumers before consummation pursuant to an 
arrangement with the bank or finance company, as permitted under Sec. 
222.73(c).
    (c) Multiple consumers--(1) Risk-based pricing notices. In a 
transaction involving two or more consumers who are granted, extended, 
or otherwise provided credit, a person must provide a notice to each 
consumer to satisfy the requirements of Sec. 222.72(a) or (c). Whether 
the consumers have the same address or not, the person must provide a 
separate notice to each consumer if a notice includes a credit score(s). 
Each separate notice that includes a credit score(s) must contain only 
the credit score(s) of the consumer to whom the notice is provided, and 
not the credit score(s) of the other consumer. If the

[[Page 93]]

consumers have the same address, and the notice does not include a 
credit score(s), a person may satisfy the requirements by providing a 
single notice addressed to both consumers.
    (2) Credit score disclosure notices. In a transaction involving two 
or more consumers who are granted, extended, or otherwise provided 
credit, a person must provide a separate notice to each consumer to 
satisfy the exceptions in Sec. 222.74(d), (e), or (f). Whether the 
consumers have the same address or not, the person must provide a 
separate notice to each consumer. Each separate notice must contain only 
the credit score(s) of the consumer to whom the notice is provided, and 
not the credit score(s) of the other consumer.
    (3) Examples. (i) Two consumers jointly apply for credit with a 
creditor. The creditor obtains credit scores on both consumers. Based in 
part on the credit scores, the creditor grants credit to the consumers 
on material terms that are materially less favorable than the most 
favorable terms available to other consumers from the creditor. The 
creditor provides risk-based pricing notices to satisfy its obligations 
under this subpart. The creditor must provide a separate risk-based 
pricing notice to each consumer whether the consumers have the same 
address or not. Each risk-based pricing notice must contain only the 
credit score(s) of the consumer to whom the notice is provided.
    (ii) Two consumers jointly apply for credit with a creditor. The two 
consumers reside at the same address. The creditor obtains credit scores 
on each of the two consumer applicants. The creditor grants credit to 
the consumers. The creditor provides credit score disclosure notices to 
satisfy its obligations under this subpart. Even though the two 
consumers reside at the same address, the creditor must provide a 
separate credit score disclosure notice to each of the consumers. Each 
notice must contain only the credit score of the consumer to whom the 
notice is provided.

[75 FR 2752, January 15, 2010, as amended at 76 FR 41617, July 15, 2011]



 Subpart I_Duties of Users of Consumer Reports Regarding Identity Theft

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



Sec. 222.80-222.81  [Reserved]



Sec. 222.82  Duties of users regarding address discrepancies.

    (a) Scope. This section applies to a user of consumer reports (user) 
that receives a notice of address discrepancy from a consumer reporting 
agency described in 15 U.S.C. 1681a(p), and that is a member bank of the 
Federal Reserve System (other than a national bank) and its respective 
operating subsidiaries, a branch or agency of a foreign bank (other than 
a Federal branch, Federal agency, or insured State branch of a foreign 
bank), commercial lending company owned or controlled by a foreign bank, 
and an organization operating under section 25 or 25A of the Federal 
Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).
    (b) Definition. For purposes of this section, a notice of address 
discrepancy means a notice sent to a user by a consumer reporting agency 
described in 15 U.S.C. 1681a(p) pursuant to 15 U.S.C. 1681c(h)(1), that 
informs the user of a substantial difference between the address for the 
consumer that the user provided to request the consumer report and the 
address(es) in the agency's file for the consumer.
    (c) Reasonable belief--(1) Requirement to form a reasonable belief. 
A user must develop and implement reasonable policies and procedures 
designed to enable the user to form a reasonable belief that a consumer 
report relates to the consumer about whom it has requested the report, 
when the user receives a notice of address discrepancy.
    (2) Examples of reasonable policies and procedures. (i) Comparing 
the information in the consumer report provided by the consumer 
reporting agency with information the user:
    (A) Obtains and uses to verify the consumer's identity in accordance 
with the requirements of the Customer Identification Program (CIP) rules 
implementing 31 U.S.C. 5318(l) (31 CFR 103.121);

[[Page 94]]

    (B) Maintains in its own records, such as applications, change of 
address notifications, other customer account records, or retained CIP 
documentation; or
    (C) Obtains from third-party sources; or
    (ii) Verifying the information in the consumer report provided by 
the consumer reporting agency with the consumer.
    (d) Consumer's address--(1) Requirement to furnish consumer's 
address to a consumer reporting agency. A user must develop and 
implement reasonable policies and procedures for furnishing an address 
for the consumer that the user has reasonably confirmed is accurate to 
the consumer reporting agency described in 15 U.S.C. 1681a(p) from whom 
it received the notice of address discrepancy when the user:
    (i) Can form a reasonable belief that the consumer report relates to 
the consumer about whom the user requested the report;
    (ii) Establishes a continuing relationship with the consumer; and
    (iii) Regularly and in the ordinary course of business furnishes 
information to the consumer reporting agency from which the notice of 
address discrepancy relating to the consumer was obtained.
    (2) Examples of confirmation methods. The user may reasonably 
confirm an address is accurate by:
    (i) Verifying the address with the consumer about whom it has 
requested the report;
    (ii) Reviewing its own records to verify the address of the 
consumer;
    (iii) Verifying the address through third-party sources; or
    (iv) Using other reasonable means.
    (3) Timing. The policies and procedures developed in accordance with 
paragraph (d)(1) of this section must provide that the user will furnish 
the consumer's address that the user has reasonably confirmed is 
accurate to the consumer reporting agency described in 15 U.S.C. 
1681a(p) as part of the information it regularly furnishes for the 
reporting period in which it establishes a relationship with the 
consumer.

[Reg. V, 72 FR 63756, Nov. 9, 2007, as amended at 74 FR 22642, May 14, 
2009]



Sec. 222.83  Disposal of consumer information.

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



                   Subpart J_Identity Theft Red Flags

    Source: Reg. V, 72 FR 63758, Nov. 9, 2007, unless otherwise noted.



Sec. 222.90  Duties regarding the detection, prevention, and mitigation of 

identity theft.

    (a) Scope. This section applies to financial institutions and 
creditors that are member banks of the Federal Reserve System (other 
than national banks) and their respective operating subsidiaries that 
are not functionally regulated within the meaning of section 5(c)(5) of 
the Bank Holding Company Act, as amended (12 U.S.C. 1844(c)(5)), 
branches and agencies of foreign banks (other than Federal branches, 
Federal agencies, and insured State branches of foreign banks), 
commercial lending companies owned or

[[Page 95]]

controlled by foreign banks, and organizations operating under section 
25 or 25A of the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et 
seq.).
    (b) Definitions. For purposes of this section and appendix J, the 
following definitions apply:
    (1) Account means a continuing relationship established by a person 
with a financial institution or creditor to obtain a product or service 
for personal, family, household or business purposes. Account includes:
    (i) An extension of credit, such as the purchase of property or 
services involving a deferred payment; and
    (ii) A deposit account.
    (2) The term board of directors includes:
    (i) In the case of a branch or agency of a foreign bank, the 
managing official in charge of the branch or agency; and
    (ii) In the case of any other creditor that does not have a board of 
directors, a designated employee at the level of senior management.
    (3) Covered account means:
    (i) An account that a financial institution or creditor offers or 
maintains, primarily for personal, family, or household purposes, that 
involves or is designed to permit multiple payments or transactions, 
such as a credit card account, mortgage loan, automobile loan, margin 
account, cell phone account, utility account, checking account, or 
savings account; and
    (ii) Any other account that the financial institution or creditor 
offers or maintains for which there is a reasonably foreseeable risk to 
customers or to the safety and soundness of the financial institution or 
creditor from identity theft, including financial, operational, 
compliance, reputation, or litigation risks.
    (4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5), and 
includes lenders such as banks, finance companies, automobile dealers, 
mortgage brokers, utility companies, and telecommunications companies.
    (6) Customer means a person that has a covered account with a 
financial institution or creditor.
    (7) Financial institution has the same meaning as in 15 U.S.C. 
1681a(t).
    (8) Identity theft has the same meaning as in 16 CFR 603.2(a).
    (9) Red Flag means a pattern, practice, or specific activity that 
indicates the possible existence of identity theft.
    (10) Service provider means a person that provides a service 
directly to the financial institution or creditor.
    (c) Periodic Identification of Covered Accounts. Each financial 
institution or creditor must periodically determine whether it offers or 
maintains covered accounts. As a part of this determination, a financial 
institution or creditor must conduct a risk assessment to determine 
whether it offers or maintains covered accounts described in paragraph 
(b)(3)(ii) of this section, taking into consideration:
    (1) The methods it provides to open its accounts;
    (2) The methods it provides to access its accounts; and
    (3) Its previous experiences with identity theft.
    (d) Establishment of an Identity Theft Prevention Program--(1) 
Program requirement. Each financial institution or creditor that offers 
or maintains one or more covered accounts must develop and implement a 
written Identity Theft Prevention Program (Program) that is designed to 
detect, prevent, and mitigate identity theft in connection with the 
opening of a covered account or any existing covered account. The 
Program must be appropriate to the size and complexity of the financial 
institution or creditor and the nature and scope of its activities.
    (2) Elements of the Program. The Program must include reasonable 
policies and procedures to:
    (i) Identify relevant Red Flags for the covered accounts that the 
financial institution or creditor offers or maintains, and incorporate 
those Red Flags into its Program;
    (ii) Detect Red Flags that have been incorporated into the Program 
of the financial institution or creditor;
    (iii) Respond appropriately to any Red Flags that are detected 
pursuant to paragraph (d)(2)(ii) of this section to prevent and mitigate 
identity theft; and

[[Page 96]]

    (iv) Ensure the Program (including the Red Flags determined to be 
relevant) is updated periodically, to reflect changes in risks to 
customers and to the safety and soundness of the financial institution 
or creditor from identity theft.
    (e) Administration of the Program. Each financial institution or 
creditor that is required to implement a Program must provide for the 
continued administration of the Program and must:
    (1) Obtain approval of the initial written Program from either its 
board of directors or an appropriate committee of the board of 
directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a designated employee at the level of senior management in 
the oversight, development, implementation and administration of the 
Program;
    (3) Train staff, as necessary, to effectively implement the Program; 
and
    (4) Exercise appropriate and effective oversight of service provider 
arrangements.
    (f) Guidelines. Each financial institution or creditor that is 
required to implement a Program must consider the guidelines in appendix 
J of this part and include in its Program those guidelines that are 
appropriate.

[Reg. V, 72 FR 63758, Nov. 9, 2007, as amended at 74 FR 22642, May 14, 
2009]



Sec. 222.91  Duties of card issuers regarding changes of address.

    (a) Scope. This section applies to a person described in Sec. 
222.90(a) that issues a debit or credit card (card issuer).
    (b) Definitions. For purposes of this section:
    (1) Cardholder means a consumer who has been issued a credit or 
debit card.
    (2) Clear and conspicuous means reasonably understandable and 
designed to call attention to the nature and significance of the 
information presented.
    (c) Address validation requirements. A card issuer must establish 
and implement reasonable policies and procedures to assess the validity 
of a change of address if it receives notification of a change of 
address for a consumer's debit or credit card account and, within a 
short period of time afterwards (during at least the first 30 days after 
it receives such notification), the card issuer receives a request for 
an additional or replacement card for the same account. Under these 
circumstances, the card issuer may not issue an additional or 
replacement card, until, in accordance with its reasonable policies and 
procedures and for the purpose of assessing the validity of the change 
of address, the card issuer:
    (1)(i) Notifies the cardholder of the request:
    (A) At the cardholder's former address; or
    (B) By any other means of communication that the card issuer and the 
cardholder have previously agreed to use; and
    (ii) Provides to the cardholder a reasonable means of promptly 
reporting incorrect address changes; or
    (2) Otherwise assesses the validity of the change of address in 
accordance with the policies and procedures the card issuer has 
established pursuant to Sec. 222.90 of this part.
    (d) Alternative timing of address validation. A card issuer may 
satisfy the requirements of paragraph (c) of this section if it 
validates an address pursuant to the methods in paragraph (c)(1) or 
(c)(2) of this section when it receives an address change notification, 
before it receives a request for an additional or replacement card.
    (e) Form of notice. Any written or electronic notice that the card 
issuer provides under this paragraph must be clear and conspicuous and 
provided separately from its regular correspondence with the cardholder.



                 Sec. Appendix A to Part 222 [Reserved]



   Sec. Appendix B to Part 222--Model Notices of Furnishing Negative 

                               Information

    a. Although use of the model notices is not required, a financial 
institution that is subject to section 623(a)(7) of the FCRA shall be 
deemed to be in compliance with the notice requirement in section 
623(a)(7) of the FCRA if the institution properly uses the model notices 
in this appendix (as applicable).
    b. A financial institution may use Model Notice B-1 if the 
institution provides the notice prior to furnishing negative information 
to a nationwide consumer reporting agency.

[[Page 97]]

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

                            Model Notice B-1

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

                            Model Notice B-2

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

[69 FR 33285, June 15, 2004]



      Sec. Appendix C to Part 222--Model Forms for Opt-Out Notices

    a. Although use of the model forms is not required, use of the model 
forms in this appendix (as applicable) complies with the requirement in 
section 624 of the Act for clear, conspicuous, and concise notices.
    b. Certain changes may be made to the language or format of the 
model forms without losing the protection from liability afforded by use 
of the model forms. These changes may not be so extensive as to affect 
the substance, clarity, or meaningful sequence of the language in the 
model forms. Persons making such extensive revisions will lose the safe 
harbor that this appendix provides. Acceptable changes include, for 
example:
    1. Rearranging the order of the references to ``your income,'' 
``your account history,'' and ``your credit score.''
    2. Substituting other types of information for ``income,'' ``account 
history,'' or ``credit score'' for accuracy, such as ``payment 
history,'' ``credit history,'' ``payoff status,'' or ``claims history.''
    3. Substituting a clearer and more accurate description of the 
affiliates providing or covered by the notice for phrases such as ``the 
[ABC] group of companies,'' including without limitation a statement 
that the entity providing the notice recently purchased the consumer's 
account.
    4. Substituting other types of affiliates covered by the notice for 
``credit card,'' ``insurance,'' or ``securities'' affiliates.
    5. Omitting items that are not accurate or applicable. For example, 
if a person does not limit the duration of the opt-out period, the 
notice may omit information about the renewal notice.
    6. Adding a statement informing consumers how much time they have to 
opt out before shared eligibility information may be used to make 
solicitations to them.
    7. Adding a statement that the consumer may exercise the right to 
opt out at any time.
    8. Adding the following statement, if accurate: ``If you previously 
opted out, you do not need to do so again.''
    9. Providing a place on the form for the consumer to fill in 
identifying information, such as his or her name and address.
    10. Adding disclosures regarding the treatment of opt-outs by joint 
consumers to comply with Sec. 222.23(a)(2) of this part.

C-1 Model Form for Initial Opt-out Notice (Single-Affiliate Notice)

C-2 Model Form for Initial Opt-out Notice (Joint Notice)
C-3 Model Form for Renewal Notice (Single-Affiliate Notice)
C-4 Model Form for Renewal Notice (Joint Notice)
C-5 Model Form for Voluntary ``No Marketing'' Notice
C-6 Model Form for Voluntary ``No Marketing'' Notice

 C-1--Model Form for Initial Opt-out Notice (Single-Affiliate Notice)--
          [Your Choice To Limit Marketing]/[Marketing Opt-out]

     [Name of Affiliate] is providing this notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from our affiliates. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from our affiliates.]
     You may limit our affiliates in the [ABC] group 
of companies, such as our [credit card, insurance, and securities] 
affiliates, from marketing their products or services to you based on 
your personal information that we

[[Page 98]]

collect and share with them. This information includes your [income], 
your [account history with us], and your [credit score].
     Your choice to limit marketing offers from our 
affiliates will apply [until you tell us to change your choice]/[for x 
years from when you tell us your choice]/[for at least 5 years from when 
you tell us your choice]. [Include if the opt-out period expires.] Once 
that period expires, you will receive a renewal notice that will allow 
you to continue to limit marketing offers from our affiliates for 
[another x years]/[at least another 5 years].
     [Include, if applicable, in a subsequent notice, 
including an annual notice, for consumers who may have previously opted 
out.] If you have already made a choice to limit marketing offers from 
our affiliates, you do not need to act again until you receive the 
renewal notice.
    To limit marketing offers, contact us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

    --Do not allow your affiliates to use my personal information to 
market to me.

C-2--Model Form for Initial Opt-out Notice (Joint Notice)--[Your Choice 
                 To Limit Marketing]/[Marketing Opt-out]

     The [ABC group of companies] is providing this 
notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from the [ABC] companies. Federal law 
also requires us to give you this notice to tell you about your choice 
to limit marketing from the [ABC] companies.]
     You may limit the [ABC] companies, such as the 
[ABC credit card, insurance, and securities] affiliates, from marketing 
their products or services to you based on your personal information 
that they receive from other [ABC] companies. This information includes 
your [income], your [account history], and your [credit score].
     Your choice to limit marketing offers from the 
[ABC] companies will apply [until you tell us to change your choice]/
[for x years from when you tell us your choice]/[for at least 5 years 
from when you tell us your choice]. [Include if the opt-out period 
expires.] Once that period expires, you will receive a renewal notice 
that will allow you to continue to limit marketing offers from the [ABC] 
companies for [another x years]/[at least another 5 years].
     [Include, if applicable, in a subsequent notice, 
including an annual notice, for consumers who may have previously opted 
out.] If you have already made a choice to limit marketing offers from 
the [ABC] companies, you do not need to act again until you receive the 
renewal notice.
    To limit marketing offers, contact us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

    --Do not allow any company [in the ABC group of companies] to use my 
personal information to market to me.

C-3--Model Form for Renewal Notice (Single-Affiliate Notice)--[Renewing 
    Your Choice To Limit Marketing]/[Renewing Your Marketing Opt-Out]

     [Name of Affiliate] is providing this notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from our affiliates. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from our affiliates.]
     You previously chose to limit our affiliates in 
the [ABC] group of companies, such as our [credit card, insurance, and 
securities] affiliates, from marketing their products or services to you 
based on your personal information that we share with them. This 
information includes your [income], your [account history with us], and 
your [credit score].
     Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

--Renew my choice to limit marketing for [x] more years.

C-4--Model Form for Renewal Notice (Joint Notice)--[Renewing Your Choice 
          To Limit Marketing]/[Renewing Your Marketing Opt-Out]

     The [ABC group of companies] is providing this 
notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from the [ABC] companies. Federal law 
also requires us to give you this notice to tell you about your choice 
to limit marketing from the [ABC] companies.]
     You previously chose to limit the [ABC] 
companies, such as the [ABC credit card, insurance, and securities] 
affiliates, from marketing their products or services to you

[[Page 99]]

based on your personal information that they receive from other ABC 
companies. This information includes your [income], your [account 
history], and your [credit score].
     Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]
--Renew my choice to limit marketing for [x] more years.

          C-5--Model Form for Voluntary ``No Marketing'' Notice

                      Your Choice To Stop Marketing

     [Name of Affiliate] is providing this notice.
     You may choose to stop all marketing from us and 
our affiliates.
     [Your choice to stop marketing from us and our 
affiliates will apply until you tell us to change your choice.]
    To stop all marketing, contact us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.--.com
     By mail: Check the box and complete the form 
below, and send the form to:
[Company name]
[Company address]
--Do not market to me.


[Reg. V, 72 FR 62962, Nov. 7, 2007, as amended at 74 FR 22642, May 14, 
2009]



                 Sec. Appendix D to Part 222 [Reserved]



  Sec. Appendix E to Part 222-- Interagency Guidelines Concerning the 

 Accuracy and Integrity of Information Furnished to Consumer Reporting 

                                Agencies

    The Board encourages voluntary furnishing of information to consumer 
reporting agencies. Section 222.42 of this part requires each furnisher 
to establish and implement reasonable written policies and procedures 
concerning the accuracy and integrity of the information it furnishes to 
consumer reporting agencies. Under Sec. 222.42(b) of this part, a 
furnisher must consider the guidelines set forth below in developing its 
policies and procedures. In establishing these policies and procedures, 
a furnisher may include any of its existing policies and procedures that 
are relevant and appropriate. Section 222.42(c) requires each furnisher 
to review its policies and procedures periodically and update them as 
necessary to ensure their continued effectiveness.

       I. Nature, Scope, and Objectives of Policies and Procedures

    (a) Nature and Scope. Section 222.42(a) of this part requires that a 
furnisher's policies and procedures be appropriate to the nature, size, 
complexity, and scope of the furnisher's activities. In developing its 
policies and procedures, a furnisher should consider, for example:
    (1) The types of business activities in which the furnisher engages;
    (2) The nature and frequency of the information the furnisher 
provides to consumer reporting agencies; and
    (3) The technology used by the furnisher to furnish information to 
consumer reporting agencies.
    (b) Objectives. A furnisher's policies and procedures should be 
reasonably designed to promote the following objectives:
    (1) To furnish information about accounts or other relationships 
with a consumer that is accurate, such that the furnished information:
    (i) Identifies the appropriate consumer;
    (ii) Reflects the terms of and liability for those accounts or other 
relationships; and
    (iii) Reflects the consumer's performance and other conduct with 
respect to the account or other relationship;
    (2) To furnish information about accounts or other relationships 
with a consumer that has integrity, such that the furnished information:
    (i) Is substantiated by the furnisher's records at the time it is 
furnished;
    (ii) Is furnished in a form and manner that is designed to minimize 
the likelihood that the information may be incorrectly reflected in a 
consumer report; thus, the furnished information should:
    (A) Include appropriate identifying information about the consumer 
to whom it pertains; and
    (B) Be furnished in a standardized and clearly understandable form 
and manner and with a date specifying the time period to which the 
information pertains; and
    (iii) Includes the credit limit, if applicable and in the 
furnisher's possession;
    (3) To conduct reasonable investigations of consumer disputes and 
take appropriate actions based on the outcome of such investigations; 
and
    (4) To update the information it furnishes as necessary to reflect 
the current status of the consumer's account or other relationship, 
including, for example:
    (i) Any transfer of an account (e.g., by sale or assignment for 
collection) to a third party; and

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    (ii) Any cure of the consumer's failure to abide by the terms of the 
account or other relationship.

        II. Establishing and Implementing Policies and Procedures

    In establishing and implementing its policies and procedures, a 
furnisher should:
    (a) Identify practices or activities of the furnisher that can 
compromise the accuracy or integrity of information furnished to 
consumer reporting agencies, such as by:
    (1) Reviewing its existing practices and activities, including the 
technological means and other methods it uses to furnish information to 
consumer reporting agencies and the frequency and timing of its 
furnishing of information;
    (2) Reviewing its historical records relating to accuracy or 
integrity or to disputes; reviewing other information relating to the 
accuracy or integrity of information provided by the furnisher to 
consumer reporting agencies; and considering the types of errors, 
omissions, or other problems that may have affected the accuracy or 
integrity of information it has furnished about consumers to consumer 
reporting agencies;
    (3) Considering any feedback received from consumer reporting 
agencies, consumers, or other appropriate parties;
    (4) Obtaining feedback from the furnisher's staff; and
    (5) Considering the potential impact of the furnisher's policies and 
procedures on consumers.
    (b) Evaluate the effectiveness of existing policies and procedures 
of the furnisher regarding the accuracy and integrity of information 
furnished to consumer reporting agencies; consider whether new, 
additional, or different policies and procedures are necessary; and 
consider whether implementation of existing policies and procedures 
should be modified to enhance the accuracy and integrity of information 
about consumers furnished to consumer reporting agencies.
    (c) Evaluate the effectiveness of specific methods (including 
technological means) the furnisher uses to provide information to 
consumer reporting agencies; how those methods may affect the accuracy 
and integrity of the information it provides to consumer reporting 
agencies; and whether new, additional, or different methods (including 
technological means) should be used to provide information to consumer 
reporting agencies to enhance the accuracy and integrity of that 
information.

           III. Specific Components of Policies and Procedures

    In developing its policies and procedures, a furnisher should 
address the following, as appropriate:
    (a) Establishing and implementing a system for furnishing 
information about consumers to consumer reporting agencies that is 
appropriate to the nature, size, complexity, and scope of the 
furnisher's business operations.
    (b) Using standard data reporting formats and standard procedures 
for compiling and furnishing data, where feasible, such as the 
electronic transmission of information about consumers to consumer 
reporting agencies.
    (c) Maintaining records for a reasonable period of time, not less 
than any applicable recordkeeping requirement, in order to substantiate 
the accuracy of any information about consumers it furnishes that is 
subject to a direct dispute.
    (d) Establishing and implementing appropriate internal controls 
regarding the accuracy and integrity of information about consumers 
furnished to consumer reporting agencies, such as by implementing 
standard procedures and verifying random samples of information provided 
to consumer reporting agencies.
    (e) Training staff that participates in activities related to the 
furnishing of information about consumers to consumer reporting agencies 
to implement the policies and procedures.
    (f) Providing for appropriate and effective oversight of relevant 
service providers whose activities may affect the accuracy or integrity 
of information about consumers furnished to consumer reporting agencies 
to ensure compliance with the policies and procedures.
    (g) Furnishing information about consumers to consumer reporting 
agencies following mergers, portfolio acquisitions or sales, or other 
acquisitions or transfers of accounts or other obligations in a manner 
that prevents re-aging of information, duplicative reporting, or other 
problems that may similarly affect the accuracy or integrity of the 
information furnished.
    (h) Deleting, updating, and correcting information in the 
furnisher's records, as appropriate, to avoid furnishing inaccurate 
information.
    (i) Conducting reasonable investigations of disputes.
    (j) Designing technological and other means of communication with 
consumer reporting agencies to prevent duplicative reporting of 
accounts, erroneous association of information with the wrong 
consumer(s), and other occurrences that may compromise the accuracy or 
integrity of information provided to consumer reporting agencies.
    (k) Providing consumer reporting agencies with sufficient 
identifying information in the furnisher's possession about each 
consumer about whom information is furnished to enable the consumer 
reporting agency properly to identify the consumer.

[[Page 101]]

    (l) Conducting a periodic evaluation of its own practices, consumer 
reporting agency practices of which the furnisher is aware, 
investigations of disputed information, corrections of inaccurate 
information, means of communication, and other factors that may affect 
the accuracy or integrity of information furnished to consumer reporting 
agencies.
    (m) Complying with applicable requirements under the Fair Credit 
Reporting Act and its implementing regulations.

[Reg. V, 74 FR 31516, July 1, 2009]



               Sec. Appendices F-G to Part 222 [Reserved]



  Sec. Appendix H to Part 222--Appendix H--Model Forms for Risk-Based 

          Pricing and Credit Score Disclosure Exception Notices

    1. This appendix contains four model forms for risk-based pricing 
notices and three model forms for use in connection with the credit 
score disclosure exceptions. Each of the model forms is designated for 
use in a particular set of circumstances as indicated by the title of 
that model form.
    2. Model form H-1 is for use in complying with the general risk-
based pricing notice requirements in Sec. 222.72 if a credit score is 
not used in setting the material terms of credit. Model form H-2 is for 
risk-based pricing notices given in connection with account review if a 
credit score is not used in increasing the annual percentage rate. Model 
form H-3 is for use in connection with the credit score disclosure 
exception for loans secured by residential real property. Model form H-4 
is for use in connection with the credit score disclosure exception for 
loans that are not secured by residential real property. Model form H-5 
is for use in connection with the credit score disclosure exception when 
no credit score is available for a consumer. Model form H-6 is for use 
in complying with the general risk-based pricing notice requirements in 
Sec. 222.72 if a credit score is used in setting the material terms of 
credit. Model form H-7 is for risk-based pricing notices given in 
connection with account review if a credit score is used in increasing 
the annual percentage rate. All forms contained in this appendix are 
models; their use is optional.
    3. A person may change the forms by rearranging the format or by 
making technical modifications to the language of the forms, in each 
case without modifying the substance of the disclosures. Any such 
rearrangement or modification of the language of the model forms may not 
be so extensive as to materially affect the substance, clarity, 
comprehensibility, or meaningful sequence of the forms. Persons making 
revisions with that effect will lose the benefit of the safe harbor for 
appropriate use of Appendix H model forms. A person is not required to 
conduct consumer testing when rearranging the format of the model forms.
    a. Acceptable changes include, for example:
    i. Corrections or updates to telephone numbers, mailing addresses, 
or Web site addresses that may change over time.
    ii. The addition of graphics or icons, such as the person's 
corporate logo.
    iii. Alteration of the shading or color contained in the model 
forms.
    iv. Use of a different form of graphical presentation to depict the 
distribution of credit scores.
    v. Substitution of the words ``credit'' and ``creditor'' or 
``finance'' and ``finance company'' for the terms ``loan'' and 
``lender.''
    vi. Including pre-printed lists of the sources of consumer reports 
or consumer reporting agencies in a ``check-the-box'' format.
    vii. Including the name of the consumer, transaction identification 
numbers, a date, and other information that will assist in identifying 
the transaction to which the form pertains.
    viii. Including the name of an agent, such as an auto dealer or 
other party, when providing the ``Name of the Entity Providing the 
Notice.''
    b. Unacceptable changes include, for example:
    i. Providing model forms on register receipts or interspersed with 
other disclosures.
    ii. Eliminating empty lines and extra spaces between sentences 
within the same section.
    4. Optional language in model forms H-6 and H-7 may be used to 
direct the consumer to the entity (which may be a consumer reporting 
agency or the creditor itself, for a proprietary score that meets the 
definition of a credit score) that provided the credit score for any 
questions about the credit score, along with the entity's contact 
information. Creditors may use or not use the additional language 
without losing the safe harbor, since the language is optional.
    H-1 Model form for risk-based pricing notice.
    H-2 Model form for account review risk-based pricing notice.
    H-3 Model form for credit score disclosure exception for credit 
secured by one to four units of residential real property.
    H-4 Model form for credit score disclosure exception for loans not 
secured by residential real property.
    H-5 Model form for credit score disclosure exception for loans where 
credit score is not available.
    H-6 Model form for risk-based pricing notice with credit score 
information

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    H-7 Model form for account review risk-based pricing notice with 
credit score information
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[75 FR 2759, January 15, 2010, as amended at 76 FR 41617, July 15, 2011]



                 Sec. Appendix I to Part 222 [Reserved]



 Sec. Appendix J to Part 222--Interagency Guidelines on Identity Theft 

                  Detection, Prevention, and Mitigation

    Section 222.90 of this part requires each financial institution and 
creditor that offers or maintains one or more covered accounts, as 
defined in Sec. 222.90(b)(3) of this part, to develop and provide for 
the continued administration of a written Program to detect, prevent, 
and mitigate identity theft in connection with the opening of a covered 
account or any existing covered account. These guidelines are intended 
to assist financial institutions and creditors in the formulation and 
maintenance of a Program that satisfies the requirements of Sec. 222.90 
of this part.

                             I. The Program

    In designing its Program, a financial institution or creditor may 
incorporate, as appropriate, its existing policies, procedures, and 
other arrangements that control reasonably foreseeable risks to 
customers or to the safety and soundness of the financial institution or 
creditor from identity theft.

                   II. Identifying Relevant Red Flags

    (a) Risk Factors. A financial institution or creditor should 
consider the following factors in identifying relevant Red Flags for 
covered accounts, as appropriate:
    (1) The types of covered accounts it offers or maintains;
    (2) The methods it provides to open its covered accounts;
    (3) The methods it provides to access its covered accounts; and
    (4) Its previous experiences with identity theft.
    (b) Sources of Red Flags. Financial institutions and creditors 
should incorporate relevant Red Flags from sources such as:
    (1) Incidents of identity theft that the financial institution or 
creditor has experienced;
    (2) Methods of identity theft that the financial institution or 
creditor has identified that reflect changes in identity theft risks; 
and
    (3) Applicable supervisory guidance.
    (c) Categories of Red Flags. The Program should include relevant Red 
Flags from the

[[Page 114]]

following categories, as appropriate. Examples of Red Flags from each of 
these categories are appended as Supplement A to this appendix J.
    (1) Alerts, notifications, or other warnings received from consumer 
reporting agencies or service providers, such as fraud detection 
services;
    (2) The presentation of suspicious documents;
    (3) The presentation of suspicious personal identifying information, 
such as a suspicious address change;
    (4) The unusual use of, or other suspicious activity related to, a 
covered account; and
    (5) Notice from customers, victims of identity theft, law 
enforcement authorities, or other persons regarding possible identity 
theft in connection with covered accounts held by the financial 
institution or creditor.

                        III. Detecting Red Flags

    The Program's policies and procedures should address the detection 
of Red Flags in connection with the opening of covered accounts and 
existing covered accounts, such as by:
    (a) Obtaining identifying information about, and verifying the 
identity of, a person opening a covered account, for example, using the 
policies and procedures regarding identification and verification set 
forth in the Customer Identification Program rules implementing 31 
U.S.C. 5318(l) (31 CFR 103.121); and
    (b) Authenticating customers, monitoring transactions, and verifying 
the validity of change of address requests, in the case of existing 
covered accounts.

              IV. Preventing and Mitigating Identity Theft

    The Program's policies and procedures should provide for appropriate 
responses to the Red Flags the financial institution or creditor has 
detected that are commensurate with the degree of risk posed. In 
determining an appropriate response, a financial institution or creditor 
should consider aggravating factors that may heighten the risk of 
identity theft, such as a data security incident that results in 
unauthorized access to a customer's account records held by the 
financial institution, creditor, or third party, or notice that a 
customer has provided information related to a covered account held by 
the financial institution or creditor to someone fraudulently claiming 
to represent the financial institution or creditor or to a fraudulent 
website. Appropriate responses may include the following:
    (a) Monitoring a covered account for evidence of identity theft;
    (b) Contacting the customer;
    (c) Changing any passwords, security codes, or other security 
devices that permit access to a covered account;
    (d) Reopening a covered account with a new account number;
    (e) Not opening a new covered account;
    (f) Closing an existing covered account;
    (g) Not attempting to collect on a covered account or not selling a 
covered account to a debt collector;
    (h) Notifying law enforcement; or
    (i) Determining that no response is warranted under the particular 
circumstances.

                         V. Updating the Program

    Financial institutions and creditors should update the Program 
(including the Red Flags determined to be relevant) periodically, to 
reflect changes in risks to customers or to the safety and soundness of 
the financial institution or creditor from identity theft, based on 
factors such as:
    (a) The experiences of the financial institution or creditor with 
identity theft;
    (b) Changes in methods of identity theft;
    (c) Changes in methods to detect, prevent, and mitigate identity 
theft;
    (d) Changes in the types of accounts that the financial institution 
or creditor offers or maintains; and
    (e) Changes in the business arrangements of the financial 
institution or creditor, including mergers, acquisitions, alliances, 
joint ventures, and service provider arrangements.

                VI. Methods for Administering the Program

    (a) Oversight of Program. Oversight by the board of directors, an 
appropriate committee of the board, or a designated employee at the 
level of senior management should include:
    (1) Assigning specific responsibility for the Program's 
implementation;
    (2) Reviewing reports prepared by staff regarding compliance by the 
financial institution or creditor with Sec. 222.90 of this part; and
    (3) Approving material changes to the Program as necessary to 
address changing identity theft risks.
    (b) Reports. (1) In general. Staff of the financial institution or 
creditor responsible for development, implementation, and administration 
of its Program should report to the board of directors, an appropriate 
committee of the board, or a designated employee at the level of senior 
management, at least annually, on compliance by the financial 
institution or creditor with Sec. 222.90 of this part.
    (2) Contents of report. The report should address material matters 
related to the Program and evaluate issues such as: the effectiveness of 
the policies and procedures of the financial institution or creditor in 
addressing the risk of identity theft in connection with the opening of 
covered accounts and with respect to existing covered accounts; service 
provider arrangements; significant

[[Page 115]]

incidents involving identity theft and management's response; and 
recommendations for material changes to the Program.
    (c) Oversight of service provider arrangements. Whenever a financial 
institution or creditor engages a service provider to perform an 
activity in connection with one or more covered accounts the financial 
institution or creditor should take steps to ensure that the activity of 
the service provider is conducted in accordance with reasonable policies 
and procedures designed to detect, prevent, and mitigate the risk of 
identity theft. For example, a financial institution or creditor could 
require the service provider by contract to have policies and procedures 
to detect relevant Red Flags that may arise in the performance of the 
service provider's activities, and either report the Red Flags to the 
financial institution or creditor, or to take appropriate steps to 
prevent or mitigate identity theft.

                VII. Other Applicable Legal Requirements

    Financial institutions and creditors should be mindful of other 
related legal requirements that may be applicable, such as:
    (a) For financial institutions and creditors that are subject to 31 
U.S.C. 5318(g), filing a Suspicious Activity Report in accordance with 
applicable law and regulation;
    (b) Implementing any requirements under 15 U.S.C. 1681c-1(h) 
regarding the circumstances under which credit may be extended when the 
financial institution or creditor detects a fraud or active duty alert;
    (c) Implementing any requirements for furnishers of information to 
consumer reporting agencies under 15 U.S.C. 1681s-2, for example, to 
correct or update inaccurate or incomplete information, and to not 
report information that the furnisher has reasonable cause to believe is 
inaccurate; and
    (d) Complying with the prohibitions in 15 U.S.C. 1681m on the sale, 
transfer, and placement for collection of certain debts resulting from 
identity theft.

                       Supplement A to Appendix J

    In addition to incorporating Red Flags from the sources recommended 
in section II.b. of the Guidelines in appendix J of this part, each 
financial institution or creditor may consider incorporating into its 
Program, whether singly or in combination, Red Flags from the following 
illustrative examples in connection with covered accounts:

   Alerts, Notifications or Warnings from a Consumer Reporting Agency

    1. A fraud or active duty alert is included with a consumer report.
    2. A consumer reporting agency provides a notice of credit freeze in 
response to a request for a consumer report.
    3. A consumer reporting agency provides a notice of address 
discrepancy, as defined in Sec. 222.82(b) of this part.
    4. A consumer report indicates a pattern of activity that is 
inconsistent with the history and usual pattern of activity of an 
applicant or customer, such as:
    a. A recent and significant increase in the volume of inquiries;
    b. An unusual number of recently established credit relationships;
    c. A material change in the use of credit, especially with respect 
to recently established credit relationships; or
    d. An account that was closed for cause or identified for abuse of 
account privileges by a financial institution or creditor.

                          Suspicious Documents

    5. Documents provided for identification appear to have been altered 
or forged.
    6. The photograph or physical description on the identification is 
not consistent with the appearance of the applicant or customer 
presenting the identification.
    7. Other information on the identification is not consistent with 
information provided by the person opening a new covered account or 
customer presenting the identification.
    8. Other information on the identification is not consistent with 
readily accessible information that is on file with the financial 
institution or creditor, such as a signature card or a recent check.
    9. An application appears to have been altered or forged, or gives 
the appearance of having been destroyed and reassembled.

               Suspicious Personal Identifying Information

    10. Personal identifying information provided is inconsistent when 
compared against external information sources used by the financial 
institution or creditor. For example:
    a. The address does not match any address in the consumer report; or
    b. The Social Security Number (SSN) has not been issued, or is 
listed on the Social Security Administration's Death Master File.
    11. Personal identifying information provided by the customer is not 
consistent with other personal identifying information provided by the 
customer. For example, there is a lack of correlation between the SSN 
range and date of birth.
    12. Personal identifying information provided is associated with 
known fraudulent activity as indicated by internal or third-party 
sources used by the financial institution or creditor. For example:
    a. The address on an application is the same as the address provided 
on a fraudulent application; or
    b. The phone number on an application is the same as the number 
provided on a fraudulent application.

[[Page 116]]

    13. Personal identifying information provided is of a type commonly 
associated with fraudulent activity as indicated by internal or third-
party sources used by the financial institution or creditor. For 
example:
    a. The address on an application is fictitious, a mail drop, or a 
prison; or
    b. The phone number is invalid, or is associated with a pager or 
answering service.
    14. The SSN provided is the same as that submitted by other persons 
opening an account or other customers.
    15. The address or telephone number provided is the same as or 
similar to the address or telephone number submitted by an unusually 
large number of other persons opening accounts or by other customers.
    16. The person opening the covered account or the customer fails to 
provide all required personal identifying information on an application 
or in response to notification that the application is incomplete.
    17. Personal identifying information provided is not consistent with 
personal identifying information that is on file with the financial 
institution or creditor.
    18. For financial institutions and creditors that use challenge 
questions, the person opening the covered account or the customer cannot 
provide authenticating information beyond that which generally would be 
available from a wallet or consumer report.

 Unusual Use of, or Suspicious Activity Related to, the Covered Account

    19. Shortly following the notice of a change of address for a 
covered account, the institution or creditor receives a request for a 
new, additional, or replacement card or a cell phone, or for the 
addition of authorized users on the account.
    20. A new revolving credit account is used in a manner commonly 
associated with known patterns of fraud. For example:
    a. The majority of available credit is used for cash advances or 
merchandise that is easily convertible to cash (e.g., electronics 
equipment or jewelry); or
    b. The customer fails to make the first payment or makes an initial 
payment but no subsequent payments.
    21. A covered account is used in a manner that is not consistent 
with established patterns of activity on the account. There is, for 
example:
    a. Nonpayment when there is no history of late or missed payments;
    b. A material increase in the use of available credit;
    c. A material change in purchasing or spending patterns;
    d. A material change in electronic fund transfer patterns in 
connection with a deposit account; or
    e. A material change in telephone call patterns in connection with a 
cellular phone account.
    22. A covered account that has been inactive for a reasonably 
lengthy period of time is used (taking into consideration the type of 
account, the expected pattern of usage and other relevant factors).
    23. Mail sent to the customer is returned repeatedly as 
undeliverable although transactions continue to be conducted in 
connection with the customer's covered account.
    24. The financial institution or creditor is notified that the 
customer is not receiving paper account statements.
    25. The financial institution or creditor is notified of 
unauthorized charges or transactions in connection with a customer's 
covered account.

   Notice from Customers, Victims of Identity Theft, Law Enforcement 
   Authorities, or Other Persons Regarding Possible Identity Theft in 
 Connection with Covered Accounts Held by the Financial Institution or 
                                Creditor

    26. The financial institution or creditor is notified by a customer, 
a victim of identity theft, a law enforcement authority, or any other 
person that it has opened a fraudulent account for a person engaged in 
identity theft.

[Reg. V, 72 FR 63758, Nov. 9, 2007, as amended at 74 FR 22642, May 14, 
2009]



PART 223_TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION 

W)--Table of Contents



                 Subpart A_Introduction and Definitions

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

               Subpart B_General Provisions of Section 23A

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

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       Subpart C_Valuation and Timing Principles Under Section 23A

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

             Subpart D_Other Requirements Under Section 23A

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

         Subpart E_Exemptions from the Provisions of Section 23A

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

               Subpart F_General Provisions of Section 23B

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

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

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

                 Subpart H_Miscellaneous Interpretations

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

       Subpart I_Savings Associations_Transactions with Affiliates

223.72 Transactions with affiliates.

    Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e), 
1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5412).

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



                 Subpart A_Introduction and Definitions



Sec. 223.1  Authority, purpose, and scope.

    (a) Authority. The Board of Governors of the Federal Reserve System 
(Board) has issued this part (Regulation W) under the authority of 
sections 23A(f) and 23B(e) of the Federal Reserve Act (FRA) (12 U.S.C. 
371c(f), 371c-1(e)) section 11 of the Home Owners' Loan Act (12 U.S.C. 
1468), and section 312(b)(2)(A) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (12 U.S.C. 5412).
    (b) Purpose. Sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1) establish certain quantitative limits and other 
prudential requirements for loans, purchases of assets, and certain 
other transactions between a member bank and its affiliates. This 
regulation implements sections 23A and 23B by defining terms used in the 
statute, explaining the statute's requirements, and exempting certain 
transactions.
    (c) Scope. Sections 23A and 23B and this regulation apply by their 
terms to ``member banks''--that is, any national bank, State bank, trust 
company, or other institution that is a member of the Federal Reserve 
System. In addition, the Federal Deposit Insurance Act (12 U.S.C. 
1828(j)) applies sections 23A and 23B to insured State nonmember banks 
in the same manner and to the same extent as if they were member banks. 
The Home Owners' Loan Act (12 U.S.C. 1468(a)) also applies sections 23A 
and 23B to insured savings

[[Page 118]]

associations in the same manner and to the same extent as if they were 
member banks (and imposes two additional restrictions).

[67 FR 76604, Dec. 12, 2002, as amended at 76 FR 56531, Sept. 13, 2011]



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

this part?

    (a) For purposes of this part and except as provided in paragraphs 
(b) and (c) of this section, ``affiliate'' with respect to a member bank 
means:
    (1) Parent companies. Any company that controls the member bank;
    (2) Companies under common control by a parent company. Any company, 
including any subsidiary of the member bank, that is controlled by a 
company that controls the member bank;
    (3) Companies under other common control. Any company, including any 
subsidiary of the member bank, that is controlled, directly or 
indirectly, by trust or otherwise, by or for the benefit of shareholders 
who beneficially or otherwise control, directly or indirectly, by trust 
or otherwise, the member bank or any company that controls the member 
bank;
    (4) Companies with interlocking directorates. Any company in which a 
majority of its directors, trustees, or general partners (or individuals 
exercising similar functions) constitute a majority of the persons 
holding any such office with the member bank or any company that 
controls the member bank;
    (5) Sponsored and advised companies. Any company, including a real 
estate investment trust, that is sponsored and advised on a contractual 
basis by the member bank or an affiliate of the member bank;
    (6) Investment companies. (i) Any investment company for which the 
member bank or any affiliate of the member bank serves as an investment 
adviser, as defined in section 2(a)(20) of the Investment Company Act of 
1940 (15 U.S.C. 80a-2(a)(20)); and
    (ii) Any other investment fund for which the member bank or any 
affiliate of the member bank serves as an investment advisor, if the 
member bank and its affiliates own or control in the aggregate more than 
5 percent of any class of voting securities or of the equity capital of 
the fund;
    (7) Depository institution subsidiaries. A depository institution 
that is a subsidiary of the member bank;
    (8) Financial subsidiaries. A financial subsidiary of the member 
bank;
    (9) Companies held under merchant banking or insurance company 
investment authority--(i) In general. Any company in which a holding 
company of the member bank owns or controls, directly or indirectly, or 
acting through one or more other persons, 15 percent or more of the 
equity capital pursuant to section 4(k)(4)(H) or (I) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(4)(H) or (I)).
    (ii) General exemption. A company will not be an affiliate under 
paragraph (a)(9)(i) of this section if the holding company presents 
information to the Board that demonstrates, to the Board's satisfaction, 
that the holding company does not control the company.
    (iii) Specific exemptions. A company also will not be an affiliate 
under paragraph (a)(9)(i) of this section if:
    (A) No director, officer, or employee of the holding company serves 
as a director, trustee, or general partner (or individual exercising 
similar functions) of the company;
    (B) A person that is not affiliated or associated with the holding 
company owns or controls a greater percentage of the equity capital of 
the company than is owned or controlled by the holding company, and no 
more than one officer or employee of the holding company serves as a 
director or trustee (or individual exercising similar functions) of the 
company; or
    (C) A person that is not affiliated or associated with the holding 
company owns or controls more than 50 percent of the voting shares of 
the company, and officers and employees of the holding company do not 
constitute a majority of the directors or trustees (or individuals 
exercising similar functions) of the company.
    (iv) Application of rule to private equity funds. A holding company 
will not be deemed to own or control the equity capital of a company for 
purposes of paragraph (a)(9)(i) of this section solely by virtue of an 
investment made by the

[[Page 119]]

holding company in a private equity fund (as defined in the merchant 
banking subpart of the Board's Regulation Y (12 CFR 225.173(a))) that 
owns or controls the equity capital of the company unless the holding 
company controls the private equity fund under 12 CFR 225.173(d)(4).
    (v) Definition. For purposes of this paragraph (a)(9), ``holding 
company'' with respect to a member bank means a company that controls 
the member bank, or a company that is controlled by shareholders that 
control the member bank, and all subsidiaries of the company (including 
any depository institution that is a subsidiary of the company).
    (10) Partnerships associated with the member bank or an affiliate. 
Any partnership for which the member bank or any affiliate of the member 
bank serves as a general partner or for which the member bank or any 
affiliate of the member bank causes any director, officer, or employee 
of the member bank or affiliate to serve as a general partner;
    (11) Subsidiaries of affiliates. Any subsidiary of a company 
described in paragraphs (a)(1) through (10) of this section; and
    (12) Other companies. Any company that the Board determines by 
regulation or order, or that the appropriate Federal banking agency for 
the member bank determines by order, to have a relationship with the 
member bank, or any affiliate of the member bank, such that covered 
transactions by the member bank with that company may be affected by the 
relationship to the detriment of the member bank.
    (b) ``Affiliate'' with respect to a member bank does not include:
    (1) Subsidiaries. Any company that is a subsidiary of the member 
bank, unless the company is:
    (i) A depository institution;
    (ii) A financial subsidiary;
    (iii) Directly controlled by:
    (A) One or more affiliates (other than depository institution 
affiliates) of the member bank; or
    (B) A shareholder that controls the member bank or a group of 
shareholders that together control the member bank;
    (iv) An employee stock option plan, trust, or similar organization 
that exists for the benefit of the shareholders, partners, members, or 
employees of the member bank or any of its affiliates; or
    (v) Any other company determined to be an affiliate under paragraph 
(a)(12) of this section;
    (2) Bank premises. Any company engaged solely in holding the 
premises of the member bank;
    (3) Safe deposit. Any company engaged solely in conducting a safe 
deposit business;
    (4) Government securities. Any company engaged solely in holding 
obligations of the United States or its agencies or obligations fully 
guaranteed by the United States or its agencies as to principal and 
interest; and
    (5) Companies held DPC. Any company where control results from the 
exercise of rights arising out of a bona fide debt previously 
contracted. This exclusion from the definition of ``affiliate'' applies 
only for the period of time specifically authorized under applicable 
State or Federal law or regulation or, in the absence of such law or 
regulation, for a period of two years from the date of the exercise of 
such rights. The Board may authorize, upon application and for good 
cause shown, extensions of time for not more than one year at a time, 
but such extensions in the aggregate will not exceed three years.
    (c) For purposes of subpart F (implementing section 23B), 
``affiliate'' with respect to a member bank also does not include any 
depository institution.



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

23B and this part?

    For purposes of this part:
    (a) Aggregate amount of covered transactions means the amount of the 
covered transaction about to be engaged in added to the current amount 
of all outstanding covered transactions.
    (b) Appropriate Federal banking agency with respect to a member bank 
or other depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (c) ``Bank holding company'' has the same meaning as in 12 CFR 
225.2.

