[Federal Register Volume 77, Number 114 (Wednesday, June 13, 2012)]
[Rules and Regulations]
[Pages 35253-35259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-14169]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1, 5, 16, 28, and 160
[Docket ID OCC-2012-0005]
RIN 1557-AD36
Alternatives to the Use of External Credit Ratings in the
Regulations of the OCC
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Final rule.
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SUMMARY: Section 939A of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) contains two directives to Federal
agencies including the OCC. First, section 939A directs all Federal
agencies to review, no later than one year after enactment, any
regulation that requires the use of an assessment of creditworthiness
of a security or money market instrument and any references to, or
requirements in, such regulations regarding credit ratings. Second, the
agencies are required to remove any references to, or requirements of
reliance on, credit ratings and substitute such standard of
creditworthiness as each agency determines is appropriate. The statute
further provides that the agencies shall seek to establish, to the
extent feasible, uniform standards of creditworthiness, taking into
account the entities the agencies regulate and the purposes for which
those entities would rely on such standards.
On November 29, 2011, the OCC issued a notice of proposed
rulemaking (NPRM), seeking comment on a proposal to revise its
regulations pertaining to investment securities, securities offerings,
and foreign bank capital equivalency deposits to replace references to
credit ratings with alternative standards of creditworthiness.
The OCC also proposed to amend its regulations pertaining to
financial subsidiaries of national banks to better reflect the language
of the underlying statute, as amended by section 939(d) of the Dodd-
Frank Act.
Today, the OCC is finalizing those rules as proposed.
DATES: The final rule amending 12 CFR part 5 is effective on July 21,
2012. The final rules amending 12 CFR parts 1, 16, 28, and 160 are
effective on January 1, 2013.
FOR FURTHER INFORMATION CONTACT: Kerri Corn, Director for Market Risk,
Credit and Market Risk Division, (202) 874-4660; Michael Drennan,
Senior Advisor, Credit and Market Risk Division, (202) 874-4660; Carl
Kaminski, Senior Attorney, or Kevin Korzeniewski, Attorney, Legislative
and Regulatory Activities Division, (202) 874-5090; or Eugene H.
Cantor, Counsel, Securities and Corporate Practices Division, (202)
874-5210, Office of the Comptroller of the Currency, 250 E Street SW.,
Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
I. Background
Section 939A of the Dodd-Frank Wall Street Reform and Consumer
Protection Act \1\ (the Dodd-Frank Act) contains two directives to
Federal agencies including the OCC. First, section 939A directs all
Federal agencies to review, no later than one year after enactment, any
regulation that requires the use of an assessment of creditworthiness
of a security or money market instrument and any references to or
requirements in such regulations regarding credit ratings. Second, the
agencies are required to remove references to, or requirements of
reliance on, credit ratings and substitute such standard of
creditworthiness as each agency determines is appropriate. The statute
further provides that the agencies shall seek to establish, to the
extent feasible, uniform standards of creditworthiness, taking into
account the entities the agencies regulate and the purposes for which
those entities would rely on those standards.
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\1\ Public Law 111-203, Section 939A, 124 Stat. 1376, 1887 (July
21, 2010).
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On November 29, 2011, the OCC issued a notice of proposed
rulemaking (NPRM), seeking comment on a proposal to revise its
regulations pertaining to investment securities, securities offerings,
and foreign bank capital equivalency deposits to replace references to
credit ratings with alternative standards of creditworthiness. The OCC
also proposed to amend its regulations pertaining to financial
subsidiaries of national banks to better reflect the language of the
underlying statute, as amended by section 939(d) of the Dodd-Frank Act.
The proposal generally pertained to rules that require national
banks and Federal savings associations to determine whether a
particular security or issuance qualifies, or does not qualify, for a
specific treatment. For example, except for U.S. government securities
and certain municipal securities, the OCC's investment securities
regulations generally require a national bank or Federal savings
association to determine whether or not a security is ``investment
grade'' in order to determine whether purchasing the security is
permissible.
The OCC received 11 comments on the proposed rules from banks, bank
trade groups, individuals, and bank service providers. The majority of
the commenters generally supported the proposed rules and stated that
they presented a workable alternative to the use of credit ratings. A
few commenters raised specific issues, which are addressed in more
detail below.
After considering the comments and the issues raised, the OCC has
decided to finalize the rules as proposed. In order to assist national
banks and Federal savings associations in making these ``investment
grade'' determinations, the OCC also is publishing a final guidance
document today in this issue of the Federal Register.
