[Federal Register Volume 76, Number 241 (Thursday, December 15, 2011)]
[Proposed Rules]
[Pages 78085-78090]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31883]
[[Page 78085]]
Vol. 76
Thursday,
No. 241
December 15, 2011
Part II
Federal Deposit Insurance Corporation
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12 CFR Part 362
Permissible Investments for Federal and State Savings Associations:
Corporate Debt Securities; Guidance on Due Diligence Requirements for
Savings Associations in Determining Whether a Corporate Debt Security
Is Eligible for Investment; Proposed Rules
Federal Register / Vol. 76, No. 241 / Thursday, December 15, 2011 /
Proposed Rules
[[Page 78086]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 362
RIN 3064-AD88
Permissible Investments for Federal and State Savings
Associations: Corporate Debt Securities
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The FDIC is seeking public comment to amend the FDIC's
regulations in accordance with the requirements of Federal Deposit
Insurance Act (FDI Act). Specifically, to prohibit any insured savings
association from acquiring and retaining a corporate debt security
unless it determines, prior to acquiring such security and periodically
thereafter, that the issuer has adequate capacity to meet all financial
commitments under the security for the projected life of the
investment. For purposes of the Proposed Rule, an issuer would satisfy
this requirement if, based on the assessment of the savings
association, the issuer presents a low risk of default and is likely to
make full and timely repayment of principal and interest. As proposed,
this standard is consistent with alternative creditworthiness standards
proposed by other Federal agencies under the Dodd-Frank Act and
existing guidance regarding securities investments and credit
classifications of banks and savings associations. In connection with
this NPR, the FDIC is also seeking public comment on proposed guidance,
published elsewhere in today's Federal Register, that sets forth
supervisory expectations for savings associations conducting due
diligence to determine whether a corporate debt security is eligible
for investment under this proposed rule.
DATES: Comments must be received by February 13, 2012.
ADDRESSES: You may submit comments, identified by RIN [3064-AD88], by
any of the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web site.
Email: Comments@fdic.gov. Include the RIN [3064-AD88] on
the subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW.,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: All comments received must include the agency
name and RIN [3064-AD88] for this rulemaking. All comments received
will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any personal information provided.
Paper copies of public comments may be ordered from the FDIC Public
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington,
VA 22226 by telephone at 1 (877) 275-3342 or 1 (703) 562-2200.
FOR FURTHER INFORMATION CONTACT: Kyle Hadley, Chief, Examination
Support Section, (202) 898-6532, Division of Risk Management
Supervision; Eric Reither, Capital Markets Specialist, (202) 898-3707,
Division of Risk Management Supervision; Mark Handzlik, Counsel, Bank
Activities Section, (202) 898-3990; Michael Phillips, Counsel, Bank
Activities Section, (202) 898-3581; or Rachel Jones, Honors Attorney,
Legal Division, (202) 898-6858.
SUPPLEMENTARY INFORMATION:
I. Background
Under Section 28(d)(1) of the FDI Act, Federal and state savings
associations generally are prohibited from acquiring or retaining,
either directly or through a financial subsidiary, a corporate debt
security that is not ``of investment grade.'' \1\ Section 28(d)(4)
defines investment grade as follows: ``Any corporate debt security is
not of `investment grade' unless that security, when acquired by the
savings association or subsidiary, was rated in one of the four highest
ratings categories by at least one nationally recognized statistical
rating organization'' (each, an ``NRSRO'').\2\
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\1\ Section 28(d)(1) of the FDI Act, 12 U.S.C. 1831e(d)(1).
Regulations governing permissible investment activities for federal
savings associations are found in 12 CFR part 160, and regulations
governing permissible investment activities for state savings
associations are found in 12 CFR 390.260-262.