[[Page 120]]

    (d) ``Capital stock and surplus'' means the sum of:
    (1) A member bank's tier 1 and tier 2 capital under the risk-based 
capital guidelines of the appropriate Federal banking agency, based on 
the member bank's most recent consolidated Report of Condition and 
Income filed under 12 U.S.C. 1817(a)(3);
    (2) The balance of a member bank's allowance for loan and lease 
losses not included in its tier 2 capital under the risk-based capital 
guidelines of the appropriate Federal banking agency, based on the 
member bank's most recent consolidated Report of Condition and Income 
filed under 12 U.S.C. 1817(a)(3); and
    (3) The amount of any investment by a member bank in a financial 
subsidiary that counts as a covered transaction and is required to be 
deducted from the member bank's capital for regulatory capital purposes.
    (e) Carrying value with respect to a security means (unless 
otherwise provided) the value of the security on the financial 
statements of the member bank, determined in accordance with GAAP.
    (f) Company means a corporation, partnership, limited liability 
company, business trust, association, or similar organization and, 
unless specifically excluded, includes a member bank and a depository 
institution.
    (g) Control--(1) In general. ``Control'' by a company or shareholder 
over another company means that:
    (i) The company or shareholder, directly or indirectly, or acting 
through one or more other persons, owns, controls, or has power to vote 
25 percent or more of any class of voting securities of the other 
company;
    (ii) The company or shareholder controls in any manner the election 
of a majority of the directors, trustees, or general partners (or 
individuals exercising similar functions) of the other company; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company or shareholder, directly or indirectly, 
exercises a controlling influence over the management or policies of the 
other company.
    (2) Ownership or control of shares as fiduciary. Notwithstanding any 
other provision of this regulation, no company will be deemed to control 
another company by virtue of its ownership or control of shares in a 
fiduciary capacity, except as provided in paragraph (a)(3) of Sec. 
223.2 or if the company owning or controlling the shares is a business 
trust.
    (3) Ownership or control of securities by subsidiary. A company 
controls securities, assets, or other ownership interests owned or 
controlled, directly or indirectly, by any subsidiary (including a 
subsidiary depository institution) of the company.
    (4) Ownership or control of convertible instruments. A company or 
shareholder that owns or controls instruments (including options or 
warrants) that are convertible or exercisable, at the option of the 
holder or owner, into securities, controls the securities, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder should not be deemed to control the securities.
    (5) Ownership or control of nonvoting securities. A company or 
shareholder that owns or controls 25 percent or more of the equity 
capital of another company controls the other company, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder does not control the other company.
    (h) Covered transaction with respect to an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) A purchase of, or an investment in, a security issued by the 
affiliate;
    (3) A purchase of an asset from the affiliate, including an asset 
subject to recourse or an agreement to repurchase, except such purchases 
of real and personal property as may be specifically exempted by the 
Board by order or regulation;
    (4) The acceptance of a security issued by the affiliate as 
collateral for an extension of credit to any person or company; and
    (5) The issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of

[[Page 121]]

credit, on behalf of the affiliate, a confirmation of a letter of credit 
issued by the affiliate, and a cross-affiliate netting arrangement.
    (i) Credit transaction with an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) An issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of credit, on behalf of the 
affiliate and a confirmation of a letter of credit issued by the 
affiliate; and
    (3) A cross-affiliate netting arrangement.
    (j) Cross-affiliate netting arrangement means an arrangement among a 
member bank, one or more affiliates of the member bank, and one or more 
nonaffiliates of the member bank in which:
    (1) A nonaffiliate is permitted to deduct any obligations of an 
affiliate of the member bank to the nonaffiliate when settling the 
nonaffiliate's obligations to the member bank; or
    (2) The member bank is permitted or required to add any obligations 
of its affiliate to a nonaffiliate when determining the member bank's 
obligations to the nonaffiliate.
    (k) ``Depository institution'' means, unless otherwise noted, an 
insured depository institution (as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813)), but does not include any branch 
of a foreign bank. For purposes of this definition, an operating 
subsidiary of a depository institution is treated as part of the 
depository institution.
    (l) ``Derivative transaction'' means any derivative contract listed 
in sections III.E.1.a. through d. of appendix A to 12 CFR part 225 and 
any similar derivative contract, including a credit derivative contract.
    (m) ``Eligible affiliated mutual fund securities'' has the meaning 
specified in paragraph (c)(2) of Sec. 223.24.
    (n) ``Equity capital'' means:
    (1) With respect to a corporation, preferred stock, common stock, 
capital surplus, retained earnings, and accumulated other comprehensive 
income, less treasury stock, plus any other account that constitutes 
equity of the corporation; and
    (2) With respect to a partnership, limited liability company, or 
other company, equity accounts similar to those described in paragraph 
(n)(1) of this section.
    (o) ``Extension of credit'' to an affiliate means the making or 
renewal of a loan, the granting of a line of credit, or the extending of 
credit in any manner whatsoever, including on an intraday basis, to an 
affiliate. An extension of credit to an affiliate includes, without 
limitation:
    (1) An advance to an affiliate by means of an overdraft, cash item, 
or otherwise;
    (2) A sale of Federal funds to an affiliate;
    (3) A lease that is the functional equivalent of an extension of 
credit to an affiliate;
    (4) An acquisition by purchase, discount, exchange, or otherwise of 
a note or other obligation, including commercial paper or other debt 
securities, of an affiliate;
    (5) Any increase in the amount of, extension of the maturity of, or 
adjustment to the interest rate term or other material term of, an 
extension of credit to an affiliate; and
    (6) Any other similar transaction as a result of which an affiliate 
becomes obligated to pay money (or its equivalent).
    (p) ``Financial subsidiary''
    (1) In general. Except as provided in paragraph (p)(2) of this 
section, the term ``financial subsidiary'' means any subsidiary of a 
member bank that:
    (i) Engages, directly or indirectly, in any activity that national 
banks are not permitted to engage in directly or that is conducted under 
terms and conditions that differ from those that govern the conduct of 
such activity by national banks; and
    (ii) Is not a subsidiary that a national bank is specifically 
authorized to own or control by the express terms of a Federal statute 
(other than 12 U.S.C. 24a), and not by implication or interpretation.
    (2) Exceptions. ``Financial subsidiary'' does not include:
    (i) A subsidiary of a member bank that is considered a financial 
subsidiary under paragraph (p)(1) of this section solely because the 
subsidiary

[[Page 122]]

engages in the sale of insurance as agent or broker in a manner that is 
not permitted for national banks; and
    (ii) A subsidiary of a State bank (other than a subsidiary described 
in section 46(a) of the Federal Deposit Insurance Act (12 U.S.C. 
1831w(a))) that is considered a financial subsidiary under paragraph 
(p)(1) of this section solely because the subsidiary engages in one or 
more of the following activities:
    (A) An activity that the State bank may engage in directly under 
applicable Federal and State law and that is conducted under the same 
terms and conditions that govern the conduct of the activity by the 
State bank; and
    (B) An activity that the subsidiary was authorized by applicable 
Federal and State law to engage in prior to December 12, 2002, and that 
was lawfully engaged in by the subsidiary on that date.
    (3) Subsidiaries of financial subsidiaries. If a company is a 
financial subsidiary under paragraphs (p)(1) and (p)(2) of this section, 
any subsidiary of such a company is also a financial subsidiary.
    (q) ``Foreign bank'' and an ``agency,'' ``branch,'' or ``commercial 
lending company'' of a foreign bank have the same meanings as in section 
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
    (r) ``GAAP'' means U.S. generally accepted accounting principles.
    (s) ``General purpose credit card'' has the meaning specified in 
paragraph (c)(4)(ii) of Sec. 223.16.
    (t) In contemplation. A transaction between a member bank and a 
nonaffiliate is presumed to be ``in contemplation'' of the nonaffiliate 
becoming an affiliate of the member bank if the member bank enters into 
the transaction with the nonaffiliate after the execution of, or 
commencement of negotiations designed to result in, an agreement under 
the terms of which the nonaffiliate would become an affiliate.
    (u) ``Intraday extension of credit'' has the meaning specified in 
paragraph (l)(2) of Sec. 223.42.
    (v) ``Low-quality asset'' means:
    (1) An asset (including a security) classified as ``substandard,'' 
``doubtful,'' or ``loss,'' or treated as ``special mention'' or ``other 
transfer risk problems,'' either in the most recent report of 
examination or inspection of an affiliate prepared by either a Federal 
or State supervisory agency or in any internal classification system 
used by the member bank or the affiliate (including an asset that 
receives a rating that is substantially equivalent to ``classified'' or 
``special mention'' in the internal system of the member bank or 
affiliate);
    (2) An asset in a nonaccrual status;
    (3) An asset on which principal or interest payments are more than 
thirty days past due;
    (4) An asset whose terms have been renegotiated or compromised due 
to the deteriorating financial condition of the obligor; and
    (5) An asset acquired through foreclosure, repossession, or 
otherwise in satisfaction of a debt previously contracted, if the asset 
has not yet been reviewed in an examination or inspection.
    (w) ``Member bank'' means any national bank, State bank, banking 
association, or trust company that is a member of the Federal Reserve 
System. For purposes of this definition, an operating subsidiary of a 
member bank is treated as part of the member bank.
    (x) ``Municipal securities'' has the same meaning as in section 
3(a)(29) of the Securities Exchange Act of 1934 (17 U.S.C. 78c(a)(29)).
    (y) ``Nonaffiliate'' with respect to a member bank means any person 
that is not an affiliate of the member bank.
    (z) ``Obligations of, or fully guaranteed as to principal and 
interest by, the United States or its agencies'' includes those 
obligations listed in 12 CFR 201.108(b) and any additional obligations 
as determined by the Board. The term does not include Federal Housing 
Administration or Veterans Administration loans.
    (aa) ``Operating subsidiary'' with respect to a member bank or other 
depository institution means any subsidiary of the member bank or 
depository institution other than a subsidiary described in paragraphs 
(b)(1)(i) through (v) of Sec. 223.2.
    (bb) ``Person'' means an individual, company, trust, joint venture, 
pool,

[[Page 123]]

syndicate, sole proprietorship, unincorporated organization, or any 
other form of entity.
    (cc) ``Principal underwriter'' has the meaning specified in 
paragraph (c)(1) of Sec. 223.53.
    (dd) ``Purchase of an asset'' by a member bank from an affiliate 
means the acquisition by a member bank of an asset from an affiliate in 
exchange for cash or any other consideration, including an assumption of 
liabilities. The merger of an affiliate into a member bank is a purchase 
of assets by the member bank from an affiliate if the member bank 
assumes any liabilities of the affiliate or pays any other form of 
consideration in the transaction.
    (ee) Riskless principal. A company is ``acting exclusively as a 
riskless principal'' if, after receiving an order to buy (or sell) a 
security from a customer, the company purchases (or sells) the security 
in the secondary market for its own account to offset a contemporaneous 
sale to (or purchase from) the customer.
    (ff) ``Securities'' means stocks, bonds, debentures, notes, or 
similar obligations (including commercial paper).
    (gg) ``Securities affiliate'' with respect to a member bank means:
    (1) An affiliate of the member bank that is registered with the 
Securities and Exchange Commission as a broker or dealer; or
    (2) Any other securities broker or dealer affiliate of a member bank 
that is approved by the Board.
    (hh) ``State bank'' has the same meaning as in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813).
    (ii) ``Subsidiary'' with respect to a specified company means a 
company that is controlled by the specified company.
    (jj) ``Voting securities'' has the same meaning as in 12 CFR 225.2.
    (kk) ``Well capitalized'' has the same meaning as in 12 CFR 225.2 
and, in the case of any holding company that is not a bank holding 
company, ``well capitalized'' means that the holding company has and 
maintains at least the capital levels required for a bank holding 
company to be well capitalized under 12 CFR 225.2.
    (ll) ``Well managed'' has the same meaning as in 12 CFR 225.2.



               Subpart B_General Provisions of Section 23A



Sec. 223.11  What is the maximum amount of covered transactions that a member 

bank may enter into with any single affiliate?

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



Sec. 223.12  What is the maximum amount of covered transactions that a member 

bank may enter into with all affiliates?

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



Sec. 223.13  What safety and soundness requirement applies to covered 

transactions?

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



Sec. 223.14  What are the collateral requirements for a credit transaction 

with an affiliate?

    (a) Collateral required for extensions of credit and certain other 
covered transactions. A member bank must ensure that each of its credit 
transactions with an affiliate is secured by the amount of collateral 
required by paragraph (b) of this section at the time of the 
transaction.
    (b) Amount of collateral required--(1) The rule. A credit 
transaction described in paragraph (a) of this section must be secured 
by collateral having a market value equal to at least:
    (i) 100 percent of the amount of the transaction, if the collateral 
is:
    (A) Obligations of the United States or its agencies;

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    (B) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest;
    (C) Notes, drafts, bills of exchange, or bankers' acceptances that 
are eligible for rediscount or purchase by a Federal Reserve Bank; or
    (D) A segregated, earmarked deposit account with the member bank 
that is for the sole purpose of securing credit transactions between the 
member bank and its affiliates and is identified as such;
    (ii) 110 percent of the amount of the transaction, if the collateral 
is obligations of any State or political subdivision of any State;
    (iii) 120 percent of the amount of the transaction, if the 
collateral is other debt instruments, including loans and other 
receivables; or
    (iv) 130 percent of the amount of the transaction, if the collateral 
is stock, leases, or other real or personal property.
    (2) Example. A member bank makes a $1,000 loan to an affiliate. The 
affiliate posts as collateral for the loan $500 in U.S. Treasury 
securities, $480 in corporate debt securities, and $130 in real estate. 
The loan satisfies the collateral requirements of this section because 
$500 of the loan is 100 percent secured by obligations of the United 
States, $400 of the loan is 120 percent secured by debt instruments, and 
$100 of the loan is 130 percent secured by real estate.
    (c) Ineligible collateral. The following items are not eligible 
collateral for purposes of this section:
    (1) Low-quality assets;
    (2) Securities issued by any affiliate;
    (3) Equity securities issued by the member bank, and debt securities 
issued by the member bank that represent regulatory capital of the 
member bank;
    (4) Intangible assets (including servicing assets), unless 
specifically approved by the Board; and
    (5) Guarantees, letters of credit, and other similar instruments.
    (d) Perfection and priority requirements for collateral--(1) 
Perfection. A member bank must maintain a security interest in 
collateral required by this section that is perfected and enforceable 
under applicable law, including in the event of default resulting from 
bankruptcy, insolvency, liquidation, or similar circumstances.
    (2) Priority. A member bank either must obtain a first priority 
security interest in collateral required by this section or must deduct 
from the value of collateral obtained by the member bank the lesser of:
    (i) The amount of any security interest in the collateral that is 
senior to that of the member bank; or
    (ii) The amount of any credit secured by the collateral that is 
senior to that of the member bank.
    (3) Example. A member bank makes a $2,000 loan to an affiliate. The 
affiliate grants the member bank a second priority security interest in 
a piece of real estate valued at $3,000. Another institution that 
previously lent $1,000 to the affiliate has a first priority security 
interest in the entire parcel of real estate. This transaction is not in 
compliance with the collateral requirements of this section. Due to the 
existence of the prior third-party lien on the real estate, the 
effective value of the real estate collateral for the member bank for 
purposes of this section is only $2,000--$600 less than the amount of 
real estate collateral required by this section for the transaction 
($2,000 x 130 percent = $2,600).
    (e) Replacement requirement for retired or amortized collateral. A 
member bank must ensure that any required collateral that subsequently 
is retired or amortized is replaced with additional eligible collateral 
as needed to keep the percentage of the collateral value relative to the 
amount of the outstanding credit transaction equal to the minimum 
percentage required at the inception of the transaction.
    (f) Inapplicability of the collateral requirements to certain 
transactions. The collateral requirements of this section do not apply 
to the following transactions.
    (1) Acceptances. An acceptance that already is fully secured either 
by attached documents or by other property that is involved in the 
transaction and has an ascertainable market value.
    (2) The unused portion of certain extensions of credit. The unused 
portion of an extension of credit to an affiliate as long as the member 
bank does not have

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any legal obligation to advance additional funds under the extension of 
credit until the affiliate provides the amount of collateral required by 
paragraph (b) of this section with respect to the entire used portion 
(including the amount of the requested advance) of the extension of 
credit.
    (3) Purchases of affiliate debt securities in the secondary market. 
The purchase of a debt security issued by an affiliate as long as the 
member bank purchases the debt security from a nonaffiliate in a bona 
fide secondary market transaction.



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

    (a) In general. A member bank may not purchase a low-quality asset 
from an affiliate unless, pursuant to an independent credit evaluation, 
the member bank had committed itself to purchase the asset before the 
time the asset was acquired by the affiliate.
    (b) Exemption for renewals of loan participations involving problem 
loans. The prohibition contained in paragraph (a) of this section does 
not apply to the renewal of, or extension of additional credit with 
respect to, a member bank's participation in a loan to a nonaffiliate 
that was originated by an affiliate if:
    (1) The loan was not a low-quality asset at the time the member bank 
purchased its participation;
    (2) The renewal or extension of additional credit is approved, as 
necessary to protect the participating member bank's investment by 
enhancing the ultimate collection of the original indebtedness, by the 
board of directors of the participating member bank or, if the 
originating affiliate is a depository institution, by:
    (i) An executive committee of the board of directors of the 
participating member bank; or
    (ii) One or more senior management officials of the participating 
member bank, if:
    (A) The board of directors of the member bank approves standards for 
the member bank's renewals or extensions of additional credit described 
in this paragraph (b), based on the determination set forth in paragraph 
(b)(2) of this section;
    (B) Each renewal or extension of additional credit described in this 
paragraph (b) meets the standards; and
    (C) The board of directors of the member bank periodically reviews 
renewals and extensions of additional credit described in this paragraph 
(b) to ensure that they meet the standards and periodically reviews the 
standards to ensure that they continue to meet the criterion set forth 
in paragraph (b)(2) of this section;
    (3) The participating member bank's share of the renewal or 
extension of additional credit does not exceed its proportional share of 
the original transaction by more than 5 percent, unless the member bank 
obtains the prior written approval of its appropriate Federal banking 
agency; and
    (4) The participating member bank provides its appropriate Federal 
banking agency with written notice of the renewal or extension of 
additional credit not later than 20 days after consummation.



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

transactions with an affiliate?

    (a) In general. A member bank must treat any of its transactions 
with any person as a transaction with an affiliate to the extent that 
the proceeds of the transaction are used for the benefit of, or 
transferred to, an affiliate.
    (b) Certain agency transactions. (1) Except to the extent described 
in paragraph (b)(2) of this section, an extension of credit by a member 
bank to a nonaffiliate is not treated as an extension of credit to an 
affiliate under paragraph (a) of this section if:
    (i) The proceeds of the extension of credit are used to purchase an 
asset through an affiliate of the member bank, and the affiliate is 
acting exclusively as an agent or broker in the transaction; and
    (ii) The asset purchased by the nonaffiliate is not issued, 
underwritten, or sold as principal by any affiliate of the member bank.
    (2) The interpretation set forth in paragraph (b)(1) of this section 
does not apply to the extent of any agency fee,

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brokerage commission, or other compensation received by an affiliate 
from the proceeds of the extension of credit. The receipt of such 
compensation may qualify, however, for the exemption contained in 
paragraph (c)(2) of this section.
    (c) Exemptions. Notwithstanding paragraph (a) of this section, the 
following transactions are not subject to the quantitative limits of 
Sec. Sec. 223.11 and 223.12 or the collateral requirements of Sec. 
223.14. The transactions are, however, subject to the safety and 
soundness requirement of Sec. 223.13 and the market terms requirement 
and other provisions of subpart F (implementing section 23B).
    (1) Certain riskless principal transactions. An extension of credit 
by a member bank to a nonaffiliate, if:
    (i) The proceeds of the extension of credit are used to purchase a 
security through a securities affiliate of the member bank, and the 
securities affiliate is acting exclusively as a riskless principal in 
the transaction;
    (ii) The security purchased by the nonaffiliate is not issued, 
underwritten, or sold as principal (other than as riskless principal) by 
any affiliate of the member bank; and
    (iii) Any riskless principal mark-up or other compensation received 
by the securities affiliate from the proceeds of the extension of credit 
meets the market terms standard set forth in paragraph (c)(2) of this 
section.
    (2) Brokerage commissions, agency fees, and riskless principal mark-
ups. An affiliate's retention of a portion of the proceeds of an 
extension of credit described in paragraph (b) or (c)(1) of this section 
as a brokerage commission, agency fee, or riskless principal mark-up, if 
that commission, fee, or mark-up is substantially the same as, or lower 
than, those prevailing at the same time for comparable transactions with 
or involving other nonaffiliates, in accordance with the market terms 
requirement of Sec. 223.51.
    (3) Preexisting lines of credit. An extension of credit by a member 
bank to a nonaffiliate, if:
    (i) The proceeds of the extension of credit are used to purchase a 
security from or through a securities affiliate of the member bank; and
    (ii) The extension of credit is made pursuant to, and consistent 
with any conditions imposed in, a preexisting line of credit that was 
not established in contemplation of the purchase of securities from or 
through an affiliate of the member bank.
    (4) General purpose credit card transactions.
    (i) In general. An extension of credit by a member bank to a 
nonaffiliate, if:
    (A) The proceeds of the extension of credit are used by the 
nonaffiliate to purchase a product or service from an affiliate of the 
member bank; and
    (B) The extension of credit is made pursuant to, and consistent with 
any conditions imposed in, a general purpose credit card issued by the 
member bank to the nonaffiliate.
    (ii) Definition. ``General purpose credit card'' means a credit card 
issued by a member bank that is widely accepted by merchants that are 
not affiliates of the member bank for the purchase of products or 
services, if:
    (A) Less than 25 percent of the total value of products and services 
purchased with the card by all cardholders are purchases of products and 
services from one or more affiliates of the member bank;
    (B) All affiliates of the member bank would be permissible for a 
financial holding company (as defined in 12 U.S.C. 1841) under section 4 
of the Bank Holding Company Act (12 U.S.C. 1843), and the member bank 
has no reason to believe that 25 percent or more of the total value of 
products and services purchased with the card by all cardholders are or 
would be purchases of products and services from one or more affiliates 
of the member bank; or
    (C) The member bank presents information to the Board that 
demonstrates, to the Board's satisfaction, that less than 25 percent of 
the total value of products and services purchased with the card by all 
cardholders are and would be purchases of products and services from one 
or more affiliates of the member bank.
    (iii) Calculating compliance. To determine whether a credit card 
qualifies as a general purpose credit card under the standard set forth 
in paragraph (c)(4)(ii)(A) of this section, a member bank must compute 
compliance on a

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monthly basis, based on cardholder purchases that were financed by the 
credit card during the preceding 12 calendar months. If a credit card 
has qualified as a general purpose credit card for 3 consecutive months 
but then ceases to qualify in the following month, the member bank may 
continue to treat the credit card as a general purpose credit card for 
such month and three additional months (or such longer period as may be 
permitted by the Board).
    (iv) Example of calculating compliance with the 25 percent test. A 
member bank seeks to qualify a credit card as a general purpose credit 
card under paragraph (c)(4)(ii)(A) of this section. The member bank 
assesses its compliance under paragraph (c)(4)(iii) of this section on 
the 15th day of every month (for the preceding 12 calendar months). The 
credit card qualifies as a general purpose credit card for at least 
three consecutive months. On June 15, 2005, however, the member bank 
determines that, for the 12-calendar-month period from June 1, 2004, 
through May 31, 2005, 27 percent of the total value of products and 
services purchased with the card by all cardholders were purchases of 
products and services from an affiliate of the member bank. Unless the 
credit card returns to compliance with the 25 percent limit by the 12-
calendar-month period ending August 31, 2005, the card will cease to 
qualify as a general purpose credit card as of September 1, 2005. Any 
outstanding extensions of credit under the credit card that were used to 
purchase products or services from an affiliate of the member bank would 
become covered transactions at such time.



       Subpart C_Valuation and Timing Principles Under Section 23A



Sec. 223.21  What valuation and timing principles apply to credit 

transactions?

    (a) Valuation--(1) Initial valuation. Except as provided in 
paragraph (a)(2) or (3) of this section, a credit transaction with an 
affiliate initially must be valued at the greater of:
    (i) The principal amount of the transaction;
    (ii) The amount owed by the affiliate to the member bank under the 
transaction; or
    (iii) The sum of:
    (A) The amount provided to, or on behalf of, the affiliate in the 
transaction; and
    (B) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (2) Initial valuation of certain acquisitions of a credit 
transaction. If a member bank acquires from a nonaffiliate a credit 
transaction with an affiliate, the covered transaction initially must be 
valued at the sum of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the credit transaction; and
    (ii) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (3) Debt securities. The valuation principles of paragraphs (a)(1) 
and (2) of this section do not apply to a member bank's purchase of or 
investment in a debt security issued by an affiliate, which is governed 
by Sec. 223.23.
    (4) Examples. The following are examples of how to value a member 
bank's credit transactions with an affiliate.
    (i) Term loan. A member bank makes a loan to an affiliate that has a 
principal amount of $100. The affiliate pays $2 in up-front fees to the 
member bank, and the affiliate receives net loan proceeds of $98. The 
member bank must initially value the covered transaction at $100.
    (ii) Revolving credit. A member bank establishes a $300 revolving 
credit facility for an affiliate. The affiliate has drawn down $100 
under the facility. The member bank must value the covered transaction 
at $300 throughout the life of the facility.
    (iii) Guarantee. A member bank has issued a guarantee to a 
nonaffiliate on behalf of an affiliate under which the member bank would 
be obligated to pay the nonaffiliate $500 if the affiliate defaults on 
an issuance of debt securities. The member bank must value the guarantee 
at $500 throughout the life of the guarantee.

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    (iv) Acquisition of a loan to an affiliate. A member bank purchases 
from a nonaffiliate a fixed-rate loan to an affiliate. The loan has an 
outstanding principal amount of $100 but, due to movements in the 
general level of interest rates since the time of the loan's 
origination, the member bank is able to purchase the loan for $90. The 
member bank initially must value the credit transaction at $90 (and must 
ensure that the credit transaction complies with the collateral 
requirements of Sec. 223.14 at the time of its acquisition of the 
loan).
    (b) Timing--(1) In general. A member bank engages in a credit 
transaction with an affiliate at the time during the day that:
    (i) The member bank becomes legally obligated to make an extension 
of credit to, issue a guarantee, acceptance, or letter of credit on 
behalf of, or confirm a letter of credit issued by, an affiliate;
    (ii) The member bank enters into a cross-affiliate netting 
arrangement; or
    (iii) The member bank acquires an extension of credit to, or 
guarantee, acceptance, or letter of credit issued on behalf of, an 
affiliate.
    (2) Credit transactions by a member bank with a nonaffiliate that 
becomes an affiliate of the member bank.
    (i) In general. A credit transaction with a nonaffiliate becomes a 
covered transaction at the time that the nonaffiliate becomes an 
affiliate of the member bank. The member bank must treat the amount of 
any such credit transaction as part of the aggregate amount of the 
member bank's covered transactions for purposes of determining 
compliance with the quantitative limits of Sec. Sec. 223.11 and 223.12 
in connection with any future covered transactions. Except as described 
in paragraph (b)(2)(ii) of this section, the member bank is not required 
to reduce the amount of its covered transactions with any affiliate 
because the nonaffiliate has become an affiliate. If the nonaffiliate 
becomes an affiliate less than one year after the member bank enters 
into the credit transaction with the nonaffiliate, the member bank also 
must ensure that the credit transaction complies with the collateral 
requirements of Sec. 223.14 promptly after the nonaffiliate becomes an 
affiliate.
    (ii) Credit transactions by a member bank with a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. Notwithstanding the provisions of paragraph (b)(2)(i) of this 
section, if a member bank engages in a credit transaction with a 
nonaffiliate in contemplation of the nonaffiliate becoming an affiliate 
of the member bank, the member bank must ensure that:
    (A) The aggregate amount of the member bank's covered transactions 
(including any such credit transaction with the nonaffiliate) would not 
exceed the quantitative limits of Sec. 223.11 or 223.12 at the time the 
nonaffiliate becomes an affiliate; and
    (B) The credit transaction complies with the collateral requirements 
of Sec. 223.14 at the time the nonaffiliate becomes an affiliate.
    (iii) Example. A member bank with capital stock and surplus of 
$1,000 and no outstanding covered transactions makes a $120 unsecured 
loan to a nonaffiliate. The member bank does not make the loan in 
contemplation of the nonaffiliate becoming an affiliate. Nine months 
later, the member bank's holding company purchases all the stock of the 
nonaffiliate, thereby making the nonaffiliate an affiliate of the member 
bank. The member bank is not in violation of the quantitative limits of 
Sec. 223.11 or 223.12 at the time of the stock acquisition. The member 
bank is, however, prohibited from engaging in any additional covered 
transactions with the new affiliate at least until such time as the 
value of the loan transaction falls below 10 percent of the member 
bank's capital stock and surplus. In addition, the member bank must 
bring the loan into compliance with the collateral requirements of Sec. 
223.14 promptly after the stock acquisition.



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

    (a) Valuation--(1) In general. Except as provided in paragraph 
(a)(2) of this section, a purchase of an asset by a member bank from an 
affiliate must be valued initially at the total amount of consideration 
given (including liabilities assumed) by the member bank in exchange for 
the asset. The value of

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the covered transaction after the purchase may be reduced to reflect 
amortization or depreciation of the asset, to the extent that such 
reductions are consistent with GAAP.
    (2) Exceptions. (i) Purchase of an extension of credit to an 
affiliate. A purchase from an affiliate of an extension of credit to an 
affiliate must be valued in accordance with Sec. 223.21, unless the 
note or obligation evidencing the extension of credit is a security 
issued by an affiliate (in which case the transaction must be valued in 
accordance with Sec. 223.23).
    (ii) Purchase of a security issued by an affiliate. A purchase from 
an affiliate of a security issued by an affiliate must be valued in 
accordance with Sec. 223.23.
    (iii) Transfer of a subsidiary. A transfer to a member bank of 
securities issued by an affiliate that is treated as a purchase of 
assets from an affiliate under Sec. 223.31 must be valued in accordance 
with paragraph (b) of Sec. 223.31.
    (iv) Purchase of a line of credit. A purchase from an affiliate of a 
line of credit, revolving credit facility, or other similar credit 
arrangement for a nonaffiliate must be valued initially at the total 
amount of consideration given by the member bank in exchange for the 
asset plus any additional amount that the member bank could be required 
to provide to the borrower under the terms of the credit arrangement.
    (b) Timing--(1) In general. A purchase of an asset from an affiliate 
remains a covered transaction for a member bank for as long as the 
member bank holds the asset.
    (2) Asset purchases by a member bank from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. If a member bank purchases an asset from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank, the asset purchase becomes a covered transaction at the time that 
the nonaffiliate becomes an affiliate of the member bank. In addition, 
the member bank must ensure that the aggregate amount of the member 
bank's covered transactions (including any such transaction with the 
nonaffiliate) would not exceed the quantitative limits of Sec. 223.11 
or 223.12 at the time the nonaffiliate becomes an affiliate.
    (c) Examples. The following are examples of how to value a member 
bank's purchase of an asset from an affiliate.
    (1) Cash purchase of assets. A member bank purchases a pool of loans 
from an affiliate for $10 million. The member bank initially must value 
the covered transaction at $10 million. Going forward, if the borrowers 
repay $6 million of the principal amount of the loans, the member bank 
may value the covered transaction at $4 million.
    (2) Purchase of assets through an assumption of liabilities. An 
affiliate of a member bank contributes real property with a fair market 
value of $200,000 to the member bank. The member bank pays the affiliate 
no cash for the property, but assumes a $50,000 mortgage on the 
property. The member bank has engaged in a covered transaction with the 
affiliate and initially must value the transaction at $50,000. Going 
forward, if the member bank retains the real property but pays off the 
mortgage, the member bank must continue to value the covered transaction 
at $50,000. If the member bank, however, sells the real property, the 
transaction ceases to be a covered transaction at the time of the sale 
(regardless of the status of the mortgage).



Sec. 223.23  What valuation and timing principles apply to purchases of and 

investments in securities issued by an affiliate?

    (a) Valuation--(1) In general. Except as provided in paragraph (b) 
of Sec. 223.32 with respect to financial subsidiaries, a member bank's 
purchase of or investment in a security issued by an affiliate must be 
valued at the greater of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the security, reduced to 
reflect amortization of the security to the extent consistent with GAAP; 
or
    (ii) The carrying value of the security.
    (2) Examples. The following are examples of how to value a member 
bank's purchase of or investment in securities issued by an affiliate 
(other than a financial subsidiary of the member bank).
    (i) Purchase of the debt securities of an affiliate. The parent 
holding company

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of a member bank owns 100 percent of the shares of a mortgage company. 
The member bank purchases debt securities issued by the mortgage company 
for $600. The initial carrying value of the securities is $600. The 
member bank initially must value the investment at $600.
    (ii) Purchase of the shares of an affiliate. The parent holding 
company of a member bank owns 51 percent of the shares of a mortgage 
company. The member bank purchases an additional 30 percent of the 
shares of the mortgage company from a third party for $100. The initial 
carrying value of the shares is $100. The member bank initially must 
value the investment at $100. Going forward, if the member bank's 
carrying value of the shares declines to $40, the member bank must 
continue to value the investment at $100.
    (iii) Contribution of the shares of an affiliate. The parent holding 
company of a member bank owns 100 percent of the shares of a mortgage 
company and contributes 30 percent of the shares to the member bank. The 
member bank gives no consideration in exchange for the shares. If the 
initial carrying value of the shares is $300, then the member bank 
initially must value the investment at $300. Going forward, if the 
member bank's carrying value of the shares increases to $500, the member 
bank must value the investment at $500.
    (b) Timing--(1) In general. A purchase of or investment in a 
security issued by an affiliate remains a covered transaction for a 
member bank for as long as the member bank holds the security.
    (2) A member bank's purchase of or investment in a security issued 
by a nonaffiliate that becomes an affiliate of the member bank. A member 
bank's purchase of or investment in a security issued by a nonaffiliate 
that becomes an affiliate of the member bank must be treated according 
to the same transition rules that apply to credit transactions described 
in paragraph (b)(2) of Sec. 223.21.



Sec. 223.24  What valuation principles apply to extensions of credit secured 

by affiliate securities?

    (a) Valuation of extensions of credit secured exclusively by 
affiliate securities. An extension of credit by a member bank to a 
nonaffiliate secured exclusively by securities issued by an affiliate of 
the member bank must be valued at the lesser of:
    (1) The total value of the extension of credit; or
    (2) The fair market value of the securities issued by an affiliate 
that are pledged as collateral, if the member bank verifies that such 
securities meet the market quotation standard contained in paragraph (e) 
of Sec. 223.42 or the standards set forth in paragraphs (f)(1) and (5) 
of Sec. 223.42.
    (b) Valuation of extensions of credit secured by affiliate 
securities and other collateral. An extension of credit by a member bank 
to a nonaffiliate secured in part by securities issued by an affiliate 
of the member bank and in part by nonaffiliate collateral must be valued 
at the lesser of:
    (1) The total value of the extension of credit less the fair market 
value of the nonaffiliate collateral; or
    (2) The fair market value of the securities issued by an affiliate 
that are pledged as collateral, if the member bank verifies that such 
securities meet the market quotation standard contained in paragraph (e) 
of Sec. 223.42 or the standards set forth in paragraphs (f)(1) and (5) 
of Sec. 223.42.
    (c) Exclusion of eligible affiliated mutual fund securities--(1) The 
exclusion. Eligible affiliated mutual fund securities are not considered 
to be securities issued by an affiliate, and are instead considered to 
be nonaffiliate collateral, for purposes of paragraphs (a) and (b) of 
this section, unless the member bank knows or has reason to know that 
the proceeds of the extension of credit will be used to purchase the 
eligible affiliated mutual fund securities collateral or will otherwise 
be used for the benefit of or transferred to an affiliate of the member 
bank.
    (2) Definition. ``Eligible affiliated mutual fund securities'' with 
respect to a member bank are securities issued by an affiliate of the 
member bank that is

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an open-end investment company registered with the Securities and 
Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 
80a-1 et seq.), if:
    (i) The securities issued by the investment company:
    (A) Meet the market quotation standard contained in paragraph (e) of 
Sec. 223.42;
    (B) Meet the standards set forth in paragraphs (f)(1) and (5) of 
Sec. 223.42; or
    (C) Have closing prices that are made public through a mutual fund 
``supermarket'' website maintained by an unaffiliated securities broker-
dealer or mutual fund distributor; and
    (ii) The member bank and its affiliates do not own or control in the 
aggregate more than 5 percent of any class of voting securities or of 
the equity capital of the investment company (excluding securities held 
by the member bank or an affiliate in good faith in a fiduciary 
capacity, unless the member bank or affiliate holds the securities for 
the benefit of the member bank or affiliate, or the shareholders, 
employees, or subsidiaries of the member bank or affiliate).
    (3) Example. A member bank proposes to lend $100 to a nonaffiliate 
secured exclusively by eligible affiliated mutual fund securities. The 
member bank knows that the nonaffiliate intends to use all the loan 
proceeds to purchase the eligible affiliated mutual fund securities that 
would serve as collateral for the loan. Under the attribution rule in 
Sec. 223.16, the member bank must treat the loan to the nonaffiliate as 
a loan to an affiliate, and, because securities issued by an affiliate 
are ineligible collateral under Sec. 223.14, the loan would not be in 
compliance with Sec. 223.14.



             Subpart D_Other Requirements Under Section 23A



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

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

acquisition?

    (a) Certain acquisitions by a member bank of securities issued by an 
affiliate are treated as a purchase of assets from an affiliate. A 
member bank's acquisition of a security issued by a company that was an 
affiliate of the member bank before the acquisition is treated as a 
purchase of assets from an affiliate, if:
    (1) As a result of the transaction, the company becomes an operating 
subsidiary of the member bank; and
    (2) The company has liabilities, or the member bank gives cash or 
any other consideration in exchange for the security.
    (b) Valuation--(1) Initial valuation. A transaction described in 
paragraph (a) of this section must be valued initially at the greater 
of:
    (i) The sum of:
    (A) The total amount of consideration given by the member bank in 
exchange for the security; and
    (B) The total liabilities of the company whose security has been 
acquired by the member bank, as of the time of the acquisition; or
    (ii) The total value of all covered transactions (as computed under 
this part) acquired by the member bank as a result of the security 
acquisition.
    (2) Ongoing valuation. The value of a transaction described in 
paragraph (a) of this section may be reduced after the initial transfer 
to reflect:
    (i) Amortization or depreciation of the assets of the transferred 
company, to the extent that such reductions are consistent with GAAP; 
and
    (ii) Sales of the assets of the transferred company.
    (c) Valuation example. The parent holding company of a member bank 
contributes between 25 and 100 percent of the voting shares of a 
mortgage company to the member bank. The parent holding company retains 
no shares of the mortgage company. The member bank gives no 
consideration in exchange for the transferred shares. The mortgage 
company has total assets of $300,000 and total liabilities of $100,000. 
The mortgage company's assets do not include any loans to an affiliate 
of the member bank or any other asset that would represent a separate 
covered transaction for the member bank upon consummation of the share 
transfer. As a result of the transaction, the mortgage company becomes 
an operating subsidiary of the member bank. The transaction is treated 
as a purchase of the assets of the mortgage company by

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the member bank from an affiliate under paragraph (a) of this section. 
The member bank initially must value the transaction at $100,000, the 
total amount of the liabilities of the mortgage company. Going forward, 
if the member bank pays off the liabilities, the member bank must 
continue to value the covered transaction at $100,000. If the member 
bank, however, sells $15,000 of the transferred assets of the mortgage 
company or if $15,000 of the transferred assets amortize, the member 
bank may value the covered transaction at $85,000.
    (d) Exemption for step transactions. A transaction described in 
paragraph (a) of this section is exempt from the requirements of this 
regulation (other than the safety and soundness requirement of Sec. 
223.13 and the market terms requirement of Sec. 223.51) if:
    (1) The member bank acquires the securities issued by the 
transferred company within one business day (or such longer period, up 
to three months, as may be permitted by the member bank's appropriate 
Federal banking agency) after the company becomes an affiliate of the 
member bank;
    (2) The member bank acquires all the securities of the transferred 
company that were transferred in connection with the transaction that 
made the company an affiliate of the member bank;
    (3) The business and financial condition (including the asset 
quality and liabilities) of the transferred company does not materially 
change from the time the company becomes an affiliate of the member bank 
and the time the member bank acquires the securities issued by the 
company; and
    (4) At or before the time that the transferred company becomes an 
affiliate of the member bank, the member bank notifies its appropriate 
Federal banking agency and the Board of the member bank's intent to 
acquire the company.
    (e) Example of step transaction. A bank holding company acquires 100 
percent of the shares of an unaffiliated leasing company. At that time, 
the subsidiary member bank of the holding company notifies its 
appropriate Federal banking agency and the Board of its intent to 
acquire the leasing company from its holding company. On the day after 
consummation of the acquisition, the holding company transfers all of 
the shares of the leasing company to the member bank. No material change 
in the business or financial condition of the leasing company occurs 
between the time of the holding company's acquisition and the member 
bank's acquisition. The leasing company has liabilities. The leasing 
company becomes an operating subsidiary of the member bank at the time 
of the transfer. This transfer by the holding company to the member 
bank, although deemed an asset purchase by the member bank from an 
affiliate under paragraph (a) of this section, would qualify for the 
exemption in paragraph (d) of this section.



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

    (a) Exemption from the 10 percent limit for covered transactions 
between a member bank and a single financial subsidiary. The 10 percent 
quantitative limit contained in Sec. 223.11 does not apply with respect 
to covered transactions between a member bank and a financial subsidiary 
of the member bank. The 20 percent quantitative limit contained in Sec. 
223.12 does apply to such transactions.
    (b) Valuation of purchases of or investments in the securities of a 
financial subsidiary--(1) General rule. A member bank's purchase of or 
investment in a security issued by a financial subsidiary of the member 
bank must be valued at the greater of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the security, reduced to 
reflect amortization of the security to the extent consistent with GAAP; 
and
    (ii) The carrying value of the security (adjusted so as not to 
reflect the member bank's pro rata portion of any earnings retained or 
losses incurred by the financial subsidiary after the member bank's 
acquisition of the security).
    (2) Carrying value of an investment in a consolidated financial 
subsidiary. If a financial subsidiary is consolidated with its parent 
member bank under GAAP, the carrying value of the member bank's 
investment in securities issued

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



Sec. 223.33  What rules apply to derivative transactions?

    (a) Market terms requirement. Derivative transactions between a 
member bank and its affiliates (other than depository institutions) are 
subject to the market terms requirement of Sec. 223.51.
    (b) Policies and procedures. A member bank must establish and 
maintain policies and procedures reasonably designed to manage the 
credit exposure arising from its derivative transactions with affiliates 
in a safe and sound manner. The policies and procedures must at a 
minimum provide for:
    (1) Monitoring and controlling the credit exposure arising at any 
one time

[[Page 134]]

from the member bank's derivative transactions with each affiliate and 
all affiliates in the aggregate (through, among other things, imposing 
appropriate credit limits, mark-to-market requirements, and collateral 
requirements); and
    (2) Ensuring that the member bank's derivative transactions with 
affiliates comply with the market terms requirement of Sec. 223.51.
    (c) Credit derivatives. A credit derivative between a member bank 
and a nonaffiliate in which the member bank provides credit protection 
to the nonaffiliate with respect to an obligation of an affiliate of the 
member bank is a guarantee by a member bank on behalf of an affiliate 
for purposes of this regulation. Such derivatives would include:
    (1) An agreement under which the member bank, in exchange for a fee, 
agrees to compensate the nonaffiliate for any default of the underlying 
obligation of the affiliate; and
    (2) An agreement under which the member bank, in exchange for 
payments based on the total return of the underlying obligation of the 
affiliate, agrees to pay the nonaffiliate a spread over funding costs 
plus any depreciation in the value of the underlying obligation of the 
affiliate.



         Subpart E_Exemptions from the Provisions of Section 23A



Sec. 223.41  What covered transactions are exempt from the quantitative limits 

and collateral requirements?

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

[[Page 135]]

other covered transactions (as computed under this part) engaged in by 
the member bank under this exemption during the preceding 12 calendar 
months, represents less than 10 percent of the member bank's capital 
stock and surplus (or such higher amount, up to 25 percent of the member 
bank's capital stock and surplus, as may be permitted by the member 
bank's appropriate Federal banking agency after conducting a review of 
the member bank's financial condition and the quality of the assets 
transferred to the member bank); and
    (7) The holding company and all its subsidiary member banks and 
other subsidiary depository institutions are well capitalized and well 
managed and would remain well capitalized upon consummation of the 
transaction.



Sec. 223.42  What covered transactions are exempt from the quantitative 

limits, collateral requirements, and low-quality asset prohibition?

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

[[Page 136]]

    (5) The security's price is quoted routinely on an unaffiliated 
electronic service that provides indicative data from real-time 
financial networks, provided that:
    (i) The price paid by the member bank is at or below the current 
market quotation for the security; and
    (ii) The size of the transaction executed by the member bank does 
not cast material doubt on the appropriateness of relying on the current 
market quotation for the security; and
    (6) The member bank maintains, for a period of two years, records 
and supporting information that are sufficient to enable the appropriate 
Federal banking agency to ensure the member bank's compliance with the 
terms of this exemption.
    (g) Purchasing municipal securities. Purchasing a municipal security 
from a securities affiliate if:
    (1) The security is rated by a nationally recognized statistical 
rating organization or is part of an issue of securities that does not 
exceed $25 million;
    (2) The security is eligible for purchase by a State member bank, 
subject to the same terms and conditions that govern the investment 
activities of a State member bank, and the member bank records the 
transaction as a purchase of a security for purposes of its Call Report, 
consistent with the requirements for a State member bank; and
    (3)(i) The security's price is quoted routinely on an unaffiliated 
electronic service that provides indicative data from real-time 
financial networks, provided that:
    (A) The price paid by the member bank is at or below the current 
market quotation for the security; and
    (B) The size of the transaction executed by the member bank does not 
cast material doubt on the appropriateness of relying on the current 
market quotation for the security; or
    (ii) The price paid for the security can be verified by reference to 
two or more actual, current price quotes from unaffiliated broker-
dealers on the exact security to be purchased or a security comparable 
to the security to be purchased, where:
    (A) The price quotes obtained from the unaffiliated broker-dealers 
are based on a transaction similar in size to the transaction that is 
actually executed; and
    (B) The price paid is no higher than the average of the price 
quotes; or
    (iii) The price paid for the security can be verified by reference 
to the written summary provided by the syndicate manager to syndicate 
members that discloses the aggregate par values and prices of all bonds 
sold from the syndicate account, if the member bank:
    (A) Purchases the municipal security during the underwriting period 
at a price that is at or below that indicated in the summary; and
    (B) Obtains a copy of the summary from its securities affiliate and 
retains the summary for three years.
    (h) Purchasing an extension of credit subject to a repurchase 
agreement. Purchasing from an affiliate an extension of credit that was 
originated by the member bank and sold to the affiliate subject to a 
repurchase agreement or with recourse.
    (i) Asset purchases by a newly formed member bank. The purchase of 
an asset from an affiliate by a newly formed member bank, if the 
appropriate Federal banking agency for the member bank has approved the 
asset purchase in writing in connection with its review of the formation 
of the member bank.
    (j) Transactions approved under the Bank Merger Act. Any merger or 
consolidation between a member bank and an affiliated depository 
institution or U.S. branch or agency of a foreign bank, or any 
acquisition of assets or assumption of deposit liabilities by a member 
bank from an affiliated depository institution or U.S. branch or agency 
of a foreign bank, if the transaction has been approved by the 
responsible Federal banking agency pursuant to the Bank Merger Act (12 
U.S.C. 1828(c)).
    (k) Purchasing an extension of credit from an affiliate. Purchasing 
from an affiliate, on a nonrecourse basis, an extension of credit, if:
    (1) The extension of credit was originated by the affiliate;
    (2) The member bank makes an independent evaluation of the 
creditworthiness of the borrower before the affiliate makes or commits 
to make the extension of credit;

[[Page 137]]

    (3) The member bank commits to purchase the extension of credit 
before the affiliate makes or commits to make the extension of credit;
    (4) The member bank does not make a blanket advance commitment to 
purchase extensions of credit from the affiliate; and
    (5) The dollar amount of the extension of credit, when aggregated 
with the dollar amount of all other extensions of credit purchased from 
the affiliate during the preceding 12 calendar months by the member bank 
and its depository institution affiliates, does not represent more than 
50 percent (or such lower percent as is imposed by the member bank's 
appropriate Federal banking agency) of the dollar amount of extensions 
of credit originated by the affiliate during the preceding 12 calendar 
months.
    (l) Intraday extensions of credit--(1) In general. An intraday 
extension of credit to an affiliate, if the member bank:
    (i) Has established and maintains policies and procedures reasonably 
designed to manage the credit exposure arising from the member bank's 
intraday extensions of credit to affiliates in a safe and sound manner, 
including policies and procedures for:
    (A) Monitoring and controlling the credit exposure arising at any 
one time from the member bank's intraday extensions of credit to each 
affiliate and all affiliates in the aggregate; and
    (B) Ensuring that any intraday extension of credit by the member 
bank to an affiliate complies with the market terms requirement of Sec. 
223.51;
    (ii) Has no reason to believe that the affiliate will have 
difficulty repaying the extension of credit in accordance with its 
terms; and
    (iii) Ceases to treat any such extension of credit (regardless of 
jurisdiction) as an intraday extension of credit at the end of the 
member bank's business day in the United States.
    (2) Definition. Intraday extension of credit by a member bank to an 
affiliate means an extension of credit by a member bank to an affiliate 
that the member bank expects to be repaid, sold, or terminated, or to 
qualify for a complete exemption under this regulation, by the end of 
its business day in the United States.
    (m) Riskless principal transactions. Purchasing a security from a 
securities affiliate of the member bank if:
    (1) The member bank or the securities affiliate is acting 
exclusively as a riskless principal in the transaction; and
    (2) The security purchased is not issued, underwritten, or sold as 
principal (other than as riskless principal) by any affiliate of the 
member bank.
    (n) Securities financing transactions. (1) From September 15, 2008, 
until October 30, 2009 (unless further extended by the Board), 
securities financing transactions with an affiliate, if:
    (i) The security or other asset financed by the member bank in the 
transaction is of a type that the affiliate financed in the U.S. tri-
party repurchase agreement market at any time during the week of 
September 8-12, 2008;
    (ii) The transaction is marked to market daily and subject to daily 
margin-maintenance requirements, and the member bank is at least as 
over-collateralized in the transaction as the affiliate's clearing bank 
was over-collateralized in comparable transactions with the affiliate in 
the U.S. tri-party repurchase agreement market on September 12, 2008;
    (iii) The aggregate risk profile of the securities financing 
transactions under this exemption is no greater than the aggregate risk 
profile of the securities financing transactions of the affiliate in the 
U.S. tri-party repurchase agreement market on September 12, 2008;
    (iv) The member bank's top-tier holding company guarantees the 
obligations of the affiliate under the securities financing transactions 
(or provides other security to the bank that is acceptable to the 
Board); and
    (v) The member bank has not been specifically informed by the Board, 
after consultation with the member bank's appropriate Federal banking 
agency, that the member bank may not use this exemption.
    (2) For purposes of this exemption:
    (i) Securities financing transaction means:
    (A) A purchase by a member bank from an affiliate of a security or 
other asset, subject to an agreement by the

[[Page 138]]

affiliate to repurchase the asset from the member bank;
    (B) A borrowing of a security by a member bank from an affiliate on 
a collateralized basis; or
    (C) A secured extension of credit by a member bank to an affiliate.
    (ii) U.S. tri-party repurchase agreement market means the U.S. 
market for securities financing transactions in which the counterparties 
use custodial arrangements provided by JPMorgan Chase Bank or Bank of 
New York or another financial institution approved by the Board.
    (o) Purchases of certain asset-backed commercial paper. Purchases of 
asset-backed commercial paper from an affiliated SEC-registered open-end 
investment company that holds itself out as a money market mutual fund 
under SEC Rule 2a-7 (17 CFR 270.2a-7), if the member bank:
    (1) Purchases the asset-backed commercial paper on or after 
September 19, 2008;
    (2) Pledges the asset-backed commercial paper to a Federal Reserve 
Bank to secure financing from the asset-backed commercial paper lending 
facility (AMLF) established by the Board on September 19, 2008; and
    (3) Has not been specifically informed by the Board, after 
consultation with the member bank's appropriate Federal banking agency, 
that the member bank may not use this exemption.

[67 FR 76604, Dec. 12, 2002, as amended at 73 FR 54308, Sept. 19, 2008; 
73 FR 55709, Sept. 26, 2008; 74 FR 6226, 6227, Feb. 6, 2009]



Sec. 223.43  What are the standards under which the Board may grant additional 

exemptions from the requirements of section 23A?

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



               Subpart F_General Provisions of Section 23B



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

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



Sec. 223.52  What transactions with affiliates or others must comply with 

section 23B's market terms requirement?

    (a) The market terms requirement of Sec. 223.51 applies to the 
following transactions:
    (1) Any covered transaction with an affiliate, unless the 
transaction is exempt under paragraphs (a) through (c) of Sec. 223.41 
or paragraphs (a) through (e) or (h) through (j) of Sec. 223.42;
    (2) The sale of a security or other asset to an affiliate, including 
an asset subject to an agreement to repurchase;
    (3) The payment of money or the furnishing of a service to an 
affiliate under contract, lease, or otherwise;
    (4) Any transaction in which an affiliate acts as an agent or broker 
or receives a fee for its services to the member bank or to any other 
person; and
    (5) Any transaction or series of transactions with a nonaffiliate, 
if an affiliate:
    (i) Has a financial interest in the nonaffiliate; or

[[Page 139]]

    (ii) Is a participant in the transaction or series of transactions.
    (b) For the purpose of this section, any transaction by a member 
bank with any person will be deemed to be a transaction with an 
affiliate of the member bank if any of the proceeds of the transaction 
are used for the benefit of, or transferred to, the affiliate.



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

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



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

    (a) In general. A member bank and its affiliates may not publish any 
advertisement or enter into any agreement stating or suggesting that the 
member bank will in any way be responsible for the obligations of its 
affiliates.
    (b) Guarantees, acceptances, letters of credit, and cross-affiliate 
netting arrangements subject to section 23A. Paragraph (a) of this 
section does not prohibit a member bank from:
    (1) Issuing a guarantee, acceptance, or letter of credit on behalf 
of an affiliate, confirming a letter of credit

[[Page 140]]

issued by an affiliate, or entering into a cross-affiliate netting 
arrangement, to the extent such transaction satisfies the quantitative 
limits of Sec. Sec. 223.11 and 223.12 and the collateral requirements 
of Sec. 223.14, and is otherwise permitted under this regulation; or
    (2) Making reference to such a guarantee, acceptance, letter of 
credit, or cross-affiliate netting arrangement if otherwise required by 
law.