II. Description of the Final Rules
For the purposes of its regulations at 12 CFR parts 1, 16, 28, and
160, the OCC is amending the definition of ``investment grade'' to
remove references to credit ratings and nationally recognized
statistical rating
[[Page 35254]]
organizations (NRSROs).\2\ Where appropriate, the final rules replace
the references to credit ratings with non-ratings based standards of
creditworthiness.
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\2\ A nationally recognized statistical rating organization
(NRSRO) is an entity registered with the U.S. Securities and
Exchange Commission (SEC) as an NRSRO under section 15E of the
Securities Exchange Act of 1934. See, 15 U.S.C. 78o-7, as
implemented by 17 CFR 240.17g-1.
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Parts 1, 16, and 160
These final rules remove references to credit ratings provided by
NRSROs and instead generally require national banks and Federal savings
associations to make assessments of a security's creditworthiness,
similar to the assessments currently required for the purchase of
unrated securities.
National Bank Regulations
Under the proposed amendments to parts 1 and 16, a security would
be ``investment grade'' if the issuer of the security has an adequate
capacity to meet financial commitments under the security for the
projected life of the asset or exposure. To meet this new standard,
national banks must determine that the risk of default by the obligor
is low and the full and timely repayment of principal and interest is
expected. In the case of a structured security (that is, a security
that relies primarily on the cash flows and performance of underlying
collateral for repayment, rather than the credit of the issuer), the
determination that full and timely repayment of principal and interest
is expected may be influenced more by the quality of the underlying
collateral, the cash flow rules, and the structure of the security
itself than by the condition of the entity that is technically the
issuer.
When determining whether a particular security is ``investment
grade,'' the OCC expects national banks to consider a number of
factors, to the extent appropriate. While external credit ratings and
assessments remain valuable sources of information and provide national
banks with a standardized credit risk indicator, if a national bank
chooses to use credit ratings as part of its ``investment grade''
determination and due diligence, the bank should, consistent with
existing rules and guidance, supplement the external ratings with a
degree of due diligence processes and additional analyses that are
appropriate for the bank's risk profile and for the size and complexity
of the instrument. In other words, a security rated in the top four
rating categories by an NRSRO is not automatically deemed to satisfy
the revised ``investment grade'' standard.
Importantly, the proposal did not include a requirement that a
national bank consider external credit ratings to make an ``investment
grade'' determination. Therefore, a national bank could rely on other
sources of information, including its own internal systems and/or
analytics provided by third parties, when conducting due diligence and
determining whether a particular security is a permissible and
appropriate investment.
In comments on the proposed rule and guidance, banks and industry
groups expressed concern about the amount of due diligence that the OCC
would require a bank to conduct to determine whether an issuer has an
adequate capacity to meet financial commitments under the security.
Commenters were particularly concerned about the impact of due
diligence requirements on smaller institutions. The OCC believes that
the proposed ``investment grade'' standard and the due diligence
required to meet it are consistent with those under prior ratings-based
standards and existing due diligence requirements and guidance. Even
under the prior ratings-based standards, national banks of all sizes
should not rely solely on a credit rating to evaluate the credit risk
of a security, and consistently have been advised through guidance and
other supervisory materials to supplement any use of credit ratings
with additional research on the credit risk of a particular security.
Therefore, the OCC expects that most national banks already have such
processes in place.
After considering the comments received, the OCC has decided to
finalize the definition of ``investment grade'' as proposed. Also, in
today's Federal Register, the OCC is publishing final guidance to
assist national banks in determining whether a security is ``investment
grade'' and to further explain the OCC's expectations with regard to
regulatory due diligence requirements,\3\ which remain unchanged. While
the final guidance explains the OCC's expectations in more detail, the
OCC's regulations require national banks to understand and evaluate the
risks of purchasing investment securities. Fundamentally, national
banks should not purchase securities for which they do not understand
the relevant risks.
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\3\ See 12 CFR 1.5 (national banks) and 12 CFR 160.1(b) and
160.40(c) (federal savings associations).
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One commenter stated that the definition of ``investment grade''
for structured securities should explicitly require a bank to consider
the likely performance of the underlying collateral under stressed
economic scenarios. In the proposed rule, the OCC noted that the
National Credit Union Administration (NCUA) explicitly proposed to
include a similar requirement for all investment securities in
regulations applicable to Federal credit unions.\4\ Under the NCUA
proposal, a Federal credit union must consider whether an obligor will
continue to have the capacity to meet financial commitments, even under
adverse economic conditions, when considering the creditworthiness of a
security. In the November 29, 2011, proposal, the OCC requested comment
on whether OCC regulations should include a similar requirement in the
regulations applicable to national banks and Federal savings
associations.