\2\ Id. Under Section 28(d)(2), the investment-grade requirement
does not apply to a corporate debt security acquired or retained by
a ``qualified affiliate'' of a savings association, defined as, (i)
In the case of a stock savings association, an affiliate other than
a subsidiary or an insured depository institution; and (ii) in the
case of a mutual savings association, a subsidiary other than an
insured depository institution, so long as all of the savings
association's investments in and extensions of credit to the
subsidiary are deducted from the capital of the savings association.
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Consistent with the requirements of Section 28(d), Sec.
362.11(b)(1) of the FDIC's regulations generally prohibits a state
savings association from acquiring or retaining a corporate debt
security that is not of investment grade.\3\ Under 12 CFR 362.10(b),
the term ``corporate debt securities that are not of investment grade''
is defined, in a manner consistent with Section 28(d), as, ``any
corporate security that when acquired was not rated among the four
highest rating categories by at least one nationally recognized
statistical rating organization.'' \4\
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\3\ 12 CFR 362.11(b).
\4\ Id. at Sec. 362.10(b). Under section 28(d)(4)(C) of the FDI
Act, however, this term does not include any obligation issued or
guaranteed by a corporation that may be held by a federal savings
association without limitation as a percentage of assets under
section 5(c)(1)(D), (E), or (F) of the Home Owners Loan Act
(``HOLA'').
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The FDIC currently may require a state savings association to take
corrective measures in the event a corporate debt security experiences
a downgrade (to non-investment grade status) following acquisition. For
example, a savings association may be required to reduce the level of
non-investment grade corporate debt security investments as a
percentage of tier 1 or total capital, write-down the value of the
security to reflect an impairment, or divest the security. The FDIC
addresses nonconforming investments on a case-by-case basis through the
examination process, and in view of the risk profile of the savings
association and size and composition of its investment portfolio.
Section 939(a)(2) of the Dodd-Frank Act amends Section 28(d) by (a)
removing references to NRSRO credit ratings, including the investment-
grade standard under paragraph (1) and the definition of ``investment
grade'' under paragraph (4); and (b) inserting in paragraph (1) a
reference to ``standards of creditworthiness established by the
[FDIC]''. Section 939(a) is effective on July 21, 2012, and, therefore,
as of this date federal and state savings associations will be
permitted to invest only in corporate debt securities that satisfy
creditworthiness standards established by the FDIC.\5\
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\5\ See section 939(g) of the Dodd-Frank Act.
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II. Description of the Proposed Rule and Consistency With Other Federal
Regulations
In accordance with the requirements of Section 939(a), the Proposed
Rule would amend Sec. Sec. 362.09, 362.10, and 362.11(b)(1) of the
FDIC's regulations. Section 362.10 would be amended by deleting the
definition of corporate debt securities not of investment grade.
Section 362.11(b)(1) would be amended by replacing the investment-grade
standard, applicable to permissible
[[Page 78087]]
corporate debt securities investments of a state savings association,
with a requirement, applicable to federal and state savings
associations, that prior to acquiring a corporate debt security, and
periodically thereafter, the savings association must determine that
the issuer has adequate capacity to meet all financial commitments
under the security for the projected life of the investment. For
purposes of the Proposed Rule, an issuer would satisfy this requirement
if the savings association appropriately determines that the obligor
presents low default risk and is likely to make timely payments of
principal and interest. The FDIC notes that, in addition to the
requirements of the Proposed Rule, any savings association investment
in a corporate debt security must be conducted in a manner that is
consistent with safety and soundness principles.
In determining whether an issuer has an adequate financial capacity
to satisfy all financial commitments under a security for the projected
life of the investment, the FDIC would expect savings associations to
consider a number of factors commensurate with the risk profile and
nature of the issuer. Although savings associations would be permitted
to consider an external credit assessment for purposes of such
determination, they must supplement any external credit assessment with
due diligence processes and analyses that are appropriate for the size
and complexity of the investment.