Sec. 223.55  What are the standards under which the Board may grant exemptions 

from the requirements of section 23B?

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



Sec. 223.56  What transactions are exempt from the market-terms requirement of 

section 23B?

    The following transactions are exempt from the market-terms 
requirement of Sec. 223.51.
    (a) Purchases of certain asset-backed commercial paper. Purchases of 
asset-backed commercial paper from an affiliated SEC-registered open-end 
investment company that holds itself out as a money market mutual fund 
under SEC Rule 2a-7 (17 CFR 270.2a-7), if the member bank:
    (1) Purchases the asset-backed commercial paper on or after 
September 19, 2008;
    (2) Pledges the asset-backed commercial paper to a Federal Reserve 
Bank to secure financing from the asset-backed commercial paper lending 
facility (AMLF) established by the Board on September 19, 2008; and
    (3) Has not been specifically informed by the Board, after 
consultation with the member bank's appropriate Federal banking agency, 
that the member bank may not use this exemption.
    (b) [Reserved]

[Reg. W, 74 FR 6228, Feb. 6, 2009]



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

                        Agencies of Foreign Banks



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

of foreign banks?

    (a) Applicability of sections 23A and 23B to foreign banks engaged 
in underwriting insurance, underwriting or dealing in securities, 
merchant banking, or insurance company investment in the United States. 
Except as provided in this subpart, sections 23A and 23B of the Federal 
Reserve Act and the provisions of this regulation apply to each U.S. 
branch, agency, or commercial lending company of a foreign bank in the 
same manner and to the same extent as if the branch, agency, or 
commercial lending company were a member bank.
    (b) Affiliate defined. For purposes of this subpart, any company 
that would be an affiliate of a U.S. branch, agency, or commercial 
lending company of a foreign bank if such branch, agency, or commercial 
lending company were a member bank is an affiliate of the branch, 
agency, or commercial lending company if the company also is:
    (1) Directly engaged in the United States in any of the following 
activities:
    (i) Insurance underwriting pursuant to section 4(k)(4)(B) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(B));
    (ii) Securities underwriting, dealing, or market making pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E));
    (iii) Merchant banking activities pursuant to section 4(k)(4)(H) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) (but only to the 
extent that the proceeds of the transaction are used for the purpose of 
funding the affiliate's merchant banking activities);
    (iv) Insurance company investment activities pursuant to section 
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I)); or
    (v) Any other activity designated by the Board;

[[Page 141]]

    (2) A portfolio company (as defined in the merchant banking subpart 
of Regulation Y (12 CFR 225.177(c))) controlled by the foreign bank or 
an affiliate of the foreign bank or a company that would be an affiliate 
of the branch, agency, or commercial lending company of the foreign bank 
under paragraph (a)(9) of Sec. 223.2 if such branch, agency, or 
commercial lending company were a member bank; or
    (3) A subsidiary of an affiliate described in paragraph (b)(1) or 
(2) of this section.
    (c) Capital stock and surplus. For purposes of this subpart, the 
``capital stock and surplus'' of a U.S. branch, agency, or commercial 
lending company of a foreign bank will be determined by reference to the 
capital of the foreign bank as calculated under its home country capital 
standards.



                 Subpart H_Miscellaneous Interpretations



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

member bank purchases from one affiliate an asset relating to another 

affiliate?

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



       Subpart I_Savings Associations_Transactions with Affiliates



Sec. 223.72  Transactions with affiliates.

    (a) Scope. (1) This subpart implements section 11(a) of the Home 
Owners' Loan Act (12 U.S.C. 1468(a)). Section 11(a) applies sections 23A 
and 23B of the FRA (12 U.S.C. 371c and 371c1) to every savings 
association in the same manner and to the same extent as if the 
association were a member bank; prohibits certain types of transactions 
with affiliates; and authorizes the Board to impose additional 
restrictions on a savings association's transactions with affiliates.

[[Page 142]]

    (2) For the purposes of this subpart, ``savings association'' is 
defined at section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813), and also includes any savings bank or any cooperative bank that 
is a savings association under 12 U.S.C. 1467a(l). A non-affiliate 
subsidiary of a savings association is treated as part of the savings 
association. For purposes of this subpart, a ``non-affiliate 
subsidiary'' is a subsidiary of a savings association other than a 
subsidiary described at 12 CFR 223.2(b)(1)(i), and (b)(1)(iii) through 
(v).
    (b) Sections 23A and 23B of the FRA. A savings association must 
comply with sections 23A and 23B of the Federal Reserve Act and this 
part as if it were a member bank, except as described in the following 
chart.

[[Page 143]]



----------------------------------------------------------------------------------------------------------------
          Provision of Regulation W                                       Application
----------------------------------------------------------------------------------------------------------------
(1) 12 CFR 223.2(a)(8)--``Affiliate''          Does not apply. Savings association subsidiaries do not meet the
 includes a financial subsidiary.               statutory definition of financial subsidiary.
(2) 12 CFR 223.2(a)(12)--Determination that    Read to include the following statement: ``Affiliate also
 ``affiliate'' includes other types of          includes any company that the Board determines, by order or
 companies.                                     regulation, to present a risk to the safety and soundness of the
                                                savings association.''
(3) 12 CFR 223.2(b)(1)(ii)--``Affiliate''      Does not apply. Savings association subsidiaries do not meet the
 includes a subsidiary that is a financial      statutory definition of financial subsidiary.
 subsidiary.
(4) 12 CFR 223.3(d)--Definition of ``capital   ``Capital stock and surplus'' for a savings association has the
 stock and surplus.''                           same meaning as under the regulatory capital requirements
                                                applicable to that savings association.
(5) 12 CFR 223.3(h)(1)--Section 23A covered    Read to incorporate paragraph (c)(1) of this section, which
 transactions include an extension of credit    prohibits loans or extensions of credit to an affiliate, unless
 to the affiliate.                              the affiliate is engaged only in the activities described at 12
                                                U.S.C. 1467a(c)(2)(F)(i), as defined in Regulation LL at 12 CFR
                                                238.54.
(6) 12 CFR 223.3(h)(2)--Section 23A covered    Read to incorporate paragraph (c)(2) of this section, which
 transactions include a purchase of or          prohibits purchases and investments in securities issued by an
 investment in securities issued by an          affiliate, other than with respect to shares of a subsidiary.
 affiliate.
(7) 12 CFR 223.3(k)--Definition of             Read to include the following statement: ``For the purposes of
 ``depository institution.''                    this definition, a non-affiliate subsidiary of a savings
                                                association is treated as part of the depository institution.''
(8) 12 CFR 223.3(p)--Definition of             Does not apply. Savings association subsidiaries do not meet the
 ``financial subsidiary.''                      statutory definition of financial subsidiary.
(9) 12 CFR 223.3(w)--Definition of ``member    Read to include the following statement: ``Member bank also
 bank.''                                        includes a savings association. For purposes of this definition,
                                                a non-affiliate subsidiary of a savings association is treated
                                                as part of the savings association.''
(10) 12 CFR 223.3(aa)--Definition of           Does not apply.
 ``operating subsidiary.''
(11) 12 CFR 223.31--Application of section     Read to refer to ``a non-affiliate subsidiary'' instead of
 23A to an acquisition of an affiliate that     ``operating subsidiary.''
 becomes an operating subsidiary.
(12) 12 CFR 223.32--Rules that apply to        Does not apply. Savings association subsidiaries do not meet the
 financial subsidiaries of a bank.              statutory definition of financial subsidiary.
(13) 12 CFR 223.42(f)(2)--Exemption for        Read to refer to ``Thrift Financial Report'' instead of ``Call
 purchasing certain marketable securities.      Report.'' References to ``state member bank'' are unchanged.
(14) 12 CFR 223.42(g)(2)--Exemption for        Read to refer to ``Thrift Financial Report'' instead of ``Call
 purchasing municipal securities.               Report.'' References to ``state member bank'' are unchanged.
(15) 12 CFR 223.61--Application of sections    Does not apply to savings associations or their subsidiaries.
 23A and 23B to U.S. branches and agencies of
 foreign banks.
----------------------------------------------------------------------------------------------------------------


[[Page 144]]

    (c) Additional prohibitions and restrictions. A savings association 
must comply with the additional prohibitions and restrictions in this 
paragraph (c). Except as described in paragraph (b) of this section, the 
definitions in this part apply to these additional prohibitions and 
restrictions.
    (1) Loans and extensions of credit. (i) A savings association may 
not make a loan or other extension of credit to an affiliate, unless the 
affiliate is solely engaged in the activities described at 12 U.S.C. 
1467a(c)(2)(F)(i), as defined in Sec. 238.54 of Regulation LL (12 CFR 
238.54). A loan or extension of credit to a third party is not 
prohibited merely because proceeds of the transaction are used for the 
benefit of, or are transferred to, an affiliate.
    (ii) If the Board determines that a particular transaction is, in 
substance, a loan or extension of credit to an affiliate that is engaged 
in activities other than those described at 12 U.S.C. 1467a(c)(2)(F)(i), 
as defined in Sec. 238.54 of Regulation LL (12 CFR 238.54), or the 
Board has other supervisory concerns concerning the transaction, the 
Board may inform the savings association that the transaction is 
prohibited under this paragraph (c)(1), and require the savings 
association to divest the loan, unwind the transaction, or take other 
appropriate action.
    (2) Purchases or investments in securities. A savings association 
may not purchase or invest in securities issued by any affiliate other 
than with respect to shares of a subsidiary. For the purposes of this 
paragraph (c)(2), subsidiary includes a bank and a savings association.

[76 FR 56531, Sept. 13, 2011]



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



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

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

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

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



Sec. 224.1  Authority, purpose, and scope.

    (a) Authority and purpose. Regulation X (this part) is issued by the 
Board of Governors of the Federal Reserve System (the Board) under the 
Securities Exchange Act of 1934, as amended (the Act) (15 U.S.C. 78a et 
seq.). This part implements section 7(f) of the Act (15 U.S.C. 78g(f)), 
the purpose of which is to require that credit obtained within or 
outside the United States complies with the limitations of the Board's 
Margin Regulations T and U (12 CFR parts 220 and 221, respectively).
    (b) Scope and exemptions. The Act and this part apply the Board's 
margin regulations to United States persons and foreign persons 
controlled by or acting on behalf of or in conjunction with United 
States persons (hereinafter borrowers), who obtain credit outside the 
United States to purchase or carry United States securities, or within 
the United States to purchase or carry any securities (both types of 
credit are hereinafter referred to as purpose credit). The following 
borrowers are exempt from the Act and this part:
    (1) Any borrower who obtains purpose credit within the United 
States, unless the borrower willfully causes the credit to be extended 
in contravention of Regulations T or U.
    (2) Any borrower whose permanent residence is outside the United 
States and who does not obtain or have outstanding, during any calendar 
year, a total of more than $100,000 in purpose credit obtained outside 
the United States; and
    (3) Any borrower who is exempt by Order upon terms and conditions 
set by the Board.

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



Sec. 224.2  Definitions.

    The terms used in this part have the meanings given to them in 
sections 3(a) and 7(f) of the Act, and in Regulations T and U. Section 
7(f) of the Act contains the following definitions:
    (a) United States person includes a person which is organized or 
exists under the laws of any State or, in the case of

[[Page 145]]

a natural person, a citizen or resident of the United States; a domestic 
estate; or a trust in which one or more of the foregoing persons has a 
cumulative direct or indirect beneficial interest in excess of 50 per 
centum of the valve of the trust.
    (b) United States security means a security (other than an exempted 
security) issued by a person incorporated under the laws of any State, 
or whose principal place of business is within a State.
    (c) Foreign person controlled by a United States person includes any 
noncorporate entity in which United States persons directly or 
indirectly have more than a 50 per centum beneficial interest, and any 
corporation in which one or more United States persons, directly or 
indirectly, own stock possessing more than 50 per centum of the total 
combined voting power of all classes of stock entitled to vote, or more 
than 50 per centum of the total value of shares of all classes of stock.

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



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

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

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



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

Table of Contents



                               Regulations

                      Subpart A_General Provisions

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

           Subpart B_Acquisition of Bank Securities or Assets

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

    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 
                                Companies

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

[[Page 146]]

              Subpart D_Control and Divestiture Proceedings

225.31 Control proceedings.

                    Subpart E_Change in Bank Control

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

                 Subpart F_Limitations on Nonbank Banks

225.52 Limitation on overdrafts.

    Subpart G_Appraisal Standards for Federally Related Transactions

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

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

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

                  Subpart I_Financial Holding Companies

225.81 What is a financial holding company?
225.82 How does a bank holding company elect to become a financial 
          holding company?
225.83 What are the consequences of failing to continue to meet 
          applicable capital and management requirements?
225.84 What are the consequences of failing to maintain a satisfactory 
          or better rating under the Community Reinvestment Act at all 
          insured depository institution subsidiaries?
225.85 Is notice to or approval from the Board required prior to 
          engaging in a financial activity?
225.86 What activities are permissible for any financial holding 
          company?
225.87 Is notice to the Board required after engaging in a financial 
          activity?
225.88 How to request the Board to determine that an activity is 
          financial in nature or incidental to a financial activity?
225.89 How to request approval to engage in an activity that is 
          complementary to a financial activity?
225.90 What are the requirements for a foreign bank to be treated as a 
          financial holding company?
225.91 How may a foreign bank elect to be treated as a financial holding 
          company?
225.92 How does an election by a foreign bank become effective?
225.93 What are the consequences of a foreign bank failing to continue 
          to meet applicable capital and management requirements?
225.94 What are the consequences of an insured branch or depository 
          institution failing to maintain a satisfactory or better 
          rating under the Community Reinvestment Act?

                             Interpretations

225.101 Bank holding company's subsidiary banks owning shares of 
          nonbanking companies.
225.102 Bank holding company indirectly owning nonbanking company 
          through subsidiaries.
225.103 Bank holding company acquiring stock by dividends, stock splits 
          or exercise of rights.
225.104 ``Services'' under section 4(c)(1) of Bank Holding Company Act.
225.107 Acquisition of stock in small business investment company.
225.109 ``Services'' under section 4(c)(1) of Bank Holding Company Act.
225.111 Limit on investment by bank holding company system in stock of 
          small business investment companies.
225.112 Indirect control of small business concern through convertible 
          debentures held by small business investment company.
225.113 Services under section 4(a) of Bank Holding Company Act.
225.115 Applicability of Bank Service Corporation Act in certain bank 
          holding company situations.
225.118 Computer services for customers of subsidiary banks.
225.121 Acquisition of Edge corporation affiliate by State member banks 
          of registered bank holding company.
225.122 Bank holding company ownership of mortgage companies.
225.123 Activities closely related to banking.
225.124 Foreign bank holding companies.
225.125 Investment adviser activities.
225.126 Activities not closely related to banking.
225.127 Investment in corporations or projects designed primarily to 
          promote community welfare.
225.129 Activities closely related to banking.

[[Page 147]]

225.130 Issuance and sale of short-term debt obligations by bank holding 
          companies.
225.131 Activities closely related to banking.
225.132 Acquisition of assets.
225.133 Computation of amount invested in foreign corporations under 
          general consent procedures.
225.134 Escrow arrangements involving bank stock resulting in a 
          violation of the Bank Holding Company Act.
225.136 Utilization of foreign subsidiaries to sell long-term debt 
          obligations in foreign markets and to transfer the proceeds to 
          their United States parent(s) for domestic purposes.
225.137 Acquisitions of shares pursuant to section 4(c)(6) of the Bank 
          Holding Company Act.
225.138 Statement of policy concerning divestitures by bank holding 
          companies.
225.139 Presumption of continued control under section (2)(g)(3) of the 
          Bank Holding Company Act.
225.140 Disposition of property acquired in satisfaction of debts 
          previously contracted.
225.141 Operations subsidiaries of a bank holding company.
225.142 Statement of policy concerning bank holding companies engaging 
          in futures, forward and options contracts on U.S. Government 
          and agency securities and money market instruments.
225.143 Policy statement on nonvoting equity investments by bank holding 
          companies.
225.145 Limitations established by the Competitive Equality Banking Act 
          of 1987 on the activities and growth of nonbank banks.

                 Subpart J_Merchant Banking Investments

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

                          Conditions to Orders

  Subpart K_Proprietary Trading and Relationships With Hedge Fund and 
                          Private Equity Funds

225.180 Definitions.
225.181 Conformance Period for Banking Entities Engaged in Proprietary 
          Trading or Private Fund Activities.
225.182 Conformance Period for Nonbank Financial Companies Supervised by 
          the Board Engaged in Proprietary Trading or Private Fund 
          Activities.

                     Subpart L_Conditions to Orders

225.200 Conditions to Board's section 20 orders.

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Risk-Based Measure
Appendix B to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies and State Member Banks: Leverage Measure
Appendix C to Part 225--Small Bank Holding Company Policy Statement
Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Tier 1 Leverage Measure
Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Market Risk Measure
Appendix F to Part 225--Interagency Guidelines Establishing Information 
          Security Standards
Appendix G to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Internal-Ratings-Based and Advanced Measurement 
          Approaches

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1851, 1972(1), 3106, 3108, 3310, 3331-3351, 3907, 
and 3909; 15 U.S.C. 6801 and 6805.

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

    Editorial Note: Nomenclature changes for part 225 appear at 69 FR 
77618, Dec. 28, 2004.

                               Regulations



                      Subpart A_General Provisions

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

[[Page 148]]



Sec. 225.1  Authority, purpose, and scope.

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

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

    (b) Purpose. The principal purposes of this part are to:
    (1) Regulate the acquisition of control of banks by companies and 
individuals;
    (2) Define and regulate the nonbanking activities in which bank 
holding companies and foreign banking organizations with United States 
operations may engage; and
    (3) Set forth the procedures for securing approval for these 
transactions and activities.
    (c) Scope--(1) Subpart A contains general provisions and definitions 
of terms used in this regulation.
    (2) Subpart B governs acquisitions of bank or bank holding company 
securities and assets by bank holding companies or by any company that 
will become a bank holding company as a result of the acquisition.
    (3) Subpart C defines and regulates the nonbanking activities in 
which bank holding companies and foreign banking organizations may 
engage directly or through a subsidiary. The Board's Regulation K 
governs certain nonbanking activities conducted by foreign banking 
organizations and certain foreign activities conducted by bank holding 
companies (12 CFR part 211, International Banking Operations).
    (4) Subpart D specifies situations in which a company is presumed to 
control voting securities or to have the power to exercise a controlling 
influence over the management or policies of a bank or other company; 
sets forth the procedures for making a control determination; and 
provides rules governing the effectiveness of divestitures by bank 
holding companies.
    (5) Subpart E governs changes in bank control resulting from the 
acquisition by individuals or companies (other than bank holding 
companies) of voting securities of a bank holding company or state 
member bank of the Federal Reserve System.
    (6) Subpart F specifies the limitations that govern companies that 
control so-called nonbank banks and the activities of nonbank banks.
    (7) Subpart G prescribes minimum standards that apply to the 
performance of real estate appraisals and identifies transactions that 
require state certified appraisers.
    (8) Subpart H identifies the circumstances when written notice must 
be provided to the Board prior to the appointment of a director or 
senior officer of a bank holding company and establishes procedures for 
obtaining the required Board approval.
    (9) Subpart I establishes the procedure by which a bank holding 
company may elect to become a financial holding company, enumerates the 
consequences if a financial holding company ceases to meet a requirement 
applicable to a financial holding company, lists the activities in which 
a financial holding company may engage, establishes the procedure by 
which a person may request the Board to authorize additional activities 
as financial in nature or incidental thereto, and establishes the 
procedure by which a financial holding company may seek approval to 
engage in an activity that is complementary to a financial activity.
    (10) Subpart J governs the conduct of merchant banking investment 
activities by financial holding companies as permitted under section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)).
    (11) Subpart K governs the period of time that firms subject to 
section 13 of

[[Page 149]]

the Bank Holding Company Act (12 U.S.C. 1851) have to bring their 
activities, investments and relationships into compliance with the 
requirements of such section.
    (12) Appendix B contains the Board's Capital Adequacy Guidelines for 
measuring leverage for bank holding companies and state member banks.
    (13) Appendix C contains the Board's policy statement governing 
small bank holding companies.
    (14) Appendix D contains the Board's Capital Adequacy Guidelines for 
measuring tier 1 leverage for bank holding companies.
    (15) Appendix E contains the Board's Capital Adequacy Guidelines for 
measuring market risk of bank holding companies.
    (16) Appendix F contains the Interagency Guidelines Establishing 
Information Security Standards.

[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; 76 FR 8275, Feb. 14, 2011]



Sec. 225.2  Definitions.

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

[[Page 150]]

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

[[Page 151]]

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

    \2\ For purposes of this subpart and subparts B and C of this part, 
a bank holding company with consolidated assets of less than $500 
million that is subject to the Small Bank Holding Company Policy 
Statement in appendix C of this part will be deemed to be ``well-
capitalized'' if the bank holding company meets the requirements for 
expedited/waived processing in appendix C.
---------------------------------------------------------------------------

    (i) On a consolidated basis, the bank holding company maintains a 
total risk-based capital ratio of 10.0 percent

[[Page 152]]

or greater, as defined in appendix A of this part;
    (ii) On a consolidated basis, the bank holding company maintains a 
Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined in 
appendix A of this part; and
    (iii) The bank holding company is not subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific capital 
level for any capital measure.
    (2) Insured and uninsured depository institution--(i) Insured 
depository institution. In the case of an insured depository 
institution, ``well capitalized'' means that the institution has and 
maintains at least the capital levels required to be well capitalized 
under the capital adequacy regulations or guidelines applicable to the 
institution that have been adopted by the appropriate Federal banking 
agency for the institution under section 38 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o).
    (ii) Uninsured depository institution. In the case of a depository 
institution the deposits of which are not insured by the Federal Deposit 
Insurance Corporation, ``well capitalized'' means that the institution 
has and maintains at least the capital levels required for an insured 
depository institution to be well capitalized.
    (3) Foreign banks--(i) Standards applied. For purposes of 
determining whether a foreign banking organization qualifies under 
paragraph (r)(1) of this section:
    (A) A foreign banking organization whose home country supervisor, as 
defined in Sec. 211.21 of the Board's Regulation K (12 CFR 211.21), has 
adopted capital standards consistent in all respects with the Capital 
Accord of the Basle Committee on Banking Supervision (Basle Accord) may 
calculate its capital ratios under the home country standard; and
    (B) A foreign banking organization whose home country supervisor has 
not adopted capital standards consistent in all respects with the Basle 
Accord shall obtain a determination from the Board that its capital is 
equivalent to the capital that would be required of a U.S. banking 
organization under paragraph (r)(1) of this section.
    (ii) Branches and agencies. For purposes of determining, under 
paragraph (r)(1) of this section, whether a branch or agency of a 
foreign banking organization is well-capitalized, the branch or agency 
shall be deemed to have the same capital ratios as the foreign banking 
organization.
    (s) Well managed--(1) In general. Except as otherwise provided in 
this part, a company or depository institution is well managed if:
    (i) At its most recent inspection or examination or subsequent 
review by the appropriate Federal banking agency for the company or 
institution (or the appropriate state banking agency in an examination 
described in section 10(d) of the Federal Deposit Insurance Act (12 
U.S.C. 1820(d)), the company or institution received:
    (A) At least a satisfactory composite rating; and
    (B) At least a satisfactory rating for management, if such rating is 
given.
    (ii) In the case of a company or depository institution that has not 
received an inspection or examination rating, the Board has determined, 
after a review of the managerial and other resources of the company or 
depository institution and after consulting with the appropriate Federal 
and state banking agencies, as applicable, for the company or 
institution, that the company or institution is well managed.
    (2) Merged depository institutions--(i) Merger involving well 
managed institutions. A depository institution that results from the 
merger of two or more depository institutions that are well managed 
shall be considered to be well managed unless the Board determines 
otherwise after consulting with the appropriate Federal and state 
banking agencies, as applicable, for each depository institution 
involved in the merger.
    (ii) Merger involving a poorly rated institution. A depository 
institution that results from the merger of a depository institution 
that is well managed with one or more depository institutions 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

[[Page 153]]

and other resources of the resulting depository institution and after 
consulting with the appropriate Federal and state banking agencies for 
the institutions involved in the merger, as applicable, that the 
resulting institution is well managed.
    (3) Foreign banking organizations. Except as otherwise provided in 
this part, a foreign banking organization is considered well managed if 
the combined operations of the foreign banking organization in the 
United States have received at least a satisfactory composite rating at 
the most recent annual assessment.
    (t) Depository institution. For purposes of this part, the term 
``depository institution'' has the same meaning as in section 3(c) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 3791, Jan. 25, 
2000; 65 FR 15055, Mar. 21, 2000; 66 FR 414, Jan. 3, 2001; 71 FR 9901, 
Feb. 28, 2006]



Sec. 225.3  Administration.

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



Sec. 225.4  Corporate practices.

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

[[Page 154]]

    (2) Contents of notice. Any notice under this section shall be filed 
with the appropriate Reserve Bank and shall contain the following 
information:
    (i) The purpose of the transaction, a description of the securities 
to be purchased or redeemed, the total number of each class outstanding, 
the gross consideration to be paid, and the terms and sources of funding 
for the transaction;
    (ii) A description of all equity securities redeemed within the 
preceding 12 months, the net consideration paid, and the terms of any 
debt incurred in connection with those transactions; and
    (iii) (A) If the bank holding company has consolidated assets of 
$500 million or more, consolidated pro forma risk-based capital and 
leverage ratio calculations for the bank holding company as of the most 
recent quarter, and, if the redemption is to be debt funded, a parent-
only pro forma balance sheet as of the most recent quarter; or
    (B) If the bank holding company has consolidated assets of less than 
$500 million, a pro forma parent-only balance sheet as of the most 
recent quarter, and, if the redemption is to be debt funded, one-year 
income statement and cash flow projections.
    (3) Acting on notice. Within 15 calendar days of receipt of a notice 
under this section, the appropriate Reserve Bank shall either approve 
the transaction proposed in the notice or refer the notice to the Board 
for decision. If the notice is referred to the Board for decision, the 
Board shall act on the notice within 30 calendar days after the Reserve 
Bank receives the notice.
    (4) Factors considered in acting on notice. (i) The Board may 
disapprove a proposed purchase or redemption if it finds that the 
proposal would constitute an unsafe or unsound practice, or would 
violate any law, regulation, Board order, directive, or any condition 
imposed by, or written agreement with, the Board.
    (ii) In determining whether a proposal constitutes an unsafe or 
unsound practice, the Board shall consider whether the bank holding 
company's financial condition, after giving effect to the proposed 
purchase or redemption, meets the financial standards applied by the 
Board under section 3 of the BHC Act, including the Board's Capital 
Adequacy Guidelines (appendix A of this part) and the Board's Policy 
Statement for Small Bank Holding Companies (appendix C of this part).
    (5) Disapproval and hearing. (i) The Board shall notify the bank 
holding company in writing of the reasons for a decision to disapprove 
any proposed purchase or redemption. Within 10 calendar days of receipt 
of a notice of disapproval by the Board, the bank holding company may 
submit a written request for a hearing.
    (ii) The Board shall order a hearing within 10 calendar days of 
receipt of the request if it finds that material facts are in dispute, 
or if it otherwise appears appropriate. Any hearing conducted under this 
paragraph shall be held in accordance with the Board's Rules of Practice 
for Formal Hearings (12 CFR part 263).
    (iii) At the conclusion of the hearing, the Board shall by order 
approve or disapprove the proposed purchase or redemption on the basis 
of the record of the hearing.
    (6) Exception for well-capitalized bank holding companies. A bank 
holding company is not required to obtain prior Board approval for the 
redemption or purchase of its equity securities under this section 
provided:
    (i) Both before and immediately after the redemption, the bank 
holding company is well-capitalized;
    (ii) The bank holding company is well-managed; and
    (iii) The bank holding company is not the subject of any unresolved 
supervisory issues.
    (7) Exception for certain bank holding companies. This section 
225.4(b) shall not apply to any bank holding company that is subject to 
Sec. 225.8 of Regulation Y (12 CFR 225.8).
    (c) Deposit insurance. Every bank that is a bank holding company or 
a subsidiary of a bank holding company shall obtain Federal Deposit 
Insurance and shall remain an insured bank as defined in section 3(h) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
    (d) Acting as transfer agent or clearing agent. A bank holding 
company or any nonbanking subsidiary that is a ``bank,'' as defined in 
section 3(a)(6) of

[[Page 155]]

the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(6)), and that is a 
transfer agent of securities, a clearing agency, or a participant in a 
clearing agency (as those terms are defined in section 3(a) of the 
Securities Exchange Act (15 U.S.C. 78c(a)), shall be subject to 
Sec. Sec. 208.31-208.33 of the Board's Regulation H (12 CFR 208.31-
208.33) as if it were a state member bank.
    (e) Reporting requirement for credit secured by certain bank holding 
company stock. Each executive officer or director of a bank holding 
company the shares of which are not publicly traded shall report 
annually to the board of directors of the bank holding company the 
outstanding amount of any credit that was extended to the executive 
officer or director and that is secured by shares of the bank holding 
company. For purposes of this paragraph, the terms ``executive officer'' 
and ``director'' shall have the meaning given in Sec. 215.2 of 
Regulation O (12 CFR 215.2).
    (f) Suspicious activity report. A bank holding company or any 
nonbank subsidiary thereof, or a foreign bank that is subject to the BHC 
Act or any nonbank subsidiary of such foreign bank operating in the 
United States, shall file a suspicious activity report in accordance 
with the provisions of Sec. 208.62 of the Board's Regulation H (12 CFR 
208.62).
    (g) Requirements for financial holding companies engaged in 
securities underwriting, dealing, or market-making activities. (1) Any 
intra-day extension of credit by a bank or thrift, or U.S. branch or 
agency of a foreign bank to an affiliated company engaged in 
underwriting, dealing in, or making a market in securities pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E)) must be on market terms consistent with section 23B of 
the Federal Reserve Act. (12 U.S.C. 371c-1).
    (2) A foreign bank that is or is treated as a financial holding 
company under this part shall ensure that:
    (i) Any extension of credit by any U.S. branch or agency of such 
foreign bank to an affiliated company engaged in underwriting, dealing 
in, or making a market in securities pursuant to section 4(k)(4)(E) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(E)), conforms to 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
371c-1) as if the branch or agency were a member bank;
    (ii) Any purchase by any U.S. branch or agency of such foreign bank, 
as principal or fiduciary, of securities for which a securities 
affiliate described in paragraph (g)(2)(i) of this section is a 
principal underwriter conforms to sections 23A and 23B of the Federal 
Reserve Act (12 U.S.C. 371c and 371c-1) as if the branch or agency were 
a member bank; and
    (iii) Its U.S. branches and agencies not advertise or suggest that 
they are responsible for the obligations of a securities affiliate 
described in paragraph (g)(2)(i) of this section, consistent with 
section 23B(c) of the Federal Reserve Act (12 U.S.C. 371c-1(c)) as if 
the branches or agencies were member banks.
    (h) Protection of customer information and consumer information. A 
bank holding company shall comply with the Interagency Guidelines 
Establishing Information Security Standards, as set forth in appendix F 
of this part, prescribed pursuant to sections 501 and 505 of the Gramm-
Leach-Bliley Act (15 U.S.C. 6801 and 6805). A bank holding company shall 
properly dispose of consumer information in accordance with the rules 
set forth at 16 CFR part 682.

[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; 69 FR 77618, 
Dec. 28, 2004; 71 FR 9901, Feb. 28, 2006; 76 FR 74644, Dec. 1, 2011]



Sec. 225.5  Registration, reports, and inspections.

    (a) Registration of bank holding companies. Each company shall 
register within 180 days after becoming a bank holding company by 
furnishing information in the manner and form prescribed by the Board. A 
company that receives the Board's prior approval under subpart B of this 
part to become a bank holding company may complete this registration 
requirement through submission of its first annual report to the Board 
as required by paragraph (b) of this section.

[[Page 156]]

    (b) Reports of bank holding companies. Each bank holding company 
shall furnish, in the manner and form prescribed by the Board, an annual 
report of the company's operations for the fiscal year in which it 
becomes a bank holding company, and for each fiscal year during which it 
remains a bank holding company. Additional information and reports shall 
be furnished as the Board may require.
    (c) Examinations and inspections. The Board may examine or inspect 
any bank holding company and each of its subsidiaries and prepare a 
report of their operations and activities. With respect to a foreign 
banking organization, the Board may also examine any branch or agency of 
a foreign bank in any state of the United States and may examine or 
inspect each of the organization's subsidiaries in the United States and 
prepare reports of their operations and activities. The Board shall 
rely, as far as possible, on the reports of examination made by the 
primary federal or state supervisor of the subsidiary bank of the bank 
holding company or of the branch or agency of the foreign bank.



Sec. 225.6  Penalties for violations.

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



Sec. 225.7  Exceptions to tying restrictions.

    (a) Purpose. This section establishes exceptions to the anti-tying 
restrictions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971, 1972(1)). These exceptions are in addition to 
those in section 106. The section also restricts tying of electronic 
benefit transfer services by bank holding companies and their nonbank 
subsidiaries.
    (b) Exceptions to statute. Subject to the limitations of paragraph 
(c) of this section, a bank may:
    (1) Extension to affiliates of statutory exceptions preserving 
traditional banking relationships. Extend credit, lease or sell property 
of any kind, or furnish any service, or fix or vary the consideration 
for any of the foregoing, on the condition or requirement that a 
customer:
    (i) Obtain a loan, discount, deposit, or trust service from an 
affiliate of the bank; or
    (ii) Provide to an affiliate of the bank some additional credit, 
property, or service that the bank could require to be provided to 
itself pursuant to section 106(b)(1)(C) of the Bank Holding Company Act 
Amendments of 1970 (12 U.S.C. 1972(1)(C)).
    (2) Safe harbor for combined-balance discounts. Vary the 
consideration for any product or package of products based on a 
customer's maintaining a combined minimum balance in certain products 
specified by the bank (eligible products), if:
    (i) The bank offers deposits, and all such deposits are eligible 
products; and
    (ii) Balances in deposits count at least as much as nondeposit 
products toward the minimum balance.
    (3) Safe harbor for foreign transactions. Engage in any transaction 
with a customer if that customer is:
    (i) A corporation, business, or other person (other than an 
individual) that:
    (A) Is incorporated, chartered, or otherwise organized outside the 
United States; and
    (B) Has its principal place of business outside the United States; 
or

[[Page 157]]

    (ii) An individual who is a citizen of a foreign country and is not 
resident in the United States.
    (c) Limitations on exceptions. Any exception granted pursuant to 
this section shall terminate upon a finding by the Board that the 
arrangement is resulting in anti-competitive practices. The eligibility 
of a bank to operate under any exception granted pursuant to this 
section shall terminate upon a finding by the Board that its exercise of 
this authority is resulting in anti-competitive practices.
    (d) Extension of statute to electronic benefit transfer services. A 
bank holding company or nonbank subsidiary of a bank holding company 
that provides electronic benefit transfer services shall be subject to 
the anti-tying restrictions applicable to such services set forth in 
section 7(i)(11) of the Food Stamp Act of 1977 (7 U.S.C. 2016(i)(11)).
    (e) For purposes of this section, bank has the meaning given that 
term in section 106(a) of the Bank Holding Company Act Amendments of 
1970 (12 U.S.C. 1971), but shall also include a United States branch, 
agency, or commercial lending company subsidiary of a foreign bank that 
is subject to section 106 pursuant to section 8(d) of the International 
Banking Act of 1978 (12 U.S.C. 3106(d)), and any company made subject to 
section 106 by section 4(f)(9) or 4(h) of the BHC Act.



Sec. 225.8  Capital planning.

    (a) Purpose. This section establishes capital planning and prior 
notice and approval requirements for capital distributions by certain 
bank holding companies.
    (b) Scope and effective date. (1) This section applies to every top-
tier bank holding company domiciled in the United States:
    (i) With total consolidated assets greater than or equal to $50 
billion computed on the basis of the average of the company's total 
consolidated assets over the course of the previous four calendar 
quarters, as reflected on the bank holding company's consolidated 
financial statement for bank holding companies (FR Y-9C (the calculation 
shall be effective as of the due date of the bank holding company's most 
recent FR Y-9C required to be filed under 12 CFR 225.5(b))); or
    (ii) That is subject to this section, in whole or in part, by order 
of the Board based on the institution's size, level of complexity, risk 
profile, scope of operations, or financial condition.
    (2) Beginning on December 30, 2011, the provisions of this section 
shall apply to any bank holding company that is subject to this section 
pursuant to paragraph (b)(1) of this section, provided that:
    (i) Until July 21, 2015, this section will not apply to any bank 
holding company subsidiary of a foreign banking organization that is 
currently relying on Supervision and Regulation Letter SR 01-01 issued 
by the Board (as in effect on May 19, 2010); and
    (ii) A bank holding company that becomes subject to this section 
pursuant to paragraph (b)(1)(i) of this section after the 5th of January 
of a calendar year shall not be subject to the requirements of 
paragraphs (d)(1)(ii), (d)(4), and (f)(1)(iii) of this section until 
January 1 of the next calendar year.
    (3) Nothing in this section shall limit the authority of the Federal 
Reserve to issue a capital directive or take any other supervisory or 
enforcement action, including action to address unsafe or unsound 
practices or conditions or violations of law.
    (c) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Capital action means any issuance of a debt or equity capital 
instrument, any capital distribution, and any similar action that the 
Federal Reserve determines could impact a bank holding company's 
consolidated capital.
    (2) Capital distribution means a redemption or repurchase of any 
debt or equity capital instrument, a payment of common or preferred 
stock dividends, a payment that may be temporarily or permanently 
suspended by the issuer on any instrument that is eligible for inclusion 
in the numerator of any minimum regulatory capital ratio, and any 
similar transaction that the Federal Reserve determines to be in 
substance a distribution of capital.
    (3) Capital plan means a written presentation of a bank holding 
company's capital planning strategies and capital

[[Page 158]]

adequacy process that includes the mandatory elements set forth in 
paragraph (d)(2) of this section.
    (4) Capital policy means a bank holding company's written assessment 
of the principles and guidelines used for capital planning, capital 
issuance, usage and distributions, including internal capital goals; the 
quantitative or qualitative guidelines for dividend and stock 
repurchases; the strategies for addressing potential capital shortfalls; 
and the internal governance procedures around capital policy principles 
and guidelines.
    (5) Minimum regulatory capital ratio means any minimum regulatory 
capital ratio that the Federal Reserve may require of a bank holding 
company, by regulation or order, including the bank holding company's 
leverage ratio and tier 1 and total risk-based capital ratios as 
calculated under Appendices A, D, E, and G to this part (12 CFR part 
225), or any successor regulation.
    (6) Planning horizon means the period of at least nine quarters, 
beginning with the quarter preceding the quarter in which the bank 
holding company submits its capital plan, over which the relevant 
projections extend.
    (7) Tier 1 capital has the same meaning as under Appendix A to this 
part or any successor regulation.
    (8) Tier 1 common capital means tier 1 capital less the non-common 
elements of tier 1 capital, including perpetual preferred stock and 
related surplus, minority interest in subsidiaries, trust preferred 
securities and mandatory convertible preferred securities.
    (9) Tier 1 common ratio means the ratio of a bank holding company's 
tier 1 common capital to total risk-weighted assets. This definition 
will remain in effect until the Board adopts an alternative tier 1 
common ratio definition as a minimum regulatory capital ratio.
    (10) Total risk-weighted assets has the same meaning as under 
Appendices A, E, and G to this part, or any successor regulation.
    (d) General requirements--(1) Annual capital planning. (i) A bank 
holding company must develop and maintain a capital plan.
    (ii) A bank holding company must submit its complete capital plan to 
the appropriate Reserve Bank and the Board each year by the 5th of 
January, or such later date as directed by the Board or the appropriate 
Reserve Bank, after consultation with the Board.
    (iii) The bank holding company's board of directors or a designated 
committee thereof must at least annually and prior to submission of the 
capital plan under paragraph (d)(1)(ii) of this section:
    (A) Review the robustness of the bank holding company's process for 
assessing capital adequacy,
    (B) Ensure that any deficiencies in the bank holding company's 
process for assessing capital adequacy are appropriately remedied; and
    (C) Approve the bank holding company's capital plan.
    (2) Mandatory elements of capital plan. A capital plan must contain 
at least the following elements:
    (i) An assessment of the expected uses and sources of capital over 
the planning horizon that reflects the bank holding company's size, 
complexity, risk profile, and scope of operations, assuming both 
expected and stressful conditions, including:
    (A) Estimates of projected revenues, losses, reserves, and pro forma 
capital levels, including any minimum regulatory capital ratios (for 
example, leverage, tier 1 risk-based, and total risk-based capital 
ratios) and any additional capital measures deemed relevant by the bank 
holding company, over the planning horizon under expected conditions and 
under a range of stressed scenarios, including any scenarios provided by 
the Federal Reserve and at least one stressed scenario developed by the 
bank holding company appropriate to its business model and portfolios;
    (B) A calculation of the pro forma tier 1 common ratio over the 
planning horizon under expected conditions and under a range of stressed 
scenarios and discussion of how the company will maintain a pro forma 
tier 1 common ratio above 5 percent under expected conditions and the 
stressed scenarios required under paragraphs (d)(2)(i)(A) and (ii) of 
this section;
    (C) A discussion of the results of any stress test required by law 
or regulation, and an explanation of how the

[[Page 159]]

capital plan takes these results into account; and
    (D) A description of all planned capital actions over the planning 
horizon.
    (ii) A detailed description of the bank holding company's process 
for assessing capital adequacy, including:
    (A) A discussion of how the bank holding company will, under 
expected and stressful conditions, maintain capital commensurate with 
its risks, maintain capital above the minimum regulatory capital ratios 
and above a tier 1 common ratio of 5 percent, and serve as a source of 
strength to its subsidiary depository institutions;
    (B) A discussion of how the bank holding company will, under 
expected and stressful conditions, maintain sufficient capital to 
continue its operations by maintaining ready access to funding, meeting 
its obligations to creditors and other counterparties, and continuing to 
serve as a credit intermediary;
    (iii) The bank holding company's capital policy; and
    (iv) A discussion of any expected changes to the bank holding 
company's business plan that are likely to have a material impact on the 
firm's capital adequacy or liquidity.
    (3) Data collection. Upon the request of the Board or appropriate 
Reserve Bank, the bank holding company shall provide the Federal Reserve 
with information regarding--
    (i) The bank holding company's financial condition, including its 
capital;
    (ii) The bank holding company's structure;
    (iii) Amount and risk characteristics of the bank holding company's 
on- and off-balance sheet exposures, including exposures within the bank 
holding company's trading account, other trading-related exposures (such 
as counterparty-credit risk exposures) or other items sensitive to 
changes in market factors, including, as appropriate, information about 
the sensitivity of positions to changes in market rates and prices;
    (iv) The bank holding company's relevant policies and procedures, 
including risk management policies and procedures;
    (v) The bank holding company's liquidity profile and management; and
    (vi) Any other relevant qualitative or quantitative information 
requested by the Board or the appropriate Reserve Bank to facilitate 
review of the bank holding company's capital plan under this section.
    (4) Re-submission of a capital plan. (i) A bank holding company must 
update and re-submit its capital plan to the appropriate Reserve Bank 
within 30 calendar days of the occurrence of one of the following 
events:
    (A) The bank holding company determines there has been or will be a 
material change in the bank holding company's risk profile, financial 
condition, or corporate structure since the bank holding company adopted 
the capital plan;
    (B) The Board or the appropriate Reserve Bank objects to the capital 
plan; or
    (C) The Board or the appropriate Reserve Bank, after consultation 
with the Board, directs the bank holding company in writing to revise 
and resubmit its capital plan for any of the following reasons:
    (1) The capital plan is incomplete or the capital plan, or the bank 
holding company's internal capital adequacy process, contains material 
weaknesses;
    (2) There has been or will likely be a material change in the bank 
holding company's risk profile (including a material change in its 
business strategy or any risk exposure), financial condition, or 
corporate structure;
    (3) The stressed scenario(s) developed by the bank holding company 
is not appropriate to its business model and portfolios, or changes in 
financial markets or the macro-economic outlook that could have a 
material impact on a bank holding company's risk profile and financial 
condition require the use of updated scenarios; or
    (4) The capital plan or the condition of the bank holding company 
raise any of the issues described in paragraph (e)(2)(ii) of this 
section.
    (ii) The Board or the appropriate Reserve Bank, after consultation 
with the Board, may, at its discretion, extend the 30-day period in 
paragraph (d)(4)(i) of this section for up to an additional 60 calendar 
days.

[[Page 160]]

    (iii) Any updated capital plan must satisfy all the requirements of 
this section; however, a bank holding company may continue to rely on 
information submitted as part of a previously submitted capital plan to 
the extent that the information remains accurate and appropriate.
    (e) Review of capital plans by the Federal Reserve--(1) 
Considerations and inputs. (i) The Board or the appropriate Reserve 
Bank, after consultation with the Board, will consider the following 
factors in reviewing a bank holding company's capital plan:
    (A) The comprehensiveness of the capital plan, including the extent 
to which the analysis underlying the capital plan captures and addresses 
potential risks stemming from activities across the firm and the 
company's capital policy;
    (B) The reasonableness of the bank holding company's assumptions and 
analysis underlying the capital plan and its methodologies for reviewing 
the robustness of its capital adequacy process; and
    (C) The bank holding company's ability to maintain capital above 
each minimum regulatory capital ratio and above a tier 1 common ratio of 
5 percent on a pro forma basis under expected and stressful conditions 
throughout the planning horizon, including but not limited to any 
stressed scenarios required under paragraphs (d)(2)(i)(A) and (ii) of 
this section.
    (ii) The Board or the appropriate Reserve Bank, after consultation 
with the Board, will also consider the following information in 
reviewing a bank holding company's capital plan:
    (A) Relevant supervisory information about the bank holding company 
and its subsidiaries;
    (B) The bank holding company's regulatory and financial reports, as 
well as supporting data that would allow for an analysis of the bank 
holding company's loss, revenue, and reserve projections;
    (C) As applicable, the Federal Reserve's own pro forma estimates of 
the firm's potential losses, revenues, reserves, and resulting capital 
adequacy under expected and stressful conditions, including but not 
limited to any stressed scenarios required under paragraphs (d)(2)(i)(A) 
and (ii) of this section, as well as the results of any stress tests 
conducted by the bank holding company or the Federal Reserve; and
    (D) Other information requested or required by the appropriate 
Reserve Bank or the Board, as well as any other information relevant, or 
related, to the bank holding company's capital adequacy.
    (2) Federal Reserve action on a capital plan. (i) The Board or the 
appropriate Reserve Bank, after consultation with the Board, will 
object, in whole or in part, to the capital plan or provide the bank 
holding company with a notice of non-objection to the capital plan:
    (A) By March 31 of the calendar year in which a capital plan was 
submitted pursuant to paragraph (d)(1)(ii) of this section, and
    (B) By the date that is 75 calendar days after the date on which a 
capital plan was resubmitted pursuant to paragraph (d)(4) of this 
section.
    (ii) The Board or the appropriate Reserve Bank, after consultation 
with the Board, may object to a capital plan if it determines that:
    (A) The bank holding company has material unresolved supervisory 
issues, including but not limited to issues associated with its capital 
adequacy process;
    (B) The assumptions and analysis underlying the bank holding 
company's capital plan, or the bank holding company's methodologies for 
reviewing the robustness of its capital adequacy process, are not 
reasonable or appropriate;
    (C) The bank holding company has not demonstrated an ability to 
maintain capital above each minimum regulatory capital ratio and above a 
tier 1 common ratio of 5 percent, on a pro forma basis under expected 
and stressful conditions throughout the planning horizon; or
    (D) The bank holding company's capital planning process or proposed 
capital distributions otherwise 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. In 
determining whether a capital plan or any proposed capital distribution 
would constitute an

[[Page 161]]

unsafe or unsound practice, the appropriate Reserve Bank would consider 
whether the bank holding company is and would remain in sound financial 
condition after giving effect to the capital plan and all proposed 
capital distributions.
    (iii) The Board or the appropriate Reserve Bank, after consultation 
with the Board, will notify the bank holding company in writing of the 
reasons for a decision to object to a capital plan.
    (iv) If the Board or the appropriate Reserve Bank, after 
consultation with the Board, objects to a capital plan and until such 
time as the Board or the appropriate Reserve Bank, after consultation 
with the Board, issues a non-objection to the bank holding company's 
capital plan, the bank holding company may not make any capital 
distribution, other than those capital distributions with respect to 
which the Board or the appropriate Reserve Bank has indicated in writing 
its non-objection.
    (3) Request for reconsideration or hearing. Within 10 calendar days 
of receipt of a notice of objection to a capital plan by the Board or 
the appropriate Reserve Bank:
    (i) A bank holding company may submit a written request to the Board 
requesting reconsideration of the objection, including an explanation of 
why reconsideration should be granted. Within 10 calendar days of 
receipt of the bank holding company's request, the Board will notify the 
company of its decision to affirm or withdraw the objection to the bank 
holding company's capital plan or a specific capital distribution; or
    (ii) As an alternative to paragraph (e)(3)(i) of this section, a 
bank holding company may submit a written request to the Board for a 
hearing. Any hearing shall follow the procedures described in paragraph 
(f)(5)(ii)-(iii) of this section.
    (f) Approval requirements for certain capital actions--(1) 
Circumstances requiring approval. Notwithstanding a notice of non-
objection under paragraph (e)(2)(i) of this section a bank holding 
company may not make a capital distribution under the following 
circumstances, unless it receives approval from the Board or appropriate 
Reserve Bank pursuant to paragraph (f)(4) of this section:
    (i) After giving effect to the capital distribution, the bank 
holding company would not meet a minimum regulatory capital ratio or a 
tier 1 common ratio of at least 5 percent;
    (ii) The Board or the appropriate Reserve Bank, after consultation 
with the Board, notifies the company in writing that the Federal Reserve 
has determined that the capital distribution would result in a material 
adverse change to the organization's capital or liquidity structure or 
that the company's earnings were materially underperforming projections;
    (iii) Except as provided in paragraph (f)(2) of this section, the 
dollar amount of the capital distribution will exceed the amount 
described in the capital plan for which a non-objection was issued under 
this section; or
    (iv) The capital distribution would occur after the occurrence of an 
event requiring resubmission under paragraphs (d)(4)(A) and (C) of this 
section and before the Federal Reserve acted on the resubmitted capital 
plan.
    (2) Exception for well capitalized bank holding companies. (i) A 
bank holding company may make a capital distribution for which the 
dollar amount exceeds the amount described in the capital plan for which 
a non-objection was issued under this section if the following 
conditions are satisfied:
    (A) The bank holding company is, and after the capital distribution 
would remain, well capitalized as defined in Sec. 225.2(r) of 
Regulation Y (12 CFR 225.2(r));
    (B) The bank holding company's performance and capital levels are, 
and after the capital distribution would remain, consistent with its 
projections under expected conditions as set forth in its capital plan 
under paragraph (d)(2)(i) of this section;
    (C) The annual aggregate dollar amount of all capital distributions 
(beginning on April 1 of a calendar year and ending on March 31 of the 
following calendar year) would not exceed the total amounts described in 
the company's capital plan for which the bank holding company received a 
notice of non-objection by more than 1.00 percent multiplied by the bank 
holding

[[Page 162]]

company's tier 1 capital, as reported to the Federal Reserve on the bank 
holding company's first quarter FR Y-9C;
    (D) The bank holding company provides the appropriate Reserve Bank 
with notice 15 calendar days prior to a capital distribution that 
includes the elements described in paragraph (f)(3) of this section; and
    (E) The Board or the appropriate Reserve Bank, after consultation 
with the Board, does not object to the transaction proposed in the 
notice. In determining whether to object to the proposed transaction, 
the Board or the appropriate Reserve Bank, after consultation with the 
Board, shall apply the criteria described in paragraph (f)(4)(iv) of 
this section.
    (ii) The exception in this paragraph (f)(2) shall not apply if the 
Board or the appropriate Reserve Bank notifies the bank holding company 
in writing that it may not take advantage of this exception.
    (3) Contents of request. (i) A request for a capital distribution 
under this section shall be filed with the appropriate Reserve Bank and 
the Board and shall contain the following information:
    (A) The bank holding company's current capital plan or an 
attestation that there have been no changes to the capital plan since it 
was last submitted to the Federal Reserve;
    (B) The purpose of the transaction;
    (C) A description of the capital distribution, including for 
redemptions or repurchases of securities, the gross consideration to be 
paid and the terms and sources of funding for the transaction, and for 
dividends, the amount of the dividend(s); and
    (D) Any additional information requested by the Board or the 
appropriate Reserve Bank (which may include, among other things, an 
assessment of the bank holding company's capital adequacy under a 
revised stress scenario provided by the Federal Reserve, a revised 
capital plan, and supporting data).
    (ii) Any request submitted with respect to a capital distribution 
described in paragraph (f)(1)(i) of this section shall also include a 
plan for restoring the bank holding company's capital to an amount above 
a minimum level within 30 days and a rationale for why the capital 
distribution would be appropriate.
    (4) Approval of certain capital distributions. (i) A bank holding 
company must obtain approval from the Board or the appropriate Reserve 
Bank, after consultation with the Board, before making a capital 
distribution described in paragraph (f)(1) of this section.
    (ii) A request for a capital distribution under this section must be 
filed with the appropriate Reserve Bank and contain all the information 
set forth in paragraph (f)(3) of this section.
    (iii) The Board or the appropriate Reserve Bank, after consultation 
with the Board, will act on a request under this paragraph (f)(4) within 
30 calendar days after the receipt of a complete request under paragraph 
(f)(4)(ii) of this section. The Board or the appropriate Reserve Bank 
may, at any time, request additional information that it believes is 
necessary for its decision.
    (iv) In acting on a request under this paragraph, the Board or 
appropriate Reserve Bank will apply the considerations and principles in 
paragraph (e) of this section. In addition, the Board or the appropriate 
Reserve Bank may disapprove the transaction if the bank holding company 
does not provide all of the information required to be submitted under 
paragraphs (f)(3) and (f)(5)(iii) of this section.
    (5) Disapproval and hearing. (i) The Board or the appropriate 
Reserve Bank will notify the bank holding company in writing of the 
reasons for a decision to disapprove any proposed capital distribution. 
Within 10 calendar days after receipt of a disapproval by the Board, the 
bank holding company may submit a written request for a hearing.
    (ii) The Board will 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).