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\4\ 76 FR 11164 (March 1, 2011).
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Under the OCC's prior ratings-based definition of ``investment
grade,'' a security could be characterized as ``investment grade'' if
it was rated in the top four ``investment grade'' ratings by two NRSROs
(or one NRSRO if only one NRSRO had rated the particular security) or,
if no NRSROs had rated the security, if the national bank or Federal
savings association determined that the security was the credit
equivalent of a security rated in the top four ``investment grade''
categories by an NRSRO. As a general matter, NRSROs consider potential
adverse economic conditions when determining how to appropriately rate
a security.\5\ Therefore, the ratings-based standard for determining
whether a security is ``investment grade'' generally included the
consideration of potential adverse economic conditions.
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\5\ For example, on its public Web site, Moody's Corporation
includes the following statement in its description of its ratings
methodology:
In coming to a conclusion, rating committees routinely examine a
variety of scenarios. Moody's ratings deliberately do not
incorporate a single, internally consistent economic forecast. They
aim rather to measure the issuer's ability to meet debt obligations
against economic scenarios reasonably adverse to the issuer's
specific circumstances.
Available at, http://www.moodys.com/ratings-process/Ratings-Policy-Approach/002003.
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The OCC does not intend for the elimination of references to credit
ratings, in accordance with the Dodd-Frank Act, to change substantively
the standards national banks must follow when deciding whether a
security is ``investment grade,'' nor does it change the requirement
set forth at 12 CFR 1.5, that institutions adhere to safe and sound
banking practices when dealing in, underwriting, and purchasing and
selling investment securities, and consider, as appropriate, the risks
associated with the particular activities
[[Page 35255]]
undertaken by the bank. As previously noted, national banks must
perform due diligence necessary to establish (1) that the risk of
default by the obligor is low, and (2) that full and timely repayment
of principal and interest is expected. The depth of the due diligence
should be a function of the security's credit quality, the complexity
of the structure, and the size of the investment. The more complex a
security's structure, the greater the expectations, even when the
credit quality is perceived to be very high. To satisfy the
``investment grade'' and safety and soundness standards, a national
bank should ensure that it understands a security's structure and how
the security may perform under adverse economic conditions. A national
bank should be particularly diligent when purchasing a structured
security.
To the extent a national bank would be expected to consider adverse
economic conditions under the current ``investment grade'' and safety
and soundness standards, the OCC would expect the national bank to
continue to consider adverse economic conditions, as appropriate, when
conducting investment securities activities. Importantly, a national
bank may not need to develop its own internal systems to measure
potential adverse economic conditions to meet the revised standard.
Instead, a national bank could consider projections provided by third
parties, including those provided by NRSROs. Therefore, the OCC has
determined that the ``investment grade'' standard does not need to be
revised to address the commenter's concern. However, the OCC recognizes
the need to clarify its expectations with regard to the level of due
diligence necessary to meet the investment grade and safety and
soundness standards. Therefore, the final guidance document, which is
being published in today's Federal Register, provides further detail on
the amount of due diligence the OCC expects national banks and Federal
savings associations to undertake, including, as appropriate, the
consideration of potential adverse economic conditions.
Federal Savings Association Regulations
Under current law, savings associations generally are prohibited by
statute from investing in corporate debt securities unless they are
rated ``investment grade'' by an NRSRO.\6\ However, the Dodd-Frank Act
provides that on July 21, 2012, this statutory requirement will be
replaced by ``standards of creditworthiness established by the
[FDIC].'' \7\ In this final rule, the OCC is adopting the rule as
proposed to define the term ``investment grade,'' as it is used in Part
160, to refer to 12 U.S.C. 1831e. Therefore, it will continue to
reference the current ratings-based requirement until such time as that
requirement is replaced by the FDIC.
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\6\ 12 U.S.C. 1831e(d)(1).
\7\ Public Law 111-203, Section 939(a)(2) (July 21, 2010).
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A few commenters were concerned that the statutory provision
requiring the FDIC to create an alternative for ratings under 12 U.S.C.
1831e could lead to different alternatives to the use of ratings for
corporate debt securities. The OCC has consulted with and intends to
continue to consult with the FDIC on the development of the alternative
creditworthiness standard under 12 U.S.C. 1831e to ensure consistency
to the extent possible.
At 12 CFR 160.42, Federal savings associations are subject to
certain limitations with regard to purchases of state and local
government obligations. Previously, Federal savings associations could
hold state or municipal revenue bonds that have ratings in one of the
four highest ``investment grade'' rating categories from one issuer up
to a limit of 10 percent of total capital without prior OCC approval.
