[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2007 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
12
Parts 220 to 299
Revised as of January 1, 2007
Banks and Banking
________________________
Containing a codification of documents of general
applicability and future effect
As of January 1, 2007
With Ancillaries
Published by
Office of the Federal Register
National Archives and Records
Administration
A Special Edition of the Federal Register
[[Page ii]]
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 12:
Chapter II--Federal Reserve System (Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 919
Alphabetical List of Agencies Appearing in the CFR...... 937
List of CFR Sections Affected........................... 947
[[Page iv]]
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 12 CFR 220.1 refers
to title 12, part 220,
section 1.
----------------------------
[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
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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
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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 vi]]
Many agencies have begun publishing numerous OMB control numbers as
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OBSOLETE PROVISIONS
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[[Page vii]]
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Raymond A. Mosley,
Director,
Office of the Federal Register.
January 1, 2007.
[[Page ix]]
THIS TITLE
Title 12--Banks and Banking is composed of seven volumes. The parts
in these volumes are arranged in the following order: parts 1-199, 200-
219, 220-299, 300-499, 500-599, part 600-899, and 900-end. The first
volume containing parts 1-199 is comprised of chapter I--Comptroller of
the Currency, Department of the Treasury. The second and third volumes
containing parts 200-299 are comprised of chapter II--Federal Reserve
System. The fourth volume containing parts 300-499 is comprised of
chapter III--Federal Deposit Insurance Corporation and chapter IV--
Export-Import Bank of the United States. The fifth volume containing
parts 500-599 is comprised of chapter V--Office of Thrift Supervision,
Department of the Treasury. The sixth volume containing parts 600-899 is
comprised of chapter VI--Farm Credit Administration, chapter VII--
National Credit Union Administration, chapter VIII--Federal Financing
Bank. The seventh volume containing part 900-end is comprised of chapter
IX--Federal Housing Finance Board, chapter XI--Federal Financial
Institutions Examination Council, chapter XIV--Farm Credit System
Insurance Corporation, chapter XV--Department of the Treasury, chapter
XVII--Office of Federal Housing Enterprise Oversight, Department of
Housing and Urban Development and chapter XVIII--Community Development
Financial Institutions Fund, Department of the Treasury. The contents of
these volumes represent all of the current regulations codified under
this title of the CFR as of January 1, 2007.
For this volume, Kenneth R. Payne and Ruth Green were Chief Editors.
The Code of Federal Regulations publication program is under the
direction of Frances D. McDonald, assisted by Ann Worley.
[[Page 1]]
TITLE 12--BANKS AND BANKING
(This book contains parts 220 to 299)
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Part
chapter ii--Federal Reserve System (Continued).............. 220
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CHAPTER II--FEDERAL RESERVE SYSTEM
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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).......................... 33
222 Fair credit reporting (regulation V)........ 55
223 Transactions between member banks and their
affiliates (Regulation W)............... 64
224 Borrowers of securities credit (Regulation
X)...................................... 88
225 Bank holding companies and change in bank
control (Regulation Y).................. 89
226 Truth in lending (Regulation Z)............. 264
227 Unfair or deceptive acts or practices
(Regulation AA)......................... 511
228 Community reinvestment (Regulation BB)...... 515
229 Availability of funds and collection of
checks (Regulation CC).................. 535
230 Truth in savings (Regulation DD)............ 669
231 Netting eligibility for financial
institution (Regulation EE)............. 710
232 Obtaining and using medical information in
connection with credit (Regulation FF).. 711
250 Miscellaneous interpretations............... 716
261 Rules regarding availability of information. 745
261a Rules regarding access to personal
information under the Privacy Act of
1974.................................... 762
261b Rules regarding public observation of