[[Page 163]]

    (iii) At the conclusion of the hearing, the Board will by order 
approve or disapprove the proposed capital distribution on the basis of 
the record of the hearing.

[76 FR 74644, Dec. 1, 2011]



           Subpart B_Acquisition of Bank Securities or Assets

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



Sec. 225.11  Transactions requiring Board approval.

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



Sec. 225.12  Transactions not requiring Board approval.

    The following transactions do not require the Board's approval under 
Sec. 225.11 of this subpart:
    (a) Acquisition of securities in fiduciary capacity. The acquisition 
by a bank or other company (other than a trust that is a company) of 
control of voting securities of a bank or bank holding company in good 
faith in a fiduciary capacity, unless:
    (1) The acquiring bank or other company has sole discretionary 
authority to vote the securities and retains this authority for more 
than two years; or
    (2) The acquisition is for the benefit of the acquiring bank or 
other company, or its shareholders, employees, or subsidiaries.
    (b) Acquisition of securities in satisfaction of debts previously 
contracted. The acquisition by a bank or other company of control of 
voting securities of a bank or bank holding company in the regular 
course of securing or collecting a debt previously contracted in good 
faith, if the acquiring bank or other company divests the securities 
within two years of acquisition. The Board or Reserve Bank may grant 
requests for up to three one-year extensions.
    (c) Acquisition of securities by bank holding company with majority 
control. The acquisition by a bank holding company of additional voting 
securities of a bank or bank holding company if more than 50 percent of 
the outstanding voting securities of the bank or bank holding company is 
lawfully controlled by the acquiring bank holding company prior to the 
acquisition.
    (d) Acquisitions involving bank mergers and internal corporate 
reorganizations--(1) Transactions subject to Bank Merger Act. The merger 
or consolidation of a

[[Page 164]]

subsidiary bank of a bank holding company with another bank, or the 
purchase of assets by the subsidiary bank, or a similar transaction 
involving subsidiary banks of a bank holding company, if the transaction 
requires the prior approval of a federal supervisory agency under the 
Bank Merger Act (12 U.S.C. 1828(c)) and does not involve the acquisition 
of shares of a bank. This exception does not include:
    (i) The merger of a nonsubsidiary bank and a nonoperating subsidiary 
bank formed by a company for the purpose of acquiring the nonsubsidiary 
bank; or
    (ii) Any transaction requiring the Board's prior approval under 
Sec. 225.11(e) of this subpart.
    The Board may require an application under this subpart if it 
determines that the merger or consolidation would have a significant 
adverse impact on the financial condition of the bank holding company, 
or otherwise requires approval under section 3 of the BHC Act.
    (2) Certain acquisitions subject to Bank Merger Act. The acquisition 
by a bank holding company of shares of a bank or company controlling a 
bank or the merger of a company controlling a bank with the bank holding 
company, if the transaction is part of the merger or consolidation of 
the bank with a subsidiary bank (other than a nonoperating subsidiary 
bank) of the acquiring bank holding company, or is part of the purchase 
of substantially all of the assets of the bank by a subsidiary bank 
(other than a nonoperating subsidiary bank) of the acquiring bank 
holding company, and if:
    (i) The bank merger, consolidation, or asset purchase occurs 
simultaneously with the acquisition of the shares of the bank or bank 
holding company or the merger of holding companies, and the bank is not 
operated by the acquiring bank holding company as a separate entity 
other than as the survivor of the merger, consolidation, or asset 
purchase;
    (ii) The transaction requires the prior approval of a federal 
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));
    (iii) The transaction does not involve the acquisition of any 
nonbank company that would require prior approval under section 4 of the 
BHC Act (12 U.S.C. 1843);
    (iv) Both before and after the transaction, the acquiring bank 
holding company meets the Board's Capital Adequacy Guidelines 
(appendices A, B, C, D, and E of this part);
    (v) At least 10 days prior to the transaction, the acquiring bank 
holding company has provided to the Reserve Bank written notice of the 
transaction that contains:
    (A) A copy of the filing made to the appropriate federal banking 
agency under the Bank Merger Act; and
    (B) A description of the holding company's involvement in the 
transaction, the purchase price, and the source of funding for the 
purchase price; and
    (vi) Prior to expiration of the period provided in paragraph 
(d)(2)(v) of this section, the Reserve Bank has not informed the bank 
holding company that an application under Sec. 225.11 is required.
    (3) Internal corporate reorganizations. (i) Subject to paragraph 
(d)(3)(ii) of this section, any of the following transactions performed 
in the United States by a bank holding company:
    (A) The merger of holding companies that are subsidiaries of the 
bank holding company;
    (B) The formation of a subsidiary holding company; \1\
---------------------------------------------------------------------------

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

    (C) The transfer of control or ownership of a subsidiary bank or a 
subsidiary holding company between one subsidiary holding company and 
another subsidiary holding company or the bank holding company.
    (ii) A transaction described in paragraph (d)(3)(i) of this section 
qualifies for this exception if:
    (A) The transaction represents solely a corporate reorganization 
involving companies and insured depository institutions that, both 
preceding and following the transaction, are lawfully controlled and 
operated by the bank holding company;
    (B) The transaction does not involve the acquisition of additional 
voting

[[Page 165]]

shares of an insured depository institution that, prior to the 
transaction, was less than majority owned by the bank holding company;
    (C) The bank holding company is not organized in mutual form; and
    (D) Both before and after the transaction, the bank holding company 
meets the Board's Capital Adequacy Guidelines (appendices A, B, C, D, 
and E of this part).
    (e) Holding securities in escrow. The holding of any voting 
securities of a bank or bank holding company in an escrow arrangement 
for the benefit of an applicant pending the Board's action on an 
application for approval of the proposed acquisition, if title to the 
securities and the voting rights remain with the seller and payment for 
the securities has not been made to the seller.
    (f) Acquisition of foreign banking organization. The acquisition of 
a foreign banking organization where the foreign banking organization 
does not directly or indirectly own or control a bank in the United 
States, unless the acquisition is also by a foreign banking organization 
and otherwise subject to Sec. 225.11(f) of this subpart.



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

    (a) Factors requiring denial. As specified in section 3(c) of the 
BHC Act, the Board may not approve any application under this subpart 
if:
    (1) The transaction would result in a monopoly or would further any 
combination or conspiracy to monopolize, or to attempt to monopolize, 
the business of banking in any part of the United States;
    (2) The effect of the transaction may be substantially to lessen 
competition in any section of the country, tend to create a monopoly, or 
in any other manner be in restraint of trade, unless the Board finds 
that the transaction's anti-competitive effects are clearly outweighed 
by its probable effect in meeting the convenience and needs of the 
community;
    (3) The applicant has failed to provide the Board with adequate 
assurances that it will make available such information on its 
operations or activities, and the operations or activities of any 
affiliate of the applicant, that the Board deems appropriate to 
determine and enforce compliance with the BHC Act and other applicable 
federal banking statutes, and any regulations thereunder; or
    (4) In the case of an application involving a foreign banking 
organization, the foreign banking organization is not subject to 
comprehensive supervision or regulation on a consolidated basis by the 
appropriate authorities in its home country, as provided in Sec. 
211.24(c)(1)(ii) of the Board's Regulation K (12 CFR 211.24(c)(1)(ii)).
    (b) Other factors. In deciding applications under this subpart, the 
Board also considers the following factors with respect to the 
applicant, its subsidiaries, any banks related to the applicant through 
common ownership or management, and the bank or banks to be acquired:
    (1) Financial condition. Their financial condition and future 
prospects, including whether current and projected capital positions and 
levels of indebtedness conform to standards and policies established by 
the Board.
    (2) Managerial resources. The competence, experience, and integrity 
of the officers, directors, and principal shareholders of the applicant, 
its subsidiaries, and the banks and bank holding companies concerned; 
their record of compliance with laws and regulations; and the record of 
the applicant and its affiliates of fulfilling any commitments to, and 
any conditions imposed by, the Board in connection with prior 
applications.
    (3) Convenience and needs of community. The convenience and needs of 
the communities to be served, including the record of performance under 
the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.) and 
regulations issued thereunder, including the Board's Regulation BB (12 
CFR part 228).
    (c) Interstate transactions. The Board may approve any application 
or notice under this subpart by a bank holding company to acquire 
control of all or substantially all of the assets of a bank located in a 
state other than the home state of the bank holding company, without 
regard to whether the transaction is prohibited under the law of

[[Page 166]]

any state, if the transaction complies with the requirements of section 
3(d) of the BHC Act (12 U.S.C. 1842(d)).
    (d) Conditional approvals. The Board may impose conditions on any 
approval, including conditions to address competitive, financial, 
managerial, safety and soundness, convenience and needs, compliance or 
other concerns, to ensure that approval is consistent with the relevant 
statutory factors and other provisions of the BHC Act.



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

holding companies.

    (a) Filing of notice--(1) Information required and public notice. As 
an alternative to the procedure provided in Sec. 225.15, a bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the prior approval requirements of Sec. 225.11 in connection 
with the acquisition of shares, assets or control of a bank, or a merger 
or consolidation between bank holding companies, by providing the 
appropriate Reserve Bank with a written notice containing the following:
    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies and insured depository institutions involved in the 
transaction \2\ and identification of each banking market affected by 
the transaction;
---------------------------------------------------------------------------

    \2\ If, in connection with a transaction under this subpart, any 
person or group of persons proposes to acquire control of the acquiring 
bank holding company for purposes of the Bank Control Act or Sec. 
225.41, the person or group of persons may fulfill the notice 
requirements of the Bank Control Act and Sec. 225.43 by providing, as 
part of the submission by the acquiring bank holding company under this 
subpart, identifying and biographical information required in paragraph 
(6)(A) of the Bank Control Act (12 U.S.C. 1817(j)(6)(A)), as well as any 
financial or other information requested by the Reserve Bank under Sec. 
225.43.
---------------------------------------------------------------------------

    (iii) A description of the effect of the transaction on the 
convenience and needs of the communities to be served and of the actions 
being taken by the bank holding company to improve the CRA performance 
of any insured depository institution subsidiary that does not have at 
least a satisfactory CRA performance rating at the time of the 
transaction;
    (iv) Evidence that notice of the proposal has been published in 
accordance with Sec. 225.16(b)(1);
    (v)(A) If the bank holding company has consolidated assets of $500 
million or more, an abbreviated consolidated pro forma balance sheet as 
of the most recent quarter showing credit and debit adjustments that 
reflect the proposed transaction, consolidated pro forma risk-based 
capital ratios for the acquiring bank holding company as of the most 
recent quarter, and a description of the purchase price and the terms 
and sources of funding for the transaction;
    (B) If the bank holding company has consolidated assets of less than 
$500 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, and a description of the purchase price, the terms 
and sources of funding for the transaction, and the sources and schedule 
for retiring any debt incurred in the transaction;
    (vi) If the bank holding company has consolidated assets of less 
than $300 million, a list of and biographical information regarding any 
directors or senior executive officers of the resulting bank holding 
company that are not directors or senior executive officers of the 
acquiring bank holding company or of a company or institution to be 
acquired;
    (vii) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (viii) The market indexes for each relevant banking market 
reflecting the pro forma effect of the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraph (a)(1)(v) through (viii) of 
this section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section or notify

[[Page 167]]

the bank holding company that the transaction is subject to the 
procedure in Sec. 225.15 within 5 business days after the close of the 
public comment period. The Board and the Reserve Bank shall not approve 
any proposal under this section prior to the third business day 
following the close of the public comment period, unless an emergency 
exists that requires expedited or immediate action. The Board may extend 
the period for action under this section for up to 5 business days.
    (2) Acceptance of notice in event expedited procedure not available. 
In the event that the Board or the Reserve Bank determines after the 
filing of a notice under this section that a bank holding company may 
not use the procedure in this section and must file an application under 
Sec. 225.15, the application shall be deemed accepted for purposes of 
Sec. 225.15 as of the date that the notice was filed under this 
section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the proposed transaction:
    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (2) Well managed organization--(i) Satisfactory examination ratings. 
At the time of the transaction, the acquiring bank holding company, its 
lead insured depository institution, and insured depository institutions 
that control at least 80 percent of the total risk-weighted assets of 
insured depository institutions controlled by the holding company are 
well managed and have received at least a satisfactory rating for 
compliance at their most recent examination if such rating was given;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution;
    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if :
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Convenience and needs criteria--(i) Effect on the community. The 
record indicates that the proposed transaction would meet the 
convenience and needs of the community standard in the BHC Act; and
    (ii) Established CRA performance record. At the time of the 
transaction, the lead insured depository institution of the acquiring 
bank holding company and insured depository institutions that control at 
least 80 percent of the total risk-weighted assets of insured 
institutions controlled by the holding company have received a 
satisfactory or better composite rating at the most recent examination 
under the Community Reinvestment Act;
    (4) Public comment. No comment that is timely and substantive as 
provided in Sec. 225.16 is received by the Board or the appropriate 
Reserve Bank other than a comment that supports approval of the 
proposal;
    (5) Competitive criteria--(i) Competitive screen. Without regard to 
any

[[Page 168]]

divestitures proposed by the acquiring bank holding company, the 
acquisition does not cause:
    (A) Insured depository institutions controlled by the acquiring bank 
holding company to control in excess of 35 percent of market deposits in 
any relevant banking market; or
    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant banking market with a post-acquisition index of 
at least 1800; and
    (ii) Department of Justice. The Department of Justice has not 
indicated to the Board that consummation of the transaction is likely to 
have a significantly adverse effect on competition in any relevant 
banking market;
    (6) Size of acquisition--(i) In general--(A) Limited Growth. Except 
as provided in paragraph (c)(6)(ii) of this section, the sum of the 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk- weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph other qualifying transactions 
means any transaction approved under this section or Sec. 225.23 during 
the 12 months prior to filing the notice under this section; and
    (B) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(6)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;
    (7) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement action, is or was outstanding against the bank 
holding company or any insured depository institution subsidiary of the 
holding company, and no formal administrative enforcement proceeding 
involving any such enforcement action, order, or directive is or was 
pending;
    (8) Interstate acquisitions. Board-approval of the transaction is 
not prohibited under section 3(d) of the BHC Act;
    (9) Other supervisory considerations. Board approval of the 
transaction is not prohibited under the informational sufficiency or 
comprehensive home country supervision standards set forth in section 
3(c)(3) of the BHC Act; and
    (10) Notification. The acquiring bank holding company has not been 
notified by the Board, in its discretion, prior to the expiration of the 
period in paragraph (b)(1) of this section that an application under 
Sec. 225.15 is required in order to permit closer review of any 
financial, managerial, competitive, convenience and needs or other 
matter related to the factors that must be considered under this part.
    (d) Comment by primary banking supervisor--(1) Notice. Upon receipt 
of a notice under this section, the appropriate Reserve Bank shall 
promptly furnish notice of the proposal and a copy of the information 
filed pursuant to paragraph (a) of this section to the primary banking 
supervisor of the insured depository institutions to be acquired.
    (2) Comment period. The primary banking supervisor shall have 30 
calendar days (or such shorter time as agreed to by the primary banking 
supervisor) from the date of the letter giving notice in which to submit 
its views and recommendations to the Board.
    (3) Action subject to supervisor's comment. Action by the Board or 
the Reserve Bank on a proposal under this section is subject to the 
condition that the primary banking supervisor not recommend in writing 
to the Board disapproval of the proposal prior to the expiration of the 
comment period described in paragraph (d)(2) of this section. In such 
event, any approval given under this section shall be revoked and, if 
required by section 3(b) of the BHC Act, the Board shall order a hearing 
on the proposal.

[[Page 169]]

    (4) Emergencies. Notwithstanding paragraphs (d)(2) and (d)(3) of 
this section, the Board may provide the primary banking supervisor with 
10 calendar days' notice of a proposal under this section if the Board 
finds that an emergency exists requiring expeditious action, and may act 
during the notice period or without providing notice to the primary 
banking supervisor if the Board finds that it must act immediately to 
prevent probable failure.
    (5) Primary banking supervisor. For purposes of this section and 
Sec. 225.15(b), the primary banking supervisor for an institution is:
    (i) The Office of the Comptroller of the Currency, in the case of a 
national banking association or District bank;
    (ii) The appropriate supervisory authority for the State in which 
the bank is chartered, in the case of a State bank;
    (iii) The Director of the Office of Thrift Supervision, in the case 
of a savings association.
    (e) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution. A U.S. branch or agency of a foreign banking organization 
shall be subject to paragraph (c)(3)(ii) of this section only to the 
extent it is insured by the Federal Deposit Insurance Corporation in 
accordance with section 6 of the International Banking Act of 1978 (12 
U.S.C. 3104).

[Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001; 71 FR 9901, Feb. 28, 2006]



Sec. 225.15  Procedures for other bank acquisition proposals.

    (a) Filing application. Except as provided in Sec. 225.14, an 
application for the Board's prior approval under this subpart shall be 
governed by the provisions of this section and shall be filed with the 
appropriate Reserve Bank on the designated form.
    (b) Notice to primary banking supervisor. Upon receipt of an 
application under this subpart, the Reserve Bank shall promptly furnish 
notice and a copy of the application to the primary banking supervisor 
of each bank to be acquired. The primary supervisor shall have 30 
calendar days from the date of the letter giving notice in which to 
submit its views and recommendations to the Board.
    (c) Accepting application for processing. Within 7 calendar days 
after the Reserve Bank receives an application under this section, the 
Reserve Bank shall accept it for processing as of the date the 
application was filed or return the application if it is substantially 
incomplete. Upon accepting an application, the Reserve Bank shall 
immediately send copies to the Board. The Reserve Bank or the Board may 
request additional information necessary to complete the record of an 
application at any time after accepting the application for processing.
    (d) Action on applications--(1) Action under delegated authority. 
The Reserve Bank shall approve an application under this section within 
30 calendar days after the acceptance date for the application, unless 
the Reserve Bank, upon notice to the applicant, refers the application 
to the Board for decision because action under delegated authority is 
not appropriate.
    (2) Board action. The Board shall act on an application under this 
subpart that is referred to it for decision within 60 calendar days 
after the acceptance date for the application, unless the Board notifies 
the applicant that the 60-day period is being extended for a specified 
period and states the reasons for the extension. In no event may the 
extension exceed the 91-day period provided in Sec. 225.16(f). The 
Board may, at any time, request additional information that it believes 
is necessary for its decision.



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

applications and notices.

    (a) In general. The provisions of this section apply to all notices 
and applications filed under Sec. 225.14 and Sec. 225.15.
    (b) Public notice--(1) Newspaper publication--(i) Location of 
publication. In the case of each notice or application submitted under 
Sec. 225.14 or Sec. 225.15, the applicant shall publish a notice in a 
newspaper of general circulation, in the form and at the locations 
specified in Sec. 262.3 of the Rules of Procedure (12 CFR 262.3);

[[Page 170]]

    (ii) Contents of notice. A newspaper notice under this paragraph 
shall provide an opportunity for interested persons to comment on the 
proposal for a period of at least 30 calendar days;
    (iii) Timing of publication. Each newspaper notice published in 
connection with a proposal under this paragraph shall be published no 
more than 15 calendar days before and no later than 7 calendar days 
following the date that a notice or application is filed with the 
appropriate Reserve Bank.
    (2) Federal Register notice. (i) Publication by Board. Upon receipt 
of a notice or application under Sec. 225.14 or Sec. 225.15, the Board 
shall promptly publish notice of the proposal in the Federal Register 
and shall provide an opportunity for interested persons to comment on 
the proposal for a period of no more than 30 days;
    (ii) Request for advance publication. A bank holding company may 
request that, during the 15-day period prior to filing a notice or 
application under Sec. 225.14 or Sec. 225.15, the Board publish notice 
of a proposal in the Federal Register. A request for advance Federal 
Register publication shall be made in writing to the appropriate Reserve 
Bank and shall contain the identifying information prescribed by the 
Board for Federal Register publication;
    (3) Waiver or shortening of notice. The Board may waive or shorten 
the required notice periods under this section if the Board determines 
that an emergency exists requiring expeditious action on the proposal, 
or if the Board finds that immediate action is necessary to prevent the 
probable failure of an insured depository institution.
    (c) Public comment--(1) Timely comments. Interested persons may 
submit information and comments regarding a proposal filed under this 
subpart. A comment shall be considered timely for purposes of this 
subpart if the comment, together with all supplemental information, is 
submitted in writing in accordance with the Board's Rules of Procedure 
and received by the Board or the appropriate Reserve Bank prior to the 
expiration of the latest public comment period provided in paragraph (b) 
of this section.
    (2) Extension of comment period--(i) In general. The Board may, in 
its discretion, extend the public comment period regarding any proposal 
submitted under this subpart.
    (ii) Requests in connection with obtaining application or notice. In 
the event that an interested person has requested a copy of a notice or 
application submitted under this subpart, the Board may, in its 
discretion and based on the facts and circumstances, grant such person 
an extension of the comment period for up to 15 calendar days.
    (iii) Joint requests by interested person and acquiring company. The 
Board will grant a joint request by an interested person and the 
acquiring bank holding company for an extension of the comment period 
for a reasonable period for a purpose related to the statutory factors 
the Board must consider under this subpart.
    (3) Substantive comment. A comment will be considered substantive 
for purposes of this subpart unless it involves individual complaints, 
or raises frivolous, previously-considered or wholly unsubstantiated 
claims or irrelevant issues.
    (d) Notice to Attorney General. The Board or Reserve Bank shall 
immediately notify the United States Attorney General of approval of any 
notice or application under Sec. 225.14 or Sec. 225.15.
    (e) Hearings. As provided in section 3(b) of the BHC Act, the Board 
shall order a hearing on any application or notice under Sec. 225.15 if 
the Board receives from the primary supervisor of the bank to be 
acquired, within the 30-day period specified in Sec. 225.15(b), a 
written recommendation of disapproval of an application. The Board may 
order a formal or informal hearing or other proceeding on the 
application or notice, as provided in Sec. 262.3(i)(2) of the Board's 
Rules of Procedure. Any request for a hearing (other than from the 
primary supervisor) shall comply with Sec. 262.3(e) of the Rules of 
Procedure (12 CFR 262.3(e)).
    (f) Approval through failure to act--(1) Ninety-one day rule. An 
application or notice under Sec. 225.14 or Sec. 225.15 shall be deemed 
approved if the Board fails to act on the application or notice within 
91 calendar days after the date of submission to the Board of the 
complete record on the application. For this purpose, the Board acts 
when it issues an

[[Page 171]]

order stating that the Board has approved or denied the application or 
notice, reflecting the votes of the members of the Board, and indicating 
that a statement of the reasons for the decision will follow promptly.
    (2) Complete record. For the purpose of computing the commencement 
of the 91-day period, the record is complete on the latest of:
    (i) The date of receipt by the Board of an application or notice 
that has been accepted by the Reserve Bank;
    (ii) The last day provided in any notice for receipt of comments and 
hearing requests on the application or notice;
    (iii) The date of receipt by the Board of the last relevant material 
regarding the application or notice that is needed for the Board's 
decision, if the material is received from a source outside of the 
Federal Reserve System; or
    (iv) The date of completion of any hearing or other proceeding.
    (g) Exceptions to notice and hearing requirements--(1) Probable bank 
failure. If the Board finds it must act immediately on an application or 
notice in order to prevent the probable failure of a bank or bank 
holding company, the Board may modify or dispense with the notice and 
hearing requirements of this section.
    (2) Emergency. If the Board finds that, although immediate action on 
an application or notice is not necessary, an emergency exists requiring 
expeditious action, the Board shall provide the primary supervisor 10 
days to submit its recommendation. The Board may act on such an 
application or notice without a hearing and may modify or dispense with 
the other notice and hearing requirements of this section.
    (h) Waiting period. A transaction approved under Sec. 225.14 or 
Sec. 225.15 shall not be consummated until 30 days after the date of 
approval of the application, except that a transaction may be 
consummated:
    (1) Immediately upon approval, if the Board has determined under 
paragraph (g) of this section that the application or notice involves a 
probable bank failure;
    (2) On or after the 5th calendar day following the date of approval, 
if the Board has determined under paragraph (g) of this section that an 
emergency exists requiring expeditious action; or
    (3) On or after the 15th calendar day following the date of 
approval, if the Board has not received any adverse comments from the 
United States Attorney General relating to the competitive factors and 
the Attorney General has consented to the shorter waiting period.



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

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

    \3\ A shareholder of a bank in reorganization will be considered to 
have the same proportional interest in the holding company if the 
shareholder interest increases, on a pro rata basis, as a result of 
either the redemption of shares from dissenting shareholders by the bank 
or bank holding company, or the acquisition of shares of dissenting 
shareholders by the remaining shareholders.
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    (2) No shareholder, or group of shareholders acting in concert, 
will, following the reorganization, own or control 10 percent or more of 
any class of voting shares of the bank holding company, unless that 
shareholder or group of shareholders was authorized, after review under 
the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the 
appropriate federal banking agency for the bank, to own or control 10 
percent or more of any class of voting shares of the bank; \4\
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    \4\ This procedure is not available in cases in which the exercise 
of dissenting shareholders' rights would cause a company that is not a 
bank holding company (other than the company in formation) to be 
required to register as a bank holding company. This procedure also is 
not available for the formation of a bank holding company organized in 
mutual form.

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[[Page 172]]

    (3) The bank is adequately capitalized (as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o));
    (4) The bank received at least a composite ``satisfactory'' rating 
at its most recent examination, in the event that the bank was examined;
    (5) At the time of the reorganization, neither the bank nor any of 
its officers, directors, or principal shareholders is involved in any 
unresolved supervisory or enforcement matters with any appropriate 
federal banking agency;
    (6) The company demonstrates that any debt that it incurs at the 
time of the reorganization, and the proposed means of retiring this 
debt, will not place undue burden on the holding company or its 
subsidiary on a pro forma basis; \5\
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    \5\ For a banking organization with consolidated assets, on a pro 
forma basis, of less than $500 million (other than a banking 
organization that will control a de novo bank), this requirement is 
satisfied if the proposal complies with the Board's Small Bank Holding 
Company Policy Statement (appendix C of this part).
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    (7) The holding company will not, as a result of the reorganization, 
acquire control of any additional bank or engage in any activities other 
than those of managing and controlling banks; and
    (8) During this period, neither the appropriate Reserve Bank nor the 
Board objected to the proposal or required the filing of an application 
under Sec. 225.15 of this subpart.
    (b) Contents of notice. A notice filed under this paragraph shall 
include:
    (1) Certification by the notificant's board of directors that the 
requirements of 12 U.S.C. 1842(a)(C) and this section are met by the 
proposal;
    (2) A list identifying all principal shareholders of the bank prior 
to the reorganization and of the holding company following the 
reorganization, and specifying the percentage of shares held by each 
principal shareholder in the bank and proposed to be held in the new 
holding company;
    (3) A description of the resulting management of the proposed bank 
holding company and its subsidiary bank, including:
    (i) Biographical information regarding any senior officers and 
directors of the resulting bank holding company who were not senior 
officers or directors of the bank prior to the reorganization; and
    (ii) A detailed history of the involvement of any officer, director, 
or principal shareholder of the resulting bank holding company in any 
administrative or criminal proceeding; and
    (4) Pro forma financial statements for the holding company, and a 
description of the amount, source, and terms of debt, if any, that the 
bank holding company proposes to incur, and information regarding the 
sources and timing for debt service and retirement.
    (c) Acknowledgment of notice. Within 7 calendar days following 
receipt of a notice under this section, the Reserve Bank shall provide 
the notificant with a written acknowledgment of receipt of the notice. 
This written acknowledgment shall indicate that the transaction 
described in the notice may be consummated on the 30th calendar day 
after the date of receipt of the notice if the Reserve Bank or the Board 
has not objected to the proposal during that time.
    (d) Application required upon objection. The Reserve Bank or the 
Board may object to a proposal during the notice period by providing the 
bank holding company with a written explanation of the reasons for the 
objection. In such case, the bank holding company may file an 
application for prior approval of the proposal pursuant to Sec. 225.15 
of this subpart.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 
2006]



    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 

                                Companies

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



Sec. 225.21  Prohibited nonbanking activities and acquisitions; exempt bank 

holding companies.

    (a) Prohibited nonbanking activities and acquisitions. Except as 
provided in

[[Page 173]]

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



Sec. 225.22  Exempt nonbanking activities and acquisitions.

    (a) Certain de novo activities. A bank holding company may, either 
directly or indirectly, engage de novo in any nonbanking activity listed 
in Sec. 225.28(b) (other than operation of an insured depository 
institution) without obtaining the Board's prior approval if the bank 
holding company:
    (1) Meets the requirements of paragraphs (c) (1), (2), and (6) of 
Sec. 225.23;
    (2) Conducts the activity in compliance with all Board orders and 
regulations governing the activity; and
    (3) Within 10 business days after commencing the activity, provides 
written notice to the appropriate Reserve Bank describing the activity, 
identifying the company or companies engaged in the activity, and 
certifying that the activity will be conducted in accordance with the 
Board's orders and regulations and that the bank holding company meets 
the requirements of paragraphs (c) (1), (2), and (6) of Sec. 225.23.
    (b) Servicing activities. A bank holding company may, without the 
Board's prior approval under this subpart, furnish services to or 
perform services for, or establish or acquire a company that engages 
solely in servicing activities for:
    (1) The bank holding company or its subsidiaries in connection with 
their activities as authorized by law, including services that are 
necessary to fulfill commitments entered into by the subsidiaries with 
third parties, if the bank holding company or servicing company complies 
with the Board's published interpretations and does not act as principal 
in dealing with third parties; and

[[Page 174]]

    (2) The internal operations of the bank holding company or its 
subsidiaries. Services for the internal operations of the bank holding 
company or its subsidiaries include, but are not limited to:
    (i) Accounting, auditing, and appraising;
    (ii) Advertising and public relations;
    (iii) Data processing and data transmission services, data bases, or 
facilities;
    (iv) Personnel services;
    (v) Courier services;
    (vi) Holding or operating property used wholly or substantially by a 
subsidiary in its operations or for its future use;
    (vii) Liquidating property acquired from a subsidiary;
    (viii) Liquidating property acquired from any sources either prior 
to May 9, 1956, or the date on which the company became a bank holding 
company, whichever is later; and
    (ix) Selling, purchasing, or underwriting insurance, such as blanket 
bond insurance, group insurance for employees, and property and casualty 
insurance.
    (c) Safe deposit business. A bank holding company or nonbank 
subsidiary may, without the Board's prior approval, conduct a safe 
deposit business, or acquire voting securities of a company that 
conducts such a business.
    (d) Nonbanking acquisitions not requiring prior Board approval. The 
Board's prior approval is not required under this subpart for the 
following acquisitions:
    (1) DPC acquisitions. (i) Voting securities or assets, acquired by 
foreclosure or otherwise, in the ordinary course of collecting a debt 
previously contracted (DPC property) in good faith, if the DPC property 
is divested within two years of acquisition.
    (ii) The Board may, upon request, extend this two-year period for up 
to three additional years. The Board may permit additional extensions 
for up to 5 years (for a total of 10 years), for shares, real estate or 
other assets where the holding company demonstrates that each extension 
would not be detrimental to the public interest and either the bank 
holding company has made good faith attempts to dispose of such shares, 
real estate or other assets or disposal of the shares, real estate or 
other assets during the initial period would have been detrimental to 
the company.
    (iii) Transfers of DPC property within the bank holding company 
system do not extend any period for divestiture of the property.
    (2) Securities or assets required to be divested by subsidiary. 
Voting securities or assets required to be divested by a subsidiary at 
the request of an examining federal or state authority (except by the 
Board under the BHC Act or this regulation), if the bank holding company 
divests the securities or assets within two years from the date acquired 
from the subsidiary.
    (3) Fiduciary investments. Voting securities or assets acquired by a 
bank or other company (other than a trust that is a company) in good 
faith in a fiduciary capacity, if the voting securities or assets are:
    (i) Held in the ordinary course of business; and
    (ii) Not acquired for the benefit of the company or its 
shareholders, employees, or subsidiaries.
    (4) Securities eligible for investment by national bank. Voting 
securities of the kinds and amounts explicitly eligible by federal 
statute (other than section 4 of the Bank Service Corporation Act, 12 
U.S.C. 1864) for investment by a national bank, and voting securities 
acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the 
BHC Act and interpretations of the Comptroller of the Currency under 
section 5136 of the Revised Statutes (12 U.S.C. 24(7)).
    (5) Securities or property representing 5 percent or less of a 
company. Voting securities of a company or property that, in the 
aggregate, represent 5 percent or less of the outstanding shares of any 
class of voting securities of a company, or that represent a 5 percent 
interest or less in the property, subject to the provisions of 12 CFR 
225.137.
    (6) Securities of investment company. Voting securities of an 
investment company that is solely engaged in investing in securities and 
that does not own or control more than 5 percent of the outstanding 
shares of any class of voting securities of any company.

[[Page 175]]

    (7) Assets acquired in ordinary course of business. Assets of a 
company acquired in the ordinary course of business, subject to the 
provisions of 12 CFR 225.132, if the assets relate to activities in 
which the acquiring company has previously received Board approval under 
this regulation to engage.
    (8) Asset acquisitions by lending company or industrial bank. Assets 
of an office(s) of a company, all or substantially all of which relate 
to making, acquiring, or servicing loans if:
    (i) The acquiring company has previously received Board approval 
under this regulation or is not required to obtain prior Board approval 
under this regulation to engage in lending activities or industrial 
banking activities;
    (ii) The assets acquired during any 12-month period do not represent 
more than 50 percent of the risk-weighted assets (on a consolidated 
basis) of the acquiring lending company or industrial bank, or more than 
$100 million, whichever amount is less;
    (iii) The assets acquired do not represent more than 50 percent of 
the selling company's consolidated assets that are devoted to lending 
activities or industrial banking business;
    (iv) The acquiring company notifies the Reserve Bank of the 
acquisition within 30 days after the acquisition; and
    (v) The acquiring company, after giving effect to the transaction, 
meets the Board's Capital Adequacy Guidelines (appendix A of this part), 
and the Board has not previously notified the acquiring company that it 
may not acquire assets under the exemption in this paragraph.
    (e) Acquisition of securities by subsidiary banks--(1) National 
bank. A national bank or its subsidiary may, without the Board's 
approval under this subpart, acquire or retain securities on the basis 
of section 4(c)(5) of the BHC Act in accordance with the regulations of 
the Comptroller of the Currency.
    (2) State bank. A state-chartered bank or its subsidiary may, 
insofar as federal law is concerned, and without the Board's prior 
approval under this subpart:
    (i) Acquire or retain securities, on the basis of section 4(c)(5) of 
the BHC Act, of the kinds and amounts explicitly eligible by federal 
statute for investment by a national bank; or
    (ii) Acquire or retain all (but, except for directors' qualifying 
shares, not less than all) of the securities of a company that engages 
solely in activities in which the parent bank may engage, at locations 
at which the bank may engage in the activity, and subject to the same 
limitations as if the bank were engaging in the activity directly.
    (f) Activities and securities of new bank holding companies. A 
company that becomes a bank holding company may, for a period of two 
years, engage in nonbanking activities and control voting securities or 
assets of a nonbank subsidiary, if the bank holding company engaged in 
such activities or controlled such voting securities or assets on the 
date it became a bank holding company. The Board may grant requests for 
up to three one-year extensions of the two-year period.
    (g) Grandfathered activities and securities. Unless the Board orders 
divestiture or termination under section 4(a)(2) of the BHC Act, a 
``company covered in 1970,'' as defined in section 2(b) of the BHC Act, 
may:
    (1) Retain voting securities or assets and engage in activities that 
it has lawfully held or engaged in continuously since June 30, 1968; and
    (2) Acquire voting securities of any newly formed company to engage 
in such activities.
    (h) Securities or activities exempt under Regulation K. A bank 
holding company may acquire voting securities or assets and engage in 
activities as authorized in Regulation K (12 CFR part 211).



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

bank holding companies.

    (a) Filing of notice--(1) Information required. A bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the notice requirement of this subpart in connection with the 
acquisition of voting securities or assets of a company engaged in 
nonbanking activities that the Board has permitted by order or

[[Page 176]]

regulation (other than an insured depository institution), \1\ or a 
proposal to engage de novo, either directly or indirectly, in a 
nonbanking activity that the Board has permitted by order or by 
regulation, by providing the appropriate Reserve Bank with a written 
notice containing the following:
---------------------------------------------------------------------------

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

    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies involved in the transaction, the activities to be 
conducted, and a commitment to conduct the proposed activities in 
conformity with the Board's regulations and orders governing the conduct 
of the proposed activity;
    (iii) If the proposal involves an acquisition of a going concern:
    (A) If the bank holding company has consolidated assets of $500 
million or more, an abbreviated consolidated pro forma balance sheet for 
the acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction, 
consolidated pro forma risk-based capital ratios for the acquiring bank 
holding company as of the most recent quarter, a description of the 
purchase price and the terms and sources of funding for the transaction, 
and the total revenue and net income of the company to be acquired;
    (B) If the bank holding company has consolidated assets of less than 
$500 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, a description of the purchase price and the terms 
and sources of funding for the transaction and the sources and schedule 
for retiring any debt incurred in the transaction, and the total assets, 
off-balance sheet items, revenue and net income of the company to be 
acquired;
    (C) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis;
    (iv) Identification of the geographic markets in which competition 
would be affected by the proposal, a description of the effect of the 
proposal on competition in the relevant markets, a list of the major 
competitors in that market in the proposed activity if the affected 
market is local in nature, and, if requested, the market indexes for the 
relevant market; and
    (v) A description of the public benefits that can reasonably be 
expected to result from the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraphs (a)(1) (iii) and (iv) of this 
section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section, or notify the bank holding company that the transaction is 
subject to the procedure in Sec. 225.24, within 12 business days 
following the filing of all of the information required in paragraph (a) 
of this section.
    (2) Acceptance of notice if expedited procedure not available. If 
the Board or the Reserve Bank determines, after the filing of a notice 
under this section, that a bank holding company may not use the 
procedure in this section and must file a notice under Sec. 225.24, the 
notice shall be deemed accepted for purposes of Sec. 225.24 as of the 
date that the notice was filed under this section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the transaction:

[[Page 177]]

    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (2) Well managed organization--(i) Satisfactory examination ratings. 
At the time of the transaction, the acquiring bank holding company, its 
lead insured depository institution, and insured depository institutions 
that control at least 80 percent of the total risk-weighted assets of 
insured depository institutions controlled by the holding company are 
well managed and have received at least a satisfactory rating for 
compliance at their most recent examination if such rating was given;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution.
    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if:
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Permissible activity. (i) The Board has determined by regulation 
or order that each activity proposed to be conducted is so closely 
related to banking, or managing or controlling banks, as to be a proper 
incident thereto; and
    (ii) The Board has not indicated that proposals to engage in the 
activity are subject to the notice procedure provided in Sec. 225.24;
    (4) Competitive criteria--(i) Competitive screen. In the case of the 
acquisition of a going concern, the acquisition, without regard to any 
divestitures proposed by the acquiring bank holding company, does not 
cause:
    (A) The acquiring bank holding company to control in excess of 35 
percent of the market share in any relevant market; or
    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant market with a post-acquisition index of at least 
1800; and
    (ii) Other competitive factors. The Board has not indicated that the 
transaction is subject to close scrutiny on competitive grounds;
    (5) Size of acquisition--(i) In general--(A) Limited growth. Except 
as provided in paragraph (c)(5)(ii) of this section, the sum of 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk-weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph, ``other qualifying 
transactions'' means any transaction approved under this section or 
Sec. 225.14 during the 12 months prior to filing the notice under this 
section;
    (B) Consideration paid. The gross consideration to be paid by the 
acquiring bank holding company in the proposal does not exceed 15 
percent of the consolidated Tier 1 capital of the acquiring bank holding 
company; and
    (C) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(5)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;

[[Page 178]]

    (6) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement order is or was outstanding against the bank holding 
company or any insured depository institution subsidiary of the holding 
company, and no formal administrative enforcement proceeding involving 
any such enforcement action, order, or directive is or was pending; and
    (7) Notification. The bank holding company has not been notified by 
the Board, in its discretion, prior to the expiration of the period in 
paragraph (b) of this section that a notice under Sec. 225.24 is 
required in order to permit closer review of any potential adverse 
effect or other matter related to the factors that must be considered 
under this part.
    (d) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution.

[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001; 71 FR 9902, Feb. 28, 2006]



Sec. 225.24  Procedures for other nonbanking proposals.

    (a) Notice required for nonbanking activities. Except as provided in 
Sec. 225.22 and Sec. 225.23, a notice for the Board's prior approval 
under Sec. 225.21(a) to engage in or acquire a company engaged in a 
nonbanking activity shall be filed by a bank holding company (including 
a company seeking to become a bank holding company) with the appropriate 
Reserve Bank in accordance with this section and the Board's Rules of 
Procedure (12 CFR 262.3).
    (1) Engaging de novo in listed activities. A bank holding company 
seeking to commence or to engage de novo, either directly or through a 
subsidiary, in a nonbanking activity listed in Sec. 225.28 shall file a 
notice containing a description of the activities to be conducted and 
the identity of the company that will conduct the activity.
    (2) Acquiring company engaged in listed activities. A bank holding 
company seeking to acquire or control voting securities or assets of a 
company engaged in a nonbanking activity listed in Sec. 225.28 shall 
file a notice containing the following:
    (i) A description of the proposal, including a description of each 
proposed activity, and the effect of the proposal on competition among 
entities engaging in each proposed activity in each relevant market with 
relevant market indexes;
    (ii) The identity of any entity involved in the proposal, and, if 
the notificant proposes to conduct the activity through an existing 
subsidiary, a description of the existing activities of the subsidiary;
    (iii) A statement of the public benefits that can reasonably be 
expected to result from the proposal;
    (iv) If the bank holding company has consolidated assets of $150 
million or more:
    (A) Parent company and consolidated pro forma balance sheets for the 
acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction;
    (B) Consolidated pro forma risk-based capital and leverage ratio 
calculations for the acquiring bank holding company as of the most 
recent quarter; and
    (C) A description of the purchase price and the terms and sources of 
funding for the transaction;
    (v) If the bank holding company has consolidated assets of less than 
$150 million:
    (A) A pro forma parent-only balance sheet as of the most recent 
quarter showing credit and debit adjustments that reflect the proposed 
transaction; and
    (B) A description of the purchase price and the terms and sources of 
funding for the transaction and, if the transaction is debt funded, one-
year income statement and cash flow projections for the parent company, 
and the sources and schedule for retiring any debt incurred in the 
transaction;
    (vi) For each insured depository institution whose Tier 1 capital, 
total

[[Page 179]]

capital, total assets or risk-weighted assets change as a result of the 
transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (vii) A description of the management expertise, internal controls 
and risk management systems that will be utilized in the conduct of the 
proposed activities; and
    (viii) A copy of the purchase agreements, and balance sheet and 
income statements for the most recent quarter and year-end for any 
company to be acquired.
    (b) Notice provided to Board. The Reserve Bank shall immediately 
send to the Board a copy of any notice received under paragraphs (a)(2) 
or (a)(3) of this section.
    (c) Notice to public--(1) Listed activities and activities approved 
by order--(i) In a case involving an activity listed in Sec. 225.28 or 
previously approved by the Board by order, the Reserve Bank shall notify 
the Board for publication in the Federal Register immediately upon 
receipt by the Reserve Bank of:
    (A) A notice under this section; or
    (B) A written request that notice of a proposal under this section 
or Sec. 225.23 be published in the Federal Register. Such a request may 
request that Federal Register publication occur up to 15 calendar days 
prior to submission of a notice under this subpart.
    (ii) The Federal Register notice published under this paragraph 
shall invite public comment on the proposal, generally for a period of 
15 days.
    (2) New activities--(i) In general. In the case of a notice under 
this subpart involving an activity that is not listed in Sec. 225.28 
and that has not been previously approved by the Board by order, the 
Board shall send notice of the proposal to the Federal Register for 
publication, unless the Board determines that the notificant has not 
demonstrated that the activity is so closely related to banking or to 
managing or controlling banks as to be a proper incident thereto. The 
Federal Register notice shall invite public comment on the proposal for 
a reasonable period of time, generally for 30 days.
    (ii) Time for publication. The Board shall send the notice required 
under this paragraph to the Federal Register within 10 business days of 
acceptance by the Reserve Bank. The Board may extend the 10-day period 
for an additional 30 calendar days upon notice to the notificant. In the 
event notice of a proposal is not published for comment, the Board shall 
inform the notificant of the reasons for the decision.
    (d) Action on notices--(1) Reserve Bank action--(i) In general. 
Within 30 calendar days after receipt by the Reserve Bank of a notice 
filed pursuant to paragraphs (a)(1) or (a)(2) of this section, the 
Reserve Banks shall:
    (A) Approve the notice; or
    (B) Refer the notice to the Board for decision because action under 
delegated authority is not appropriate.
    (ii) Return of incomplete notice. Within 7 calendar days of receipt, 
the Reserve Bank may return any notice as informationally incomplete 
that does not contain all of the information required by this subpart. 
The return of such a notice shall be deemed action on the notice.
    (iii) Notice of action. The Reserve Bank shall promptly notify the 
bank holding company of any action or referral under this paragraph.
    (iv) Close of public comment period. The Reserve Bank shall not 
approve any notice under this paragraph (d)(1) of this section prior to 
the third business day after the close of the public comment period, 
unless an emergency exists that requires expedited or immediate action.
    (2) Board action; internal schedule. The Board seeks to act on every 
notice referred to it for decision within 60 days of the date that the 
notice is filed with the Reserve Bank. If the Board is unable to act 
within this period, the Board shall notify the notificant and explain 
the reasons and the date by which the Board expects to act.
    (3)(i) Required time limit for System action. The Board or the 
Reserve Bank shall act on any notice under this section within 60 days 
after the submission of a complete notice.
    (ii) Extension of required period for action (A) In general. The 
Board may extend the 60-day period required for Board action under 
paragraph (d)(3)(i)

[[Page 180]]

of this section for an additional 30 days upon notice to the notificant.
    (B) Unlisted activities. If a notice involves a proposal to engage 
in an activity that is not listed in Sec. 225.28, the Board may extend 
the period required for Board action under paragraph (d)(3)(i) of this 
section for an additional 90 days. This 90-day extension is in addition 
to the 30-day extension period provided in paragraph (d)(3)(ii)(A) of 
this section. The Board shall notify the notificant that the notice 
period has been extended and explain the reasons for the extension.
    (4) Requests for additional information. The Board or the Reserve 
Bank may modify the information requirements under this section or at 
any time request any additional information that either believes is 
needed for a decision on any notice under this section.
    (5) Tolling of period. The Board or the Reserve Bank may at any time 
extend or toll the time period for action on a notice for any period 
with the consent of the notificant.

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



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

    (a) Hearings--(1) Procedure to request hearing. Any request for a 
hearing on a notice under this subpart shall comply with the provisions 
of 12 CFR 262.3(e).
    (2) Determination to hold hearing. The Board may order a formal or 
informal hearing or other proceeding on a notice as provided in 12 CFR 
262.3(i)(2). The Board shall order a hearing only if there are disputed 
issues of material fact that cannot be resolved in some other manner.
    (3) Extension of period for hearing. The Board may extend the time 
for action on any notice for such time as is reasonably necessary to 
conduct a hearing and evaluate the hearing record. Such extension shall 
not exceed 91 calendar days after the date of submission to the Board of 
the complete record on the notice. The procedures for computation of the 
91-day rule as set forth in Sec. 225.16(f) apply to notices under this 
subpart that involve hearings.
    (b) Approval through failure to act. (1) Except as provided in 
paragraph (a) of this section or Sec. 225.24(d)(5), a notice under this 
subpart shall be deemed to be approved at the conclusion of the period 
that begins on the date the complete notice is received by the Reserve 
Bank or the Board and that ends 60 calendar days plus any applicable 
extension and tolling period thereafter.
    (2) Complete notice. For purposes of paragraph (b)(1) of this 
section, a notice shall be deemed complete at such time as it contains 
all information required by this subpart and all other information 
requested by the Board or the Reserve Bank.
    (c) Notice to expand or alter nonbanking activities--(1) De novo 
expansion. A notice under this subpart is required to open a new office 
or to form a subsidiary to engage in, or to relocate an existing office 
engaged in, a nonbanking activity that the Board has previously approved 
for the bank holding company under this regulation, only if:
    (i) The Board's prior approval was limited geographically;
    (ii) The activity is to be conducted in a country outside of the 
United States and the bank holding company has not previously received 
prior Board approval under this regulation to engage in the activity in 
that country; or
    (iii) The Board or appropriate Reserve Bank has notified the company 
that a notice under this subpart is required.
    (2) Activities outside United States. With respect to activities to 
be engaged in outside the United States that require approval under this 
subpart, the procedures of this section apply only to activities to be 
engaged in directly by a bank holding company that is not a qualifying 
foreign banking organization, or by a nonbank subsidiary of a bank 
holding company approved under this subpart. Regulation K (12 CFR part 
211) governs other international operations of bank holding companies.
    (3) Alteration of nonbanking activity. Unless otherwise permitted by 
the Board, a notice under this subpart is required to alter a nonbanking 
activity in any material respect from that considered by the Board in 
acting on the application or notice to engage in the activity.

[[Page 181]]

    (d) Emergency savings association acquisitions. In the case of a 
notice to acquire a savings association, the Board may modify or 
dispense with the public notice and hearing requirements of this subpart 
if the Board finds that an emergency exists that requires the Board to 
act immediately and the primary federal regulator of the institution 
concurs.

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



Sec. 225.26  Factors considered in acting on nonbanking proposals.

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



Sec. 225.27  Procedures for determining scope of nonbanking activities.

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

[[Page 182]]

proper incident thereto, and notifies the requester of the 
determination.
    (4) Comments and hearing requests. Any comment and any request for a 
hearing regarding a proposal under this section shall comply with the 
provisions of Sec. 262.3(e) of the Board's Rules of Procedure (12 CFR 
262.3(e)).



Sec. 225.28  List of permissible nonbanking activities.

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

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

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

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

    (B) Stands only in the position of a creditor and does not purchase 
equity of obligors of debt in default (other than equity that may be 
collateral for such debt); and
    (C) Does not acquire debt in default secured by shares of a bank or 
bank holding company.
    (viii) Real estate settlement servicing. Providing real estate 
settlement services. \4\
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    \4\ For purposes of this section, real estate settlement services do 
not include providing title insurance as principal, agent, or broker.