Under the revised rules, this provision would apply to state or
municipal revenue bonds if the issuer has an adequate capacity to meet
financial commitments under the security for the projected life of the
asset or exposure. An issuer has an adequate capacity to meet financial
commitments if the risk of default by the obligor is low and the full
and timely repayment of principal and interest is expected.
The OCC considered the comments discussed above regarding changes
to the definition of ``investment grade'' for national bank
regulations. For the same reasons, the OCC believes that Federal
savings associations already should be conducting due diligence on
these securities and that the new ``investment grade'' standard is
appropriate. Therefore, the OCC adopts the revisions to Sec. 160.42 as
proposed. In addition, Federal savings associations should look to the
final guidance document, issued today in the Federal Register, to
provide more information about how to meet the ``investment grade''
standard in Sec. 160.42.
Safety and Soundness Regulations
In addition to regulatory provisions that generally limit national
banks and Federal savings associations to purchasing securities that
are of ``investment grade,'' OCC regulations require that national
banks and Federal savings associations conduct their investment
activities in a manner that is consistent with safe and sound
practices.\8\ Specifically, national banks and Federal savings
associations must consider the interest rate, credit, liquidity, price
and other risks presented by investments, and the investments must be
appropriate for the particular institution.\9\ In addition to
determining whether a security is of ``investment grade,'' national
banks and Federal savings associations with substantial securities
portfolios, in particular, must have and maintain robust risk
management frameworks to ensure that an investment in a particular
security appropriately fits within its goals and that the institution
will remain in compliance with all relevant concentration limits. The
final rules do not amend those provisions.\10\
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\8\ 12 CFR 1.5; 12 CFR 160.1(b), 160.40(c).
\9\ 12 CFR 1.5(a); 12 CFR 160.1(b), 160.40(c).
\10\ 76 FR 11164 (March 1, 2011).
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Part 28--Foreign Banking Institutions
The OCC's capital equivalency deposit regulation at 12 CFR 28.15
previously allowed for the use of certificates of deposit or bankers'
acceptances as part of the deposit if the issuer is rated ``investment
grade'' by an internationally recognized rating organization. This
final rule removes the requirement referencing credit ratings provided
by ratings organizations. Instead, the issuer of the certificate of
deposit or banker's acceptance must have ``an adequate capacity to meet
financial commitments for the projected life of the asset or
exposure.'' The OCC received no comments on this revision, and adopts
it as proposed.
Effective Date
The OCC did not propose a specific effective date in the proposed
rule. Two bank industry commenters were concerned that banks and
savings associations would have insufficient time to develop processes
for making ``investment grade'' determinations on new securities
purchased before the effective date of this final rule. In addition,
these commenters were concerned about the burden of analyzing
securities institutions had purchased before the effective date of this
final rule. These commenters suggested that the OCC adopt a one-year
delayed effective date and allow for grandfathering of securities held
by the institution before the effective date of this rule.
The OCC recognizes that it may take time for some national banks
and
[[Page 35256]]
Federal savings associations to develop the systems and processes
necessary to make ``investment grade'' determinations under the new
standard. Therefore, the OCC is allowing institutions until January 1,
2013, to come into compliance with this rule.
The OCC also understands that national banks and Federal savings
associations own a significant amount of securities that were purchased
with heavy reliance on credit ratings. Some of these securities,
particularly structured securities, have maturity dates that could
extend to 30 years. Therefore, the OCC does not believe that
grandfathering would be appropriate, as institutions would be able to
hold a grandfathered security for decades without performing additional
``investment grade'' analysis. National banks and Federal savings
associations will still have until the proposed effective date of
January 1, 2013, to evaluate their existing holdings and ensure that
they meet the revised standard.
Part 5--Financial Subsidiaries
Finally, the OCC is adopting as proposed a technical change to 12
CFR 5.39, which pertains to financial subsidiaries of national banks,
to conform with section 939(d) of the Dodd-Frank Act, which amends the
criteria applicable to national banks seeking to control or hold an
interest in a financial subsidiary.