If promulgated in final form, the Proposed Rule would be effective
on July 21, 2012, in accordance with the requirements of section 939(g)
of the Dodd-Frank Act. The Proposed Rule would not grandfather any
corporate debt securities acquired before the effective date and,
therefore, federal and state savings associations would be permitted to
retain only those securities for which the savings association
determines that (as of the effective date and periodically thereafter)
the issuer has adequate capacity to satisfy all financial commitments
under the security for the expected life of the investment. This
proposed treatment for previously acquired securities is consistent
with the requirements of Section 28(d) and the Proposed Rule, which
prohibit a savings association from acquiring or retaining any
corporate debt security that does not satisfy the creditworthiness
standard described in this proposal. Accordingly, savings associations
will be required to periodically review and update the analysis
required to make such determination.
The FDIC is not revising its current supervisory practice with
respect to nonconforming corporate debt securities investments. That
is, if a security acquired in compliance with the Proposed Rule
experiences credit impairment or other deterioration following its
acquisition, the appropriate federal regulator may require a state
savings association to take corrective measures on a case-by-case
basis.
In addition to the revisions described above, the Proposed Rule
would make conforming, technical amendments to Sec. 362.9 of the
FDIC's regulations to expand the scope of the rule to federal savings
associations \6\ and reflect the abolishment of the Office of Thrift
Supervision under section 313 of the Dodd-Frank Act.
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\6\ Currently, Sec. 362.11(b) applies only to insured state
savings associations.
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In connection with this NPR, the FDIC is seeking public comment on
proposed guidance, published elsewhere in today's Federal Register,
that sets forth supervisory expectations for due diligence conducted by
a savings association in determining whether a corporate debt security
is eligible for investment under this proposal. The proposed guidance
describes the factors savings associations should consider in
evaluating the creditworthiness of an issuer and, in particular,
determining whether the issuer has adequate capacity to satisfy all
financial commitments under the security for the expected life of the
investment. The FDIC encourages commenters to review and comment on the
proposed guidance in connection with their review of the Proposed Rule.
Consideration of Potential Alternative Creditworthiness Standards
In developing the Proposed Rule, the FDIC considered various
alternatives to the proposed creditworthiness standard, that is, that
the issuer has adequate capacity to satisfy all financial commitments
under the security for the expected life of the investment. One option
for assessing the creditworthiness of a corporate debt security would
be to differentiate the credit risk of the security based on financial
and economic measures appropriate to the issuer. For example, the FDIC
could require the savings association to demonstrate that the issuer
satisfies certain metrics based on balance sheet or cash flow ratios
such as current assets to current liabilities, debt to equity, or some
form of debt service to cash flow ratio. Alternatively, for publicly
traded issuers, the FDIC could require the savings association to
demonstrate that the issuer satisfies certain market-based measures,
such as credit spreads, market-implied risk, and measures of capital
adequacy and liquidity.
The Proposed Rule would require a savings association to determine
that the issuer has adequate capacity to satisfy all financial
commitments under the security for the projected life of the
investment. The FDIC believes that the proposed standard provides a
flexible, straightforward measure of creditworthiness that is generally
consistent with existing policy \7\ and supervisory guidance for
classifying exposures as substandard, doubtful, or loss.\8\ Although
the alternatives present certain advantages, including the potential
for identical or similar creditworthiness assessments across
institutions, the FDIC believes the Proposed Rule would foster prudent
risk management; be transparent, replicable, and well-defined; allow
different savings associations to make a similar creditworthiness
assessment with respect to the same credit exposure; allow for
supervisory review; differentiate among investments in the same asset
class with different credit risk; and provide for the timely and
accurate measurement of negative and positive changes in investment
quality. In addition, as described below, the FDIC believes that the
Proposed Rule is consistent with the requirements of section 939A
(``Section 939A'') of the Dodd-Frank Act, which requires the federal
agencies, to the extent feasible, to establish uniform standards of
creditworthiness. Section 939A also directs the agencies to consider
the differences among their regulated entities and the purposes of
which these entities would rely on such standards.