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[[Page 183]]

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

    (ii) The initial term of the lease is at least 90 days;
    (iii) In the case of leases involving real property:
    (A) At the inception of the initial lease, the effect of the 
transaction will yield a return that will compensate the lessor for not 
less than the lessor's full investment in the property plus the 
estimated total cost of financing the property over the term of the 
lease from rental payments, estimated tax benefits, and the estimated 
residual value of the property at the expiration of the initial lease; 
and
    (B) The estimated residual value of property for purposes of 
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of 
the acquisition cost of the property to the lessor.
    (4) Operating nonbank depository institutions--(i) Industrial 
banking. Owning, controlling, or operating an industrial bank, Morris 
Plan bank, or industrial loan company, so long as the institution is not 
a bank.
    (ii) Operating savings association. Owning, controlling, or 
operating a savings association, if the savings association engages only 
in deposit-taking activities, lending, and other activities that are 
permissible for bank holding companies under this subpart C.
    (5) Trust company functions. Performing functions or activities that 
may be performed by a trust company (including activities of a 
fiduciary, agency, or custodial nature), in the manner authorized by 
federal or state law, so long as the company is not a bank for purposes 
of section 2(c) of the Bank Holding Company Act.
    (6) Financial and investment advisory activities. Acting as 
investment or financial advisor to any person, including (without, in 
any way, limiting the foregoing):
    (i) Serving as investment adviser (as defined in section 2(a)(20) of 
the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an 
investment company registered under that act, including sponsoring, 
organizing, and managing a closed-end investment company;
    (ii) Furnishing general economic information and advice, general 
economic statistical forecasting services, and industry studies;
    (iii) Providing advice in connection with mergers, acquisitions, 
divestitures, investments, joint ventures, leveraged buyouts, 
recapitalizations, capital structurings, financing transactions and 
similar transactions, and conducting financial feasibility studies;\6\
---------------------------------------------------------------------------

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

    (iv) Providing information, statistical forecasting, and advice with 
respect to any transaction in foreign exchange, swaps, and similar 
transactions, commodities, and any forward contract, option, future, 
option on a future, and similar instruments;
    (v) Providing educational courses, and instructional materials to 
consumers on individual financial management matters; and
    (vi) Providing tax-planning and tax-preparation services to any 
person.
    (7) Agency transactional services for customer investments--(i) 
Securities brokerage. Providing securities brokerage services (including 
securities clearing and/or securities execution services on an 
exchange), whether alone or in combination with investment advisory

[[Page 184]]

services, and incidental activities (including related securities credit 
activities and custodial services), if the securities brokerage services 
are restricted to buying and selling securities solely as agent for the 
account of customers and do not include securities underwriting or 
dealing.
    (ii) Riskless principal transactions. Buying and selling in the 
secondary market all types of securities on the order of customers as a 
``riskless principal'' to the extent of engaging in a transaction in 
which the company, after receiving an order to buy (or sell) a security 
from a customer, purchases (or sells) the security for its own account 
to offset a contemporaneous sale to (or purchase from) the customer. 
This does not include:
    (A) Selling bank-ineligible securities \7\ at the order of a 
customer that is the issuer of the securities, or selling bank-
ineligible securities in any transaction where the company has a 
contractual agreement to place the securities as agent of the issuer; or
---------------------------------------------------------------------------

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

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

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

    (iii) Private placement services. Acting as agent for the private 
placement of securities in accordance with the requirements of the 
Securities Act of 1933 (1933 Act) and the rules of the Securities and 
Exchange Commission, if the company engaged in the activity does not 
purchase or repurchase for its own account the securities being placed, 
or hold in inventory unsold portions of issues of these securities.
    (iv) Futures commission merchant. Acting as a futures commission 
merchant (FCM) for unaffiliated persons in the execution, clearance, or 
execution and clearance of any futures contract and option on a futures 
contract traded on an exchange in the United States or abroad if:
    (A) The activity is conducted through a separately incorporated 
subsidiary of the bank holding company, which may engage in activities 
other than FCM activities (including, but not limited to, permissible 
advisory and trading activities); and
    (B) The parent bank holding company does not provide a guarantee or 
otherwise become liable to the exchange or clearing association other 
than for those trades conducted by the subsidiary for its own account or 
for the account of any affiliate.
    (v) Other transactional services. Providing to customers as agent 
transactional services with respect to swaps and similar transactions, 
any transaction described in paragraph (b)(8) of this section, any 
transaction that is permissible for a state member bank, and any other 
transaction involving a forward contract, option, futures, option on a 
futures or similar contract (whether traded on an exchange or not) 
relating to a commodity that is traded on an exchange.
    (8) Investment transactions as principal--(i) Underwriting and 
dealing in government obligations and money market instruments. 
Underwriting and dealing in obligations of the United States, general 
obligations of states and their political subdivisions, and other 
obligations that state member banks of the Federal Reserve System may be 
authorized to underwrite and deal in under 12 U.S.C. 24 and 335, 
including banker's acceptances and certificates of deposit, under the 
same limitations as would be applicable if the activity were performed 
by the bank holding company's subsidiary member banks or its subsidiary 
nonmember banks as if they were member banks.
    (ii) Investing and trading activities. Engaging as principal in:
    (A) Foreign exchange;

[[Page 185]]

    (B) Forward contracts, options, futures, options on futures, swaps, 
and similar contracts, whether traded on exchanges or not, based on any 
rate, price, financial asset (including gold, silver, platinum, 
palladium, copper, or any other metal approved by the Board), 
nonfinancial asset, or group of assets, other than a bank-ineligible 
security, \9\ if:
---------------------------------------------------------------------------

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

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

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

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

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

    (1) On any matter to unaffiliated depository institutions, including 
commercial banks, savings and loan associations, savings banks, credit 
unions, industrial banks, Morris Plan banks, cooperative banks, 
industrial loan companies, trust companies, and branches or agencies of 
foreign banks;
    (2) On any financial, economic, accounting, or audit matter to any 
other company.
    (B) A company conducting management consulting activities under this 
subparagraph and any affiliate of such company may not:
    (1) Own or control, directly or indirectly, more than 5 percent of 
the voting securities of the client institution; and
    (2) Allow a management official, as defined in 12 CFR 212.2(h), of 
the company or any of its affiliates to serve as a management official 
of the client institution, except where such interlocking relationship 
is permitted pursuant to an exemption granted under 12

[[Page 186]]

CFR 212.4(b) or otherwise permitted by the Board.
    (C) A company conducting management consulting activities may 
provide management consulting services to customers not described in 
paragraph (b)(9)(i)(A)(1) of this section or regarding matters not 
described in paragraph (b)(9)(i)(A)(2) of this section, if the total 
annual revenue derived from those management consulting services does 
not exceed 30 percent of the company's total annual revenue derived from 
management consulting activities.
    (ii) Employee benefits consulting services. Providing consulting 
services to employee benefit, compensation and insurance plans, 
including designing plans, assisting in the implementation of plans, 
providing administrative services to plans, and developing employee 
communication programs for plans.
    (iii) Career counseling services. Providing career counseling 
services to:
    (A) A financial organization \12\ and individuals currently employed 
by, or recently displaced from, a financial organization;
---------------------------------------------------------------------------

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

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

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

    (ii) Printing and selling MICR-encoded items. Printing and selling 
checks and related documents, including corporate image checks, cash 
tickets, voucher checks, deposit slips, savings withdrawal packages, and 
other forms that require Magnetic Ink Character Recognition (MICR) 
encoding.
    (11) Insurance agency and underwriting--(i) Credit insurance. Acting 
as principal, agent, or broker for insurance (including home mortgage 
redemption insurance) that is:
    (A) Directly related to an extension of credit by the bank holding 
company or any of its subsidiaries; and
    (B) Limited to ensuring the repayment of the outstanding balance due 
on the extension of credit \14\ in the event of the death, disability, 
or involuntary unemployment of the debtor.
---------------------------------------------------------------------------

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

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

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

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

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

    (C) The applicant commits to notify borrowers in writing that:

[[Page 187]]

    (1) They are not required to purchase such insurance from the 
applicant;
    (2) Such insurance does not insure any interest of the borrower in 
the collateral; and
    (3) The applicant will accept more comprehensive property insurance 
in place of such single-interest insurance.
    (iii) Insurance in small towns. Engaging in any insurance agency 
activity in a place where the bank holding company or a subsidiary of 
the bank holding company has a lending office and that:
    (A) Has a population not exceeding 5,000 (as shown in the preceding 
decennial census); or
    (B) Has inadequate insurance agency facilities, as determined by the 
Board, after notice and opportunity for hearing.
    (iv) Insurance-agency activities conducted on May 1, 1982. Engaging 
in any specific insurance-agency activity \17\ if the bank holding 
company, or subsidiary conducting the specific activity, conducted such 
activity on May 1, 1982, or received Board approval to conduct such 
activity on or before May 1, 1982. \18\ A bank holding company or 
subsidiary engaging in a specific insurance agency activity under this 
clause may:
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    \17\ Nothing contained in this provision shall preclude a bank 
holding company subsidiary that is authorized to engage in a specific 
insurance-agency activity under this clause from continuing to engage in 
the particular activity after merger with an affiliate, if the merger is 
for legitimate business purposes and prior notice has been provided to 
the Board.
    \18\ For the purposes of this paragraph, activities engaged in on 
May 1, 1982, include activities carried on subsequently as the result of 
an application to engage in such activities pending before the Board on 
May 1, 1982, and approved subsequently by the Board or as the result of 
the acquisition by such company pursuant to a binding written contract 
entered into on or before May 1, 1982, of another company engaged in 
such activities at the time of the acquisition.
---------------------------------------------------------------------------

    (A) Engage in such specific insurance agency activity only at 
locations:
    (1) In the state in which the bank holding company has its principal 
place of business (as defined in 12 U.S.C. 1842(d));
    (2) In any state or states immediately adjacent to such state; and
    (3) In any state in which the specific insurance-agency activity was 
conducted (or was approved to be conducted) by such bank holding company 
or subsidiary thereof or by any other subsidiary of such bank holding 
company on May 1, 1982; and
    (B) Provide other insurance coverages that may become available 
after May 1, 1982, so long as those coverages insure against the types 
of risks as (or are otherwise functionally equivalent to) coverages sold 
or approved to be sold on May 1, 1982, by the bank holding company or 
subsidiary.
    (v) Supervision of retail insurance agents. Supervising on behalf of 
insurance underwriters the activities of retail insurance agents who 
sell:
    (A) Fidelity insurance and property and casualty insurance on the 
real and personal property used in the operations of the bank holding 
company or its subsidiaries; and
    (B) Group insurance that protects the employees of the bank holding 
company or its subsidiaries.
    (vi) Small bank holding companies. Engaging in any insurance-agency 
activity if the bank holding company has total consolidated assets of 
$50 million or less. A bank holding company performing insurance-agency 
activities under this paragraph may not engage in the sale of life 
insurance or annuities except as provided in paragraphs (b)(11) (i) and 
(iii) of this section, and it may not continue to engage in insurance-
agency activities pursuant to this provision more than 90 days after the 
end of the quarterly reporting period in which total assets of the 
holding company and its subsidiaries exceed $50 million.
    (vii) Insurance-agency activities conducted before 1971. Engaging in 
any insurance-agency activity performed at any location in the United 
States directly or indirectly by a bank holding company that was engaged 
in insurance-agency activities prior to January 1, 1971, as a 
consequence of approval by the Board prior to January 1, 1971.
    (12) Community development activities--(i) Financing and investment 
activities. Making equity and debt investments in corporations or 
projects designed primarily to promote community welfare, such as the 
economic rehabilitation

[[Page 188]]

and development of low-income areas by providing housing, services, or 
jobs for residents.
    (ii) Advisory activities. Providing advisory and related services 
for programs designed primarily to promote community welfare.
    (13) Money orders, savings bonds, and traveler's checks. The 
issuance and sale at retail of money orders and similar consumer-type 
payment instruments; the sale of U.S. savings bonds; and the issuance 
and sale of traveler's checks.
    (14) Data processing. (i) Providing data processing, data storage 
and data transmission services, facilities (including data processing, 
data storage and data transmission hardware, software, documentation, or 
operating personnel), databases, advice, and access to such services, 
facilities, or data-bases by any technological means, if:
    (A) The data to be processed, stored or furnished are financial, 
banking or economic; and
    (B) The hardware provided in connection therewith is offered only in 
conjunction with software designed and marketed for the processing, 
storage and transmission of financial, banking, or economic data, and 
where the general purpose hardware does not constitute more than 30 
percent of the cost of any packaged offering.
    (ii) A company conducting data processing, data storage, and data 
transmission activities may conduct data processing, data storage, and 
data transmission activities not described in paragraph (b)(14)(i) of 
this section if the total annual revenue derived from those activities 
does not exceed 49 percent of the company's total annual revenues 
derived from data processing, data storage and data transmission 
activities.

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



              Subpart D_Control and Divestiture Proceedings



Sec. 225.31  Control proceedings.

    (a) Preliminary determination of control. (1) The Board may issue a 
preliminary determination of control under the procedures set forth in 
this section in any case in which:
    (i) Any of the presumptions of control set forth in paragraph (d) of 
this section is present; or
    (ii) It otherwise appears that a company has the power to exercise a 
controlling influence over the management or policies of a bank or other 
company.
    (2) If the Board makes a preliminary determination of control under 
this section, the Board shall send notice to the controlling company 
containing a statement of the facts upon which the preliminary 
determination is based.
    (b) Response to preliminary determination of control. Within 30 
calendar days of issuance by the Board of a preliminary determination of 
control or such longer period permitted by the Board, the company 
against whom the determination has been made shall:
    (1) Submit for the Board's approval a specific plan for the prompt 
termination of the control relationship;
    (2) File an application under subpart B or C of this regulation to 
retain the control relationship; or
    (3) Contest the preliminary determination by filing a response, 
setting forth the facts and circumstances in support of its position 
that no control exists, and, if desired, requesting a hearing or other 
proceeding.
    (c) Hearing and final determination. (1) The Board shall order a 
formal hearing or other appropriate proceeding upon the request of a 
company that contests a preliminary determination that the company has 
the power to exercise a controlling influence over the management or 
policies of a bank or other company, if the Board finds that material 
facts are in dispute. The Board may also in its discretion order a 
formal hearing or other proceeding with respect to a preliminary 
determination that the company controls voting securities of the bank or 
other company under the presumptions in paragraph (d)(1) of this 
section.
    (2) At a hearing or other proceeding, any applicable presumptions 
established by paragraph (d) of this section shall be considered in 
accordance with the Federal Rules of Evidence and the Board's Rules of 
Practice for Formal Hearings (12 CFR part 263).

[[Page 189]]

    (3) After considering the submissions of the company and other 
evidence, including the record of any hearing or other proceeding, the 
Board shall issue a final order determining whether the company controls 
voting securities, or has the power to exercise a controlling influence 
over the management or policies, of the bank or other company. If a 
control relationship is found, the Board may direct the company to 
terminate the control relationship or to file an application for the 
Board's approval to retain the control relationship under subpart B or C 
of this regulation.
    (d) Rebuttable presumptions of control. The following rebuttable 
presumptions shall be used in any proceeding under this section:
    (1) Control of voting securities--(i) Securities convertible into 
voting securities. A company that owns, controls, or holds securities 
that are immediately convertible, at the option of the holder or owner, 
into voting securities of a bank or other company, controls the voting 
securities.
    (ii) Option or restriction on voting securities. A company that 
enters into an agreement or understanding under which the rights of a 
holder of voting securities of a bank or other company are restricted in 
any manner controls the securities. This presumption does not apply 
where the agreement or understanding:
    (A) Is a mutual agreement among shareholders granting to each other 
a right of first refusal with respect to their shares;
    (B) Is incident to a bona fide loan transaction; or
    (C) Relates to restrictions on transferability and continues only 
for the time necessary to obtain approval from the appropriate Federal 
supervisory authority with respect to acquisition by the company of the 
securities.
    (2) Control over company--(i) Management agreement. A company that 
enters into any agreement or understanding with a bank or other company 
(other than an investment advisory agreement), such as a management 
contract, under which the first company or any of its subsidiaries 
directs or exercises significant influence over the general management 
or overall operations of the bank or other company controls the bank or 
other company.
    (ii) Shares controlled by company and associated individuals. A 
company that, together with its management officials or controlling 
shareholders (including members of the immediate families of either), 
owns, controls, or holds with power to vote 25 percent or more of the 
outstanding shares of any class of voting securities of a bank or other 
company controls the bank or other company, if the first company owns, 
controls, or holds with power to vote more than 5 percent of the 
outstanding shares of any class of voting securities of the bank or 
other company.
    (iii) Common management officials. A company that has one or more 
management officials in common with a bank or other company controls the 
bank or other company, if the first company owns, controls or holds with 
power to vote more than 5 percent of the outstanding shares of any class 
of voting securities of the bank or other company, and no other person 
controls as much as 5 percent of the outstanding shares of any class of 
voting securities of the bank or other company.
    (iv) Shares held as fiduciary. The presumptions in paragraphs (d)(2) 
(ii) and (iii) of this section do not apply if the securities are held 
by the company in a fiduciary capacity without sole discretionary 
authority to exercise the voting rights.
    (e) Presumption of non-control--(1) In any proceeding under this 
section, there is a presumption that any company that directly or 
indirectly owns, controls, or has power to vote less than 5 percent of 
the outstanding shares of any class of voting securities of a bank or 
other company does not have control over that bank or other company.
    (2) In any proceeding under this section, or judicial proceeding 
under the BHC Act, other than a proceeding in which the Board has made a 
preliminary determination that a company has the power to exercise a 
controlling influence over the management or policies of the bank or 
other company, a company may not be held to have had control over the 
bank or other company at any given time, unless that company, at the 
time in question, directly or indirectly owned, controlled,

[[Page 190]]

or had power to vote 5 percent or more of the outstanding shares of any 
class of voting securities of the bank or other company, or had already 
been found to have control on the basis of the existence of a 
controlling influence relationship.

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



                    Subpart E_Change in Bank Control

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



Sec. 225.41  Transactions requiring prior notice.

    (a) Prior notice requirement. Any person acting directly or 
indirectly, or through or in concert with one or more persons, shall 
give the Board 60 days' written notice, as specified in Sec. 225.43 of 
this subpart, before acquiring control of a state member bank or bank 
holding company, unless the acquisition is exempt under Sec. 225.42.
    (b) Definitions. For purposes of this subpart:
    (1) Acquisition includes a purchase, assignment, transfer, or pledge 
of voting securities, or an increase in percentage ownership of a state 
member bank or a bank holding company resulting from a redemption of 
voting securities.
    (2) Acting in concert includes knowing participation in a joint 
activity or parallel action towards a common goal of acquiring control 
of a state member bank or bank holding company whether or not pursuant 
to an express agreement.
    (3) Immediate family includes a person's father, mother, stepfather, 
stepmother, brother, sister, stepbrother, stepsister, son, daughter, 
stepson, stepdaughter, grandparent, grandson, granddaughter, father-in-
law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-
in-law, the spouse of any of the foregoing, and the person's spouse.
    (c) Acquisitions requiring prior notice--(1) Acquisition of control. 
The acquisition of voting securities of a state member bank or bank 
holding company constitutes the acquisition of control under the Bank 
Control Act, requiring prior notice to the Board, if, immediately after 
the transaction, the acquiring person (or persons acting in concert) 
will own, control, or hold with power to vote 25 percent or more of any 
class of voting securities of the institution.
    (2) Rebuttable presumption of control. The Board presumes that an 
acquisition of voting securities of a state member bank or bank holding 
company constitutes the acquisition of control under the Bank Control 
Act, requiring prior notice to the Board, if, immediately after the 
transaction, the acquiring person (or persons acting in concert) will 
own, control, or hold with power to vote 10 percent or more of any class 
of voting securities of the institution, and if:
    (i) The institution has registered securities under section 12 of 
the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
    (ii) No other person will own, control, or hold the power to vote a 
greater percentage of that class of voting securities immediately after 
the transaction. \1\
---------------------------------------------------------------------------

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

    (d) Rebuttable presumption of concerted action. The following 
persons shall be presumed to be acting in concert for purposes of this 
subpart:
    (1) A company and any controlling shareholder, partner, trustee, or 
management official of the company, if both the company and the person 
own voting securities of the state member bank or bank holding company;
    (2) An individual and the individual's immediate family;
    (3) Companies under common control;
    (4) Persons that are parties to any agreement, contract, 
understanding, relationship, or other arrangement, whether written or 
otherwise, regarding the acquisition, voting, or transfer of control of 
voting securities of a state member bank or bank holding company, other 
than through a revocable proxy as described in Sec. 225.42(a)(5) of 
this subpart;

[[Page 191]]

    (5) Persons that have made, or propose to make, a joint filing under 
sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m 
or 78n), and the rules promulgated thereunder by the Securities and 
Exchange Commission; and
    (6) A person and any trust for which the person serves as trustee.
    (e) Acquisitions of loans in default. The Board presumes an 
acquisition of a loan in default that is secured by voting securities of 
a state member bank or bank holding company to be an acquisition of the 
underlying securities for purposes of this section.
    (f) Other transactions. Transactions other than those set forth in 
paragraph (c) of this section resulting in a person's control of less 
than 25 percent of a class of voting securities of a state member bank 
or bank holding company are not deemed by the Board to constitute 
control for purposes of the Bank Control Act.
    (g) Rebuttal of presumptions. Prior notice to the Board is not 
required for any acquisition of voting securities under the presumption 
of control set forth in this section, if the Board finds that the 
acquisition will not result in control. The Board shall afford any 
person seeking to rebut a presumption in this section an opportunity to 
present views in writing or, if appropriate, orally before its 
designated representatives at an informal conference.



Sec. 225.42  Transactions not requiring prior notice.

    (a) Exempt transactions. The following transactions do not require 
notice to the Board under this subpart:
    (1) Existing control relationships. The acquisition of additional 
voting securities of a state member bank or bank holding company by a 
person who:
    (i) Continuously since March 9, 1979 (or since the institution 
commenced business, if later), held power to vote 25 percent or more of 
any class of voting securities of the institution; or
    (ii) Is presumed, under Sec. 225.41(c)(2) of this subpart, to have 
controlled the institution continuously since March 9, 1979, if the 
aggregate amount of voting securities held does not exceed 25 percent or 
more of any class of voting securities of the institution or, in other 
cases, where the Board determines that the person has controlled the 
bank continuously since March 9, 1979;
    (2) Increase of previously authorized acquisitions. Unless the Board 
or the Reserve Bank otherwise provides in writing, the acquisition of 
additional shares of a class of voting securities of a state member bank 
or bank holding company by any person (or persons acting in concert) who 
has lawfully acquired and maintained control of the institution (for 
purposes of Sec. 225.41(c) of this subpart), after complying with the 
procedures and receiving approval to acquire voting securities of the 
institution under this subpart, or in connection with an application 
approved under section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of 
subpart B of this part) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
    (3) Acquisitions subject to approval under BHC Act or Bank Merger 
Act. Any acquisition of voting securities subject to approval under 
section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of subpart B of 
this part), or section 18(c) of the Federal Deposit Insurance Act (Bank 
Merger Act, 12 U.S.C. 1828(c));
    (4) Transactions exempt under BHC Act. Any transaction described in 
sections 2(a)(5), 3(a)(A), or 3(a)(B) of the BHC Act (12 U.S.C. 
1841(a)(5), 1842(a)(A), and 1842(a)(B)), by a person described in those 
provisions;
    (5) Proxy solicitation. The acquisition of the power to vote 
securities of a state member bank or bank holding company through 
receipt of a revocable proxy in connection with a proxy solicitation for 
the purposes of conducting business at a regular or special meeting of 
the institution, if the proxy terminates within a reasonable period 
after the meeting;
    (6) Stock dividends. The receipt of voting securities of a state 
member bank or bank holding company through a stock dividend or stock 
split if the proportional interest of the recipient in the institution 
remains substantially the same; and
    (7) Acquisition of foreign banking organization. The acquisition of 
voting securities of a qualifying foreign banking organization. (This 
exemption does not extend to the reports and information

[[Page 192]]

required under paragraphs 9, 10, and 12 of the Bank Control Act (12 
U.S.C. 1817(j) (9), (10), and (12)) and Sec. 225.44 of this subpart.)
    (b) Prior notice exemption. (1) The following acquisitions of voting 
securities of a state member bank or bank holding company, which would 
otherwise require prior notice under this subpart, are not subject to 
the prior notice requirements if the acquiring person notifies the 
appropriate Reserve Bank within 90 calendar days after the acquisition 
and provides any relevant information requested by the Reserve Bank:
    (i) Acquisition of voting securities through inheritance;
    (ii) Acquisition of voting securities as a bona fide gift; and
    (iii) Acquisition of voting securities in satisfaction of a debt 
previously contracted (DPC) in good faith.
    (2) The following acquisitions of voting securities of a state 
member bank or bank holding company, which would otherwise require prior 
notice under this subpart, are not subject to the prior notice 
requirements if the acquiring person does not reasonably have advance 
knowledge of the transaction, and provides the written notice required 
under section 225.43 to the appropriate Reserve Bank within 90 calendar 
days after the transaction occurs:
    (i) Acquisition of voting securities resulting from a redemption of 
voting securities by the issuing bank or bank holding company; and
    (ii) Acquisition of voting securities as a result of actions 
(including the sale of securities) by any third party that is not within 
the control of the acquiror.
    (3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits 
the authority of the Board to disapprove a notice pursuant to Sec. 
225.43(h) of this subpart.



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

notices.

    (a) Filing notice. (1) A notice required under this subpart shall be 
filed with the appropriate Reserve Bank and shall contain all the 
information required by paragraph 6 of the Bank Control Act (12 U.S.C. 
1817(j)(6)), or prescribed in the designated Board form.
    (2) The Board may waive any of the informational requirements of the 
notice if the Board determines that it is in the public interest.
    (3) A notificant shall notify the appropriate Reserve Bank or the 
Board immediately of any material changes in a notice submitted to the 
Reserve Bank, including changes in financial or other conditions.
    (4) When the acquiring person is an individual, or group of 
individuals acting in concert, the requirement to provide personal 
financial data may be satisfied by a current statement of assets and 
liabilities and an income summary, as required in the designated Board 
form, together with a statement of any material changes since the date 
of the statement or summary. The Reserve Bank or the Board, 
nevertheless, may request additional information, if appropriate.
    (b) Acceptance of notice. The 60-day notice period specified in 
Sec. 225.41 of this subpart begins on the date of receipt of a complete 
notice. The Reserve Bank shall notify the person or persons submitting a 
notice under this subpart in writing of the date the notice is or was 
complete and thereby accepted for processing. The Reserve Bank or the 
Board may request additional relevant information at any time after the 
date of acceptance.
    (c) Publication--(1) Newspaper Announcement. Any person(s) filing a 
notice under this subpart shall publish, in a form prescribed by the 
Board, an announcement soliciting public comment on the proposed 
acquisition. The announcement shall be published in a newspaper of 
general circulation in the community in which the head office of the 
state member bank to be acquired is located or, in the case of a 
proposed acquisition of a bank holding company, in the community in 
which its head office is located and in the community in which the head 
office of each of its subsidiary banks is located. The announcement 
shall be published no earlier than 15 calendar days before the filing of 
the notice with the appropriate Reserve Bank and no later than 10 
calendar days after the filing date; and the publisher's affidavit of a 
publication shall be provided to the appropriate Reserve Bank.

[[Page 193]]

    (2) Contents of newspaper announcement. The newspaper announcement 
shall state:
    (i) The name of each person identified in the notice as a proposed 
acquiror of the bank or bank holding company;
    (ii) The name of the bank or bank holding company to be acquired, 
including the name of each of the bank holding company's subsidiary 
banks; and
    (iii) A statement that interested persons may submit comments on the 
notice to the Board or the appropriate Reserve Bank for a period of 20 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section.
    (3) Federal Register announcement. The Board shall, upon filing of a 
notice under this subpart, publish announcement in the Federal Register 
of receipt of the notice. The Federal Register announcement shall 
contain the information required under paragraphs (c)(2)(i) and 
(c)(2)(ii) of this section and a statement that interested persons may 
submit comments on the proposed acquisition for a period of 15 calendar 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section. The Board may waive publication in the Federal 
Register, if the Board determines that such action is appropriate.
    (4) Delay of publication. The Board may permit delay in the 
publication required under paragraphs (c)(1) and (c)(3) of this section 
if the Board determines, for good cause shown, that it is in the public 
interest to grant such delay. Requests for delay of publication may be 
submitted to the appropriate Reserve Bank.
    (5) Shortening or waiving notice. The Board may shorten or waive the 
public comment or newspaper publication requirements of this paragraph, 
or act on a notice before the expiration of a public comment period, if 
it determines in writing that an emergency exists, or that disclosure of 
the notice, solicitation of public comment, or delay until expiration of 
the public comment period would seriously threaten the safety or 
soundness of the bank or bank holding company to be acquired.
    (6) Consideration of public comments. In acting upon a notice filed 
under this subpart, the Board shall consider all public comments 
received in writing within the period specified in the newspaper or 
Federal Register announcement, whichever is later. At the Board's 
option, comments received after this period may, but need not, be 
considered.
    (7) Standing. No person (other than the acquiring person) who 
submits comments or information on a notice filed under this subpart 
shall thereby become a party to the proceeding or acquire any standing 
or right to participate in the Board's consideration of the notice or to 
appeal or otherwise contest the notice or the Board's action regarding 
the notice.
    (d) Time period for Board action--(1) Consummation of acquisition--
(i) The notificant(s) may consummate the proposed acquisition 60 days 
after submission to the Reserve Bank of a complete notice under 
paragraph (a) of this section, unless within that period the Board 
disapproves the proposed acquisition or extends the 60-day period, as 
provided under paragraph (d)(2) of this section.
    (ii) The notificant(s) may consummate the proposed transaction 
before the expiration of the 60-day period if the Board notifies the 
notificant(s) in writing of the Board's intention not to disapprove the 
acquisition.
    (2) Extensions of time period. (i) The Board may extend the 60-day 
period in paragraph (d)(1) of this section for an additional 30 days by 
notifying the acquiring person(s).
    (ii) The Board may further extend the period during which it may 
disapprove a notice for two additional periods of not more than 45 days 
each, if the Board determines that:
    (A) Any acquiring person has not furnished all the information 
required under paragraph (a) of this section;
    (B) Any material information submitted is substantially inaccurate;
    (C) The Board is unable to complete the investigation of an 
acquiring person because of inadequate cooperation or delay by that 
person; or
    (D) Additional time is needed to investigate and determine that no 
acquiring person has a record of failing to

[[Page 194]]

comply with the requirements of the Bank Secrecy Act, subchapter II of 
Chapter 53 of Title 31, United States Code.
    (iii) If the Board extends the time period under this paragraph, it 
shall notify the acquiring person(s) of the reasons therefor and shall 
include a statement of the information, if any, deemed incomplete or 
inaccurate.
    (e) Advice to bank supervisory agencies. (1) Upon accepting a notice 
relating to acquisition of securities of a state member bank, the 
Reserve Bank shall send a copy of the notice to the appropriate state 
bank supervisor, which shall have 30 calendar days from the date the 
notice is sent in which to submit its views and recommendations to the 
Board. The Reserve Bank also shall send a copy of any notice to the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
and the Office of Thrift Supervision.
    (2) If the Board finds that it must act immediately in order to 
prevent the probable failure of the bank or bank holding company 
involved, the Board may dispense with or modify the requirements for 
notice to the state supervisor.
    (f) Investigation and report. (1) After receiving a notice under 
this subpart, the Board or the appropriate Reserve Bank shall conduct an 
investigation of the competence, experience, integrity, and financial 
ability of each person by and for whom an acquisition is to be made. The 
Board shall also make an independent determination of the accuracy and 
completeness of any information required to be contained in a notice 
under paragraph (a) of this section. In investigating any notice 
accepted under this subpart, the Board or Reserve Bank may solicit 
information or views from any person, including any bank or bank holding 
company involved in the notice, and any appropriate state, federal, or 
foreign governmental authority.
    (2) The Board or the appropriate Reserve Bank shall prepare a 
written report of its investigation, which shall contain, at a minimum, 
a summary of the results of the investigation.
    (g) Factors considered in acting on notices. In reviewing a notice 
filed under this subpart, the Board shall consider the information in 
the record, the views and recommendations of the appropriate bank 
supervisor, and any other relevant information obtained during any 
investigation of the notice.
    (h) Disapproval and hearing--(1) Disapproval of notice. The Board 
may disapprove an acquisition if it finds adverse effects with respect 
to any of the factors set forth in paragraph 7 of the Bank Control Act 
(12 U.S.C. 1817(j)(7)) (i.e., competitive, financial, managerial, 
banking, or incompleteness of information).
    (2) Disapproval notification. Within three days after its decision 
to issue a notice of intent to disapprove any proposed acquisition, the 
Board shall notify the acquiring person in writing of the reasons for 
the action.
    (3) Hearing. Within 10 calendar days of receipt of the notice of the 
Board's intent to disapprove, the acquiring person may submit a written 
request for a hearing. Any hearing conducted under this paragraph shall 
be in accordance with the Rules of Practice for Formal Hearings (12 CFR 
part 263). At the conclusion of the hearing, the Board shall, by order, 
approve or disapprove the proposed acquisition on the basis of the 
record of the hearing. If the acquiring person does not request a 
hearing, the notice of intent to disapprove becomes final and 
unappealable.



Sec. 225.44  Reporting of stock loans.

    (a) Requirements. (1) Any foreign bank or affiliate of a foreign 
bank that has credit outstanding to any person or group of persons, in 
the aggregate, which is secured, directly or indirectly, by 25 percent 
or more of any class of voting securities of a state member bank, shall 
file a consolidated report with the appropriate Reserve Bank for the 
state member bank.
    (2) The foreign bank or its affiliate also shall file a copy of the 
report with its appropriate Federal banking agency.
    (3) Any shares of the state member bank held by the foreign bank or 
any affiliate of the foreign bank as principal must be included in the 
calculation of the number of shares in which the foreign bank or its 
affiliate has a security interest for purposes of paragraph (a) of this 
section.

[[Page 195]]

    (b) Definitions. For purposes of paragraph (a) of this section:
    (1) Foreign bank shall have the same meaning as in section 1(b) of 
the International Banking Act of 1978 (12 U.S.C. 3101).
    (2) Credit outstanding includes any loan or extension of credit; the 
issuance of a guarantee, acceptance, or letter of credit, including an 
endorsement or standby letter of credit; and any other type of 
transaction that extends credit or financing to the person or group of 
persons.
    (3) Group of persons includes any number of persons that the foreign 
bank or any affiliate of a foreign bank has reason to believe:
    (i) Are acting together, in concert, or with one another to acquire 
or control shares of the same insured depository institution, including 
an acquisition of shares of the same depository institution at 
approximately the same time under substantially the same terms; or
    (ii) Have made, or propose to make, a joint filing under section 13 
or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and 
the rules promulgated thereunder by the Securities and Exchange 
Commission regarding ownership of the shares of the same insured 
depository institution.
    (c) Exceptions. Compliance with paragraph (a) of this section is not 
required if:
    (1) The person or group of persons referred to in that paragraph has 
disclosed the amount borrowed and the security interest therein to the 
Board or appropriate Reserve Bank in connection with a notice filed 
under Sec. 225.41 of this subpart, or another application filed with 
the Board or Reserve Bank as a substitute for a notice under Sec. 
225.41 of this subpart, including an application filed under section 3 
of the BHC Act (12 U.S.C. 1842) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)), or an application 
for membership in the Federal Reserve System; or
    (2) The transaction involves a person or group of persons that has 
been the owner or owners of record of the stock for a period of one year 
or more; or, if the transaction involves stock issued by a newly 
chartered bank, before the bank is opened for business.
    (d) Report requirements. (1) The consolidated report shall indicate 
the number and percentage of shares securing each applicable extension 
of credit, the identity of the borrower, and the number of shares held 
as principal by the foreign bank and any affiliate thereof.
    (2) A foreign bank, or any affiliate of a foreign bank, shall file 
the consolidated report in writing within 30 days of the date on which 
the foreign bank or affiliate first believes that the security for any 
outstanding credit consists of 25 percent or more of any class of voting 
securities of a state member bank.
    (e) Other reporting requirements. A foreign bank, or any affiliate 
thereof, that is supervised by the System and is required to report 
credit outstanding that is secured by the shares of an insured 
depository institution to another Federal banking agency also shall file 
a copy of the report with the appropriate Reserve Bank.



                 Subpart F_Limitations on Nonbank Banks



Sec. 225.52  Limitation on overdrafts.

    (a) Definitions. For purposes of this section--
    (1) Account means a reserve account, clearing account, or deposit 
account as defined in the Board's Regulation D (12 CFR 204.2(a)(1)(i)), 
that is maintained at a Federal Reserve Bank or nonbank bank.
    (2) Cash item means (i) a check other than a check classified as a 
noncash item; or (ii) any other item payable on demand and collectible 
at par that the Federal Reserve Bank of the district in which the item 
is payable is willing to accept as a cash item.
    (3) Discount window loan means any credit extended by a Federal 
Reserve Bank to a nonbank bank or industrial bank pursuant to the 
provisions of the Board's Regulation A (12 CFR part 201).
    (4) Industrial bank means an institution as defined in section 
2(c)(2)(H) of the BHC Act (12 U.S.C. 1841(c)(2)(H)).
    (5) Noncash item means an item handled by a Reserve Bank as a 
noncash item under the Reserve Bank's ``Collection of Noncash Items 
Operating

[[Page 196]]

Circular'' (e.g., a maturing bankers' acceptance or a maturing security, 
or a demand item, such as a check, with special instructions or an item 
that has not been preprinted or post-encoded).
    (6) Other nonelectronic transactions include all other transactions 
not included as funds transfers, book-entry securities transfers, cash 
items, noncash items, automated clearing house transactions, net 
settlement entries, and discount window loans (e.g., original issue of 
securities or redemption of securities).
    (7) An overdraft in an account occurs whenever the Federal Reserve 
Bank, nonbank bank, or industrial bank holding an account posts a 
transaction to the account of the nonbank bank, industrial bank, or 
affiliate that exceeds the aggregate balance of the accounts of the 
nonbank bank, industrial bank, or affiliate, as determined by the 
posting rules set forth in paragraphs (d) and (e) of this section and 
continues until the aggregate balance of the account is zero or greater.
    (8) Transfer item means an item as defined in subpart B of 
Regulation J (12 CFR 210.25 et seq).
    (b) Restriction on overdrafts--(1) Affiliates. Neither a nonbank 
bank nor an industrial bank shall permit any affiliate to incur any 
overdraft in its account with the nonbank bank or industrial bank.
    (2) Nonbank banks or industrial banks. (i) No nonbank bank or 
industrial bank shall incur any overdraft in its account at a Federal 
Reserve Bank on behalf of an affiliate.
    (ii) An overdraft by a nonbank bank or industrial bank in its 
account at a Federal Reserve Bank shall be deemed to be on behalf of an 
affiliate whenever:
    (A) A nonbank bank or industrial bank holds an account for an 
affiliate from which third-party payments can be made; and
    (B) When the posting of an affiliate's transaction to the nonbank 
bank's or industrial bank's account at a Reserve Bank creates an 
overdraft in its account at a Federal Reserve Bank or increases the 
amount of an existing overdraft in its account at a Federal Reserve 
Bank.
    (c) Permissible overdrafts. The following are permissible overdrafts 
not subject to paragraph (b) of this section:
    (1) Inadvertent error. An overdraft in its account by a nonbank bank 
or its affiliate, or an industrial bank or its affiliate, that results 
from an inadvertent computer error or inadvertent accounting error, that 
was not reasonably forseeable or could not have been prevented through 
the maintenance of procedures reasonably adopted by the nonbank bank or 
affiliate to avoid such overdraft; and
    (2) Fully secured primary dealer affiliate overdrafts. (i) An 
overdraft incurred by an affiliate of a nonbank bank, which affiliate is 
recognized as a primary dealer by the Federal Reserve Bank of New York, 
in the affiliate's account at the nonbank bank, or an overdraft incurred 
by a nonbank bank on behalf of its primary dealer affiliate in the 
nonbank bank's account at a Federal Reserve Bank; provided: the 
overdraft is fully secured by bonds, notes, or other obligations which 
are direct obligations of the United States or on which the principal 
and interest are fully guaranteed by the United States or by securities 
and obligations eligible for settlement on the Federal Reserve book-
entry system.
    (ii) An overdraft by a nonbank bank in its account at a Federal 
Reserve Bank that is on behalf of a primary dealer affiliate is fully 
secured when that portion of its overdraft at the Federal Reserve Bank 
that corresponds to the transaction posted for an affiliate that caused 
or increased the nonbank bank's overdraft is fully secured in accordance 
with paragraph (c)(2)(iii) of this section.
    (iii) An overdraft is fully secured under paragraph (c)(2)(i) when 
the nonbank bank can demonstrate that the overdraft is secured, at all 
times, by a perfected security interest in specific, identified 
obligations described in paragraph (c)(2)(i) with a market value that, 
in the judgment of the Reserve Bank holding the nonbank bank's account, 
is sufficiently in excess of the amount of the overdraft to provide a 
margin of protection in a volatile market or in the event the securities 
need to be liquidated quickly.

[[Page 197]]

    (d) Posting by Federal Reserve Banks. For purposes of determining 
the balance of an account under this section, payments and transfers by 
nonbank banks and industrial banks processed by the Federal Reserve 
Banks shall be considered posted to their accounts at Federal Reserve 
Banks as follows:
    (1) Funds transfers. Transfer items shall be posted:
    (i) To the transferor's account at the time the transfer is actually 
made by the transferor's Federal Reserve Bank; and
    (ii) To the transferee's account at the time the transferee's 
Reserve Bank sends the transfer item or sends or telephones the advice 
of credit for the item to the transferee, whichever occurs first.
    (2) Book-entry securities transfers against payment. A book-entry 
securities transfer against payment shall be posted: (i) to the 
transferor's account at the time the entry is made by the transferor's 
Reserve Bank; and (ii) to the transferee's account at the time the entry 
is made by the transferee's Reserve Bank.
    (3) Discount window loans. Credit for a discount window loan shall 
be posted to the account of a nonbank bank or industrial bank at the 
close of business on the day that it is made or such earlier time as may 
be specifically agreed to by the Federal Reserve Bank and the nonbank 
bank under the terms of the loan. Debit for repayment of a discount 
window loan shall be posted to the account of the nonbank bank or 
industrial bank as of the close of business on the day of maturity of 
the loan or such earlier time as may be agreed to by the Federal Reserve 
Bank and the nonbank bank or required by the Federal Reserve Bank under 
the terms of the loan.
    (4) Other transactions. Total aggregate credits for automated 
clearing house transfers, cash items, noncash items, net settlement 
entries, and other nonelectronic transactions shall be posted to the 
account of a nonbank bank or industrial bank as of the opening of 
business on settlement day. Total aggregate debits for these 
transactions and entries shall be posted to the account of a nonbank 
bank or industrial bank as of the close of business on settlement day.
    (e) Posting by nonbank banks and industrial banks. For purposes of 
determining the balance of an affiliate's account under this section, 
payments and transfers through an affiliate's account at a nonbank bank 
or industrial bank shall be posted as follows:
    (1) Funds transfers. (i) Fedwire transfer items shall be posted:
    (A) To the transferor affiliate's account no later than the time the 
transfer is actually made by the transferor's Federal Reserve Bank; and
    (B) To the transferee affiliate's account no earlier than the time 
the transferee's Reserve Bank sends the transfer item, or sends or 
telephones the advice of credit for the item to the transferee, 
whichever occurs first.
    (ii) For funds transfers not sent or received through Federal 
Reserve Banks, debits shall be posted to the transferor affiliate's 
account not later than the time the nonbank bank or industrial bank 
becomes obligated on the transfer. Credits shall not be posted to the 
transferee affiliate's account before the nonbank bank or industrial 
bank has received actually and finally collected funds for the transfer.
    (2) Book-entry securities transfers against payment. (i) A book-
entry securities transfer against payment shall be posted:
    (A) To the transferor affiliate's account not earlier than the time 
the entry is made by the transferor's Reserve Bank; and
    (B) To the transferee affiliate's account not later than the time 
the entry is made by the transferee's Reserve Bank.
    (ii) For book-entry securities transfers against payment that are 
not sent or received through Federal Reserve Banks, entries shall be 
posted:
    (A) To the buyer-affiliate's account not later than the time the 
nonbank bank or industrial bank becomes obligated on the transfer; and
    (B) To the seller-affiliate's account not before the nonbank bank or 
industrial bank has received actually and finally collected funds for 
the transfer.
    (3) Other transactions--(i) Credits. Except as otherwise provided in 
this paragraph, credits for cash items, noncash

[[Page 198]]

items, ACH transfers, net settlement entries, and all other 
nonelectronic transactions shall be posted to an affiliate's account on 
the day of the transaction (i.e., settlement day for ACH transactions or 
the day of credit for check transactions), but no earlier than the 
Federal Reserve Bank's opening of business on that day. Credit for cash 
items that are required by federal or state statute or regulation to be 
made available to the depositor for withdrawal prior to the posting time 
set forth in the preceding paragraph shall be posted as of the required 
availability time.
    (ii) Debits. Debits for cash items, noncash items, ACH transfers, 
net settlement entries, and all other nonelectronic transactions shall 
be posted to an affiliate's account on the day of the transaction (e.g., 
settlement day for ACH transactions or the day of presentment for check 
transactions), but no later than the Federal Reserve Bank's close of 
business on that day. If a check drawn on an affiliate's account or an 
ACH debit transfer received by an affiliate is returned timely by the 
nonbank bank or industrial bank in accordance with applicable law and 
agreements, no entry need to be posted to the affiliate's account for 
such item.

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



    Subpart G_Appraisal Standards for Federally Related Transactions

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



Sec. 225.61  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (the Board) under title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FlRREA) 
(Pub. L. No. 101-73, 103 Stat. 183 (1989)), 12 U.S.C. 3310, 3331-3351, 
and section 5(b) of the Bank Holding Company Act, 12 U.S.C. 1844(b).
    (b) Purpose and scope. (1) Title XI provides protection for federal 
financial and public policy interests in real estate related 
transactions by requiring real estate appraisals used in connection with 
federally related transactions to be performed in writing, in accordance 
with uniform standards, by appraisers whose competency has been 
demonstrated and whose professional conduct will be subject to effective 
supervision. This subpart implements the requirements of title XI, and 
applies to all federally related transactions entered into by the Board 
or by institutions regulated by the Board (regulated institutions).
    (2) This subpart:
    (i) Identifies which real estate-related financial transactions 
require the services of an appraiser;
    (ii) Prescribes which categories of federally related transactions 
shall be appraised by a State certified appraiser and which by a State 
licensed appraiser; and
    (iii) Prescribes minimum standards for the performance of real 
estate appraisals in connection with federally related transactions 
under the jurisdiction of the Board.



Sec. 225.62  Definitions.

    (a) Appraisal means a written statement independently and 
impartially prepared by a qualified appraiser setting forth an opinion 
as to the market value of an adequately described property as of a 
specific date(s), supported by the presentation and analysis of relevant 
market information.
    (b) Appraisal Foundation means the Appraisal Foundation established 
on November 30, 1987, as a not-for-profit corporation under the laws of 
Illinois.
    (c) Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business entity.
    (e) Complex 1-to-4 family residential property appraisal means one 
in which the property to be appraised, the form of ownership, or market 
conditions are atypical.
    (f) Federally related transaction means any real estate-related 
financial transaction entered into on or after August 9, 1990, that:
    (1) The Board or any regulated institution engages in or contracts 
for; and

[[Page 199]]

    (2) Requires the services of an appraiser.
    (g) Market value means the most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently and 
knowledgeably, and assuming the price is not affected by undue stimulus. 
Implicit in this definition is the consummation of a sale as of a 
specified date and the passing of title from seller to buyer under 
conditions whereby:
    (1) Buyer and seller are typically motivated;
    (2) Both parties are well informed or well advised, and acting in 
what they consider their own best interests;
    (3) A reasonable time is allowed for exposure in the open market;
    (4) Payment is made in terms of cash in U.S. dollars or in terms of 
financial arrangements comparable thereto; and
    (5) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (h) Real estate or real property means an identified parcel or tract 
of land, with improvements, and includes easements, rights of way, 
undivided or future interests, or similar rights in a tract of land, but 
does not include mineral rights, timber rights, growing crops, water 
rights, or similar interests severable from the land when the 
transaction does not involve the associated parcel or tract of land.
    (i) Real estate-related financial transaction means any transaction 
involving:
    (1) The sale, lease, purchase, investment in or exchange of real 
property, including interests in property, or the financing thereof; or
    (2) The refinancing of real property or interests in real property; 
or
    (3) The use of real property or interests in property as security 
for a loan or investment, including mortgage-backed securities.
    (j) State certified appraiser means any individual who has satisfied 
the requirements for certification in a State or territory whose 
criteria for certification as a real estate appraiser currently meet or 
exceed the minimum criteria for certification issued by the Appraiser 
Qualifications Board of the Appraisal Foundation. No individual shall be 
a State certified appraiser unless such individual has achieved a 
passing grade upon a suitable examination administered by a State or 
territory that is consistent with and equivalent to the Uniform State 
Certification Examination issued or endorsed by the Appraiser 
Qualifications Board of the Appraisal Foundation. In addition, the 
Appraisal Subcommittee must not have issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI of FIRREA. The Board may, from time to time, impose additional 
qualification criteria for certified appraisers performing appraisals in 
connection with federally related transactions within its jurisdiction.
    (k) State licensed appraiser means any individual who has satisfied 
the requirements for licensing in a State or territory where the 
licensing procedures comply with title XI of FIRREA and where the 
Appraisal Subcommittee has not issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI. The Board may, from time to time, impose additional 
qualification criteria for licensed appraisers performing appraisals in 
connection with federally related transactions within the Board's 
jurisdiction.
    (l) Tract development means a project of five units or more that is 
constructed or is to be constructed as a single development.
    (m) Transaction value means:
    (1) For loans or other extensions of credit, the amount of the loan 
or extension of credit;
    (2) For sales, leases, purchases, and investments in or exchanges of 
real property, the market value of the real property interest involved; 
and
    (3) For the pooling of loans or interests in real property for 
resale or purchase, the amount of the loan or the market value of the 
real property calculated with respect to each such loan or interest in 
real property.

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

[[Page 200]]



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

licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State certified 
or licensed appraiser is required for all real estate-related financial 
transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than the 
real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived from, 
real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met Board regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable to 
that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity and 
is not required to obtain an appraisal under other law;
    (12) The transaction involves underwriting or dealing in mortgage-
backed securities; or
    (13) The Board determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is consistent 
with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The Board 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
    (d) Transactions requiring a State certified appraiser--(1) All 
transactions of $1,000,000 or more. All federally related transactions 
having a transaction value of $1,000,000 or more shall require an 
appraisal prepared by a State certified appraiser.
    (2) Nonresidential transactions of $250,000 or more. All federally 
related transactions having a transaction value of $250,000 or more, 
other than those involving appraisals of 1-to-4 family residential 
properties, shall require an appraisal prepared by a State certified 
appraiser.

[[Page 201]]

    (3) Complex residential transactions of $250,000 or more. All 
complex 1-to-4 family residential property appraisals rendered in 
connection with federally related transactions shall require a State 
certified appraiser if the transaction value is $250,000 or more. A 
regulated institution may presume that appraisals of 1-to-4 family 
residential properties are not complex, unless the institution has 
readily available information that a given appraisal will be complex. 
The regulated institution shall be responsible for making the final 
determination of whether the appraisal is complex. If during the course 
of the appraisal a licensed appraiser identifies factors that would 
result in the property, form of ownership, or market conditions being 
considered atypical, then either:
    (i) The regulated institution may ask the licensed appraiser to 
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
    (ii) The institution may engage a certified appraiser to complete 
the appraisal.
    (e) Transactions requiring either a State certified or licensed 
appraiser. All appraisals for federally related transactions not 
requiring the services of a State certified appraiser shall be prepared 
by either a State certified appraiser or a State licensed appraiser.

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



Sec. 225.64  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice promulgated 
by the Appraisal Standards Board of the Appraisal Foundation, 1029 
Vermont Ave., NW., Washington, DC 20005, unless principles of safe and 
sound banking require compliance with stricter standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (d) Be based upon the definition of market value as set forth in 
this subpart; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.

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



Sec. 225.65  Appraiser independence.

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

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

[[Page 202]]



Sec. 225.66  Professional association membership; competency.

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



Sec. 225.67  Enforcement.

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



Subpart H_Notice of Addition or Change of Directors and Senior Executive 

                                Officers

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



Sec. 225.71  Definitions.

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



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

    (a) Prior notice by regulated institution. A regulated institution 
shall give the Board 30 days' written notice, as specified in Sec. 
225.73, before adding or replacing any member of its board of directors, 
employing any person as a senior executive officer of the institution, 
or changing the responsibilities of any

[[Page 203]]

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



Sec. 225.73  Procedures for filing, processing, and acting on notices; 

standards for disapproval; waiver of notice.