Currently, pursuant to 12 U.S.C. 24a(a)(3), a national bank that is
one of the 50 largest insured banks may control or hold an interest in
a financial subsidiary if, among other criteria, the bank has at least
one issue of outstanding eligible debt rated in one of the top three
``investment grade'' rating categories by an NRSRO.\11\ A national bank
that is one of the second 50 largest insured banks may either satisfy
this requirement or it may satisfy such other criteria as the Secretary
of the Treasury and the Federal Reserve Board may establish jointly by
regulation. The Secretary of the Treasury and the Federal Reserve Board
established an alternative creditworthiness requirement under this
provision of the National Bank Act; however, the alternative
requirement also is based on NRSRO credit ratings. Pursuant to Treasury
Department regulations, a national bank that is within the second 50
largest insured banks may invest in a financial subsidiary if it has a
``current long-term issuer credit rating from at least one NRSRO that
is within the three highest ``investment grade'' rating categories used
by the organization.'' \12\ No statutory creditworthiness requirement
applies under current law to national banks that are not among the
largest 100 insured banks.
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\11\ 12 U.S.C. 24a(a)(3)(A)(i).
\12\ 12 U.S.C. 24a(a)(3)(A)(ii). See, 12 CFR 1501.3.
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Section 939(d) of the Dodd-Frank Act amends the creditworthiness
requirements applicable to the 100 largest insured banks by removing
the reference to NRSRO ratings and by eliminating any distinction
between the first 50 largest insured banks and the second 50 such
institutions. Effective on July 21, 2012, a national bank that is one
of the 100 largest insured banks may control a financial subsidiary,
directly or indirectly, or hold an interest in a financial subsidiary
if the bank has not fewer than one issue of outstanding debt that meets
such standards of creditworthiness or other criteria as the Secretary
of the Treasury and the Federal Reserve Board may jointly establish. As
is the case under current law, this statutory creditworthiness
requirement does not apply to an insured depository institution that is
not among the largest 100 insured depository institutions. Therefore,
the Dodd-Frank revision will not affect the ability of such an
institution to control or hold an interest in a financial
subsidiary.\13\
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\13\ The reference to creditworthiness standards issued jointly
by the Treasury Department and the Federal Reserve Board with
respect to the 100 largest insured banks appears in a paragraph--
paragraph (3)--that is cross-referenced by section 24a(a)(2)(E),
which lists all of the requirements necessary for a national bank to
have a financial subsidiary. This (a)(2)(E) list of requirements was
amended by Dodd-Frank so that it continues to cross-reference
paragraph (3), but now also refers to standards of creditworthiness
established by the OCC as a criterion for having a financial
subsidiary. Under one reading, (a)(2)(E) could be construed to
impose new creditworthiness requirements for having a financial
subsidiary on national banks that are not among the 100 largest
insured banks and to permit banks that are among the 100 largest
insured banks to choose between any creditworthiness standards that
the OCC might issue and those issued jointly by the Treasury and the
Board. Neither result squares with the cross-reference in the text
to the requirement for the Treasury and the Board to issue
creditworthiness standards for the 100 largest insured banks.
Moreover, this reading is not sensible given that the statutory
purpose is to eliminate references to credit rating agency ratings
in statute and regulation, not to alter the requirements for all
national banks to hold financial subsidiaries. The better reading is
that national banks that are among the 100 largest insured banks
must meet such standards of creditworthiness as the Treasury and the
Board jointly establish and that the OCC is not required to impose
new requirements on national banks that are not in that category.
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The Secretary of the Treasury and Federal Reserve Board have not
yet established alternative non-ratings-based creditworthiness
requirements applicable to the 100 largest insured banks under this
revised provision of the National Bank Act. Until specific
creditworthiness standards are established under 12 U.S.C. 24a, as
modified by the Dodd-Frank Act, no specific creditworthiness
requirements will be required of national banks applying to control or
hold an interest in a financial subsidiary. Importantly, however, the
requirements at 12 CFR 5.39(g)(1) and (2) still apply. These provisions
provide that a national bank may control or hold an interest in a
financial subsidiary only if it and each depository institution
affiliate is well-capitalized and well-managed, and the aggregate
consolidated total assets of all financial subsidiaries of the national
bank do not exceed the lesser of 45 percent of the consolidated total
assets of the parent bank or $50 billion (or such greater amount as is
determined according to an indexing mechanism jointly established by
regulation by the Secretary of the Treasury and the Board of Governors
of the Federal Reserve System).
In the NPRM and technical supplement,\14\ the OCC proposed to
revise 12 CFR 5.39 to be consistent with the Dodd-Frank Act revisions
to 12 U.S.C. 24a described above. The OCC received no comments on the
proposed revision, and therefore adopts it as proposed in the NPRM and
technical amendment supplement.
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\14\ 76 FR 76905 (December 9, 2011).
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III. Implementation Guidance
Together with this final rule, the OCC is publishing guidance for
national bank and Federal savings association investment activities.