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\7\ See Supervisory Policy Statement on Investment Securities
and End-User Derivatives (April 23, 1998).
\8\ See Uniform Agreement on the Classification of Assets and
Appraisal of Securities Held by Banks and Thrifts (June 15, 2004).
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Consistency With Other Federal Regulations
As discussed above, in accordance with the requirements of Section
939A, the FDIC reviewed standards of creditworthiness proposed by other
federal agencies to ensure, to the extent feasible, that the FDIC
adopts a consistent creditworthiness standard. The FDIC reviewed
proposed rules from the Department of Treasury (``Treasury''), the
Securities and Exchange Commission (``SEC''), and the Commodity Futures
Trading Commission (``CFTC'').
[[Page 78088]]
On September 27, 2011, the Treasury issued a proposed rule that
would implement Section 939A with respect to its liquid capital rule,
which prescribes the minimum capital requirements for registered
government securities brokers and dealers.\9\ Currently, if a
government securities broker or dealer invests in commercial paper, the
investment could qualify for a more favorable haircut if the issuer is
rated by at least two NRSROs in one of the three highest categories. As
a substitute standard of creditworthiness, the Treasury is proposing
that commercial paper with a ``minimal amount of credit risk,'' as
determined by the broker or dealer, receive the favorable haircut.
Similarly, under the FDIC's Proposed Rule, instead of relying solely on
an NRSRO credit rating, a savings association would be required to
determine the credit risk of a corporate debt security by considering
various factors. Additionally, the Treasury would require security
brokers and dealers to establish and maintain written policies and
procedures on how they assess credit risk. The Treasury would not
mandate any particular evaluation criteria, but would provide
recommendations. For example, the Treasury recommends considering the
following factors: Credit spreads, liquidity, securities-related
research, internal or external credit risk assessments (which includes
rating agencies), default statistics, inclusion on an index, price and/
or yield, and factors specific to the commercial paper market (e.g.,
general liquidity conditions). Also similar to the FDIC's Proposed
Rule, brokers and dealers would be required to periodically review
their creditworthiness determination. The frequency of the review would
depend on the characteristics of the underlying commercial paper
instrument.
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\9\ 76 FR 59592 (September 27, 2011).
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On March 9, 2011, the SEC published a notice of proposed rulemaking
to implement Section 939A with respect to Rule 5b-3. SEC Rule 5b-3
permits funds under the Investment Company Act to treat certain
repurchase agreements as an acquisition of the securities
collateralizing the repurchase agreement instead of an interest in the
counterparty.\10\ A repurchase agreement may qualify for the favorable
treatment only if, in part, the underlying collateral is comprised of
securities that are rated investment grade by at least two NRSROs at
the time the repurchase agreement is entered into. This provision
ensures that the collateral can be easily liquidated in the event of
default. In accordance with Section 939A, the SEC proposed to define a
security as fully collateralized if, in part, the collateral (1) Is
issued by an issuer that has the highest capacity to meet its financial
obligations; and (2) is sufficiently liquid that the securities can be
sold at approximately their carrying value in the ordinary course of
business within seven calendar days. Similar to the FDIC's proposal,
the responsibility for making the creditworthiness determination is
placed with the regulated institution. However, in contrast to the
FDIC's Proposed Rule, the SEC proposed rules would require that funds
determine the issuer has the highest capacity to meet its financial
obligations.\11\
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\10\ 76 FR 12896 (March 9, 2011).
\11\ As discussed previously in Section II, the FDIC's Proposed
Rule only requires an adequate capacity to meet its financial
commitments.