    (a) Filing notice--(1) Content. The notice required in Sec. 225.72 
shall be filed with the appropriate Reserve Bank and shall contain:
    (i) The information required by paragraph 6(A) of the Change in Bank 
Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the 
designated Board form;
    (ii) Additional information consistent with the Federal Financial 
Institutions Examination Council's Joint Statement of Guidelines on 
Conducting Background Checks and Change in Control Investigations, as 
set forth in the designated Board form; and
    (iii) Such other information as may be required by the Board or 
Reserve Bank.
    (2) Modification. The Reserve Bank may modify or accept other 
information in place of the requirements of Sec. 225.73(a)(1) for a 
notice filed under this subpart.
    (3) Acceptance and processing of notice. The 30-day notice period 
specified in Sec. 225.72 shall begin on the date all information 
required to be submitted by the notificant pursuant to Sec. 
225.73(a)(1) is received by the appropriate Reserve Bank. The Reserve 
Bank shall notify the regulated institution or individual submitting the 
notice of the date on which all required information is received and the 
notice is accepted for processing, and of the date on which the 30-day 
notice period will expire. The Board or Reserve Bank may extend the 30-
day notice period for an additional period of not more than 60 days by 
notifying the regulated institution or individual filing the notice that 
the period has been extended and stating the reason for not processing 
the notice within the 30-day notice period.
    (b) Commencement of service--(1) At expiration of period. A proposed 
director or senior executive officer may begin service after the end of 
the 30-day period and any extension as provided under paragraph (a)(3) 
of this section, unless the Board or Reserve Bank disapproves the notice 
before the end of the period.
    (2) Prior to expiration of period. A proposed director or senior 
executive officer may begin service before the end of the 30-day period 
and any extension as provided under paragraph (a)(3) of this section, if 
the Board or the Reserve Bank notifies in writing the regulated 
institution or individual submitting the notice of the Board's or 
Reserve Bank's intention not to disapprove the notice.
    (c) Notice of disapproval. The Board or Reserve Bank shall 
disapprove a notice under Sec. 225.72 if the Board or Reserve Bank 
finds that the competence, experience, character, or integrity of the 
individual with respect to whom the notice is submitted indicates that 
it would not be in the best interests of the depositors of the regulated 
institution or in the best interests of the public to permit the 
individual to be employed by, or associated with, the regulated 
institution. The notice of disapproval shall contain a statement of the 
basis for disapproval and shall be sent to the regulated institution and 
the disapproved individual.
    (d) Appeal of a notice of disapproval. (1) A disapproved individual 
or a regulated institution that has submitted a notice that is 
disapproved under this section may appeal the disapproval to

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the Board within 15 days of the effective date of the notice of 
disapproval. An appeal shall be in writing and explain the reasons for 
the appeal and include all facts, documents, and arguments that the 
appealing party wishes to be considered in the appeal, and state whether 
the appealing party is requesting an informal hearing.
    (2) Written notice of the final decision of the Board shall be sent 
to the appealing party within 60 days of the receipt of an appeal, 
unless the appealing party's request for an informal hearing is granted.
    (3) The disapproved individual may not serve as a director or senior 
executive officer of the state member bank or bank holding company while 
the appeal is pending.
    (e) Informal hearing. (1) An individual or regulated institution 
whose notice under this section has been disapproved may request an 
informal hearing on the notice. A request for an informal hearing shall 
be in writing and shall be submitted within 15 days of a notice of 
disapproval. The Board may, in its sole discretion, order an informal 
hearing if the Board finds that oral argument is appropriate or 
necessary to resolve disputes regarding material issues of fact.
    (2) An informal hearing shall be held within 30 days of a request, 
if granted, unless the requesting party agrees to a later date.
    (3) Written notice of the final decision of the Board shall be given 
to the individual and the regulated institution within 60 days of the 
conclusion of any informal hearing ordered by the Board, unless the 
requesting party agrees to a later date.
    (f) Waiver of notice--(1) Waiver requests. The Board or Reserve Bank 
may permit an individual to serve as a senior executive officer or 
director before the notice required under this subpart is provided, if 
the Board or Reserve Bank finds that:
    (i) Delay would threaten the safety or soundness of the regulated 
institution or a bank controlled by a bank holding company;
    (ii) Delay would not be in the public interest; or
    (iii) Other extraordinary circumstances exist that justify waiver of 
prior notice.
    (2) Automatic waiver. An individual may serve as a director upon 
election to the board of directors of a regulated institution before the 
notice required under this subpart is provided if the individual:
    (i) Is not proposed by the management of the regulated institution;
    (ii) Is elected as a new member of the board of directors at a 
meeting of the regulated institution; and
    (iii) Provides to the appropriate Reserve Bank all the information 
required in Sec. 225.73(a) within two (2) business days after the 
individual's election.
    (3) Effect on disapproval authority. A waiver shall not affect the 
authority of the Board or Reserve Bank to disapprove a notice within 30 
days after a waiver is granted under paragraph (f)(1) of this section or 
the election of an individual who has filed a notice and is serving 
pursuant to an automatic waiver under paragraph (f)(2) of this section.



                  Subpart I_Financial Holding Companies

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



Sec. 225.81  What is a financial holding company?

    (a) Definition. A financial holding company is a bank holding 
company that meets the requirements of this section.
    (b) Requirements to be a financial holding company. In order to be a 
financial holding company:
    (1) All depository institutions controlled by the bank holding 
company must be and remain well capitalized;
    (2) All depository institutions controlled by the bank holding 
company must be and remain well managed; and
    (3) The bank holding company must have made an effective election to 
become a financial holding company.
    (c) Requirements for foreign banks that are or are owned by bank 
holding companies--(1) Foreign banks with U.S. branches or agencies that 
also own U.S. banks. A foreign bank that is a bank holding company and 
that operates a branch or agency or owns or controls a commercial 
lending company in the

[[Page 205]]

United States must comply with the requirements of this section, Sec. 
225.82, and Sec. Sec. 225.90 through 225.92 in order to be a financial 
holding company. After it becomes a financial holding company, a foreign 
bank described in this paragraph will be subject to the provisions of 
Sec. Sec. 225.83, 225.84, 225.93, and 225.94.
    (2) Bank holding companies that own foreign banks with U.S. branches 
or agencies. A bank holding company that owns a foreign bank that 
operates a branch or agency or owns or controls a commercial lending 
company in the United States must comply with the requirements of this 
section, Sec. 225.82, and Sec. Sec. 225.90 through 225.92 in order to 
be a financial holding company. After it becomes a financial holding 
company, a bank holding company described in this paragraph will be 
subject to the provisions of Sec. Sec. 225.83, 225.84, 225.93, and 
225.94.



Sec. 225.82  How does a bank holding company elect to become a financial 

holding company?

    (a) Filing requirement. A bank holding company may elect to become a 
financial holding company by filing a written declaration with the 
appropriate Reserve Bank. A declaration by a bank holding company is 
considered to be filed on the date that all information required by 
paragraph (b) of this section is received by the appropriate Reserve 
Bank.
    (b) Contents of declaration. To be deemed complete, a declaration 
must:
    (1) State that the bank holding company elects to be a financial 
holding company;
    (2) Provide the name and head office address of the bank holding 
company and of each depository institution controlled by the bank 
holding company;
    (3) Certify that each depository institution controlled by the bank 
holding company is well capitalized as of the date the bank holding 
company submits its declaration;
    (4) Provide the capital ratios as of the close of the previous 
quarter for all relevant capital measures, as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o), for each depository 
institution controlled by the company on the date the company submits 
its declaration; and
    (5) Certify that each depository institution controlled by the 
company is well managed as of the date the company submits its 
declaration.
    (c) Effectiveness of election. An election by a bank holding company 
to become a financial holding company shall not be effective if, during 
the period provided in paragraph (e) of this section, the Board finds 
that, as of the date the declaration was filed with the appropriate 
Reserve Bank:
    (1) Any insured depository institution controlled by the bank 
holding company (except an institution excluded under paragraph (d) of 
this section) has not achieved at least a rating of ``satisfactory 
record of meeting community credit needs'' under the Community 
Reinvestment Act at the institution's most recent examination; or
    (2) Any depository institution controlled by the bank holding 
company is not both well capitalized and well managed.
    (d) Consideration of the CRA performance of a recently acquired 
insured depository institution. Except as provided in paragraph (f) of 
this section, an insured depository institution will be excluded for 
purposes of the review of the Community Reinvestment Act rating 
provisions of paragraph (c)(1) of this section if:
    (1) The bank holding company acquired the insured depository 
institution during the 12-month period preceding the filing of an 
election under paragraph (a) of this section;
    (2) The bank holding company has submitted an affirmative plan to 
the appropriate Federal banking agency for the institution to take 
actions necessary for the institution to achieve at least a rating of 
``satisfactory record of meeting community credit needs'' under the 
Community Reinvestment Act at the next examination of the institution; 
and
    (3) The appropriate Federal banking agency for the institution has 
accepted the plan described in paragraph (d)(2) of this section.
    (e) Effective date of election--(1) In general. An election filed by 
a bank holding company under paragraph (a) of this section is effective 
on the 31st

[[Page 206]]

calendar day after the date that a complete declaration was filed with 
the appropriate Reserve Bank, unless the Board notifies the bank holding 
company prior to that time that the election is ineffective.
    (2) Earlier notification that an election is effective. The Board or 
the appropriate Reserve Bank may notify a bank holding company that its 
election to become a financial holding company is effective prior to the 
31st day after the date that a complete declaration was filed with the 
appropriate Reserve Bank. Such a notification must be in writing.
    (f) Requests to become a financial holding company submitted as part 
of an application to become a bank holding company--(1) In general. A 
company that is not a bank holding company and has applied for the 
Board's approval to become a bank holding company under section 3(a)(1) 
of the BHC Act (12 U.S.C. 1842(a)(1)) may as part of that application 
submit a request to become a financial holding company.
    (2) Contents of request. A request to become a financial holding 
company submitted as part of an application to become a bank holding 
company must:
    (i) State that the company seeks to become a financial holding 
company on consummation of its proposal to become a bank holding 
company; and
    (ii) Certify that each depository institution that would be 
controlled by the company on consummation of its proposal to become a 
bank holding company will be both well capitalized and well managed as 
of the date the company consummates the proposal.
    (3) Request becomes a declaration and an effective election on date 
of consummation of bank holding company proposal. A complete request 
submitted by a company under this paragraph (f) becomes a complete 
declaration by a bank holding company for purposes of section 4(l) of 
the BHC Act (12 U.S.C. 1843(l)) and becomes an effective election for 
purposes of Sec. 225.81(b) on the date that the company lawfully 
consummates its proposal under section 3 of the BHC Act (12 U.S.C. 
1842), unless the Board notifies the company at any time prior to 
consummation of the proposal and that:
    (i) Any depository institution that would be controlled by the 
company on consummation of the proposal will not be both well 
capitalized and well managed on the date of consummation; or
    (ii) Any insured depository institution that would be controlled by 
the company on consummation of the proposal has not achieved at least a 
rating of ``satisfactory record of meeting community credit needs'' 
under the Community Reinvestment Act at the institution's most recent 
examination.
    (4) Limited exclusion for recently acquired institutions not 
available. Unless the Board determines otherwise, an insured depository 
institution that is controlled or would be controlled by the company as 
part of its proposal to become a bank holding company may not be 
excluded for purposes of evaluating the Community Reinvestment Act 
criterion described in this paragraph or in paragraph (d) of this 
section.
    (g) Board's authority to exercise supervisory authority over a 
financial holding company. An effective election to become a financial 
holding company does not in any way limit the Board's statutory 
authority under the BHC Act, the Federal Deposit Insurance Act, or any 
other relevant Federal statute to take appropriate action, including 
imposing supervisory limitations, restrictions, or prohibitions on the 
activities and acquisitions of a bank holding company that has elected 
to become a financial holding company, or enforcing compliance with 
applicable law.



Sec. 225.83  What are the consequences of failing to continue to meet 

applicable capital and management requirements?

    (a) Notice by the Board. If the Board finds that a financial holding 
company controls any depository institution that is not well capitalized 
or well managed, the Board will notify the company in writing that it is 
not in compliance with the applicable requirement(s) for a financial 
holding company and identify the area(s) of noncompliance. The Board may 
provide this notice at any time before or after receiving notice from 
the financial holding company under paragraph (b) of this section.

[[Page 207]]

    (b) Notification by a financial holding company required--(1) Notice 
to Board. A financial holding company must notify the Board in writing 
within 15 calendar days of becoming aware that any depository 
institution controlled by the company has ceased to be well capitalized 
or well managed. This notification must identify the depository 
institution involved and the area(s) of noncompliance.
    (2) Triggering events for notice to the Board--(i) Well capitalized. 
A company becomes aware that a depository institution it controls is no 
longer well capitalized upon the occurrence of any material event that 
would change the category assigned to the institution for purposes of 
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o). See 
12 CFR 6.3(b)-(c), 208.42(b)-(c), and 325.102(b)-(c).
    (ii) Well managed. A company becomes aware that a depository 
institution it controls is no longer well managed at the time the 
depository institution receives written notice from the appropriate 
Federal or state banking agency that either its composite rating or its 
rating for management is not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice from the 
Board under paragraph (a) of this section, the company must execute an 
agreement acceptable to the Board to comply with all applicable capital 
and management requirements.
    (2) Extension of time for executing agreement. Upon request by a 
company, the Board may extend the 45-day period under paragraph (c)(1) 
of this section if the Board determines that granting additional time is 
appropriate under the circumstances. A request by a company for 
additional time must include an explanation of why an extension is 
necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1) of this section to correct a capital or management deficiency 
must:
    (i) Explain the specific actions that the company will take to 
correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.
    (d) Limitations during period of noncompliance--Until the Board 
determines that a company has corrected the conditions described in a 
notice under paragraph (a) of this section:
    (1) The Board may impose any limitations or conditions on the 
conduct or activities of the company or any of its affiliates as the 
Board finds to be appropriate and consistent with the purposes of the 
BHC Act; and
    (2) The company and its affiliates may not commence any additional 
activity or acquire control or shares of any company under section 4(k) 
of the BHC Act without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Divestiture of depository institutions. If a company does not 
correct the conditions described in a notice under paragraph (a) of this 
section within 180 days of receipt of the notice or such additional time 
as the Board may permit, the Board may order the company to divest 
ownership or control of any depository institution owned or controlled 
by the company. Such divestiture must be done in accordance with the 
terms and conditions established by the Board.
    (2) Alternative method of complying with a divestiture order. A 
company may comply with an order issued under paragraph (e)(1) of this 
section by ceasing to engage (both directly and through any subsidiary 
that is not a depository institution or a subsidiary of a depository 
institution) in any activity that may be conducted only under section 
4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n), or (o)). The 
termination of activities must be completed within the time period 
referred to in paragraph (e)(1) of this section and in accordance with 
the terms and conditions acceptable to the Board.
    (f) Consultation with other agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and state 
regulatory authorities.

[[Page 208]]



Sec. 225.84  What are the consequences of failing to maintain a satisfactory 

or better rating under the Community Reinvestment Act at all insured 

depository institution subsidiaries?

    (a) Limitations on activities--(1) In general. Upon receiving a 
notice regarding performance under the Community Reinvestment Act in 
accordance with paragraph (a)(2) of this section, a financial holding 
company may not:
    (i) Commence any additional activity under section 4(k) or 4(n) of 
the BHC Act (12 U.S.C. 1843(k) or (n)); or
    (ii) Directly or indirectly acquire control, including all or 
substantially all of the assets, of a company engaged in any activity 
under section 4(k) or 4(n) of the BHC Act (12 U.S.C. 1843(k) or (n)).
    (2) Notification. A financial holding company receives notice for 
purposes of this paragraph at the time that the appropriate Federal 
banking agency for any insured depository institution controlled by the 
company or the Board provides notice to the institution or company that 
the institution has received a rating of ``needs to improve record of 
meeting community credit needs'' or ``substantial noncompliance in 
meeting community credit needs'' in the institution's most recent 
examination under the Community Reinvestment Act.
    (b) Exceptions for certain activities--(1) Continuation of 
investment activities. The prohibition in paragraph (a) of this section 
does not prevent a financial holding company from continuing to make 
investments in the ordinary course of conducting merchant banking 
activities under section 4(k)(4)(H) of the BHC Act (12 U.S.C. 
1843(k)(4)(H)) or insurance company investment activities under section 
4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I))if:
    (i) The financial holding company lawfully was a financial holding 
company and commenced the merchant banking activity under section 
4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)) or the insurance 
company investment activity under section 4(k)(4)(I) of the BHC Act (12 
U.S.C. 1843(k)(4)(I)) prior to the time that an insured depository 
institution controlled by the financial holding company received a 
rating below ``satisfactory record of meeting community credit needs'' 
under the Community Reinvestment Act; and
    (ii) The Board has not, in the exercise of its supervisory 
authority, advised the financial holding company that these activities 
must be restricted.
    (2) Activities that are closely related to banking. The prohibition 
in paragraph (a) of this section does not prevent a financial holding 
company from commencing any additional activity or acquiring control of 
a company engaged in any activity under section 4(c) of the BHC Act (12 
U.S.C. 1843(c)), if the company complies with the notice, approval, and 
other requirements of that section and section 4(j) of the BHC Act (12 
U.S.C. 1843(j)).
    (c) Duration of prohibitions. The prohibitions described in 
paragraph (a) of this section shall continue in effect until such time 
as each insured depository institution controlled by the financial 
holding company has achieved at least a rating of ``satisfactory record 
of meeting community credit needs'' under the Community Reinvestment Act 
at the most recent examination of the institution.



Sec. 225.85  Is notice to or approval from the Board required prior to 

engaging in a financial activity?

    (a) No prior approval required generally--(1) In general. A 
financial holding company and any subsidiary (other than a depository 
institution or subsidiary of a depository institution) of the financial 
holding company may engage in any activity listed in Sec. 225.86, or 
acquire shares or control of a company engaged exclusively in activities 
listed in Sec. 225.86, without providing prior notice to or obtaining 
prior approval from the Board unless required under paragraph (c) of 
this section.
    (2) Acquisitions by a financial holding company of a company engaged 
in other permissible activities. In addition to the activities listed in 
Sec. 225.86, a company acquired or to be acquired by a financial 
holding company under paragraph (a)(1) of this section may engage in 
activities otherwise permissible for a financial holding company under 
this part in accordance with any applicable notice, approval, or other 
requirement.

[[Page 209]]

    (3) Acquisition by a financial holding company of a company engaged 
in limited nonfinancial activities--(i) Mixed acquisitions generally 
permitted. A financial holding company may under this subpart acquire 
more than 5 percent of the outstanding shares of any class of voting 
securities or control of a company that is not engaged exclusively in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding company 
under section 4(c) of the BHC Act (12 U.S.C. 1843(c)) if:
    (A) The company to be acquired is substantially engaged in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding company 
under section 4(c) of the BHC Act (12 U.S.C. 1843(c));
    (B) The financial holding company complies with the notice 
requirements of Sec. 225.87, if applicable; and
    (C) The company conforms, terminates, or divests, within 2 years of 
the date the financial holding company acquires shares or control of the 
company, all activities that are not financial in nature, incidental to 
a financial activity, or otherwise permissible for the financial holding 
company under section 4(c) (12 U.S.C. 1843(c))of the BHC Act.
    (ii) Definition of ``substantially engaged.'' Unless the Board 
determines otherwise, a company will be considered to be ``substantially 
engaged'' in activities permissible for a financial holding company for 
purposes of paragraph (a)(3)(A) of this section if at least 85 percent 
of the company's consolidated total annual gross revenues is derived 
from and at least 85 percent of the company's consolidated total assets 
is attributable to the conduct of activities that are financial in 
nature, incidental to a financial activity, or otherwise permissible for 
a financial holding company under section 4(c) of the BHC Act (12 U.S.C. 
1843(c)).
    (b) Locations in which a financial holding company may conduct 
financial activities. A financial holding company may conduct any 
activity listed in Sec. 225.86 at any location in the United States or 
at any location outside of the United States subject to the laws of the 
jurisdiction in which the activity is conducted.
    (c) Circumstances under which prior notice to the Board is 
required--(1) Acquisition of more than 5 percent of the shares of a 
savings association. A financial holding company must obtain Board 
approval in accordance with section 4(j) of the BHC Act (12 U.S.C. 
1843(j)) and either Sec. 225.14 or Sec. 225.24, as appropriate, prior 
to acquiring control or more than 5 percent of the outstanding shares of 
any class of voting securities of a savings association or of a company 
that owns, operates, or controls a savings association.
    (2) Supervisory actions. The Board may, if appropriate in the 
exercise of its supervisory or other authority, including under Sec. 
225.82(g) or Sec. 225.83(d) or other relevant authority, require a 
financial holding company to provide notice to or obtain approval from 
the Board prior to engaging in any activity or acquiring shares or 
control of any company.



Sec. 225.86  What activities are permissible for any financial holding 

company?

    The following activities are financial in nature or incidental to a 
financial activity:
    (a) Activities determined to be closely related to banking. (1) Any 
activity that the Board had determined by regulation prior to November 
12, 1999, to be so closely related to banking as to be a proper incident 
thereto, subject to the terms and conditions contained in this part, 
unless modified by the Board. These activities are listed in Sec. 
225.28.
    (2) Any activity that the Board had determined by an order that was 
in effect on November 12, 1999, to be so closely related to banking as 
to be a proper incident thereto, subject to the terms and conditions 
contained in this part and those in the authorizing orders. These 
activities are:
    (i) Providing administrative and other services to mutual funds 
(Societe Generale, 84 Federal Reserve Bulletin 680 (1998));
    (ii) Owning shares of a securities exchange (J.P. Morgan & Co, Inc., 
and UBS AG, 86 Federal Reserve Bulletin 61 (2000));

[[Page 210]]

    (iii) Acting as a certification authority for digital signatures and 
authenticating the identity of persons conducting financial and 
nonfinancial transactions (Bayerische Hypo- und Vereinsbank AG, et al., 
86 Federal Reserve Bulletin 56 (2000));
    (iv) Providing employment histories to third parties for use in 
making credit decisions and to depository institutions and their 
affiliates for use in the ordinary course of business (Norwest 
Corporation, 81 Federal Reserve Bulletin 732 (1995));
    (v) Check cashing and wire transmission services (Midland Bank, PLC, 
76 Federal Reserve Bulletin 860 (1990) (check cashing); Norwest 
Corporation, 81 Federal Reserve Bulletin 1130 (1995) (money 
transmission));
    (vi) In connection with offering banking services, providing notary 
public services, selling postage stamps and postage-paid envelopes, 
providing vehicle registration services, and selling public 
transportation tickets and tokens (Popular, Inc., 84 Federal Reserve 
Bulletin 481 (1998)); and
    (vii) Real estate title abstracting (The First National Company, 81 
Federal Reserve Bulletin 805 (1995)).
    (b) Activities determined to be usual in connection with the 
transaction of banking abroad. Any activity that the Board had 
determined by regulation in effect on November 11, 1999, to be usual in 
connection with the transaction of banking or other financial operations 
abroad (see Sec. 211.5(d) of this chapter), subject to the terms and 
conditions in part 211 and Board interpretations in effect on that date 
regarding the scope and conduct of the activity. In addition to the 
activities listed in paragraphs (a) and (c) of this section, these 
activities are:
    (1) Providing management consulting services, including to any 
person with respect to nonfinancial matters, so long as the management 
consulting services are advisory and do not allow the financial holding 
company to control the person to which the services are provided;
    (2) Operating a travel agency in connection with financial services 
offered by the financial holding company or others; and
    (3) Organizing, sponsoring, and managing a mutual fund, so long as:
    (i) The fund does not exercise managerial control over the entities 
in which the fund invests; and
    (ii) The financial holding company reduces its ownership in the 
fund, if any, to less than 25 percent of the equity of the fund within 
one year of sponsoring the fund or such additional period as the Board 
permits.
    (c) Activities permitted under section 4(k)(4) of the BHC Act (12 
U.S.C. 1843(k)(4)). Any activity defined to be financial in nature under 
sections 4(k)(4)(A) through (E), (H) and (I) of the BHC Act (12 U.S.C. 
1843(k)(4)(A) through (E), (H) and (I)).
    (d) Activities determined to be financial in nature or incidental to 
financial activities by the Board--(1) Acting as a finder--Acting as a 
finder in bringing together one or more buyers and sellers of any 
product or service for transactions that the parties themselves 
negotiate and consummate.
    (i) What is the scope of finder activities? Acting as a finder 
includes providing any or all of the following services through any 
means--
    (A) Identifying potential parties, making inquiries as to interest, 
introducing and referring potential parties to each other, and arranging 
contacts between and meetings of interested parties;
    (B) Conveying between interested parties expressions of interest, 
bids, offers, orders and confirmations relating to a transaction; and
    (C) Transmitting information concerning products and services to 
potential parties in connection with the activities described in 
paragraphs (d)(1)(i)(A) and (B) of this section.
    (ii) What are some examples of finder services? The following are 
examples of the services that may be provided by a finder when done in 
accordance with paragraphs (d)(1)(iii) and (iv) of this section. These 
examples are not exclusive.
    (A) Hosting an electronic marketplace on the financial holding 
company's Internet web site by providing hypertext or similar links to 
the web sites of third party buyers or sellers.

[[Page 211]]

    (B) Hosting on the financial holding company's servers the Internet 
web site of--
    (1) A buyer (or seller) that provides information concerning the 
buyer (or seller) and the products or services it seeks to buy (or sell) 
and allows sellers (or buyers) to submit expressions of interest, bids, 
offers, orders and confirmations relating to such products or services; 
or
    (2) A government or government agency that provides information 
concerning the services or benefits made available by the government or 
government agency, assists persons in completing applications to receive 
such services or benefits from the government or agency, and allows 
persons to transmit their applications for services or benefits to the 
government or agency.
    (C) Operating an Internet web site that allows multiple buyers and 
sellers to exchange information concerning the products and services 
that they are willing to purchase or sell, locate potential 
counterparties for transactions, aggregate orders for goods or services 
with those made by other parties, and enter into transactions between 
themselves.
    (D) Operating a telephone call center that provides permissible 
finder services.
    (iii) What limitations are applicable to a financial holding company 
acting as a finder? (A) A finder may act only as an intermediary between 
a buyer and a seller.
    (B) A finder may not bind any buyer or seller to the terms of a 
specific transaction or negotiate the terms of a specific transaction on 
behalf of a buyer or seller, except that a finder may--
    (1) Arrange for buyers to receive preferred terms from sellers so 
long as the terms are not negotiated as part of any individual 
transaction, are provided generally to customers or broad categories of 
customers, and are made available by the seller (and not by the 
financial holding company); and
    (2) Establish rules of general applicability governing the use and 
operation of the finder service, including rules that--
    (i) Govern the submission of bids and offers by buyers and sellers 
that use the finder service and the circumstances under which the finder 
service will match bids and offers submitted by buyers and sellers; and
    (ii) Govern the manner in which buyers and sellers may bind 
themselves to the terms of a specific transaction.
    (C) A finder may not--
    (1) Take title to or acquire or hold an ownership interest in any 
product or service offered or sold through the finder service;
    (2) Provide distribution services for physical products or services 
offered or sold through the finder service;
    (3) Own or operate any real or personal property that is used for 
the purpose of manufacturing, storing, transporting, or assembling 
physical products offered or sold by third parties; or
    (4) Own or operate any real or personal property that serves as a 
physical location for the physical purchase, sale or distribution of 
products or services offered or sold by third parties.
    (D) A finder may not engage in any activity that would require the 
company to register or obtain a license as a real estate agent or broker 
under applicable law.
    (iv) What disclosures are required? A finder must distinguish the 
products and services offered by the financial holding company from 
those offered by a third party through the finder service.
    (2) [Reserved]
    (e) Activities permitted under section 4(k)(5) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(5)). (1) The following types of 
activities are financial in nature or incidental to a financial activity 
when conducted pursuant to a determination by the Board under paragraph 
(e)(2) of this section:
    (i) Lending, exchanging, transferring, investing for others, or 
safeguarding financial assets other than money or securities;
    (ii) Providing any device or other instrumentality for transferring 
money or other financial assets; and
    (iii) Arranging, effecting, or facilitating financial transactions 
for the account of third parties.
    (2) Review of specific activities--(i) Is a specific request 
required? A financial

[[Page 212]]

holding company that wishes to engage on the basis of paragraph (e)(1) 
of this section in an activity that is not otherwise permissible for a 
financial holding company must obtain a determination from the Board 
that the activity is permitted under paragraph (e)(1).
    (ii) Consultation with the Secretary of the Treasury. After 
receiving a request under this section, the Board will provide the 
Secretary of the Treasury with a copy of the request and consult with 
the Secretary in accordance with section 4(k)(2)(A) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(2)(A)).
    (iii) Board action on requests. After consultation with the 
Secretary, the Board will promptly make a written determination 
regarding whether the specific activity described in the request is 
included in an activity category listed in paragraph (e)(1) of this 
section and is therefore either financial in nature or incidental to a 
financial activity.
    (3) What factors will the Board consider? In evaluating a request 
made under this section, the Board will take into account the factors 
listed in section 4(k)(3) of the BHC Act (12 U.S.C. 1843(k)(3)) that it 
must consider when determining whether an activity is financial in 
nature or incidental to a financial activity.
    (4) What information must the request contain? Any request by a 
financial holding company under this section must be in writing and 
must:
    (i) Identify and define the activity for which the determination is 
sought, specifically describing what the activity would involve and how 
the activity would be conducted; and
    (ii) Provide information supporting the requested determination, 
including information regarding how the proposed activity falls into one 
of the categories listed in paragraph (e)(1) of this section, and any 
other information required by the Board concerning the proposed 
activity.

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



Sec. 225.87  Is notice to the Board required after engaging in a financial 

activity?

    (a) Post-transaction notice generally required to engage in a 
financial activity. A financial holding company that commences an 
activity or acquires shares of a company engaged in an activity listed 
in Sec. 225.86 must notify the appropriate Reserve Bank in writing 
within 30 calendar days after commencing the activity or consummating 
the acquisition by using the appropriate form.
    (b) Cases in which notice to the Board is not required--(1) 
Acquisitions that do not involve control of a company. A notice under 
paragraph (a) of this section is not required in connection with the 
acquisition of shares of a company if, following the acquisition, the 
financial holding company does not control the company.
    (2) No additional notice required to engage de novo in an activity 
for which a financial holding company already has provided notice. After 
a financial holding company provides the appropriate Reserve Bank with 
notice that the company is engaged in an activity listed in Sec. 
225.86, a financial holding company may, unless otherwise notified by 
the Board, commence the activity de novo through any subsidiary that the 
financial holding company is authorized to control without providing 
additional notice under paragraph (a) of this section.
    (3) Conduct of certain investment activities. Unless required by 
paragraph (b)(4) of this section, a financial holding company is not 
required to provide notice under paragraph (a) of this section of any 
individual acquisition of shares of a company as part of the conduct by 
a financial holding company of securities underwriting, dealing, or 
market making activities as described in section 4(k)(4)(E) of the BHC 
Act (12 U.S.C. 1843(k)(4)(E)), merchant banking activities conducted 
pursuant to section 4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), 
or insurance company investment activities conducted pursuant to section 
4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), if the financial 
holding company previously has notified the Board under paragraph (a) of 
this section that the company has commenced the relevant securities, 
merchant banking, or insurance company investment activities, as 
relevant.

[[Page 213]]

    (4) Notice of large merchant banking or insurance company 
investments. Notwithstanding paragraph (b)(1) or (b)(3) of this section, 
a financial holding company must provide notice under paragraph (a) of 
the section if:
    (i) As part of a merchant banking activity conducted under section 
4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), the financial 
holding company acquires more than 5 percent of the shares, assets, or 
ownership interests of any company at a total cost that exceeds the 
lesser of 5 percent of the financial holding company's Tier 1 capital or 
$200 million;
    (ii) As part of an insurance company investment activity conducted 
under section 4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), the 
financial holding company acquires more than 5 percent of the shares, 
assets, or ownership interests of any company at a total cost that 
exceeds the lesser of 5 percent of the financial holding company's Tier 
1 capital or $200 million; or
    (iii) The Board in the exercise of its supervisory authority 
notifies the financial holding company that a notice is necessary.



Sec. 225.88  How to request the Board to determine that an activity is 

financial in nature or incidental to a financial activity?

    (a) Requests regarding activities that may be financial in nature or 
incidental to a financial activity. A financial holding company or other 
interested party may request a determination from the Board that an 
activity not listed in Sec. 225.86 is financial in nature or incidental 
to a financial activity.
    (b) Required information. A request submitted under this section 
must be in writing and must:
    (1) Identify and define the activity for which the determination is 
sought, specifically describing what the activity would involve and how 
the activity would be conducted;
    (2) Explain in detail why the activity should be considered 
financial in nature or incidental to a financial activity; and
    (3) Provide information supporting the requested determination and 
any other information required by the Board concerning the proposed 
activity.
    (c) Board procedures for reviewing requests--(1) Consultation with 
the Secretary of the Treasury. Upon receipt of the request, the Board 
will provide the Secretary of the Treasury a copy of the request and 
consult with the Secretary in accordance with section 4(k)(2)(A) of the 
BHC Act (12 U.S.C. 1843(k)(2)(A)).
    (2) Public notice. The Board may, as appropriate and after 
consultation with the Secretary, publish a description of the proposal 
in the Federal Register with a request for public comment.
    (d) Board action. The Board will endeavor to make a decision on any 
request filed under paragraph (a) of this section within 60 calendar 
days following the completion of both the consultative process described 
in paragraph (c)(1) of this section and the public comment period, if 
any.
    (e) Advisory opinions regarding scope of financial activities--(1) 
Written request. A financial holding company or other interested party 
may request an advisory opinion from the Board about whether a specific 
proposed activity falls within the scope of an activity listed in Sec. 
225.86 as financial in nature or incidental to a financial activity. The 
request must be submitted in writing and must contain:
    (i) A detailed description of the particular activity in which the 
company proposes to engage or the product or service the company 
proposes to provide;
    (ii) An explanation supporting an interpretation regarding the scope 
of the permissible financial activity; and
    (iii) Any additional information requested by the Board regarding 
the activity.
    (2) Board response. The Board will provide an advisory opinion 
within 45 calendar days of receiving a complete written request under 
paragraph (e)(1) of this section.



Sec. 225.89  How to request approval to engage in an activity that is 

complementary to a financial activity?

    (a) Prior Board approval is required. A financial holding company 
that seeks to engage in or acquire more than 5 percent of the 
outstanding shares of

[[Page 214]]

any class of voting securities of a company engaged in an activity that 
the financial holding company believes is complementary to a financial 
activity must obtain prior approval from the Board in accordance with 
section 4(j) of the BHC Act (12 U.S.C. 1843(j)). The notice must be in 
writing and must:
    (1) Identify and define the proposed complementary activity, 
specifically describing what the activity would involve and how the 
activity would be conducted;
    (2) Identify the financial activity for which the proposed activity 
would be complementary and provide detailed information sufficient to 
support a finding that the proposed activity should be considered 
complementary to the identified financial activity;
    (3) Describe the scope and relative size of the proposed activity, 
as measured by the percentage of the projected financial holding company 
revenues expected to be derived from and assets associated with 
conducting the activity;
    (4) Discuss the risks that conducting the activity may reasonably be 
expected to pose to the safety and soundness of the subsidiary 
depository institutions of the financial holding company and to the 
financial system generally;
    (5) Describe the potential adverse effects, including potential 
conflicts of interest, decreased or unfair competition, or other risks, 
that conducting the activity could raise, and explain the measures the 
financial holding company proposes to take to address those potential 
effects;
    (6) Describe the potential benefits to the public, such as greater 
convenience, increased competition, or gains in efficiency, that the 
proposal reasonably can be expected to produce; and
    (7) Provide any information about the financial and managerial 
resources of the financial holding company and any other information 
requested by the Board.
    (b) Factors for consideration by the Board. In evaluating a notice 
to engage in a complementary activity, the Board must consider whether:
    (1) The proposed activity is complementary to a financial activity;
    (2) The proposed activity would pose a substantial risk to the 
safety or soundness of depository institutions or the financial system 
generally; and
    (3) The proposal could be expected to produce benefits to the public 
that outweigh possible adverse effects.
    (c) Board action. The Board will inform the financial holding 
company in writing of the Board's determination regarding the proposed 
activity within the period described in section 4(j) of the BHC Act (12 
U.S.C. 1843(j)).



Sec. 225.90  What are the requirements for a foreign bank to be treated as a 

financial holding company?

    (a) Foreign banks as financial holding companies. A foreign bank 
that operates a branch or agency or owns or controls a commercial 
lending company in the United States, and any company that owns or 
controls such a foreign bank, will be treated as a financial holding 
company if:
    (1) The foreign bank, any other foreign bank that maintains a U.S. 
branch, agency, or commercial lending company and is controlled by the 
foreign bank or company, and any U.S. depository institution subsidiary 
that is owned or controlled by the foreign bank or company, is and 
remains well capitalized and well managed; and
    (2) The foreign bank, and any company that owns or controls the 
foreign bank, has made an effective election to be treated as a 
financial holding company under this subpart.
    (b) Standards for ``well capitalized.'' A foreign bank will be 
considered ``well capitalized'' if either:
    (1)(i) Its home country supervisor, as defined in Sec. 211.21 of 
the Board's Regulation K (12 CFR 211.21), has adopted risk-based capital 
standards consistent with the Capital Accord of the Basel Committee on 
Banking Supervision (Basel Accord);
    (ii) The foreign bank maintains a Tier 1 capital to total risk-based 
assets ratio of 6 percent and a total capital to total risk-based assets 
ratio of 10 percent, as calculated under its home country standard; and
    (iii) The foreign bank's capital is comparable to the capital 
required for a U.S. bank owned by a financial holding company; or
    (2) The foreign bank has obtained a determination from the Board 
under

[[Page 215]]

Sec. 225.91(c) that the foreign bank's capital is otherwise comparable 
to the capital that would be required of a U.S. bank owned by a 
financial holding company.
    (c) Standards for ``well managed.'' A foreign bank will be 
considered ``well managed'' if:
    (1) The foreign bank has received at least a satisfactory composite 
rating of its U.S. branch, agency, and commercial lending company 
operations at its most recent assessment;
    (2) The home country supervisor of the foreign bank consents to the 
foreign bank expanding its activities in the United States to include 
activities permissible for a financial holding company; and
    (3) The management of the foreign bank meets standards comparable to 
those required of a U.S. bank owned by a financial holding company.



Sec. 225.91  How may a foreign bank elect to be treated as a financial holding 

company?

    (a) Filing requirement. A foreign bank that operates a branch or 
agency or owns or controls a commercial lending company in the United 
States, or a company that owns or controls such a foreign bank, may 
elect to be treated as a financial holding company by filing a written 
declaration with the appropriate Reserve Bank.
    (b) Contents of declaration. The declaration must:
    (1) State that the foreign bank or the company elects to be treated 
as a financial holding company;
    (2) Provide the risk-based capital ratios and amount of Tier 1 
capital and total assets of the foreign bank, and of each foreign bank 
that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, as of the close of the 
most recent quarter and as of the close of the most recent audited 
reporting period;
    (3) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, meets the standards of well 
capitalized set out in Sec. 225.90(b)(1)(i) and (ii) or Sec. 
225.90(b)(2) as of the date the foreign bank or company files its 
election;
    (4) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, is well managed as defined in 
Sec. 225.90(c)(1) as of the date the foreign bank or company files its 
election;
    (5) Certify that all U.S. depository institution subsidiaries of the 
foreign bank or company are well capitalized and well managed as of the 
date the foreign bank or company files its election; and
    (6) Provide the capital ratios for all relevant capital measures (as 
defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 
1831(o))) as of the close of the previous quarter for each U.S. 
depository institution subsidiary of the foreign bank or company.
    (c) Pre-clearance process. Before filing an election to be treated 
as a financial holding company, a foreign bank or company may file a 
request for review of its qualifications to be treated as a financial 
holding company. The Board will endeavor to make a determination on such 
requests within 30 days of receipt. A foreign bank that has not been 
found, or that is chartered in a country where no bank from that country 
has been found, by the Board under the Bank Holding Company Act or the 
International Banking Act to be subject to comprehensive supervision or 
regulation on a consolidated basis by its home country supervisor is 
required to use this process.



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

    (a) In general. An election described in Sec. 225.91 is effective 
on the 31st day after the date that an election was received by the 
appropriate Federal Reserve Bank, unless the Board notifies the foreign 
bank or company prior to that time that:
    (1) The election is ineffective; or
    (2) The period is extended with the consent of the foreign bank or 
company making the election.
    (b) Earlier notification that an election is effective. The Board or 
the appropriate Federal Reserve Bank may notify a foreign bank or 
company that its

[[Page 216]]

election to be treated as a financial holding company is effective prior 
to the 31st day after the election was filed with the appropriate 
Federal Reserve Bank. Such notification must be in writing.
    (c) Under what circumstances will the Board find an election to be 
ineffective? An election to be treated as a financial holding company 
shall not be effective if, during the period provided in paragraph (a) 
of this section, the Board finds that:
    (1) The foreign bank certificant, or any foreign bank that operates 
a branch or agency or owns or controls a commercial lending company in 
the United States and is controlled by a foreign bank or company 
certificant, is not both well capitalized and well managed;
    (2) Any U.S. insured depository institution subsidiary of the 
foreign bank or company (except an institution excluded under paragraph 
(d) of this section) or any U.S. branch of a foreign bank that is 
insured by the Federal Deposit Insurance Corporation has not achieved at 
least a rating of ``satisfactory record of meeting community needs'' 
under the Community Reinvestment Act at the institution's most recent 
examination;
    (3) Any U.S. depository institution subsidiary of the foreign bank 
or company is not both well capitalized and well managed; or
    (4) The Board does not have sufficient information to assess whether 
the foreign bank or company making the election meets the requirements 
of this subpart.
    (d) How is CRA performance of recently acquired insured depository 
institutions considered? An insured depository institution will be 
excluded for purposes of the review of CRA ratings described in 
paragraph (c)(2) of this section consistent with the provisions of Sec. 
225.82(d).
    (e) Factors used in the Board's determination regarding 
comparability of capital and management--(1) In general. In determining 
whether a foreign bank is well capitalized and well managed in 
accordance with comparable capital and management standards, the Board 
will give due regard to national treatment and equality of competitive 
opportunity. In this regard, the Board may take into account the foreign 
bank's composition of capital, Tier 1 capital to total assets leverage 
ratio, accounting standards, long-term debt ratings, reliance on 
government support to meet capital requirements, the foreign bank's 
anti-money laundering procedures, whether the foreign bank is subject to 
comprehensive supervision or regulation on a consolidated basis, and 
other factors that may affect analysis of capital and management. The 
Board will consult with the home country supervisor for the foreign bank 
as appropriate.
    (2) Assessment of consolidated supervision. A foreign bank that is 
not subject to comprehensive supervision on a consolidated basis by its 
home country authorities may not be considered well capitalized and well 
managed unless:
    (i) The home country has made significant progress in establishing 
arrangements for comprehensive supervision on a consolidated basis; and
    (ii) The foreign bank is in strong financial condition as 
demonstrated, for example, by capital levels that significantly exceed 
the minimum levels that are required for a well capitalized 
determination and strong asset quality.



Sec. 225.93  What are the consequences of a foreign bank failing to continue 

to meet applicable capital and management requirements?

    (a) Notice by the Board. If a foreign bank or company has made an 
effective election to be treated as a financial holding company under 
this subpart and the Board finds that the foreign bank, any foreign bank 
that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, or any U.S. depository 
institution subsidiary controlled by the foreign bank or company, ceases 
to be well capitalized or well managed, the Board will notify the 
foreign bank and company, if any, in writing that it is not in 
compliance with the applicable requirement(s) for a financial holding 
company and identify the areas of noncompliance.
    (b) Notification by a financial holding company required--(1) Notice 
to Board. Promptly upon becoming aware that the foreign bank, any 
foreign bank

[[Page 217]]

that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, or any U.S. depository 
institution subsidiary of the foreign bank or company, has ceased to be 
well capitalized or well managed, the foreign bank and company, if any, 
must notify the Board and identify the area of noncompliance.
    (2) Triggering events for notice to the Board--(i) Well capitalized. 
A foreign bank becomes aware that it is no longer well capitalized at 
the time that the foreign bank or company is required to file a report 
of condition (or similar supervisory report) with its home country 
supervisor or the appropriate Federal Reserve Bank that indicates that 
the foreign bank no longer meets the well capitalized standards.
    (ii) Well managed. A foreign bank becomes aware that it is no longer 
well managed at the time that the foreign bank receives written notice 
from the appropriate Federal Reserve Bank that the composite rating of 
its U.S. branch, agency, and commercial lending company operations is 
not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice under 
paragraph (a) of this section, the foreign bank or company must execute 
an agreement acceptable to the Board to comply with all applicable 
capital and management requirements.
    (2) Extension of time for executing agreement. Upon request by the 
foreign bank or company, the Board may extend the 45-day period under 
paragraph (c)(1) of this section if the Board determines that granting 
additional time is appropriate under the circumstances. A request by a 
foreign bank or company for additional time must include an explanation 
of why an extension is necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1) of this section to correct a capital or management deficiency 
must:
    (i) Explain the specific actions that the foreign bank or company 
will take to correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.
    (d) Limitations during period of noncompliance--Until the Board 
determines that a foreign bank or company has corrected the conditions 
described in a notice under paragraph (a) of this section:
    (1) The Board may impose any limitations or conditions on the 
conduct or the U.S. activities of the foreign bank or company or any of 
its affiliates as the Board finds to be appropriate and consistent with 
the purposes of the Bank Holding Company Act; and
    (2) The foreign bank or company and its affiliates may not commence 
any additional activity in the United States or acquire control or 
shares of any company under section 4(k) of the Bank Holding Company Act 
(12 U.S.C. 1843(k)) without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Termination of Offices and Divestiture. If a foreign bank or company 
does not correct the conditions described in a notice under paragraph 
(a) of this section within 180 days of receipt of the notice or such 
additional time as the Board may permit, the Board may order the foreign 
bank or company to terminate the foreign bank's U.S. branches and 
agencies and divest any commercial lending companies owned or controlled 
by the foreign bank or company. Such divestiture must be done in 
accordance with the terms and conditions established by the Board.
    (2) Alternative method of complying with a divestiture order. A 
foreign bank or company may comply with an order issued under paragraph 
(e)(1) of this section by ceasing to engage (both directly and through 
any subsidiary that is not a depository institution or a subsidiary of a 
depository institution) in any activity that may be conducted only under 
section 4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n) and 
(o)). The termination of activities must be completed within the time 
period referred to in paragraph (e)(1) of this section and subject to 
terms and conditions acceptable to the Board.

[[Page 218]]

    (f) Consultation with Other Agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and state 
regulatory authorities and the appropriate home country supervisor(s) of 
the foreign bank.



Sec. 225.94  What are the consequences of an insured branch or depository 

institution failing to maintain a satisfactory or better rating under the 

Community Reinvestment Act?

    (a) Insured branch as an ``insured depository institution.'' A U.S. 
branch of a foreign bank that is insured by the Federal Deposit 
Insurance Corporation shall be treated as an ``insured depository 
institution'' for purposes of Sec. 225.84.
    (b) Applicability. The provisions of Sec. 225.84, with the 
modifications contained in this section, shall apply to a foreign bank 
that operates an insured branch referred to in paragraph (a) of this 
section or an insured depository institution in the United States, and 
any company that owns or controls such a foreign bank, that has made an 
effective election under Sec. 225.92 in the same manner and to the same 
extent as they apply to a financial holding company.

                             Interpretations



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

nonbanking companies.

    (a) The Board's opinion has been requested on the following related 
matters under the Bank Holding Company Act of 1956.
    (b) The question is raised as to whether shares in a nonbanking 
company which were acquired by a banking subsidiary of the bank holding 
company many years ago when their acquisition was lawful and are now 
held as investments, and which do not include more than 5 percent of the 
outstanding voting securities of such nonbanking company and do not have 
a value greater than 5 percent of the value of the bank holding 
company's total assets, are exempted from the divestment requirements of 
the Act by the provisions of section 4(c)(5) of the Act.
    (c) In the Board's opinion, this exemption is as applicable to such 
shares when held by a banking subsidiary of a bank holding company as 
when held directly by the bank holding company itself. While the 
exemption specifically refers only to shares held or acquired by the 
bank holding company, the prohibition of the Act against retention of 
nonbanking interests applies to indirect as well as direct ownership of 
shares of a nonbanking company, and, in the absence of a clear mandate 
to the contrary, any exception to this prohibition should be given equal 
breadth with the prohibition. Any other interpretation would lead to 
unwarranted results.
    (d) Although certain of the other exemptions in section 4(c) of the 
Act specifically refer to shares held or acquired by banking 
subsidiaries, an analysis of those exemptions suggests that such 
specific reference to banking subsidiaries was for the purpose of 
excluding nonbanking subsidiaries from such exemptions, rather than for 
the purpose of providing an inclusionary emphasis on banking 
subsidiaries.
    (e) It should be noted that the Board's view as to this question 
should not be interpreted as meaning that each banking subsidiary could 
own up to 5 percent of the stock of the same nonbanking organization. In 
the Board's opinion the limitations set forth in section 4(c)(5) apply 
to the aggregate amount of stock held in a particular organization by 
the bank holding company itself and by all of its subsidiaries.
    (f) Secondly, question is raised as to whether shares in a 
nonbanking company acquired in satisfaction of debts previously 
contracted (d.p.c.) by a banking subsidiary of the bank holding company 
may be retained if such shares meet the conditions contained in section 
4(c)(5) as to value and amount, notwithstanding the requirement of 
section 4(c)(2) that shares acquired d.p.c. be disposed of within two 
years after the date of their acquisition or the date of the Act, 
whichever is later. In the Board's opinion, the 5 percent exemption 
provided by section 4(c)(5) covers any shares, including shares acquired 
d.p.c., that meet the conditions set forth in that exemption, and, 
consequently, d.p.c. shares held by a banking subsidiary of a bank 
holding

[[Page 219]]

company which meet such conditions are not subject to the two-year 
disposition requirement prescribed by section 4(c)(2), although any such 
shares would, of course, continue to be subject to such requirement for 
disposition as may be prescribed by provisions of any applicable banking 
laws or by the appropriate bank supervisory authorities.
    (g) Finally, question is raised as to whether shares held by banking 
subsidiaries of the bank holding company in companies holding bank 
premises of such subsidiaries are exempted from the divestment 
requirements by section 4(c)(1) of the Act. It is the Board's view that 
section 4(c)(1), exempting shares owned or acquired by a bank holding 
company in any company engaged solely in holding or operating properties 
used wholly or substantially by any subsidiary bank, is to be read and 
interpreted, like section 4(c)(5), as applying to shares owned 
indirectly by a bank holding company through a banking subsidiary as 
well as to shares held directly by the bank holding company. A contrary 
interpretation would impair the right that member banks controlled by 
bank holding companies would otherwise have to invest, subject to the 
limitations of section 24A of the Federal Reserve Act, in stock of 
companies holding their bank premises; and such a result was not, in the 
Board's opinion, intended by the Bank Holding Company Act.

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



Sec. 225.102  Bank holding company indirectly owning nonbanking company 

through subsidiaries.

    (a) The Board of Governors has been requested for an opinion 
regarding the exemptions contained in section 4(c)(5) of the Bank 
Holding Company Act of 1956. It is stated that Y Company is an 
investment company which is not a bank holding company and which is not 
engaged in any business other than investing in securities, which 
securities do not include more than 5 per centum of the outstanding 
voting securities of any company and do not include any asset having a 
value greater than 5 per centum of the value of the total assets of X 
Corporation, a bank holding company. It is stated that direct ownership 
by X Corporation of voting shares of Y Company would be exempt by reason 
of section 4(c)(5) from the prohibition of section 4 of the Act against 
ownership by bank holding companies of nonbanking assets.
    (b) It was asked whether it makes any difference that the shares of 
Y Company are not owned directly by X Corporation but instead are owned 
through Subsidiaries A and B. X Corporation owns all the voting shares 
of Subsidiary A, which owns one-half of the voting shares of Subsidiary 
B. Subsidiaries A and B each own one-third of the voting shares of Y 
Company.
    (c) Section 4(c)(5) is divided into two parts. The first part 
exempts the ownership of securities of nonbanking companies when the 
securities do not include more than 5 percent of the voting securities 
of the nonbanking company and do not have a value greater than 5 percent 
of the value of the total assets of the bank holding company. The second 
part exempts the ownership of securities of an investment company which 
is not a bank holding company and is not engaged in any business other 
than investing in securities, provided the securities held by the 
investment company meet the 5 percent tests mentioned above.
    (d) In Sec. 225.101, the Board expressed the opinion that the first 
exemption in section 4(c)(5):

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

    (e) The Board is of the view that the principles stated in that 
opinion are also applicable to the second exemption in section 4(c)(5), 
and that they apply whether or not the subsidiary owning the shares is a 
banking subsidiary. Accordingly, on the basis of the facts presented, 
the Board is of the opinion that the second exemption in

[[Page 220]]

section 4(c)(5) applies to the indirect ownership by X Corporation of 
shares of Y Company through Subsidiaries A and B.

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



Sec. 225.103  Bank holding company acquiring stock by dividends, stock splits 

or exercise of rights.