This guidance is designed as an aid to institutions, particularly
community banks and thrifts, regarding the factors they should consider
in their due diligence with respect to securities of different degrees
of complexity. The guidance reflects the OCC's expectations for
national banks and Federal savings associations as they review their
systems and consider any changes necessary to comply with the
provisions for assessing credit risk in this final rule. The guidance
describes factors institutions should consider with respect to certain
types of investment securities to assess creditworthiness and to
continue conducting their activities in a safe and sound manner.
As noted above, OCC regulations require that national banks and
Federal savings associations conduct their investment activities in a
manner that is consistent with safe and sound practices. Neither the
final rules, nor the final guidance, change this requirement. The OCC
expects national banks and Federal savings associations to continue
[[Page 35257]]
to follow safe and sound practices in their investment activities.
IV. Regulatory Analyses
A. Paperwork Reduction Act
This final rule amends several regulations for which the OCC
currently has approved collections of information under the Paperwork
Reduction Act (44 U.S.C. 3501-3520) (OMB Control Nos. 1557-0014; 1557-
0190; 1557-0120; 1557-0205). The amendments in this final rule do not
introduce any new collections of information into the rules, nor do
they amend the rules in a way that substantively modifies the
collections of information that Office of Management and Budget (OMB)
has previously approved. Therefore, no additional OMB Paperwork
Reduction Act approval is required at this time.
B. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act,\15\
(RFA), the regulatory flexibility analysis otherwise required under
section 604 of the RFA is not required if an agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities (defined for purposes of the RFA to include
banks with assets less than or equal to $175 million) and publishes its
certification and a short, explanatory statement in the Federal
Register along with its rule.
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\15\ 5 U.S.C. 605(b).
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This final rule would affect all 599 small national banks and all
284 small federally chartered savings associations.\16\ However,
because banks have long been expected to maintain a risk management
process to ensure that credit risk is effectively identified, measured,
monitored, and controlled, most if not all of the institutions affected
by the rule already engage in appropriate risk management activity.
Although the rule will affect a substantial number of small banks and
federally chartered savings associations, it will not have a
significant effect on a substantial number of those institutions.
Therefore, the OCC certifies that the rule would not have a significant
impact on a substantial number of small entities.
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\16\ All totals are as of March 31, 2012.
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C. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (UMRA) requires that an agency prepare a budgetary impact
statement before promulgating a rule that includes a Federal mandate
that may result in the expenditure by state, local, and tribal
governments, in the aggregate, or by the private sector of $100 million
or more (adjusted annually for inflation) in any one year. If a
budgetary impact statement is required, section 205 of the UMRA also
requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule.
The OCC has determined that its final rule would not result in
expenditures by state, local, and tribal governments, or by the private
sector, of $100 million or more. Accordingly, the OCC has not
specifically addressed the regulatory alternatives considered.
List of Subjects
12 CFR Part 1
Banks, Banking, National banks, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 5
Administrative practice and procedure, National banks, Reporting
and recordkeeping requirements, Securities.
12 CFR Part 16
National banks, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 28
Foreign banking, National banks, Reporting and recordkeeping
requirements.
12 CFR Part 160
Banks, Banking, Consumer protection, Investments, manufactured
homes, Mortgages, Reporting and recordkeeping requirements, Savings
associations, Securities, Surety bonds.
Authority and Issuance
For the reasons stated in the preamble, the Office of the
Comptroller of the Currency is amending parts 1, 5, 16, 28, and 160 of
chapter I of Title 12, Code of Federal Regulations as follows:
PART 1--INVESTMENT SECURITIES
0
1. The authority citation for part 1 continues to read as follows:
Authority: 12 U.S.C. 1, et. seq., 12 U.S.C. 24 (Seventh), and 12
U.S.C. 93a.
0
2. In Sec. 1.2, revise paragraphs (d) through (f), remove and reserve
paragraph (h), and revise paragraphs (m) and (n), to read as follows:
Sec. 1.2 Definitions.
* * * * *
(d) Investment grade means the issuer of a security has an adequate
capacity to meet financial commitments under the security for the
projected life of the asset or exposure. An issuer has an adequate
capacity to meet financial commitments if the risk of default by the
obligor is low and the full and timely repayment of principal and
interest is expected.
(e) Investment security means a marketable debt obligation that is
investment grade and not predominately speculative in nature.
(f) Marketable means that the security:
(1) Is registered under the Securities Act of 1933, 15 U.S.C. 77a
et seq.;
(2) Is a municipal revenue bond exempt from registration under the
Securities Act of 1933, 15 U.S.C. 77c(a)(2);
(3) Is offered and sold pursuant to Securities and Exchange
Commission Rule 144A, 17 CFR 230.144A, and investment grade; or
(4) Can be sold with reasonable promptness at a price that
corresponds reasonably to its fair value.