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On May 12, 2011, the CFTC published a notice of proposed rulemaking
to implement Section 939A with respect to regulations governing capital
requirements for over-the-counter (``OTC'') derivatives.\12\ The new
statutory framework provided under the Commodity Exchange Act, added by
the Dodd-Frank Act, requires the CFTC to adopt capital requirements for
certain swap dealers and major swap participants. The proposed
regulation would require swap dealers and major swap participants to
calculate current and potential future exposure to counterparties in
determining their capital requirements. This exposure would be subject
to a credit-risk factor of 50 percent regardless of the counterparty's
credit rating. The swap dealer or major swap participant would be able
to apply to the CFTC for approval to assign internal ratings to
counterparties. If the internal credit-risk management system of the
swap dealer or major swap participant is strong, the CFTC may approve
the application to use internal ratings. The swap dealer and major swap
participants would have to regularly update the internal rating,
similar to the FDIC's Proposed Rule.
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\12\ 76 FR 27802 (May 12, 2011).
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IV. Request for Comment
The FDIC seeks comment on all aspects of this NPR and the proposed
creditworthiness standard for permissible corporate debt securities
investments of federal and state savings associations. In addition, the
FDIC strongly encourages commenters to provide comment on the proposed
guidance, published elsewhere in today's Federal Register, released in
connection with this NPR. Specifically, the FDIC seeks comment on the
specific questions set forth below.
1. Does the proposed creditworthiness standard for corporate debt
securities investments of federal and state savings associations
satisfy the following criteria?
Fosters prudent risk management;
Is transparent, replicable, and well defined;
Allows different banks or savings associations to assign
the same or similar assessment of credit quality to the same or similar
credit exposures;
Allows for supervisory review;
Differentiates among investments in the same asset class
with different credit risk; and
Provides for the timely and accurate measurement of
negative and positive changes in investment quality, to the extent
practicable?
2. Would the proposed creditworthiness standard for corporate debt
securities investments of federal and state savings associations avoid
concerns regarding regulatory arbitrage and oversimplified measures;
dampen systemic risk; appropriately consider market complexities;
identify appropriate time horizons; and, allow for accurate and timely
reassessments? What changes could the FDIC make to the Proposed Rule to
more appropriately address these objectives?
3. Does the proposed revised definition strike an appropriate
balance between the measurement of credit risk and the implementation
burden in considering alternative measures of creditworthiness? Are
there other alternatives that strike a more appropriate balance between
these objectives?
V. Regulatory Analyses
A. Paperwork Reduction Act (PRA)
No new collection of information pursuant to the PRA (44 U.S.C.
3501 et seq.) is contained in this NPR.
B. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and
make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small entities
(defined in regulations promulgated by the Small Business
Administration to include banking organizations with total assets of
less than or equal to $175 million).\13\ However, a regulatory
flexibility analysis is not required if the agency
[[Page 78089]]
certifies that the rule will not have a significant economic impact on
a substantial number of small entities, and publishes its certification
and a short explanatory statement in the Federal Register together with
the rule. For the reasons provided below, the FDIC certifies that the
Proposed Rule, if adopted in final form, would not have a significant
economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis is not required.
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\13\ 5 U.S.C. 601 et seq.
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As discussed in this NPR, Section 28(d) of the FDI Act, as amended
by Section 939(a) of the Dodd-Frank Act, prohibits federal and state
savings associations from acquiring or retaining a corporate debt
security that does not meet FDIC's standards of creditworthiness. In
accordance with the requirements of amended Section 28(d), this NPR
proposes that savings associations cannot invest in a corporate debt
security unless the savings association determines that the issuer has
adequate capacity to meet all financial commitments under the security
for the projected life of the investment. Consequently, this Proposed
Rule only impacts savings associations that hold corporate debt
security investments.
In determining whether this Proposed Rule would have a significant
economic impact on a substantial number of small savings associations,
the FDIC reviewed June 2011 Thrift Financial Report (TFR) data to
evaluate the number of savings associations with corporate debt
securities. There are 708 insured state and federal savings
associations. Of these 708 insured savings associations, 204 reported
investments in the Other Investment Securities line of their TFR.\14\
Even assuming the entire amount listed in the Other Investment
Securities line of the TFR represents investment in corporate debt
securities, Other Investment Securities represents only 2.40 percent of
the aggregate total assets of the 708 applicable savings associations.