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

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



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

    (a) Section 4(c)(1) of the Bank Holding Company Act, among other 
things, exempts from the nonbanking divestment requirements of section 
4(a) of the Act shares of a company engaged ``solely in the business of 
furnishing services to or performing services for'' its bank holding 
company or subsidiary banks thereof.
    (b) The Board of Governors has had occasion to express opinions as 
to whether this section of law applies to the following two sets of 
facts:
    (1) In the first case, Corporation X, a nonbanking subsidiary of a 
bank holding company (Holding Company A), was engaged in the business of 
purchasing installment paper suitable for investment by banking 
subsidiaries of Holding Company A. All installment paper purchased by 
Corporation X was sold by it to a bank which is a subsidiary of Holding 
Company A, without recourse, at a price equal to the cost of the 
installment paper to Corporation X, and with compensation to the latter 
based on the earnings from such paper remaining after certain reserves, 
expenses and charges. The subsidiary bank sold participations in such 
installment paper to the other affiliated banks of Holding Company A 
which desired to participate. Purchases by Corporation X consisted 
mainly of paper insured under Title I of the National Housing Act and, 
in addition, Corporation X purchased time payment contracts covering 
sales of appliances by dealers under contractual arrangements with 
utilities, as well as paper covering home improvements which was not 
insured. Pursuant to certain service agreements, Corporation X made all 
collections, enforced guaranties, filed claims under Title I insurance 
and performed other services for the affiliated banks. Also Corporation 
X rendered to banking subsidiaries of

[[Page 221]]

Holding Company A various accounting, statistical and advisory services 
such as payroll, life insurance and budget loan installment account.
    (2) In the second case, Corporation Y, a nonbanking subsidiary of a 
bank holding company (Holding Company B, which was also a bank), 
solicited business on behalf of Holding Company B from dealers, 
throughout several adjoining or contiguous States, who made time sales 
and desired to convert their time sales paper into cash; but Corporation 
Y made no loans or purchases of sales contracts and did not discount or 
advance money for time sales obligations. Corporation Y investigated 
credit standings of purchasers obligated on time sale contracts to be 
acquired by Holding Company B, Corporation Y received from dealers the 
papers offered by them and inspected such papers to see that they were 
in order, and transmitted to Holding Company B for its determination to 
purchase, including, in some cases, issuance of drafts in favor of 
dealers in order to facilitate their prompt receipt of payment for 
installment paper purchased by Holding Company B. Corporation Y made 
collections of delinquent paper or delinquent installments, which 
sometimes involved repossession and resale of the automobile or other 
property which secured the paper. Also, upon request of purchasers 
obligated on paper held by Holding Company B, Corporation Y transmitted 
installment payments to Holding Company B. Holding Company B reimbursed 
Corporation Y for its actual costs and expenses in performing the 
services mentioned above, including the salaries and wages of all 
Corporation Y officers and employees.
    (c) While the term ``services'' is sometimes used in a broad and 
general sense, the legislative history of the Bank Holding Company Act 
indicates that in section 4(c)(1) the word was meant to be somewhat more 
limited in its application. An early version of the bill specifically 
exempted companies engaged in serving the bank holding company and its 
subsidiary banks in ``auditing, appraising, investment counseling''. The 
statute as finally enacted does not expressly mention any specific type 
of servicing activity for exemption. In recommending the change, the 
Senate Banking and Currency Committee stated that the types of services 
contemplated are ``in the fields of advertising, public relations, 
developing new business, organizations, operations, preparing tax 
returns, personnel, and many others'', which indicates that latitude 
should be given to the range of activities contemplated by this section 
beyond those specifically set forth in the early draft of the bill. 
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3.) It 
nevertheless seems evident that Congress intended such services to be 
types of activities generally comparable to those mentioned above from 
the early bill (``auditing, appraising, investment counseling'') and in 
the excerpt from the Committee Report on the later bill (``advertising, 
public relations, developing new business, organization, operations, 
preparing tax returns, personnel, and many others''). This legislative 
history and the context in which the term ``services'' is used in 
section 4(c)(1) seem to suggest that the term was in general intended to 
refer to servicing operations which a bank could carry on itself, but 
which the bank or its holding company chooses to have done through 
another organization. Moreover, the report of the Senate Banking and 
Currency Committee indicated that the types of servicing permitted under 
section 4(c)(1) are to be distinguished from activities of a 
``financial, fiduciary, or insurance nature'', such as those which might 
be considered for possible exemption under section 4(c)(6) of the Act.
    (d) With respect to the first set of facts, the Board expressed the 
opinion that certain of the activities of Corporation X, such as the 
accounting, statistical and advisory services referred to above, may be 
within the range of servicing activities contemplated by section 
4(c)(1), but that this would not appear to be the case with the main 
activity of Corporation X, which was the purchase of installment paper 
and the resale of such paper at cost, without recourse, to banking 
subsidiaries of Holding Company A. This latter and basic activity of 
Corporation X appeared to involve

[[Page 222]]

essentially a financial relationship between it and the banking 
subsidiaries of Holding Company A and appeared beyond the category of 
servicing exemptions contemplated by section 4(c)(1) of the Act. 
Accordingly, it was the Board's view that Corporation X could not be 
regarded as qualifying under section 4 (c)(1) as a company engaged 
``solely in the business of furnishing services to or performing 
services for'' Holding Company A or subsidiary banks thereof.
    (e) With respect to the second set of facts, the Board expressed the 
opinion that some of the activities engaged in by Corporation Y were 
clearly within the range of servicing activities contemplated by section 
4(c)(1). There was some question as to whether or not some of the other 
activities of Corporation Y mentioned above could meet the test, but on 
balance, it seemed that all such activities probably were activities in 
which Holding Company B, which as already indicated was a bank, could 
itself engage, at the present locations of Corporation Y, without being 
engaged in the operation of bank branches at those locations. In the 
circumstances, while the question was not free from doubt, the Board 
expressed the opinion that the activities of Corporation Y were those of 
a company engaged ``solely in the business of furnishing services to or 
performing services for'' Holding Company B within the meaning of 
section 4(c)(1) of the Act, and that, accordingly, the control by 
Holding Company B of shares in Corporation Y was exempted under that 
section.

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



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

    (a) A registered bank holding company requested an opinion by the 
Board of Governors with respect to whether that company and its banking 
subsidiaries may acquire stock in a small business investment company 
organized pursuant to the Small Business Investment Act of 1958.
    (b) It is understood that the bank holding company and its 
subsidiary banks propose to organize and subscribe for stock in a small 
business investment company which would be chartered pursuant to the 
Small Business Investment Act of 1958 which provides for long-term 
credit and equity financing for small business concerns.
    (c) Section 302(b) of the Small Business Investment Act authorizes 
national banks, as well as other member banks and nonmember insured 
banks to the extent permitted by applicable State law, to invest capital 
in small business investment companies not exceeding one percent of the 
capital and surplus of such banks. Section 4(c)(4) of the Bank Holding 
Company Act exempts from the prohibitions of section 4 of the Act 
``shares which are of the kinds and amounts eligible for investment by 
National banking associations under the provisions of section 5136 of 
the Revised Statutes''. Section 5136 of the Revised Statutes (paragraph 
``Seventh'') in turn provides, in part, as follows:

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


Since the shares of a small business investment company are of a kind 
and amount expressly made eligible for investment by a national bank 
under the Small Business Investment Act of 1958, it follows, therefore, 
that the ownership or control of such shares by a bank holding company 
would be exempt from the prohibitions of section 4 of the Bank Holding 
Company Act by virtue of the provisions of section 4(c)(4) of that Act. 
Accordingly, the ownership or control of such shares by the bank holding 
company would be exempt from the prohibitions of section 4 of the Bank 
Holding Company Act.
    (d) An additional question is presented, however, as to whether 
section 6 of the Bank Holding Company Act prohibits banking subsidiaries 
of the bank holding company from purchasing stock in a small business 
investment company where the latter is a ``subsidiary'' under that Act.
    (e) Section 6(a)(1) of the Act makes it unlawful for a bank to 
invest any of its funds in the capital stock of any other subsidiary of 
the bank holding company. However, section 6(a)(1) was, in effect, 
amended by section 302(b) of the

[[Page 223]]

Small Business Investment Act (15 U.S.C. 682) as amended by the Act of 
June 11, 1960 (Pub. L. 86-502) so as to nullify this prohibition when 
the ``subsidiary'' is a small business investment company.
    (f) Accordingly, section 6 of the Bank Holding Company Act does not 
prohibit banking subsidiaries of the bank holding company from 
purchasing stock in a small business investment company organized 
pursuant to the Small Business Investment Act of 1958, where that 
company is or will be a subsidiary of the bank holding company.

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



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

    (a) The Board of Governors has been requested by a bank holding 
company for an interpretation under section 4(c)(1) of the Bank Holding 
Company Act which, among other things, exempts from the nonbanking 
divestment requirements of section 4(a) of the Act, shares of a company 
engaged ``solely in the business of furnishing services to or performing 
services for'' its bank holding company or subsidiary banks thereof.
    (b) It is understood that a nonbanking subsidiary of the holding 
company engages in writing comprehensive automobile insurance (fire, 
theft, and collision) which is sold only to customers of a subsidiary 
bank of the holding company in connection with the bank's retail 
installment loans; that when payment is made on a loan secured by a lien 
on a motor vehicle, renewal policies are not issued by the insurance 
company; and that the insurance company receives the usual agency 
commissions on all comprehensive automobile insurance written for 
customers of the bank.
    (c) It is also understood that the insurance company writes credit 
life insurance for the benefit of the bank and its installment-loan 
customers; that each insured debtor is covered for an amount equal to 
the unpaid balance of his note to the bank, not to exceed $5,000; that 
as the note is reduced by regular monthly payments, the amount of 
insurance is correspondingly reduced so that at all times the debtor is 
insured for the unpaid balance of his note; that each insurance contract 
provides for payment in full of the entire loan balance upon the death 
or permanent disability of the insured borrower; and that this credit 
life insurance is written only at the request of, and solely for, the 
bank's borrowing customers. It is further understood that the insurance 
company engages in no other activity.
    (d) As indicated in Sec. 225.104 (23 FR 2675), the term 
``services,'' while sometimes used in a broad and general sense, appears 
to be somewhat more limited in its application in section 4(c)(1) of the 
Bank Holding Company Act. Unlike an early version of the Senate bill (S. 
2577, before amendment), the act as finally enacted does not expressly 
mention any type of servicing activity for exemption. The legislative 
history of the Act, however, as indicated in the relevant portion of the 
record of the Senate Banking and Currency Committee on amended S. 2577 
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3) makes it 
evident that Congress had in mind the exemption of services comparable 
to the types of activities mentioned expressly in the early Senate bill 
(``auditing, appraising, investment counseling'') and in the Committee 
Report on the later bill (``advertising, public relations, developing 
new business, organization, operations, preparing tax returns, 
personnel, and many others''). Furthermore, this Committee Report 
expressly stated that the provision of section 4(c)(1) with respect to 
``furnishing services to or performing services for'' was not intended 
to supplant the exemption contained under section 4 (c)(6) of the Act.
    (e) The only activity of the insurance company (writing 
comprehensive automobile insurance and credit life insurance) appears to 
involve an insurance relationship between it and a banking subsidiary of 
the holding company which the legislative history clearly indicates does 
not come within the meaning of the phrase ``furnishing services to or 
performing services for'' a bank holding company or its banking 
subsidiaries.

[[Page 224]]

    (f) Accordingly, it is the Board's view that the insurance company 
could not be regarded as qualifying as a company engaged ``solely in the 
business of furnishing services to or performing services for'' the bank 
holding company or banks with respect to which the latter is a bank 
holding company.

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



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

small business investment companies.

    (a) Under the provisions of section 4(c)(5) of the Bank Holding 
Company Act, as amended (12 U.S.C. 1843), a bank holding company may 
acquire shares of nonbank companies ``which are of the kinds and amounts 
eligible for investment'' by national banks. Pursuant to section 302(b) 
of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)), as 
amended by Title II of the Small Business Act Amendments of 1967 (Pub. 
L. 90-104, 81 Stat. 268, 270), a national bank may invest in stock of 
small business investment companies (SBICs) subject to certain 
restrictions.
    (b) On the basis of the foregoing statutory provisions, it is the 
position of the Board that a bank holding company may acquire direct or 
indirect ownership or control of stock of an SBIC subject to the 
following limits:
    (1) The total direct and indirect investments of a bank holding 
company in stock of SBICs may not exceed:
    (i) With respect to all stock of SBICs owned or controlled directly 
or indirectly by a subsidiary bank, 5 percent of that bank's capital and 
surplus;
    (ii) With respect to all stock of SBICs owned directly by a bank 
holding company that is a bank, 5 percent of that bank's capital and 
surplus; and
    (iii) With respect to all stock of SBICs otherwise owned or 
controlled directly or indirectly by a bank holding company, 5 percent 
of its proportionate interest in the capital and surplus of each 
subsidiary bank (that is, the holding company's percentage of that 
bank's stock times that bank's capital and surplus) less that bank's 
investment in stock of SBICs; and
    (2) A bank holding company may not acquire direct or indirect 
ownership or control of 50 percent or more of the shares of any class of 
equity securities of an SBIC that have actual or potential voting 
rights.
    (c) A bank holding company or a bank subsidiary that acquired direct 
or indirect ownership or control of 50 percent or more of any such class 
of equity securities prior to January 9, 1968, is not required to divest 
to a level below 50 percent. A bank that acquired 50 percent or more 
prior to January 9, 1968, may become a subsidiary in a holding company 
system without any necessity for divesting to a level below 50 percent: 
Provided, That such action does not result in the bank holding company 
acquiring control of a percentage greater than that controlled by such 
bank.

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

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



Sec. 225.112  Indirect control of small business concern through convertible 

debentures held by small business investment company.

    (a) A question has been raised concerning the applicability of 
provisions of the Bank Holding Company Act of 1956 to the acquisition by 
a bank holding company of stock of a small business investment company 
(``SBIC'') organized pursuant to the Small Business Investment Act of 
1958 (``SBI Act'').
    (b) As indicated in the interpretation of the Board (Sec. 225.107) 
published at 23 FR 7813, it is the Board's opinion that, since stock of 
an SBIC is eligible for purchase by national banks and since section 
4(c)(4) of the Holding Company Act exempts stock eligible for investment 
by national banks from the prohibitions of section 4 of that Act, a bank 
holding company may lawfully acquire stock in such an SBIC.
    (c) However, section 304 of the SBI Act provides that debentures of 
a small business concern purchased by a small business investment 
company may be converted at the option of such company into stock of the 
small business concern. The question therefore arises as to whether, in 
the event of such conversion, the parent bank holding company would be 
regarded as having acquired ``direct or indirect ownership or

[[Page 225]]

control'' of stock of the small business concern in violation of section 
4(a) of the Holding Company Act.
    (d) The Small Business Investment Act clearly contemplates that one 
of the primary purposes of that Act was to enable SBICs to provide 
needed equity capital to small business concerns through the purchase of 
debentures convertible into stock. Thus, to the extent that a 
stockholder in an SBIC might acquire indirect control of stock of a 
small business concern, such control appears to be a natural and 
contemplated incident of ownership of stock of the SBIC. The Office of 
the Comptroller of the Currency has informally indicated concurrence 
with this interpretation insofar as it affects investments by national 
banks in stock of an SBIC.
    (e) Since the exception as to stock eligible for investment by 
national banks contained in section 4(c)(4) of the Holding Company Act 
was apparently intended to permit a bank holding company to acquire any 
stock that would be eligible for purchase by a national bank, it is the 
Board's view that section 4(a)(1) of the Act does not prohibit a bank 
holding company from acquiring stock of an SBIC, even though ownership 
of such stock may result in the acquisition of indirect ownership or 
control of stock of a small business concern which would not itself be 
eligible for purchase directly by a national bank or a bank holding 
company.

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



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

    (a) The Board of Governors has been requested for an opinion as to 
whether the performance of certain functions by a bank holding company 
for four banks of which it owns less than 25 percent of the voting 
shares is in violation of section 4(a) of the Bank Holding Company Act.
    (b) It is claimed that the holding company is engaged in 
``managing'' four nonsubsidiary banks, for which services it receives 
``management fees.'' Specifically, the company engages in the following 
activities for the four nonsubsidiary banks: (1) Establishment and 
supervision of loaning policies; (2) direction of the purchase and sale 
of investment securities; (3) selection and training of officer 
personnel; (4) establishment and enforcement of operating policies; and 
(5) general supervision over all policies and practices.
    (c) The question raised is whether these activities are prohibited 
by section 4(a)(2) of the Bank Holding Company Act, which permits a bank 
holding company to engage in only three categories of business: (1) 
Banking; (2) managing or controlling banks; and (3) furnishing services 
to or performing services for any bank of which the holding company owns 
or controls 25 percent or more of the voting shares.
    (d) Clearly, the activities of the company with respect to the four 
nonsubsidiary banks do not constitute ``banking.'' With respect to the 
business of ``managing or controlling'' banks, it is the Board's view 
that such business, within the purview of section 4(a)(2), is 
essentially the exercise of a broad governing influence of the sort 
usually exercised by bank stockholders, as distinguished from direct or 
active participation in the establishment or carrying out of particular 
policies or operations. The latter kinds of activities fall within the 
third category of businesses in which a bank holding company is 
permitted to engage. In the Board's view, the activities enumerated 
above fall in substantial part within that third category.
    (e) Section 4(a)(2), like all other sections of the Holding Company 
Act, must be interpreted in the light of all of its provisions, as well 
as in the light of other sections of the Act. The expression ``managing 
* * * banks,'' if it could be taken by itself, might appear to include 
activities of the sort enumerated. However, such an interpretation of 
those words would virtually nullify the last portion of section 4(a)(2), 
which permits a holding company to furnish services to or perform 
services for ``any bank of which it owns or controls 25 per centum or 
more of the voting shares.''
    (f) Since Congress explicitly authorized the performance of services 
for banks that are at least 25 percent

[[Page 226]]

owned by a holding company, it obviously intended that the holding 
company should not perform services for banks in which it owns less than 
25 percent of the voting shares. However, if the second category--
``managing or controlling banks''--were interpreted to permit the 
holding company to perform services for any bank, including a bank in 
which it held less than 25 percent of the stock (or no stock 
whatsoever), the last clause of section 4(a)(2) would be meaningless.
    (g) It is principally for this reason--that is, to give effective 
meaning to the final clause of section 4(a)(2)--that the Board 
interprets ``managing or controlling banks'' in that provision as 
referring to the exercise of a stockholder's management or control of 
banks, rather than direct and active participation in their operations. 
To repeat, such active participation in operations falls within the 
third category (``furnishing services to or performing services for any 
bank'') and consequently may be engaged in only with respect to banks in 
which the holding company ``owns or controls 25 per centum or more of 
the voting shares.''
    (h) Accordingly, it is the Board's conclusion that, in performing 
the services enumerated, the bank holding company is ``furnishing 
services to or performing services for'' the four banks referred to. 
Under the Act such furnishing or performing of services is permissible 
only if the holding company owns or controls 25 percent of the voting 
shares of each bank receiving such services, and, since the company owns 
less than 25 percent of the voting shares of these banks, it follows 
that these activities are prohibited by section 4(a)(2).
    (i) While this conclusion is required, in the Board's opinion, by 
the language of the statute, it may be noted further that any other 
conclusion would make it possible for bank holding company or any other 
corporation, through arrangements for the ``managing'' of banks in the 
manner here involved, to acquire effective control of banks without 
acquiring bank stocks and thus to evade the underlying objectives of 
section 3 of the Act.

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



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

holding company situations.

    (a) Questions have been presented to the Board of Governors 
regarding the applicability of the recently enacted Bank Service 
Corporation Act (Pub. L. 87-856, approved October 23, 1962) in cases 
involving service corporations that are subsidiaries of bank holding 
companies under the Bank Holding Company Act of 1956. In addition to 
being charged with the administration of the latter Act, the Board is 
named in the Bank Service Corporation Act as the Federal supervisory 
agency with respect to the performance of bank services for State member 
banks.
    (b) Holding company-owned corporation serving only subsidiary banks. 
(1) One question is whether the Bank Service Corporation Act is 
applicable in the case of a corporation, wholly owned by a bank holding 
company, which is engaged in performing ``bank services'', as defined in 
section 1(b) of the Act, exclusively for subsidiary banks of the holding 
company.
    (2) Except as noted below with respect to section 5 thereof, the 
Bank Service Corporation Act is not applicable in this case. This is 
true because none of the stock of the corporation performing the 
services is owned by any bank and the corporation, therefore, is not a 
``bank service corporation'' as defined in section 1(c) of the Act. A 
corporation cannot meet that definition unless part of its stock is 
owned by two or more banks. The situation clearly is unaffected by 
section 2(b) of the Act which permits a corporation that fell within the 
definition initially to continue to function as a bank service 
corporation although subsequently only one of the banks remains as a 
stockholder in the corporation.
    (3) However, although it is not a bank service corporation, the 
corporation in question and each of the banks for which it performs bank 
services are subject to section 5 of the Bank Service Corporation Act. 
That section, which requires the furnishing of certain assurances to the 
appropriate Federal supervisory agency in connection with the 
performance of bank services for a

[[Page 227]]

bank, is applicable whether such services are performed by a bank 
service corporation or by others.
    (4) Section 4(a)(1) of the Bank Holding Company Act prohibits the 
acquisition by a bank holding company of ``direct or indirect ownership 
or control'' of shares of a nonbanking company, subject to certain 
exceptions. Section 4(c)(1) of the Act exempts from section 4(a)(1) 
shares of a company engaged ``solely in the business of furnishing 
services to or performing services for'' its bank holding company or 
subsidiary banks thereof. Assuming that the bank services performed by 
the corporation in question are ``services'' of the kinds contemplated 
by section 4(c)(1) of the Bank Holding Company Act (as would be true, 
for example, of the electronic data processing of deposit accounts), the 
holding company's ownership of the corporation's shares in the situation 
described above clearly is permissible under that section of the Act.
    (c) Bank service corporation owned by holding company subsidiaries 
and serving also other banks. (1) The other question concerns the 
applicability of the Bank Service Corporation Act and the Bank Holding 
Company Act in the case of a corporation, all the stock of which is 
owned either by a bank holding company and its subsidiary banks together 
or by the subsidiary banks alone, which is engaged in performing ``bank 
services'', as defined in section 1(b) of the Bank Service Corporation 
Act, for the subsidiary banks and for other banks, as well.
    (2) In contrast to the situation under paragraph (b) of this 
section, the corporation in this case is a ``bank service corporation'' 
within the meaning of section 1(c) of the Bank Service Corporation Act 
because of the ownership by each of the subsidiary banks of a part of 
the corporation's stock. This stock ownership is one of the important 
facts differentiating this case from the first one. Being a bank service 
corporation, the corporation in question is subject to section 3 of the 
Act concerning applications to bank service corporations by competitive 
banks for bank services, and to section 4 forbidding a bank service 
corporation from engaging in any activity other than the performance of 
bank services for banks. Section 5, mentioned previously and relating to 
``assurances'', also is applicable in this case.
    (3) The other important difference between this case and the 
situation in paragraph (b) of this section is that here the bank service 
corporation performs services for nonsubsidiary banks, as well as for 
subsidiary banks. This is permissible because section 2(a) of the Bank 
Service Corporation Act, which authorizes any two or more banks to 
invest limited amounts in a bank service corporation, removes all 
limitations and prohibitions of Federal law exclusively relating to 
banks that otherwise would prevent any such investment. From the 
legislative history of section 2(a), it is clear that section 6 of the 
Bank Holding Company Act is among the limitations and prohibitions so 
removed. But for such removal, section 6(a)(1) of that Act would make it 
unlawful for any of the subsidiary banks of the bank holding company in 
question to own stock in the bank service corporation subsidiary of the 
holding company, as the exemption in section 6(b)(1) would not apply 
because of the servicing by the bank service corporation of 
nonsubsidiary banks.
    (4) Because the bank service corporation referred to in the question 
is serving banks other than the subsidiary banks, the bank holding 
company is not exempt under section 4(c)(1) of the Bank Holding Company 
Act from the prohibition of acquisition of nonbanking interests in 
section 4(a)(1) of that Act. The bank holding company, however, is 
entitled to the benefit of the exemption in section 4(c)(4) of the Act. 
That section exempts from section 4(a) ``shares which are of the kinds 
and amounts eligible for investment by National banking associations 
under the provisions of section 5136 of the Revised Statutes''. Section 
5136 provides, in part, that: ``Except as hereinafter provided or 
otherwise permitted by law, nothing herein contained shall authorize the 
purchase by the association for its own account of any shares of stock 
of any corporation.'' As the provisions of section 2(a) of the Bank 
Service Corporation Act and its legislative history make it clear that 
shares of a bank service corporation are of a

[[Page 228]]

kind eligible for investment by national banks under section 5136, it 
follows that the direct or indirect ownership on control of such shares 
by a bank holding company are permissible within the amount limitation 
discussed in paragraph (d) of this section.
    (d) Limit on investment by bank holding company system in stock of 
bank service corporation. (1) In the situation presented by paragraph 
(c) the bank holding company clearly owns or controls, directly or 
indirectly, all of the stock of the bank service corporation. The 
remaining question, therefore, is whether the total direct and indirect 
investment of the bank holding company in the bank service corporation 
exceeds the amount permissible under the Bank Holding Company Act.
    (2) The effect of sections 4(a)(1) and 4(c)(4) of the Bank Holding 
Company Act is to limit the amount of shares of a bank service 
corporation that a bank holding company may own or control, directly or 
indirectly, to the amount eligible for investment by a national bank, as 
previously indicated. Under section 2(a) of the Bank Service Corporation 
Act, the amount of shares of a bank service corporation eligible for 
investment by a national bank may not exceed ``10 per centum [of the 
bank's] * * * paid-in and unimpaired capital and unimpaired surplus''.
    (3) The Board's view is that this aspect of the matter should be 
determined in accordance with the principles set forth in Sec. 225.111, 
as revised (27 FR 12671), involving the application of sections 4(a)(1) 
and 4(c)(4) of the Bank Holding Company Act in the light of section 
302(b) of the Small Business Investment Act limiting the amount eligible 
for investment by a national bank in the shares of a small business 
investment company to two percent of the bank's ``capital and surplus''.
    (4) Except for the differences in the percentage figures, the 
investment limitation in section 302(b) of the Small Business Investment 
Act is essentially the same as the investment limitation in section 2(a) 
of the Bank Service Corporation Act since, as an accounting matter and 
for the purposes under consideration, ``capital and surplus'' may be 
regarded as equivalent in meaning to ``paid-in and unimpaired capital 
and unimpaired surplus.'' Accordingly, the maximum permissible 
investment by a bank holding company system in the stock of a bank 
service corporation should be determined in accordance with the formula 
prescribed in Sec. 222.111.

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



Sec. 225.118  Computer services for customers of subsidiary banks.

    (a) The question has been presented to the Board of Governors 
whether a wholly-owned nonbanking subsidiary (``service company'') of a 
bank holding company, which is now exempt from the prohibitions of 
section 4 of the Bank Holding Company Act of 1956 (``the Act'') because 
its sole business is the providing of services for the holding company 
and the latter's subsidiary banks, would lose its exempt status if it 
should provide data processing services for customers of the subsidiary 
banks.
    (b) The Board understood from the facts presented that the service 
company owns a computer which it utilizes to furnish data processing 
services for the subsidiary banks of its parent holding company. 
Customers of these banks have requested that the banks provide for them 
computerized billing, accounting, and financial records maintenance 
services. The banks wish to utilize the computer services of the service 
company in providing these and other services of a similar nature. It is 
proposed that, in each instance where a subsidiary bank undertakes to 
provide such services, the bank will enter into a contract directly with 
the customer and then arrange to have the service company perform the 
services for it, the bank. In no case will the service company provide 
services for anyone other than its affiliated banks. Moreover, it will 
not hold itself out as, nor will its parent corporation or affiliated 
banks represent it to be, authorized or willing to provide services for 
others.
    (c) Section 4(c)(1) of the Act permits a holding company to own 
shares in ``any company engaged solely * * * in the business of 
furnishing services to or performing services for such holding company 
and banks with respect to which it is a bank holding company

[[Page 229]]

* * *.'' The Board has ruled heretofore that the term ``services'' as 
used in section 4(c)(1) is to be read as relating to those services 
(excluding ``closely related'' activities of ``a financial, fiduciary, 
or insurance nature'' within the meaning of section 4(c)(6)) which a 
bank itself can provide for its customers (Sec. 225.104). A 
determination as to whether a particular service may legitimately be 
rendered or performed by a bank for its customers must be made in the 
light of applicable Federal or State statutory or regulatory provisions. 
In the case of a State-chartered bank, the laws of the State in which 
the bank operates, together with any interpretations thereunder rendered 
by appropriate bank authorities, would govern the right of the bank to 
provide a particular service. In the case of a national bank, a similar 
determination would require reference to provisions of Federal law 
relating to the establishment and operation of national banks, as well 
as to pertinent rulings or interpretations promulgated thereunder.
    (d) Accordingly, on the assumption that all of the services to be 
performed are of the kinds that the holding company's subsidiary banks 
may render for their customers under applicable Federal or State law, 
the Board concluded that the rendition of such services by the service 
company for its affiliated banks would not adversely affect its exempt 
status under section 4(c)(1) of the Act.
    (e) In arriving at the above conclusion, the Board emphasized that 
its views were premised explicitly upon the facts presented to it, and 
particularly its understanding that banks are permitted, under 
applicable Federal or State law to provide the proposed computer 
services. The Board emphasized also that in respect to the service 
company's operations, there continues in effect the requirement under 
section 4(c)(1) that the service company engage solely in the business 
of furnishing services to or performing services for the bank holding 
company and its subsidiary banks. The Board added that any substantial 
change in the facts that had been presented might require re-examination 
of the service company's status under section 4(c)(1).

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



Sec. 225.121  Acquisition of Edge corporation affiliate by State member banks 

of registered bank holding company.

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

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

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

[[Page 230]]



Sec. 225.122  Bank holding company ownership of mortgage companies.

    (a) The Board of Governors recently considered whether a bank 
holding may acquire, either directly or through a subsidiary, the stock 
of a so-called ``mortgage company'' that would be operated on the 
following basis: The company would solicit mortgage loans on behalf of a 
bank in the holding company system, assemble credit information, make 
property inspections and appraisals, and secure title information. The 
company would also participate in the preparation of applications for 
mortgage loans, which it would submit, together with recommendations 
with respect to action thereon, to the bank, which alone would decide 
whether to make any or all of the loans requested. The company would in 
addition solicit investors to purchase mortgage loans from the bank and 
would seek to have such investors contract with the bank for the 
servicing of such loans.
    (b) Under section 4 of the Bank Holding Company Act (12 U.S.C. 
1843), a bank holding company is generally prohibited from acquiring 
``direct or indirect ownership'' of stock of nonbanking corporations. 
The two exceptions principally involved in the question presented are 
with respect to (1) stock that is eligible for investment by a national 
bank (section 4(c)(5) of the Act) and (2) shares of a company 
``furnishing services to or performing services for such bank holding 
company or its banking subsidiaries'' (section 4(c)(1)(C) of the Act).
    (c) The Board has previously indicated its view that a national bank 
is forbidden by the so-called ``stock-purchase prohibition'' of 
paragraph ``Seventh'' of section 5136 of the Revised Statutes (12 U.S.C. 
24) to purchase ``for its own account * * * any shares of stock of any 
corporation'' except (1) to the extent permitted by specific provisions 
of Federal law or (2) as comprised within the concept of ``such 
incidental powers as shall be necessary to carry on the business of 
banking'' referred to in the first sentence of said paragraph 
``Seventh''. There is no specific statutory provision authorizing a 
national bank to purchase stock in a mortgage company, and in the 
Board's view such purchase may not properly be regarded as authorized 
under the ``incidental powers'' clause. (See 1966 Federal Reserve 
Bulletin 1151; 12 CFR 208.119.) Accordingly, a bank holding company may 
not acquire stock in a mortgage company on the basis of the section 
4(c)(5) exemption.
    (d) However, the Board does not believe that such conclusion 
prejudices consideration of the question whether such a company is 
within the section 4(c)(1)(C) ``servicing exemption''. The basic purpose 
of section 4 of the Act is to confine a bank holding company's 
activities to the management and control of banks. In determining 
whether an activity in which a bank could itself engage is within the 
servicing exemption, the question is simply whether such activity may 
appropriately be considered as ``furnishing services to or performing 
services for'' a bank.
    (e) As indicated in the Board's interpretation published in the 1958 
Federal Reserve Bulletin at page 431 (12 CFR 225.104), the legislative 
history of the servicing exemption indicates that it includes the 
following activities: ``auditing, appraising, investment counseling'' 
and ``advertising, public relations, developing new business, 
organization, operations, preparing tax returns, and personnel''. The 
legislative history further indicates that some other activities also 
are within the scope of the exemption. However, the types of servicing 
permitted under such exemption must be distinguished from activities of 
a ``financial fiduciary, or insurance nature'', such as those that might 
be considered for possible exemption under section 4(c)(8) of the Act.
    (f) In considering the interrelation of these exemptions in the 
light of the purpose of the prohibition against bank holding company 
interests in nonbanking organizations, the Board has concluded that the 
appropriate test for determining whether a mortgage company may be 
considered as within the servicing exemption is whether the company will 
perform as principal any banking activities--such as receiving deposits, 
paying checks, extending credit, conducting a trust department, and the 
like. In other words, if the mortgage company is to act merely as

[[Page 231]]

an adjunct to a bank for the purpose of facilitating the banks 
operations, the company may appropriately be considered as within the 
scope of the servicing exemption. \1\
---------------------------------------------------------------------------

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

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

(12 U.S.C. 248)

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



Sec. 225.123  Activities closely related to banking.

    (a) Effective June 15, 1971, the Board of Governors has amended 
Sec. 225.4(a) of Regulation Y to implement its regulatory authority 
under section 4(c)(8) of the Bank Holding Company Act. In some respects 
activities determined by the Board to be closely related to banking are 
described in general terms that will require interpretation from time to 
time. The Board's views on some questions that have arisen are set forth 
below.
    (b) Section 225.4(a) states that a company whose ownership by a bank 
holding company is authorized on the basis of that section may engage 
solely in specified activities. That limitation refers only to 
activities the authority for which depends on section 4(c)(8) of the 
Act. It does not prevent a holding company from establishing one 
subsidiary to engage, for example, in activities specified in Sec. 
225.4(a) and also in activities that fall within the scope of section 
4(c)(1)(C) of the Act--the ``servicing'' exemption.
    (c) The amendments to Sec. 225.4(a) do not apply to restrict the 
activities of a company previously approved by the Board on the basis of 
section 4(c)(8) of the Act. Activities of a company authorized on the 
basis of section 4(c)(8) either before the 1970 Amendments or pursuant 
to the amended Sec. 225.4(a) may be shifted in a corporate 
reorganization to another company within the holding company system 
without complying with the procedures of Sec. 225.4(b), as long as all 
the activities of such company are permissible under one of the 
exemptions in section 4 of the Act.
    (d) Under the procedures in Sec. 225.4(a)(c), a holding company 
that wishes to change the location at which it engages in activities 
authorized pursuant to Sec. 225.4(a) must publish notice in a newspaper 
of general circulation in the community to be served. The Board does not 
regard minor changes in location as within the coverage of that 
requirement. A move from one site to another within a 1-mile radius 
would constitute such a minor change if the new site is in the same 
State.
    (e) Data processing. In providing packaged data processing and 
transmission services for banking, financial and economic data for 
installation on the premises of the customer, as authorized by Sec. 
225.4(a)(8)(ii), a bank holding company should limit its activities to 
providing facilities that perform banking functions, such as check 
collection, or other similar functions for customers that are depository 
or other similar institutions, such as mortgage companies. In addition, 
the Board regards the following as incidental activities necessary to 
carry on the permissible activities in this area:
    (1) Providing excess capacity, not limited to the processing or 
transmission of banking, financial or economic data on data processing 
or transmission equipment or facilities used in connection with 
permissible

[[Page 232]]

data processing and data transmission activities, where:
    (A) Equipment is not purchased solely for the purpose of creating 
excess capacity;
    (B) Hardware is not offered in connection therewith; and
    (C) Facilities for the use of the excess capacity do not include the 
provision of any software, other than systems software (including 
language), network communications support, and the operating personnel 
and documentation necessary for the maintenance and use of these 
facilities.
    (2) Providing by-products of permissible data processing and data 
transmission activities, where not designed, or appreciably enhanced, 
for the purpose of marketability.
    (3) Furnishing any data processing service upon request of a 
customer if such data processing service is not otherwise reasonably 
available in the relevant market area; and

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

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

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



Sec. 225.124  Foreign bank holding companies.

    (a) Effective December 1, 1971, the Board of Governors has added a 
new Sec. 225.4(g) to Regulation Y implementing its authority under 
section 4(c)(9) of the Bank Holding Company Act. The Board's views on 
some questions that have arisen in connection with the meaning of terms 
used in Sec. 225.4(g) are set forth in paragraphs (b) through (g) of 
this section.
    (b) The term ``activities'' refers to nonbanking activities and does 
not include the banking activities that foreign banks conduct in the 
United States through branches or agencies licensed under the banking 
laws of any State of the United States or the District of Columbia.
    (c) A company (including a bank holding company) will not be deemed 
to be engaged in ``activities'' in the United States merely because it 
exports (or imports) products to (or from) the United States, or 
furnishes services or finances goods or services in the United States, 
from locations outside the United States. A company is engaged in 
``activities'' in the United States if it owns, leases, maintains, 
operates, or controls any of the following types of facilities in the 
United States:
    (1) A factory,
    (2) A wholesale distributor or purchasing agency,
    (3) A distribution center,
    (4) A retail sales or service outlet,
    (5) A network of franchised dealers,
    (6) A financing agency, or
    (7) Similar facility for the manufacture, distribution, purchasing, 
furnishing, or financing of goods or services locally in the United 
States.

A company will not be considered to be engaged in ``activities'' in the 
United States if its products are sold to independent importers, or are 
distributed through independent warehouses, that are not controlled or 
franchised by it.
    (d) In the Board's opinion, section 4 (a)(1) of the Bank Holding 
Company Act applies to ownership or control of shares of stock as an 
investment and does not apply to ownership or control of shares of stock 
in the capacity of an underwriter or dealer in securities. Underwriting 
or dealing in shares of stock are nonbanking activities prohibited to 
bank holding companies by section 4(a)(2) of the Act, unless otherwise 
exempted. Under Sec. 225.4(g) of Regulation Y, foreign bank holding 
companies are exempt from the prohibitions of section 4 of the Act with 
respect to their activities outside the United States; thus foreign bank 
holding companies may underwrite or deal in shares of stock (including 
shares of United

[[Page 233]]

States issuers) to be distributed outside the United States, provided 
that shares so acquired are disposed of within a reasonable time.
    (e) A foreign bank holding company does not ``indirectly'' own 
voting shares by reason of the ownership or control of such voting 
shares by any company in which it has a noncontrolling interest. A 
foreign bank holding company may, however, ``indirectly'' control such 
voting shares if its noncontrolling interest in such company is 
accompanied by other arrangements that, in the Board's judgment, result 
in control of such shares by the bank holding company. The Board has 
made one exception to this general approach. A foreign bank holding 
company will be considered to indirectly own or control voting shares of 
a bank if that bank holding company acquires more than 5 percent of any 
class of voting shares of another bank holding company. A bank holding 
company may make such an acquisition only with prior approval of the 
Board.
    (f) A company is ``indirectly'' engaged in activities in the United 
States if any of its subsidiaries (whether or not incorporated under the 
laws of this country) is engaged in such activities. A company is not 
``indirectly'' engaged in activities in the United States by reason of a 
noncontrolling interest in a company engaged in such activities.
    (g) Under the foregoing rules, a foreign bank holding company may 
have a noncontrolling interest in a foreign company that has a U.S. 
subsidiary (but is not engaged in the securities business in the United 
States) if more than half of the foreign company's consolidated assets 
and revenues are located and derived outside the United States. For the 
purpose of such determination, the assets and revenues of the United 
States subsidiary would be counted among the consolidated assets and 
revenues of the foreign company to the extent required or permitted by 
generally accepted accounting principles in the United States. The 
foreign bank holding company would not, however, be permitted to 
``indirectly'' control voting shares of the said U.S. subsidiary, as 
might be the case if there are other arrangements accompanying its 
noncontrolling interest in the foreign parent company that, in the 
Board's judgment, result in control of such shares by the bank holding 
company.

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

[36 FR 21808, Nov. 16, 1971]



Sec. 225.125  Investment adviser activities.

    (a) Effective February 1, 1972, the Board of Governors amended Sec. 
225.4(a) of Regulation Y to add ``serving as investment adviser, as 
defined in section 2(a)(20) of the Investment Company Act of 1940, to an 
investment company registered under that Act'' to the list of activities 
it has determined to be so closely related to banking or managing or 
controlling banks as to be a proper incident thereto. During the course 
of the Board's consideration of this amendment several questions arose 
as to the scope of such activity, particularly in view of certain 
restrictions imposed by sections 16, 20, 21, and 32 of the Banking Act 
of 1933 (12 U.S.C. 24, 377, 378, 78) (sometimes referred to hereinafter 
as the ``Glass-Steagall Act provisions'') and the U.S. Supreme Court's 
decision in Investment Company Institute v. Camp, 401 U.S. 617 (1971). 
The Board's views with respect to some of these questions are set forth 
below.
    (b) It is clear from the legislative history of the Bank Holding 
Company Act Amendments of 1970 (84 Stat. 1760) that the Glass-Steagall 
Act provisions were not intended to be affected thereby. Accordingly, 
the Board regards the Glass-Steagall Act provisions and the Board's 
prior interpretations thereof as applicable to a holding company's 
activities as an investment adviser. Consistently with the spirit and 
purpose of the Glass-Steagall Act, this interpretation applies to all 
bank holding companies registered under the Bank Holding Company Act 
irrespective of whether they have subsidiaries that are member banks.
    (c) Under Sec. 225.4(a)(5), as amended, bank holding companies 
(which term, as used herein, includes both their bank and nonbank 
subsidiaries) may, in accordance with the provisions of Sec. 225.4 (b), 
act as investment advisers to various types of investment companies,

[[Page 234]]

such as ``open-end'' investment companies (commonly referred to as 
``mutual funds'') and ``closed-end'' investment companies. Briefly, a 
mutual fund is an investment company which, typically, is continuously 
engaged in the issuance of its shares and stands ready at any time to 
redeem the securities as to which it is the issuer; a closed-end 
investment company typically does not issue shares after its initial 
organization except at infrequent intervals and does not stand ready to 
redeem its shares.
    (d) The Board intends that a bank holding company may exercise all 
functions that are permitted to be exercised by an ``investment 
adviser'' under the Investment Company Act of 1940, except to the extent 
limited by the Glass-Steagall Act provisions, as described, in part, 
hereinafter.
    (e) The Board recognizes that presently most mutual funds are 
organized, sponsored and managed by investment advisers with which they 
are affiliated and that their securities are distributed to the public 
by such affiliated investment advisers, or subsidiaries or affiliates 
thereof. However, the Board believes that (1) The Glass-Steagall Act 
provisions do not permit a bank holding company to perform all such 
functions, and (2) It is not necessary for a bank holding company to 
perform all such functions in order to engage effectively in the 
described activity.
    (f) In the Board's opinion, the Glass-Steagall Act provisions, as 
interpreted by the U.S. Supreme Court, forbid a bank holding company to 
sponsor, organize, or control a mutual fund. However, the Board does not 
believe that such restrictions apply to closed-end investment companies 
as long as such companies are not primarily or frequently engaged in the 
issuance, sale, and distribution of securities. A bank holding company 
should not act as investment adviser to an investment company that has a 
name similar to the name of the holding company or any of its subsidiary 
banks, unless the prospectus of the investment company contains the 
disclosures required in paragraph (h) of this section. In no case should 
a bank holding company act as investment adviser to an investment 
company that has either the same name as the name of the holding company 
or any of its subsidiary banks, or a name that contains the word 
``bank.''
    (g) In view of the potential conflicts of interests that may exist, 
a bank holding company and its bank and nonbank subsidiaries should not 
purchase in their sole discretion, in a fiduciary capacity (including as 
managing agent), securities of any investment company for which the bank 
holding company acts as investment adviser unless, the purchase is 
specifically authorized by the terms of the instrument creating the 
fiduciary relationship, by court order, or by the law of the 
jurisdiction under which the trust is administered.
    (h) Under section 20 of the Glass-Steagall Act, a member bank is 
prohibited from being affiliated with a company that directly, or 
through a subsidiary, engages principally in the issue, flotation, 
underwriting, public sale, or distribution of securities. A bank holding 
company or its nonbank subsidiary may not engage, directly or 
indirectly, in the underwriting, public sale or distribution of 
securities of any investment company for which the holding company or 
any nonbank subsidiary provides investment advice except in compliance 
with the terms of section 20, and only after obtaining the Board's 
approval under section 4 of the Bank Holding Company Act and subject to 
the limitations and disclosures required by the Board in those cases. 
The Board has determined, however, that the conduct of securities 
brokerage activities by a bank holding company or its nonbank 
subsidiaries, when conducted individually or in combination with 
investment advisory activities, is not deemed to be the underwriting, 
public sale, or distribution of securities prohibited by the Glass-
Steagall Act, and the U.S. Supreme Court has upheld that determination. 
See Securities Industry Ass'n v. Board of Governors, 468 U.S. 207 
(1984); see also Securities Industry Ass'n v. Board of Governors, 821 
F.2d 810 (D.C. Cir. 1987), cert. denied, 484 U.S. 1005 (1988). 
Accordingly, the Board believes that a bank holding company or any of 
its nonbank subsidiaries that has been authorized by the

[[Page 235]]

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

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



Sec. 225.126  Activities not closely related to banking.

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

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

[[Page 236]]



Sec. 225.127  Investment in corporations or projects designed primarily to 

promote community welfare.

    (a) Under Sec. 225.25(b)(6) of Regulation Y, a bank holding company 
may, in accordance with the provisions of Sec. 225.23, engage in 
``making equity and debt investments in corporations or projects 
designed primarily to promote community welfare, such as the economic 
rehabilitation and development of low-income areas.'' The Board included 
that activity among those the Board has determined to be so closely 
related to banking or managing or controlling banks as be a proper 
incident thereto, in order to permit bank holding companies to fulfill 
their civic responsibilities. As indicated hereinafter in this 
interpretation, the Board intends Sec. 225.25(b)(6) to enable bank 
holding companies to take an active role in the quest for solutions to 
the Nation's social problems. Although the interpretation primarily 
focuses on low- and moderate-income housing, it is not intended to limit 
projects under Sec. 225.25(b)(6) to that area. Other investments 
primarily designed to promote community welfare are considered 
permissible, but have not been defined in order to provide bank holding 
companies flexibility in approaching community problems. For example, 
bank holding companies may utilize this flexibility to provide new and 
creative approaches to the promotion of employment opportunities for 
low-income persons. Bank holding companies possess a unique combination 
of financial and managerial resources making them particularly suited 
for a meaningful and substantial role in remedying our social ills. 
Section 225.25(b)(6) is intended to provide an opportunity for them to 
assume such a role.
    (b) Under the authority of Sec. 225.25(b)(6), a bank holding 
company may invest in community development corporations established 
pursuant to Federal or State law. A bank holding company may also 
participate in other civic projects, such as a municipal parking 
facility sponsored by a local civic organization as a means to promote 
greater public use of the community's facilities.
    (c) Within the category of permissible investments under Sec. 
225.25(b)(6) are investments in projects to construct or rehabilitate 
multifamily low- or moderate-income housing with respect to which a 
mortgage is insured under section 221(d)(3), 221(d)(4), or 236 of the 
National Housing Act (12 U.S.C. 1701) and investments in projects to 
construct or rehabilitate low- or moderate-income housing which is 
financed or assisted by direct loan, tax abatement, or insurance under 
provisions of State or local law, similar to the aforementioned Federal 
programs, provided that, with respect to all such projects the owner is, 
by statute, regulation, or regulatory authority, limited as to the rate 
of return on his investment in the project, as to rentals or occupancy 
charges for units in the project, and in such other respects as would be 
a ``limited dividend corporation'' (as defined by the Secretary of 
Housing and Urban Development).
    (d) Investments in other projects that may be considered to be 
designed primarily to promote community welfare include but are not 
limited to: (1) Projects for the construction or rehabilitation of 
housing for the benefit of persons of low- or moderate-income, (2) 
projects for the construction or rehabilitation of ancillary local 
commercial facilities necessary to provide goods or services principally 
to persons residing in low- or moderate-income housing, and (3) projects 
designed explicitly to create improved job opportunities for low- or 
moderate-income groups (for example, minority equity investments, on a 
temporary basis, in small or medium-sized locally-controlled businesses 
in low-income urban or other economically depressed areas). In the case 
of de novo projects, the copy of the notice with respect to such other 
projects which is to be furnished to Reserve Banks in accordance with 
the provisions of Sec. 225.23 should be accompanied by a memorandum 
which demonstrates that such projects meet the objectives of Sec. 
225.25(b)(6).
    (e) Investments in corporations or projects organized to build or 
rehabilitate high-income housing, or commercial, office, or industrial 
facilities that are not designed explicitly to create improved job 
opportunities for low-income persons shall be presumed not to

[[Page 237]]

be designed primarily to promote community welfare, unless there is 
substantial evidence to the contrary, even though to some extent the 
investment may benefit the community.
    (f) Section 6 of the Depository Institutions Disaster Relief Act of 
1992 permits state member banks (12 U.S.C. 338a) and national banks (12 
U.S.C. 24 (Eleventh)) to invest in the stock of community development 
corporations that are designed primarily to promote the public welfare 
of low- and moderate-income communities and persons in the areas of 
housing, services and employment. The Board and the Office of the 
Comptroller of the Currency have adopted rules that permit state member 
banks and national banks to make certain investments without prior 
approval. The Board believes that these rules are consistent with the 
Board's interpretation of, and decisions regarding, the scope of 
community welfare activities permissible for bank holding companies. 
Accordingly, approval received by a bank holding company to conduct 
activities designed to promote the community welfare under section 
4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)) and Sec. 
225.25(b)(6) of the Board's Regulation Y (12 CFR 225.25(b)(6)) includes 
approval to engage, either directly or through a subsidiary, in the 
following activities, up to five percent of the bank holding company's 
total consolidated capital stock and surplus, without additional Board 
or Reserve Bank approval:
    (1) Invest in and provide financing to a corporation or project or 
class of corporations or projects that the Board previously has 
determined is a public welfare project pursuant to paragraph 23 of 
section 9 of the Federal Reserve Act (12 U.S.C. 338a);
    (2) Invest in and provide financing to a corporation or project that 
the Office of the Comptroller of the Currency previously has determined, 
by order or regulation, is a public welfare investment pursuant to 
section 5136 of the Revised Statutes (12 U.S.C. 24 (Eleventh));
    (3) Invest in and provide financing to a community development 
financial institution pursuant to section 103(5) of the Community 
Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 
4702(5));
    (4) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent residential property if a majority of the units will be 
occupied by low- and moderate-income persons or if the property is a 
``qualified low-income building'' as defined in section 42(c)(2) of the 
Internal Revenue Code (26 U.S.C. 42(c)(2));
    (5) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent nonresidential real property or other assets located in a 
low- or moderate-income area provided the property is used primarily for 
low- and moderate-income persons;
    (6) Invest in and provide financing to one or more small businesses 
located in a low- or moderate-income area to stimulate economic 
development;
    (7) Invest in, provide financing to, develop, and otherwise assist 
job training or placement facilities or programs designed primarily for 
low- and moderate-income persons;
    (8) Invest in and provide financing to an entity located in a low- 
or moderate-income area if that entity creates long-term employment 
opportunities, a majority of which (based on full time equivalent 
positions) will be held by low- and moderate-income persons; and
    (9) Provide technical assistance, credit counseling, research, and 
program development assistance to low- and moderate-income persons, 
small businesses, or nonprofit corporations to help achieve community 
development.
    (g) For purposes of paragraph (f) of this section, low- and 
moderate-income persons or areas means individuals and communities whose 
incomes do not exceed 80 percent of the median income of the area 
involved, as determined by the U.S. Department of Housing and Urban 
Development. Small businesses are businesses that are smaller than the 
maximum size eligibility standards established by the Small Business 
Administration (SBA) for the Small Business Investment Company and 
Development Company Programs or the SBA section 7A loan program; and 
specifically include those businesses that are

[[Page 238]]

majority-owned by members of minority groups or by women.
    (h) For purposes of paragraph (f) of this section, five percent of 
the total consolidated capital stock and surplus of a bank holding 
company includes its total investment in projects described in paragraph 
(f) of this section, when aggregated with similar types of investments 
made by depository institutions controlled by the bank holding company. 
The term total consolidated capital stock and surplus of the bank 
holding company means total equity capital and the allowance for loan 
and lease losses. For bank holding companies that file the FR Y-9C 
(Consolidated Financial Statements for Bank Holding Companies), these 
items are readily ascertained from Schedule HC--Consolidated Balance 
Sheet (total equity capital (line 27h) and allowance for loan and lease 
losses (line 4b)). For bank holding companies filing the FR Y-SP (Parent 
Company Only Financial Statements for Small Bank Holding Companies), an 
approximation of these items is ascertained from the Balance Sheet 
(total equity capital (line 16e)) and allowance for loan and lease 
losses (line 3b)) and from the Report of Condition for Insured Banks 
(Schedule RC--Balance Sheet (line 4b)).