* * * * *
(h) [Reserved]
* * * * *
(m) Type IV security means:
(1) A small business-related security as defined in section
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(53)(A), that is fully secured by interests in a pool of loans to
numerous obligors.
(2) A commercial mortgage-related security that is offered or sold
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), that is investment grade, or a commercial mortgage-related
security as described in section 3(a)(41) of the Securities Exchange
Act of 1934, 15 U.S.C. 78c(a)(41), that represents ownership of a
promissory note or certificate of interest or participation that is
directly secured by a first lien on one or more parcels of real estate
upon which one or more commercial structures are located and that is
fully secured by interests in a pool of loans to numerous obligors.
(3) A residential mortgage-related security that is offered and
sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), that is investment grade, or a residential mortgage-related
security as described in section 3(a)(41) of the Securities Exchange
Act of 1934, 15 U.S.C. 78c(a)(41)) that does not otherwise qualify as a
Type I security.
(n) Type V security means a security that is:
(1) Investment grade;
(2) Marketable;
(3) Not a Type IV security; and
(4) Fully secured by interests in a pool of loans to numerous
obligors and in which a national bank could invest directly.
0
3. In Sec. 1.3, revise paragraphs (e) and (h) to read as follows:
[[Page 35258]]
Sec. 1.3 Limitations on dealing in, underwriting, and purchase and
sale of securities.
* * * * *
(e) Type IV securities. A national bank may purchase and sell Type
IV securities for its own account. The amount of the Type IV securities
that a bank may purchase and sell is not limited to a specified
percentage of the bank's capital and surplus.
* * * * *
(h) Pooled investments--(1) General. A national bank may purchase
and sell for its own account investment company shares provided that:
(i) The portfolio of the investment company consists exclusively of
assets that the national bank may purchase and sell for its own
account; and
(ii) The bank's holdings of investment company shares do not exceed
the limitations in Sec. 1.4(e).
(2) Other issuers. The OCC may determine that a national bank may
invest in an entity that is exempt from registration as an investment
company under section 3(c)(1) of the Investment Company Act of 1940,
provided that the portfolio of the entity consists exclusively of
assets that a national bank may purchase and sell for its own account.
(3) Investments made under this paragraph (h) must comply with
Sec. 1.5 of this part, conform with applicable published OCC
precedent, and must be:
(i) Marketable and investment grade, or
(ii) Satisfy the requirements of Sec. 1.3(i).
* * * * *
PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES
0
4. The authority citation for part 5 continues to read as follows:
Authority: 12 U.S.C. 1, et. seq., 12 U.S.C. 93a, 215a-2, 215a-
3, 481, and section 5136A of the Revised Statutes (12 U.S.C. 24a).
0
5. In Sec. 5.39, revise paragraph (g)(3), add paragraph (g)(4), and
revise paragraph (j)(2) to read as follows:
Sec. 5.39 Financial subsidiaries.
* * * * *
(g) * * *
(3) If the national bank is one of the 100 largest insured banks,
determined on the basis of the bank's consolidated total assets at the
end of the calendar year, the bank has not fewer than one issue of
outstanding debt that meets such standards of creditworthiness or other
criteria as the Secretary of the Treasury and the Federal Reserve Board
may jointly establish pursuant to Section 5136A of title LXII of the
Revised Statutes (12 U.S.C. 24a).
(4) Paragraph (g)(3) of this section does not apply if the
financial subsidiary is engaged solely in activities in an agency
capacity.
* * * * *
(j) * * *
(2) Eligible debt requirement. A national bank that does not
continue to meet the qualification requirement set forth in paragraph
(g)(3) of this section, applicable where the bank's financial
subsidiary is engaged in activities other than solely in an agency
capacity, may not directly or through a subsidiary, purchase or acquire
any additional equity capital of any such financial subsidiary until
the bank meets the requirement in paragraph (g)(3) of this section. For
purposes of this paragraph (j)(2), the term ``equity capital''
includes, in addition to any equity investment, any debt instrument
issued by the financial subsidiary if the instrument qualifies as
capital of the subsidiary under Federal or state law, regulation, or
interpretation applicable to the subsidiary.
* * * * *
PART 16--SECURITIES OFFERING DISCLOSURE RULES
0
6. The authority citation for part 16 continues to read as follows:
Authority: 12 U.S.C. 1, et. seq., 12 U.S.C. 93a.
0
7. In Sec. 16.2, revise paragraph (g) to read as follows:
Sec. 16.2 Definitions.