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\14\ This line item is where the dollar exposure to corporate
debt securities, along with other forms of investment, should be
slotted according to the TFR instructions. This line may also
include investments in instruments other than corporate debt
securities, this limited granularity does not permit a precise
understanding of the exposure to corporate debt securities.
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Moreover, only savings associations with total assets of $175
million or less apply for purposes of the RFA analysis. When applying
this additional size criterion, only 61 institutions list Other
Investment Securities in their TFR. For these smaller savings
institutions, the total amount listed as investment in Other Investment
Securities represents only .45 percent of the total assets. And only
seven of these smaller thrifts have concentrations in Other Investment
Securities that exceeds 50 percent of their tier 1 capital. Due to the
small investment in corporate debt securities on small savings
associations' balance sheets and due to the existing need to do due
diligence relating to any investment in order to assure that a savings
association is operating in a safe and sound manner, the additional
compliance burden would not result in a significant economic impact on
a substantial number of small savings associations.
Plain Language
Section 722 of the Gramm-Leach-Bliley Act required the agencies to
use plain language in all proposed and final rules published after
January 1, 2000. The agencies invite comment on how to make this
Proposed Rule easier to understand. For example:
Have the agencies organized the material to suit your
needs? If not, how could they present the rule more clearly?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
Is this section format adequate? If not, which of the
sections should be changed and how?
What other changes can the agencies incorporate to make
the regulation easier to understand?
List of Subjects in 12 CFR Part 362
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking,
Investments, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation proposes to amend part 362 of chapter III of
Title 12, Code of Federal Regulations as follows:
PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS
ASSOCIATIONS
1. The authority citation for part 362 continues to read as
follows:
Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(j),
1828(m), 1828a, 1831a, 1831e, 1831w, 1843(l).
2. Amend Sec. 362.9, by revising paragraph (a) to read as follows:
Sec. 362.9 Purpose and scope.
(a) This subpart, along with the notice and application procedures
in subpart H of part 303 of this chapter, implements the provisions of
section 28(a) of the Federal Deposit Insurance Act (12 U.S.C. 1831e(a))
that restrict and prohibit insured state savings associations and their
service corporations from engaging in activities and investments of a
type that are not permissible for a Federal savings association and
their service corporations. This subpart also implements the provision
of section 28(d) of the Federal Deposit Insurance Act (12 U.S.C.
1831e(d)) that restricts state and federal savings associations from
investing in certain corporate debt securities. The term ``activity
permissible for a Federal savings association'' means any activity
authorized for a Federal savings association under any statute
including the Home Owners' Loan Act (HOLA) (12 U.S.C. 1464 et seq.), as
well as activities recognized as permissible for a Federal savings
association in regulations issued by the Office of the Comptroller of
the Currency (OCC) or in bulletins, orders or written interpretations
issued by the OCC, or by the former Office of Thrift Supervision until
modified, terminated, set aside, or superseded by the OCC.
* * * * *
Sec. 362.10 [Amended]
3. Amend Sec. 362.10 by removing paragraph (b) and redesignating
paragraphs (c), (d), and (e) as paragraphs (b), (c), and (d).
4. Amend Sec. 362.11 by revising the section heading and the last
sentence of paragraph (b)(1) to read as follows:
Sec. 362.11 Activities of insured savings associations.
* * * * *
(b) * * *
(1) * * * After July 21, 2012, an insured savings association
directly or through a subsidiary (other than, in the case of a mutual
savings association, a subsidiary that is a qualified affiliate), shall
not acquire or retain a corporate debt security unless the savings
association, prior to acquiring the security and periodically
thereafter, determines that the issuer of the security has adequate
capacity to meet all financial commitments under the
[[Page 78090]]
security for the projected life of the investment.
* * * * *
Dated at Washington, DC, this 7th day of December 2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-31883 Filed 12-13-11; 11:15 am]
BILLING CODE 6714-01-P