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



Sec. 225.129  Activities closely related to banking.

    Courier activities. The Board's amendment of Sec. 225.4(a), which 
adds courier services to the list of closely related activities is 
intended to permit holding companies to transport time critical 
materials of limited intrinsic value of the types utilized by banks and 
bank-related firms in performing their business activities. Such 
transportation activities are of particular importance in the check 
clearing process of the banking system, but are also important to the 
performance of other activities, including the processing of 
financially-related economic data. The authority is not intended to 
permit holding companies to engage generally in the provision of 
transportation services.
    During the course of the Board's proceedings pertaining to courier 
services, objections were made that courier activities were not a proper 
incident to banking because of the possibility that holding companies 
would or had engaged in unfair competitive practices. The Board believes 
that adherence to the following principles will eliminate or reduce to 
an insignificant degree any possibility of unfair competition:
    a. A holding company courier subsidiary established under section 
4(c)(8) should be a separate, independent corporate entity, not merely a 
servicing arm of a bank.
    b. As such, the subsidiary should exist as a separate, profit-
oriented operation and should not be subsidized by the holding company 
system.
    c. Services performed should be explicitly priced, and shall not be 
paid for indirectly, for example, on the basis of deposits maintained at 
or loan arrangements with affiliated banks.

Accordingly, entry of holding companies into courier activities on the 
basis of section 4(c)(8) will be conditioned as follows:
    1. The courier subsidiary shall perform services on an explicit fee 
basis and shall be structured as an individual profit center designed to 
be operated on a profitable basis. The Board may regard operating losses 
sustained over an extended period as being inconsistent with continued 
authority to engage in courier activities.
    2. Courier services performed on behalf of an affiliate's customer 
(such as the carriage of incoming cash letters) shall be paid for by the 
customer. Such payments shall not be made indirectly, for example, on 
the basis of imputed earnings on deposits maintained at or of loan 
arrangements with subsidiaries of the holding company. Concern has also 
been expressed that bank-affiliated courier services will be utilized to 
gain a competitive advantage over firms competing with other holding 
company affiliates. To reduce the possibility that courier affiliates 
might be so employed, the Board will impose the following third 
condition:
    3. The courier subsidiary shall, when requested by any bank or any 
data processing firm providing financially-related data processing 
services which firm competes with a banking or data processing

[[Page 239]]

subsidiary of Applicant, furnish comparable service at comparable rates, 
unless compliance with such request would be beyond the courier 
subsidiary's practical capacity. In this regard, the courier subsidiary 
should make known to the public its minimum rate schedule for services 
and its general pricing policies thereto. The courier subsidiary is also 
expected to maintain for a reasonable period of time (not less than two 
years) each request denied with the reasons for such denial.

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



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

companies.

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

[38 FR 35231, Dec. 26, 1973]



Sec. 225.131  Activities closely related to banking.

    (a) Bank management consulting advice. The Board's amendment of 
Sec. 225.4(a), which adds bank management consulting advice to the list 
of closely related activities, described in general terms the nature of 
such activity. This interpretation is intended to explain in greater 
detail certain of the terms in the amendment.
    (b) It is expected that bank management consulting advice would 
include, but not be limited to, advice concerning: Bank operations, 
systems and procedures; computer operations and mechanization; 
implementation of electronic funds transfer systems; site planning and 
evaluation; bank mergers and the establishment of new branches; 
operation and management of a trust department; international banking; 
foreign exchange transactions; purchasing policies and practices; cost 
analysis, capital adequacy and planning; auditing; accounting 
procedures; tax planning; investment advice (as authorized in Sec. 
225.4(a)(5)); credit policies and administration, including credit 
documentation, evaluation, and debt collection; product development, 
including specialized lending provisions; marketing operations, 
including research, market development and advertising programs; 
personnel operations, including recruiting, training, evaluation and 
compensation; and security measures and procedures.
    (c) In permitting bank holding companies to provide management 
consulting advice to nonaffiliated ``banks'', the Board intends such 
advice to be given only to an institution that both accepts deposits 
that the depositor has a legal right to withdraw on demand and engages 
in the business of making commercial loans. It is also intended that 
such management consulting advice may be provided to the ``operations 
subsidiaries'' of a bank, since such subsidiaries perform functions that 
a bank is empowered to perform directly at locations at which the bank 
is authorized to engage in business (Sec. 250.141 of this chapter).
    (d) Although a bank holding company providing management consulting 
advice is prohibited by the regulation from owning or controlling, 
directly or indirectly, any equity securities in a client bank, this 
limitation does not apply to shares of a client bank acquired, directly 
or indirectly, as a result of a default on a debt previously contracted. 
This limitation is also inapplicable to shares of a client bank acquired 
by a bank holding company, directly or indirectly, in a fiduciary 
capacity: Provided, That the bank holding company or its subsidiary does 
not have sole discretionary authority to vote such shares or shares held 
with sole voting rights constitute not more than five percent of the 
outstanding voting shares of a client bank.

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



Sec. 225.132  Acquisition of assets.

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

[[Page 240]]

the acquisition of assets, it is necessary to determine (a) whether the 
acquisition is made in the ordinary course of business \1\ or (b) 
whether it constitutes the acquisition, in whole or in part, of a going 
concern. \2\
---------------------------------------------------------------------------

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

    (c) The following examples illustrate transactions where prior Board 
approval will generally be required:
    (1) The transaction involves the acquisition of all or substantially 
all of the assets of a company, or a subsidiary, division, department or 
office thereof.
    (2) The transaction involves the acquisition of less than 
``substantially all'' of the assets of a company, or a subsidiary, 
division, department or office thereof, the operations of which are 
being terminated or substantially discontinued by the seller, but such 
asset acquisition is significant in relation to the size of the same 
line of nonbank activity of the holding company (e.g., consumer finance 
mortgage banking, data processing). For purposes of this interpretation, 
an acquisition would generally be presumed to be significant if the book 
value of the nonbank assets being acquired exceeds 50 percent of the 
book value of the nonbank assets of the holding company or nonbank 
subsidiary comprising the same line of activity.
    (3) The transaction involves the acquisition of assets for resale 
and the sale of such assets is not a normal business activity of the 
acquiring holding company.
    (4) The transaction involves the acquisition of the assets of a 
company, or a subsidiary, division, department or office thereof, and a 
major purpose of the transaction is to hire some of the seller's 
principal employees who are expert, skilled and experienced in the 
business of the company being acquired.
    (d) In some cases it may be difficult, due to the wide variety of 
circumstances involving possible acquisition of assets, to determine 
whether such acquisitions require prior Board approval. Bank holding 
companies are encouraged to contact their local Reserve Bank for 
guidance where doubt exists as to whether such an acquisition is in the 
ordinary course of business or an acquisition, in whole or in part, of a 
going concern.

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



Sec. 225.133  Computation of amount invested in foreign corporations under 

general consent procedures.

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

[40 FR 43199, Sept. 19, 1975]



Sec. 225.134  Escrow arrangements involving bank stock resulting in a 

violation of the Bank Holding Company Act.

    (a) In connection with a recent application to become a bank holding 
company, the Board considered a situation in which shares of a bank were 
acquired and then placed in escrow by the applicant prior to the Board's 
approval of the application. The facts indicated that the applicant 
company had incurred debt for the purpose of acquiring bank shares and 
immediately after the purchase the shares were transferred to an 
unaffiliated escrow agent with instructions to retain possession of the 
shares pending Board action on the company's application to become a 
bank holding company. The escrow agreement provided that, if the 
application were approved by the Board, the escrow agent was to return 
the shares to the applicant company; and, if the application were 
denied, the escrow agent was to deliver the shares to the applicant 
company's shareholders upon their assumption of debt originally incurred 
by the applicant in the acquisition of the bank shares. In addition, the 
escrow agreement provided that, while the shares were held in escrow, 
the applicant could not exercise voting or any other ownership rights 
with respect to those shares.

[[Page 241]]

    (b) On the basis of the above facts, the Board concluded that the 
company had violated the prior approval provisions of section 3 of the 
Bank Holding Company Act (``Act'') at the time that it made the initial 
acquisition of bank shares and that, for purposes of the Act, the 
company continued to control those shares in violation of the Act. In 
view of these findings, individuals and bank holding companies should 
not enter into escrow arrangements of the type described herein, or any 
similar arrangement, without securing the prior approval of the Board, 
since such action could constitute a violation of the Act.
    (c) While the above represents the Board's conclusion with respect 
to the particular escrow arrangement involved in the proposal presented, 
the Board does not believe that the use of an escrow arrangement would 
always result in a violation of the Act. For example, it appears that a 
transaction whereby bank shares are placed in escrow pending Board 
action on an application would not involve a violation of the Act so 
long as title to such shares remains with the seller during the pendency 
of the application; there are no other indicia that the applicant 
controls the shares held in escrow; and, in the event of a Board denial 
of the application, the escrow agreement provides that the shares would 
be returned to the seller.

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



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

obligations in foreign markets and to transfer the proceeds to their United 

States parent(s) for domestic purposes.

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

[42 FR 752, Jan. 4, 1977]



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

Holding Company Act.

    (a) The Board has received a request for an interpretation of 
section 4(c)(6) of the Bank Holding Company Act (``Act'') \1\ in 
connection with a proposal under which a number of bank holding 
companies would purchase interests in an insurance company to be formed 
for the purpose of underwriting or reinsuring credit life and credit 
accident and health insurance sold in connection with extensions of 
credit by the stockholder bank holding companies and their affiliates.
---------------------------------------------------------------------------

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

    (b) Each participating holding company would own no more than 5 
percent of the outstanding voting shares of the company. However, the 
investment of each holding company would be represented by a separate 
class of voting security, so that each stockholder would own 100 percent 
of its respective class. The participating companies would execute a 
formal ``Agreement Among Stockholders'' under which each would agree to 
use its best efforts at all times to direct or recommend to customers 
and clients the placement of their life, accident and health insurance 
directly or indirectly with the company. Such credit-related insurance 
placed with the company would be identified in the records of the 
company as having been originated by the respective stockholder. A 
separate capital account would be maintained for each stockholder 
consisting of the original capital contribution increased or decreased 
from time to time by the net profit or loss resulting from the insurance 
business attributable to each stockholder. Thus, each stockholder would 
receive a return on its investment based upon the claims experience and 
profitability of the insurance business that it had itself generated. 
Dividends declared by the board of directors of the company would be 
payable

[[Page 242]]

to each stockholder only out of the earned surplus reflected in the 
respective stockholder's capital account.
    (c) It has been requested that the Board issue an interpretation 
that section 4(c)(6) of the Act provides an exemption under which 
participating bank holding companies may acquire such interests in the 
company without prior approval of the Board.
    (d) On the basis of a careful review of the documents submitted, in 
light of the purposes and provisions of the Act, the Board has concluded 
that section 4(c)(6) of the Act is inapplicable to this proposal and 
that a bank holding company must obtain the approval of the Board before 
participating in such a proposal in the manner described. The Board's 
conclusion is based upon the following considerations:
    (1) Section 2(a)(2)(A) of the Act provides that a company is deemed 
to have control over a second company if it owns or controls ``25 per 
centum or more of any class of voting securities'' of the second 
company. In the case presented, the stock interest of each participant 
would be evidenced by a different class of stock and each would 
accordingly, own 100 percent of a class of voting securities of the 
company. Thus, each of the stockholders would be deemed to ``control'' 
the company and prior Board approval would be required for each 
stockholder's acquisition of stock in the company.

The Board believes that this application of section 2(a)(2)(A) of the 
Act is particularly appropriate on the facts presented here. The company 
is, in practical effect, a conglomeration of separate business ventures 
each owned 100 percent by a stockholder the value of whose economic 
interest in the company is determined by reference to the profits and 
losses attributable to its respective class of stock. Furthermore, it is 
the Board's opinion that this application of section 2(a)(2)(A) is not 
inconsistent with section 4(c)(6). Even assuming that section (4)(c)(6) 
is intended to refer to all outstanding voting shares, and not merely 
the outstanding shares of a particular class of securities, section 
4(c)(6) must be viewed as permitting ownership of 5 percent of a 
company's voting stock only when that ownership does not constitute 
``control'' as otherwise defined in the Act. For example, it is entirely 
possible that a company could exercise a controlling influence over the 
management and policies of a second company, and thus ``control'' that 
company under the Act's definitions, even though it held less than 5 
percent of the voting stock of the second company. To view section 
4(c)(6) as an unqualified exemption for holdings of less than 5 percent 
would thus create a serious gap in the coverage of the Act.
    (2) The Board believes that section 4(c)(6) should properly be 
interpreted as creating an exemption from the general prohibitions in 
section 4 on ownership of stock in nonbank companies only for passive 
investments amounting to not more than 5 percent of a company's 
outstanding stock, and that the exemption was not intended to allow a 
group of holding companies, through concerted action, to engage in an 
activity as entrepreneurs. Section 4 of the Act, of course, prohibits 
not only owning stock in nonbank companies, but engaging in activities 
other than banking or those activities permitted by the Board under 
section 4(c)(8) as being closely related to banking. Thus, if a holding 
company may be deemed to be engaging in an activity through the medium 
of a company in which it owns less than 5 percent of the voting stock it 
may nevertheless require Board approval, despite the section 4(c)(6) 
exemption.
    (e) To accept the argument that section 4(c)(6) is an unqualified 
grant of permission to a bank holding company to own 5 percent of the 
shares of any nonbanking company irrespective of the nature or extent of 
the holding company's participation in the affairs of the nonbanking 
company would, in the Board's view, create the potential for serious and 
widespread evasion of the Act's controls over nonbanking activities. 
Such a construction would allow a group of 20 bank holding companies--or 
even a single bank holding company and one or more nonbank companies--to 
engage in entrepreneurial joint ventures in businesses prohibited to 
bank holding companies, a result the Board believes to be contrary to 
the intent of Congress.

[[Page 243]]

    (f) In this proposal, each of the participating stockholders must be 
viewed as engaging in the business of insurance underwriting. Each 
stockholder would agree to channel to the company the insurance business 
it generates, and the value of the interest of each stockholder would be 
determined by reference to the profitability of the business generated 
by that stockholder itself. There is no sharing or pooling among 
stockholders of underwriting risks assumed by the company, and profit or 
loss from investments is allocated on the basis of each bank holding 
company's allocable underwriting profit or loss. The interest of each 
stockholder is thus clearly that of an entrepreneur rather than that of 
an investor.
    (g) Accordingly, on the basis of the factual situation before the 
Board, and for the reasons summarized above, the Board has concluded 
that section 4(c)(6) of the Act cannot be interpreted to exempt the 
ownership of 5 percent of the voting stock of a company under the 
circumstances described, and that a bank holding company wishing to 
become a stockholder in a company under this proposal would be required 
to obtain the Board's approval to do so.

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



Sec. 225.138  Statement of policy concerning divestitures by bank holding 

companies.

    (a) From time to time the Board of Governors receives requests from 
companies subject to the Bank Holding Company Act, or other laws 
administered by the Board, to extend time periods specified either by 
statute or by Board order for the divestiture of assets held or 
activities engaged in by such companies. Such divestiture requirements 
may arise in a number of ways. For example, divestiture may be ordered 
by the Board in connection with an acquisition found to have been made 
in violation of law. In other cases the divestiture may be pursuant to a 
statutory requirement imposed at the time and amendment to the Act was 
adopted, or it may be required as a result of a foreclosure upon 
collateral held by the company or a bank subsidiary in connection with a 
debt previously contracted in good faith. Certain divestiture periods 
may be extended in the discretion of the Board, but in other cases the 
Board may be without statutory authority, or may have only limited 
authority, to extend a specified divestiture period.
    (b) In the past, divestitures have taken many different forms, and 
the Board has followed a variety of procedures in enforcing divestiture 
requirements. Because divestitures may occur under widely disparate 
factual circumstances, and because such forced dispositions may have the 
potential for causing a serious adverse economic impact upon the 
divesting company, the Board believes it is important to maintain a 
large measure of flexibility in dealing with divestitures. For these 
reasons, there can be no fixed rule as to the type of divestiture that 
will be appropriate in all situations. For example, where divestiture 
has been ordered to terminate a control relationship created or 
maintained in violation of the Act, it may be necessary to impose 
conditions that will assure that the unlawful relationship has been 
fully terminated and that it will not arise in the future. In other 
circumstances, however, less stringent conditions may be appropriate.
    (1) Avoidance of delays in divestitures. Where a specific time 
period has been fixed for accomplishing divestiture, the affected 
company should endeavor and should be encouraged to complete the 
divestiture as early as possible during the specific period. There will 
generally be substantial advantages to divesting companies in taking 
steps to plan for and accomplish divestitures well before the end of the 
divestiture period. For example, delays may impair the ability of the 
company to realize full value for the divested assets, for as the end of 
the divestiture period approaches the ``forced sale'' aspect of the 
divestiture may lead potential buyers to withhold firm offers and to 
bargain for lower prices. In addition, because some prospective 
purchasers may themselves require regulatory approval to acquire the 
divested property, delay by the divesting company may--by leaving 
insufficient time to obtain

[[Page 244]]

such approvals--have the effect of narrowing the range of prospective 
purchases. Thus, delay in planning for divestiture may increase the 
likelihood that the company will seek an extension of the time for 
divestiture if difficulty is encountered in securing a purchaser, and in 
certain situations, of course, the Board may be without statutory 
authority to grant extensions.
    (2) Submissions and approval of divestiture plans. When a 
divestiture requirement is imposed, the company affected should 
generally be asked to submit a divestiture plan promptly for review and 
approval by the Reserve Bank or the Board. Such a requirement may be 
imposed pursuant to the Board's authority under section 5(b) of the Bank 
Holding Company Act to issue such orders as may be necessary to enable 
the Board to administer and carry out the purposes of the Act and 
prevent evasions thereof. A divestiture plan should be as specific as 
possible, and should indicate the manner in which divestiture will be 
accomplished--for example, by a bulk sale of the assets to a third 
party, by ``spinoff'' or distribution of shares to the shareholders of 
the divesting company, or by termination of prohibited activities. In 
addition, the plan should specify the steps the company expects to take 
in effecting the divestiture and assuring its completeness, and should 
indicate the time schedule for taking such steps. In appropriate 
circumstances, the divestiture plan should make provision for assuring 
that ``controlling influence'' relationships, such as management or 
financial interlocks, will not continue to exist.
    (3) Periodic progress reports. A company subject to a divestiture 
requirement should generally be required to submit regular periodic 
reports detailing the steps it has taken to effect divestiture. Such a 
requirement may be imposed pursuant to the Board's authority under 
section 5(b) of the Bank Holding Company Act, referred to above, as well 
as its authority under section 5(c) of the Act to require reports for 
the purpose of keeping the Board informed as to whether the Act and 
Board regulations and order thereunder are being complied with. Reports 
should set forth in detail such matters as the identities of potential 
buyers who have been approached by the company, the dates of discussions 
with potential buyers and the identities of the individuals involved in 
such discussions, the terms of any offers received, and the reasons for 
rejecting any offers. In addition, the reports should indicate whether 
the company has employed brokers, investment bankers or others to assist 
in the divestiture, or its reasons for not doing so, and should describe 
other efforts by the company to seek out possible purchasers. The 
purpose of requiring such reports is to insure that substantial and good 
faith efforts being made by the company to satisfy its divestiture 
obligations. The frequency of such reports may vary depending upon the 
nature of the divestiture and the period specified for divestiture. 
However, such reports should generally not be required less frequently 
than every three months, and may in appropriate cases be required on a 
monthly or even more frequent basis. Progress reports as well as 
divestiture plans should be afforded confidential treatment.
    (4) Extensions of divestiture periods. Certain divestiture periods--
such as December 31, 1980 deadline for divestitures required by the 1970 
Amendments to the Bank Holding Company Act--are not extendable. In such 
cases it is imperative that divestiture be accomplished in a timely 
manner. In certain other cases, the Board may have discretion to extend 
a statutorily prescribed divestiture period within specified limits. For 
example, under section 4(c)(2) of the Act the Board may extend for three 
one-year periods the two-year period in which a bank subsidiary of a 
holding company is otherwise required to divest shares acquired in 
satisfaction of a debt previously contracted in good faith. In such 
cases, however, when the permissible extensions expire the Board no 
longer has discretion to grant further extensions. In still other cases, 
where a divestiture period is prescribed by the Board, in the exercise 
of its regulatory judgment, the Board may have broader discretion to 
grant extensions. Where extensions of specified divestiture periods are 
permitted by law, extensions should not be granted except under

[[Page 245]]

compelling circumstances. Neither unfavorable market conditions, nor the 
possibility that the company may incur some loss, should alone be viewed 
as constituting such circumstances--particularly if the company has 
failed to take earlier steps to accomplish a divestiture under more 
favorable circumstances. Normally, a request for an extension will not 
be considered unless the company has established that it has made 
substantial and continued good faith efforts to accomplish the 
divestiture within the prescribed period. Furthermore, requests for 
extensions of divestiture periods must be made sufficiently in advance 
of the expiration of the prescribed period both to enable the Board to 
consider the request in an orderly manner and to enable the company to 
effect a timely divestiture in the event the request for extension is 
denied. Companies subject to divestiture requirements should be aware 
that a failure to accomplish a divestiture within the prescribed period 
may in and of itself be viewed as a separate violation of the Act.
    (5) Use of trustees. In appropriate cases a company subject to a 
divestiture requirement may be required to place the assets subject to 
divestiture with an independent trustee under instructions to accomplish 
a sale by a specified date, by public auction if necessary. Such a 
trustee may be given the responsibility for exercising the voting rights 
with respect to shares being divested. The use of such a trustee may be 
particularly appropriate where the divestiture is intended to terminate 
a control relationship established or maintained in violation of law, or 
where the divesting company has demonstrated an inability or 
unwillingness to take timely steps to effect a divestiture.
    (6) Presumptions of control. Bank holding companies contemplating a 
divestiture should be mindful of section 2(g)(3) of the Bank Holding 
Company Act, which creates a presumption of continued control over the 
transferred assets where the transferee is indebted to the transferor, 
or where certain interlocks exist, as well as Sec. 225.2 of Regulation 
Y, which sets forth certain additional control presumptions. Where one 
of these presumptions has arisen with respect to divested assets, the 
divestiture will not be considered as complete until the presumption has 
been overcome. It should be understood that the inquiry into the 
termination of control relationships is not limited by the statutory and 
regulatory presumptions of control, and that the Board may conclude that 
a control relationship still exists even though the presumptions do not 
apply.
    (7) Role of the Reserve Banks. The Reserve Banks have a 
responsibility for supervising and enforcing divestitures. Specifically, 
in coordination with Board staff they should review divestiture plans to 
assure that proposed divestitures will result in the termination of 
control relationships and will not create unsafe or unsound conditions 
in any bank or bank holding company; they should monitor periodic 
progress reports to assure that timely steps are being taken to effect 
divestitures; and they should prompt companies to take such steps when 
it appears that progress is not being made. Where Reserve Banks have 
delegated authority to extend divestiture periods, that authority should 
be exercised consistently with this policy statement.

[42 FR 10969, Feb. 25, 1977]



Sec. 225.139  Presumption of continued control under section 2(g)(3) of the 

Bank Holding Company Act.

    (a) Section 2(g)(3) of the Bank Holding Company Act (the ``Act'') 
establishes a statutory presumption that where certain specified 
relationships exist between a transferor and transferee of shares, the 
transferor (if it is a bank holding company, or a company that would be 
such but for the transfer) continues to own or control indirectly the 
transferred shares. \1\ This presumption arises by operation of law, as 
of the date of the transfer, without the need for any order or 
determination by the Board. Operation of the presumption may be 
terminated only by the issuance of a Board determination,

[[Page 246]]

after opportunity for hearing, ``that the transferor is not in fact 
capable of controlling the transferee.'' \2\
---------------------------------------------------------------------------

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

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

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

    (c) In the course of administering section 2(g)(3) the Board has had 
several occasions to consider the scope of that section. In addition, 
questions have been raised by and with the Board's staff as to coverage 
of the section. Accordingly, the Board believes it would be useful to 
set forth the following interpretations of section 2(g)(3):
    (1) The terms transferor and transferee, as used in section 2(g)(3), 
include parents and subsidiaries of each. Thus, for example, where a 
transferee is indebted to a subsidiary of the transferor, or where a 
specified interlocking relationship exists between the transferor or 
transferee and a subsidiary of the other (or between subsidiaries of 
each), the presumption arises. Similarly, if a parent of the transferee 
is indebted to a parent of the transferor, the presumption arises. The 
presumption of continued control also arises where an interlock or debt 
relationship is retained between the divesting company and the company 
being divested, since the divested company will be or may be viewed as a 
subsidiary of the transferee or group of transferees.
    (2) The terms officers, directors, and trustees, as used in section 
2(g)(3), include persons performing functions normally associated with 
such positions (including general partners in a partnership and limited 
partners having a right to participate in the management of the affairs 
of the partnership) as well as persons holding such positions in an 
advisory or honorary capacity. The presumption arises not only where the 
transferee or transferred company has an officer, director or trustee in 
common with the transferor, but where the transferee himself holds such 
a position with the transferor. \4\ It should be noted that where a

[[Page 247]]

transfer takes the form of a pro-rata distribution, or spin-off, of 
shares to a company's shareholders, officers and directors of the 
transferor company are likely to receive a portion of such shares. The 
presumption of continued control would, of course, attach to any shares 
transferred to officers and directors of the divesting company, whether 
by spinoff or outright sale. However, the presumption will be of legal 
significance--and will thus require an application under section 
2(g)(3)--only where the total number of shares subject to the 
presumption exceeds one of the applicable thresholds in the Act. For 
example, where officers and directors of a one-bank holding company 
receive in the aggregate 25 percent or more of the stock of a bank 
subsidiary being divested by the holding company, the holding company 
would be presumed to continue to control the divested bank. In such a 
case it would be necessary for the divesting company to demonstrate that 
it no longer controls either the divested bank or the officer/director 
transferees. However, if officers and directors were to receive in the 
aggregate less than 25 percent of the bank's stock (and no other shares 
were subject to the presumption), section 2(g)(3) would not have the 
legal effect of presuming continued control of the bank. \5\ In the case 
of a divestiture of nonbank shares, an application under section 2(g)(3) 
would be required whenever officers and directors of the divesting 
company received in the aggregate more than 5 percent of the shares of 
the company being divested.
---------------------------------------------------------------------------

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

    (3) Although section 2(g)(3) refers to transfers of shares it is 
not, in the Board's view, limited to disposition of corporate stock. 
General or limited partnership interests, for example, are included 
within the term shares. Furthermore, the transfer of all or 
substantially all of the assets of a company, or the transfer of such a 
significant volume of assets that the transfer may in effect constitute 
the disposition of a separate activity of the company, is deemed by the 
Board to involve a transfer of shares of that company.
    (4) The term indebtedness giving rise to the presumption of 
continued control under section 2(g)(3) of the Act is not limited to 
debt incurred in connection with the transfer; it includes any debt 
outstanding at the time of transfer from the transferee to the 
transferor or its subsidiaries. However, the Board believes that not 
every kind of indebtedness was within the contemplation of the Congress 
when section 2(g)(3) was adopted. Routine business credit of limited 
amounts and loans for personal or household purposes are generally not 
the kinds of indebtedness that, standing alone, support a presumption 
that the creditor is able to control the debtor. Accordingly, the Board 
does not regard the presumption of section 2(g)(3) as applicable to the 
following categories of credit, provided the extensions of credit are 
not secured by the transferred property and are made in the ordinary 
course of business of the transferor (or its subsidiary) that is 
regularly engaged in the business of extending credit:
    (i) Consumer credit extended for personal or household use to an 
individual transferee; (ii) student loans made for the education of the 
individual transferee or a spouse or child of the transferee; (iii) a 
home mortgage loan made to an individual transferee for the purchase of 
a residence for the individual's personal use and secured by the 
residence; and (iv) loans made to companies (as defined in section 2(b) 
of the Act) in an aggregate amount not exceeding ten per cent of the 
total purchase price (or if not sold, the fair market value) of the 
transferred property. The amounts and terms of the preceding categories 
of credit should not differ substantially from similar credit extended 
in comparable circumstances to others who are not transferees. It should 
be understood that, while the statutory presumption in situations 
involving these categories of credit may not apply, the Board is not 
precluded in any case from examining the facts of a particular transfer 
and finding that

[[Page 248]]

the divestiture of control was ineffective based on the facts of record.
    (d) Section 2(g)(3) provides that a Board determination that a 
transferor is not in fact capable of controlling a transferee shall be 
made after opportunity for hearing. It has been the Board's routine 
practice since 1966 to publish notice in the Federal Register of 
applications filed under section 2(g)(3) and to offer interested parties 
an opportunity for a hearing. Virtually without exception no comments 
have been submitted on such applications by parties other than the 
applicant and, with the exception of one case in which the request was 
later withdrawn, no hearings have been requested in such cases. Because 
the Board believes that the hearing provision in section 2(g)(3) was 
intended as a protection for applicants who are seeking to have the 
presumption overcome by a Board order, a hearing would not be of use 
where an application is to be granted. In light of the experience 
indicating that the publication of Federal Register notice of such 
applications has not served a useful purpose, the Board has decided to 
alter its procedures in such cases. In the future, Federal Register 
notice of section 2(g)(3) applications will be published only in cases 
in which the Board's General Counsel, acting under delegated authority, 
has determined not to grant such an application and has referred the 
matter to the Board for decision. \6\
---------------------------------------------------------------------------

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

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

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



Sec. 225.140  Disposition of property acquired in satisfaction of debts 

previously contracted.

    (a) The Board recently considered the permissibility, under section 
4 of the Bank Holding Company Act, of a subsidiary of a bank holding 
company acquiring and holding assets acquired in satisfaction of a debt 
previously contracted in good faith (a ``dpc'' acquisition). In the 
situation presented, a lending subsidiary of a bank holding company made 
a ``dpc'' acquisition of assets and transferred them to a wholly-owned 
subsidiary of the bank holding company for the purpose of effecting an 
orderly divestiture. The question presented was whether such ``dpc'' 
assets could be held indefinitely by a bank holding company subsidiary 
as incidental to its permissible lending activity.
    (b) While the Board believes that ``dpc'' acquisitions may be 
regarded as normal, necessary and incidental to the business of lending, 
the Board does not believe that the holding of assets acquired ``dpc'' 
without any time restrictions is appropriate from the standpoint of 
prudent banking and in light of the prohibitions in section 4 of the Act 
against engaging in nonbank activities. If a nonbanking subsidiary of a 
bank holding company were permitted, either directly or through a 
subsidiary, to hold ``dpc'' assets of substantial amount over an 
extended period of time, the holding of such property could result in an 
unsafe or unsound banking practice or in the holding company engaging in 
an impermissible activity in connection with the assets, rather than 
liquidating them.
    (c) The Board notes that section 4(c)(2) of the Bank Holding Company 
Act provides an exemption from the prohibitions of section 4 of the Act 
for bank holding company subsidiaries to acquire shares ``dpc''. It also 
provides that such ``dpc'' shares may be held for a period of two years, 
subject to the Board's authority to grant three one-year extensions up 
to a maximum of five years. \1\ Viewed in light of the Congressional 
policy evidenced by section

[[Page 249]]

4(c)(2), the Board believes that a lending subsidiary of a bank holding 
company or the holding company itself, should be permitted, as an 
incident to permissible lending activities, to make acquisitions of 
``dpc'' assets. Consistent with the principles underlying the provisions 
of section 4(c)(2) of the Act and as a matter of prudent banking 
practice, such assets may be held for no longer than five years from the 
date of acquisition. Within the divestiture period it is expected that 
the company will make good faith efforts to dispose of ``dpc'' shares or 
assets at the earliest practicable date. While no specific authorization 
is necessary to hold such assets for the five-year period, after two 
years from the date of acquisition of such assets, the holding company 
should report annually on its efforts to accomplish divestiture to its 
Reserve Bank. The Reserve Bank will monitor the efforts of the company 
to effect an orderly divestiture, and may order divestiture before the 
end of the five-year period if supervisory concerns warrant such action.
---------------------------------------------------------------------------

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

    (d) The Board recognizes that there are instances where a company 
may encounter particular difficulty in attempting to effect an orderly 
divestiture of ``dpc'' real estate holdings within the divestiture 
period, notwithstanding its persistent good faith efforts to dispose of 
such property. In the Depository Institutions Deregulation and Monetary 
Control Act of 1980, (Pub. L. 96-221) Congress, recognizing that real 
estate possesses unusual characteristics, amended the National Banking 
Act to permit national banks to hold real estate for five years and for 
an additional five-year period subject to certain conditions. Consistent 
with the policy underlying the recent Congressional enactment, and as a 
matter of supervisory policy, a bank holding company may be permitted to 
hold real estate acquired ``dpc'' beyond the initial five-year period 
provided that the value of the real estate on the books of the company 
has been written down to fair market value, the carrying costs are not 
significant in relation to the overall financial position of the 
company, and the company has made good faith efforts to effect 
divestiture. Companies holding real estate for this extended period are 
expected to make active efforts to dispose of it, and should keep the 
Reserve Bank advised on a regular basis concerning their ongoing 
efforts. Fair market value should be derived from appraisals, comparable 
sales or some other reasonable method. In any case, ``dpc'' real estate 
would not be permitted to be held beyond 10 years from the date of its 
acquisition.
    (e) With respect to the transfer by a subsidiary of other ``dpc'' 
shares or assets to another company in the holding company system, 
including a section 4(c)(1)(D) liquidating subsidiary, or to the holding 
company itself, such transfers would not alter the original divestiture 
period applicable to such shares or assets at the time of their 
acquisition. Moreover, to ensure that assets are not carried at inflated 
values for extended periods of time, the Board expects, in the case of 
all such intracompany transfers, that the shares or assets will be 
transferred at a value no greater than the fair market value at the time 
of transfer and that the transfer will be made in a normal arms-length 
transaction.
    (f) With regard to ``dpc'' assets acquired by a banking subsidiary 
of a holding company, so long as the assets continue to be held by the 
bank itself, the Board will regard them as being solely within the 
regulatory authority of the primary supervisor of the bank.

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

[45 FR 49905, July 28, 1980]



Sec. 225.141  Operations subsidiaries of a bank holding company.

    In orders approving the retention by a bank holding company of a 
4(c)(8) subsidiary, the Board has stated that it would permit, without 
any specific regulatory approval, the formation of a wholly owned 
subsidiary of an approved 4(c)(8) company to engage in activities that 
such a company could itself engage in directly through a division or 
department. (Northwestern Financial Corporation, 65 Federal Reserve 
Bulletin 566 (1979).) Section 4(a)(2) of

[[Page 250]]

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

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

[45 FR 54326, July 15, 1980]



Sec. 225.142  Statement of policy concerning bank holding companies engaging 

in futures, forward and options contracts on U.S. Government and agency 

securities and money market instruments.

    (a) Purpose of financial contract positions. In supervising the 
activities of bank holding companies, the Board has adopted and 
continues to follow the principle that bank holding companies should 
serve as a source of strength for their subsidiary banks. Accordingly, 
the Board believes that any positions that bank holding companies or 
their nonbank subsidiaries take in financial contracts should reduce 
risk exposure, that is, not be speculative.
    (b) Establishment of prudent written policies, appropriate 
limitations and internal controls and audit programs. If the parent 
organization or nonbank subsidiary is taking or intends to take 
positions in financial contracts, that company's board of directors 
should approve prudent written policies and establish appropriate 
limitations to insure that financial contract activities are performed 
in a safe and sound manner with levels of activity reasonably related to 
the organization's business needs and capacity to fulfill obligations. 
In addition, internal controls and internal audit programs to monitor 
such activity should be established. The board of directors, a duly 
authorized committee thereof or the internal auditors should review 
periodically (at least monthly) all financial contract positions to 
insure conformity with such policies and limits. In order to determine 
the company's exposure, all open positions should be reviewed and market 
values determined at least monthly, or more often, depending on volume 
and magnitude of positions.
    (c) Formulating policies and recording financial contracts. In 
formulating its policies and procedures, the parent holding company may 
consider the interest rate exposure of its nonbank subsidiaries, but not 
that of its bank subsidiaries. As a matter of policy, the Board believes 
that any financial contracts executed to reduce the interest rate 
exposure of a bank affiliate of a holding company should be reflected on 
the books and records of the bank affiliate (to the extent required by 
the bank policy statements), rather than on the books and records of the 
parent company. If a bank has an interest rate exposure that management 
believes requires hedging with financial contracts, the bank should be 
the direct beneficiary of any effort to reduce that exposure. The Board 
also believes that final responsibility for financial contract 
transactions for the account of each affiliated bank should reside with 
the management of that bank.
    (d) Accounting. The joint bank policy statements of March 12, 1980 
include accounting guidelines for banks that

[[Page 251]]

engage in financial contract activities. Since the Financial Accounting 
Standards Board is presently considering accounting standards for 
contract activities, no specific accounting requirements for financial 
contracts entered into by parent bank holding companies and nonbank 
subsidiaries are being mandated at this time. The Board expects to 
review further developments in this area.
    (e) Board to monitor bank holding company transactions in financial 
contracts. The Board intends to monitor closely bank holding company 
transactions in financial contracts to ensure that any such activity is 
consistent with maintaining a safe and sound banking system. In any 
cases where bank holding companies are found to be engaging in 
speculative practices, the Board is prepared to institute appropriate 
action under the Financial Institutions Supervisory Act of 1966, as 
amended.
    (f) Federal Reserve Bank notification. Bank holding companies should 
furnish written notification to their District Federal Reserve Bank 
within 10 days after financial contract activities are begun by the 
parent or a nonbank subsidiary. Holding companies in which the parent or 
a nonbank subsidiary currently engage in financial contract activity 
should furnish notice by March 31, 1983.

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

[48 FR 7720, Feb. 24, 1983]



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

companies.

    (a) Introduction. (1) In recent months, a number of bank holding 
companies have made substantial equity investments in a bank or bank 
holding company (the ``acquiree'') located in states other than the home 
state of the investing company through acquisition of preferred stock or 
nonvoting common shares of the acquiree. Because of the evident interest 
in these types of investments and because they raise substantial 
questions under the Bank Holding Company Act (the ``Act''), the Board 
believes it is appropriate to provide guidance regarding the consistency 
of such arrangements with the Act.
    (2) This statement sets out the Board's concerns with these 
investments, the considerations the Board will take into account in 
determining whether the investments are consistent with the Act, and the 
general scope of arrangements to be avoided by bank holding companies. 
The Board recognizes that the complexity of legitimate business 
arrangements precludes rigid rules designed to cover all situations and 
that decisions regarding the existence or absence of control in any 
particular case must take into account the effect of the combination of 
provisions and covenants in the agreement as a whole and the particular 
facts and circumstances of each case. Nevertheless, the Board believes 
that the factors outlined in this statement provide a framework for 
guiding bank holding companies in complying with the requirements of the 
Act.
    (b) Statutory and regulatory provisions. (1) Under section 3(a) of 
the Act, a bank holding company may not acquire direct or indirect 
ownership or control of more than 5 per cent of the voting shares of a 
bank without the Board's prior approval. (12 U.S.C. 1842(a)(3)). In 
addition, this section of the Act provides that a bank holding company 
may not, without the Board's prior approval, acquire control of a bank: 
That is, in the words of the statute, ``for any action to be taken that 
causes a bank to become a subsidiary of a bank holding company.'' (12 
U.S.C. 1842(a)(2)). Under the Act, a bank is a subsidiary of a bank 
holding company if:
    (i) The company directly or indirectly owns, controls, or holds with 
power to vote 25 per cent or more of the voting shares of the bank;
    (ii) The company controls in any manner the election of a majority 
of the board of directors of the bank; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company has the power, directly or indirectly, to 
exercise a controlling influence over the management or policies of the 
bank. (12 U.S.C. 1841(d)).
    (2) In intrastate situations, the Board may approve bank holding 
company acquisitions of additional banking subsidiaries. However, where 
the acquiree

[[Page 252]]

is located outside the home state of the investing bank holding company, 
section 3(d) of the Act prevents the Board from approving any 
application that will permit a bank holding company to ``acquire, 
directly or indirectly, any voting shares of, interest in, or all or 
substantially all of the assets of any additional bank.'' (12 U.S.C. 
1842(d)(1)).
    (c) Review of agreements. (1) In apparent expectation of statutory 
changes that might make interstate banking permissible, bank holding 
companies have sought to make substantial equity investments in other 
bank holding companies across state lines, but without obtaining more 
than 5 per cent of the voting shares or control of the acquiree. These 
investments involve a combination of the following arrangements:
    (i) Options on, warrants for, or rights to convert nonvoting shares 
into substantial blocks of voting securities of the acquiree bank 
holding company or its subsidiary bank(s);
    (ii) Merger or asset acquisition agreements with the out-of-state 
bank or bank holding company that are to be consummated in the event 
interstate banking is permitted;
    (iii) Provisions that limit or restrict major policies, operations 
or decisions of the acquiree; and
    (iv) Provisions that make acquisition of the acquiree or its 
subsidiary bank(s) by a third party either impossible or economically 
impracticable.

The various warrants, options, and rights are not exercisable by the 
investing bank holding company unless interstate banking is permitted, 
but may be transferred by the investor either immediately or after the 
passage of a period of time or upon the occurrence of certain events.
    (2) After a careful review of a number of these agreements, the 
Board believes that investments in nonvoting stock, absent other 
arrangements, can be consistent with the Act. Some of the agreements 
reviewed appear consistent with the Act since they are limited to 
investments of relatively moderate size in nonvoting equity that may 
become voting equity only if interstate banking is authorized.
    (3) However, other agreements reviewed by the Board raise 
substantial problems of consistency with the control provisions of the 
Act because the investors, uncertain whether or when interstate banking 
may be authorized, have evidently sought to assure the soundness of 
their investments, prevent takeovers by others, and allow for sale of 
their options, warrants, or rights to a person of the investor's choice 
in the event a third party obtains control of the acquiree or the 
investor otherwise becomes dissatisfied with its investment. Since the 
Act precludes the investors from protecting their investments through 
ownership or use of voting shares or other exercise of control, the 
investors have substituted contractual agreements for rights normally 
achieved through voting shares.
    (4) For example, various covenants in certain of the agreements seek 
to assure the continuing soundness of the investment by substantially 
limiting the discretion of the acquiree's management over major policies 
and decisions, including restrictions on entering into new banking 
activities without the investor's approval and requirements for 
extensive consultations with the investor on financial matters. By their 
terms, these covenants suggest control by the investing company over the 
management and policies of the acquiree.
    (5) Similarly, certain of the agreements deprive the acquiree bank 
holding company, by covenant or because of an option, of the right to 
sell, transfer, or encumber a majority or all of the voting shares of 
its subsidiary bank(s) with the aim of maintaining the integrity of the 
investment and preventing takeovers by others. These long-term 
restrictions on voting shares fall within the presumption in the Board's 
Regulation Y that attributes control of shares to any company that 
enters into any agreement placing long-term restrictions on the rights 
of a holder of voting securities. (12 CFR 225.2(b)(4)).
    (6) Finally, investors wish to reserve the right to sell their 
options, warrants or rights to a person of their choice to prevent being 
locked into what may become an unwanted investment. The Board has taken 
the position that the

[[Page 253]]

ability to control the ultimate disposition of voting shares to a person 
of the investor's choice and to secure the economic benefits therefrom 
indicates control of the shares under the Act. \1\ Moreover, the ability 
to transfer rights to large blocks of voting shares, even if nonvoting 
in the hands of the investing company, may result in such a substantial 
position of leverage over the management of the acquiree as to involve a 
structure that inevitably results in control prohibited by the Act.
---------------------------------------------------------------------------

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

    (d) Provisions that avoid control. (1) In the context of any 
particular agreement, provisions of the type described above may be 
acceptable if combined with other provisions that serve to preclude 
control. The Board believes that such agreements will not be consistent 
with the Act unless provisions are included that will preserve 
management's discretion over the policies and decisions of the acquiree 
and avoid control of voting shares.
    (2) As a first step towards avoiding control, covenants in any 
agreement should leave management free to conduct banking and 
permissible nonbanking activities. Another step to avoid control is the 
right of the acquiree to ``call'' the equity investment and options or 
warrants to assure that covenants that may become inhibiting can be 
avoided by the acquiree. This right makes such investments or agreements 
more like a loan in which the borrower has a right to escape covenants 
and avoid the lender's influence by prepaying the loan.
    (3) A measure to avoid problems of control arising through the 
investor's control over the ultimate disposition of rights to 
substantial amounts of voting shares of the acquiree would be a 
provision granting the acquiree a right of first refusal before 
warrants, options or other rights may be sold and requiring a public and 
dispersed distribution of these rights if the right of first refusal is 
not exercised.
    (4) In this connection, the Board believes that agreements that 
involve rights to less than 25 percent of the voting shares, with a 
requirement for a dispersed public distribution in the event of sale, 
have a much greater prospect of achieving consistency with the Act than 
agreements involving a greater percentage. This guideline is drawn by 
analogy from the provision in the Act that ownership of 25 percent or 
more of the voting securities of a bank constitutes control of the bank.
    (5) The Board expects that one effect of this guideline would be to 
hold down the size of the nonvoting equity investment by the investing 
company relative to the acquiree's total equity, thus avoiding the 
potential for control because the investor holds a very large proportion 
of the acquiree's total equity. Observance of the 25 percent guideline 
will also make provisions in agreements providing for a right of first 
refusal or a public and widely dispersed offering of rights to the 
acquiree's shares more practical and realistic.
    (6) Finally, certain arrangements should clearly be avoided 
regardless of other provisions in the agreement that are designed to 
avoid control. These are:
    (i) Agreements that enable the investing bank holding company (or 
its designee) to direct in any manner the voting of more than 5 per cent 
of the voting shares of the acquiree;
    (ii) Agreements whereby the investing company has the right to 
direct the acquiree's use of the proceeds of an equity investment by the 
investing company to effect certain actions, such as the purchase and 
redemption of the acquiree's voting shares; and
    (iii) The acquisition of more than 5 per cent of the voting shares 
of the acquiree that ``simultaneously'' with their acquisition by the 
investing company become nonvoting shares, remain nonvoting shares while 
held by the investor, and revert to voting shares when transferred to a 
third party.
    (e) Review by the Board. This statement does not constitute the 
exclusive scope of the Board's concerns, nor are the considerations with 
respect to control outlined in this statement an exhaustive catalog of 
permissible or impermissible arrangements. The Board has instructed its 
staff to review agreements of the kind discussed in this statement and 
to bring to the Board's attention those that raise problems of

[[Page 254]]

consistency with the Act. In this regard, companies are requested to 
notify the Board of the terms of such proposed merger or asset 
acquisition agreements or nonvoting equity investments prior to their 
execution or consummation.

[47 FR 30966, July 16, 1982]



Sec. 225.145  Limitations established by the Competitive Equality Banking Act 

of 1987 on the activities and growth of nonbank banks.

    (a) Introduction. Effective August 10, 1987, the Competitive 
Equality Banking Act of 1987 (``CEBA'') redefined the term ``bank'' in 
the Bank Holding Company Act (``BHC Act'' or ``Act'') to include any 
bank the deposits of which are insured by the Federal Deposit Insurance 
Corporation as well as any other institution that accepts demand or 
checkable deposit accounts and is engaged in the business of making 
commercial loans. 12 U.S.C. 1841(c). CEBA also contained a grandfather 
provision for certain companies affected by this redefinition. CEBA 
amended section 4 of the BHC Act to permit a company that on March 5, 
1987, controlled a nonbank bank (an institution that became a bank as a 
result of enactment of CEBA) and that was not a bank holding company on 
August 9, 1987, to retain its nonbank bank and not be treated as a bank 
holding company for purposes of the BHC Act if the company and its 
subsidiary nonbank bank observe certain limitations imposed by CEBA. \1\ 
Certain of these limitations are codified in section 4(f)(3) of the BHC 
Act and generally restrict nonbank banks from commencing new activities 
or certain cross-marketing activities with affiliates after March 5, 
1987, or permitting overdrafts for affiliates or incurring overdrafts on 
behalf of affiliates at a Federal Reserve Bank. 12 U.S.C. 1843(f)(3). 
\2\ The Board's views regarding the meaning and scope of these 
limitations are set forth below and in provisions of the Board's 
Regulation Y (12 CFR 225.52).
---------------------------------------------------------------------------

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

    (b) Congressional findings. (1) At the outset, the Board notes that 
the scope and application of the Act's limitations on nonbank banks must 
be guided by the Congressional findings set out in section 4(f)(3) of 
the BHC Act. Congress was aware that these nonbank banks had been 
acquired by companies that engage in a wide range of nonbanking 
activities, such as retailing and general securities activities that are 
forbidden to bank holding companies under section 4 of the BHC Act. In 
section 4(f)(3), Congress found that nonbank banks controlled by 
grandfathered nonbanking companies may, because of their relationships 
with affiliates, be involved in conflicts of interest, concentration of 
resources, or other effects adverse to bank safety and soundness. 
Congress also found that nonbank banks may be able to compete unfairly 
against banks controlled by bank holding companies by combining banking 
services with financial services not permissible for bank holding 
companies. Section 4(f)(3) states that the purpose of the nonbank bank 
limitations is to minimize any such potential adverse effects or 
inequities by restricting the activities of nonbank banks until further 
Congressional action in the area of bank powers could be undertaken. 
Similarly, the Senate Report accompanying CEBA states that the 
restrictions CEBA places on nonbank banks ``will help prevent existing 
nonbank banks from changing their basic character * * * while Congress 
considers proposals for comprehensive legislation; from drastically 
eroding the separation of banking and commerce; and from increasing the 
potential for unfair competition, conflicts of interest, undue 
concentration of resources, and other adverse effects.'' S.

[[Page 255]]

Rep. No. 100-19, 100th Cong., 1st Sess. 12 (1987). See also H. Rep. No. 
100-261, 100th Cong., 1st Sess. 124 (1987) (the ``Conference Report'').
    (2) Thus, Congress explicitly recognized in the statute itself that 
nonbanking companies controlling grandfathered nonbank banks, which 
include the many of the nation's largest commercial and financial 
organizations, were being accorded a significant competitive advantage 
that could not be matched by bank holding companies because of the 
general prohibition against nonbanking activities in section 4 of the 
BHC Act. Congress recognized that this inequality in regulatory approach 
could inflict serious competitive harm on regulated bank holding 
companies as the grandfathered entities sought to exploit potential 
synergies between banking and commercial products and services. See 
Conference Report at 125-126. The basic and stated purpose of the 
restrictions on grandfathered nonbank banks is to minimize these 
potential anticompetitive effects.
    (3) The Board believes that the specific CEBA limitations should be 
implemented in light of these Congressional findings and the legislative 
intent reflected in the plain meaning of the terms used in the statute. 
In those instances when the language of the statute did not provide 
clear guidance, legislative materials and the Congressional intent 
manifested in the overall statutory structure were considered. The Board 
also notes that prior precedent requires that grandfather exceptions in 
the BHC Act, such as the nonbank bank limitations and particularly the 
exceptions thereto, are to be interpreted narrowly in order to ensure 
the proper implementation of Congressional intent. \3\
---------------------------------------------------------------------------

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

    (c) Activity limitation--(1) Scope of activity. (i) The first 
limitation established under section 4(f)(3) provides that a nonbank 
bank shall not ``engage in any activity in which such bank was not 
lawfully engaged as of March 5, 1987.'' The term activity as used in 
this provision of CEBA is not defined. The structure and placement of 
the CEBA activity restriction within section 4 of the BHC Act and its 
legislative history do, however, provide direction as to certain 
transactions that Congress intended to treat as separate activities, 
thereby providing guidance as to the meaning Congress intended to 
ascribe to the term generally. First, it is clear that the term activity 
was not meant to refer to banking as a single activity. To the contrary, 
the term must be viewed as distinguishing between deposit taking and 
lending activities and treating demand deposit-taking as a separate 
activity from general deposit-taking and commercial lending as separate 
from the general lending category.
    (ii) Under the activity limitation, a nonbank bank may engage only 
in activities in which it was ``lawfully engaged'' as of March 5, 1987. 
As of that date, a nonbank bank could not have been engaged in both 
demand deposit-taking and commercial lending activity without placing it 
and its parent holding company in violation of the BHC Act. Thus, under 
the activity limitations, a nonbank bank could not after March 5, 1987, 
commence the demand deposit-taking or commercial lending activity that 
it did