* * * * *
(g) Investment grade means the issuer of a security has an adequate
capacity to meet financial commitments under the security for the
projected life of the asset or exposure. An issuer has an adequate
capacity to meet financial commitments if the risk of default by the
obligor is low and the full and timely repayment of principal and
interest is expected.
* * * * *
0
8. In Sec. 16.6, revise paragraph (a)(4) to read as follows:
Sec. 16.6 Sales of nonconvertible debt.
(a) * * *
(4) The debt is investment grade.
* * * * *
PART 28--INTERNATIONAL BANKING ACTIVITIES
0
9. The authority citation for part 28 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24 (Seventh), 93a, 161, 602,
1818, 3101 et seq., and 3901 et seq.
0
10. In Sec. 28.15, revise paragraph (a)(1)(iii) to read as follows:
Sec. 28.15 Capital equivalency deposits.
(a) * * * (1) * * *
(iii) Certificates of deposit, payable in the United States, and
banker's acceptances, provided that, in either case, the issuer has an
adequate capacity to meet financial commitments for the projected life
of the asset or exposure. An issuer has an adequate capacity to meet
financial commitments if the risk of default by the obligor is low and
the full and timely repayment of principal and interest is expected
* * * * *
PART 160--LENDING AND INVESTMENT
0
11. The authority citation for part 160 continues to read as follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3,
1828, 3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.
0
12. In Sec. 160.3, add the definition of Investment grade in
alphabetical order to read as follows:
Sec. 160.3 Definitions.
* * * * *
Investment grade means a security that meets the creditworthiness
standards described in 12 U.S.C. 1831e.
* * * * *
0
13. In Sec. 160.40, revise paragraphs (a)(1)(i), (a)(1)(ii), and
(a)(2)(ii) as follows:
Sec. 160.40 Commercial paper and corporate debt securities.
* * * * *
(a) * * * (1) * * *
(i) Investment grade as of the date of purchase; or
(ii) Guaranteed by a company having outstanding paper that meets
the standard set forth in paragraph (a)(1)(i) of this section.
(2) * * *
(ii) Investment grade.
* * * * *
0
14. In Sec. 160.42, revise paragraphs (a) and (d) to read as follows:
Sec. 160.42 State and local government obligations.
(a) Pursuant to HOLA section 5(c)(1)(H), a Federal savings
association may invest in obligations issued by any state, territory,
possession, or political subdivision thereof (``governmental entity''),
subject to appropriate underwriting and the following conditions:
[[Page 35259]]
------------------------------------------------------------------------
Aggregate Per-issuer
limitation limitation
------------------------------------------------------------------------
(1) General obligations........ None.............. None.
(2) Other obligations of a None.............. 10% of the
governmental entity (e.g., institution's
revenue bonds) if the issuer total capital.
has an adequate capacity to
meet financial commitments
under the security for the
projected life of the asset or
exposure. An issuer has an
adequate capacity to meet
financial commitments if the
risk of default by the obligor
is low and the full and timely
repayment of principal and
interest is expected.
(3) Obligations of a As approved by the 10% of the
governmental entity that do not OCC. institution's
qualify under any other total capital.
paragraph but are approved by
the OCC.
------------------------------------------------------------------------
* * * * *
(d) For all securities, the institution must consider, as
appropriate, the interest rate, credit, liquidity, price, transaction,
and other risks associated with the investment activity and determine
that such investment is appropriate for the institution. The
institution must also determine that the obligor has adequate resources
and willingness to provide for all required payments on its obligations
in a timely manner.
0
15. In Sec. 160.93, revise paragraph (d)(5) introductory text and
paragraph (d)(5)(i) to read as follows:
Sec. 160.93 Lending limitations.
* * * * *
(d) * * *
(5) Notwithstanding the limit set forth in paragraphs (c)(1) and
(c)(2) of this section, a savings association may invest up to 10
percent of unimpaired capital and unimpaired surplus in the obligations
of one issuer evidenced by:
(i) Commercial paper or corporate debt securities that are, as of
the date of purchase, investment grade.
* * * * *
0
16. In Sec. 160.121, revise paragraphs (b)(1) and (2) to read as
follows:
Sec. 160.121 Investments in state housing corporations.
* * * * *
(b) * * *
(1) The obligations are investment grade; or
(2) The obligations are approved by the OCC. The aggregate
outstanding direct investment in obligations under paragraph (b) of
this section shall not exceed the amount of the Federal savings
association's total capital.
* * * * *
Dated: June 4, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-14169 Filed 6-12-12; 8:45 am]
BILLING CODE 4810-33-P