meetings................................ 768
262 Rules of procedure.......................... 773
263 Rules of practice for hearings.............. 781
264 Employee responsibilities and conduct....... 827
264a Post-employment restrictions for senior
examiners............................... 827
264b Rules regarding foreign gifts and
decorations............................. 829
265 Rules regarding delegation of authority..... 831
266 Limitations on activities of former members
and employees of the Board.............. 850
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267 Rules of organization and procedure of the
Consumer Advisory Council............... 851
268 Rules regarding equal opportunity........... 854
269 Policy on labor relations for the Federal
Reserve banks........................... 888
269a Definitions................................. 893
269b Charges of unfair labor practices........... 894
SUBCHAPTER B--FEDERAL OPEN MARKET COMMITTEE
270 Open market operations of Federal Reserve
banks................................... 904
271 Rules regarding availability of information. 905
272 Rules of procedure.......................... 912
281 Statements of policy........................ 914
SUBCHAPTER C--FEDERAL RESERVE SYSTEM LABOR RELATIONS PANEL
290-299 [Reserved]
Supplementary Publications: The Federal Reserve Act, as amended through
December 31, 1976, with an Appendix containing provisions of certain
other statutes affecting the Federal Reserve System. Rules of
Organization and Procedure--Board of Governors of the Federal Reserve
System. Regulations of the Board of Governors of the Federal Reserve
System. The Federal Reserve System--Purposes and Functions. Annual
Report. Federal Reserve Bulletin. Monthly. Federal Reserve Chart Book
Quarterly; Historical Chart Book issued in September.
[[Page 5]]
SUBCHAPTER A_BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PART 220_CREDIT BY BROKERS AND DEALERS (REGULATION T)--Table of Contents
Sec.
220.1 Authority, purpose, and scope.
220.2 Definitions.
220.3 General provisions.
220.4 Margin account.
220.5 Special memorandum account.
220.6 Good faith account.
220.7 Broker-dealer credit account.
220.8 Cash account.
220.9 Clearance of securities, options, and futures.
220.10 Borrowing and lending securities.
220.11 Requirements for the list of marginable OTC stocks and the list
of foreign margin stocks.
220.12 Supplement: margin requirements.
Interpretations
220.101 Transactions of customers who are brokers or dealers.
220.102 [Reserved]
220.103 Borrowing of securities.
220.104 [Reserved]
220.105 Ninety-day rule in special cash account.
220.106-220.107 [Reserved]
220.108 International Bank Securities.
220.109 [Reserved]
220.110 Assistance by Federal credit union to its members.
220.111 Arranging for extensions of credit to be made by a bank.
220.112 [Reserved]
220.113 Necessity for prompt payment and delivery in special cash
accounts.
220.114-220.116 [Reserved]
220.117 Exception to 90-day rule in special cash account.
220.118 Time of payment for mutual fund shares purchased in a special
cash account.
220.119 Applicability of margin requirements to credit extended to
corporation in connection with retirement of stock.
220.120 [Reserved]
220.121 Applicability of margin requirements to joint account between
two creditors.
220.122 ``Deep in the money put and call options'' as extensions of
credit.
220.123 Partial delayed issue contracts covering nonconvertible bonds.
220.124 Installment sale of tax-shelter programs as ``arranging'' for
credit.
220.125-220.126 [Reserved]
220.127 Independent broker/dealers arranging credit in connection with
the sale of insurance premium funding programs.
220.128 Treatment of simultaneous long and short positions in the same
margin account when put or call options or combinations
thereof on such stock are also outstanding in the account.
220.129-220.130 [Reserved]
220.131 Application of the arranging section to broker-dealer activities
under SEC Rule 144A.
220.132 Credit to brokers and dealers.
Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.
Editorial Note: A copy of each form referred to in this part is
filed as a part of the original document. Copies are available upon
request to the Board of Governors of the Federal Reserve System or any
Federal Reserve Bank.
Sec. 220.1 Authority, purpose, and scope.
(a) Authority and purpose. Regulation T (this part) is issued by the
Board of Governors of the Federal Reserve System (the Board) pursuant to
the Securities Exchange Act of 1934 (the Act) (15 U.S.C.78a et seq.).
Its principal purpose is to regulate extensions of credit by brokers and
dealers; it also covers related transactions within the Board's
authority under the Act. It imposes, among other obligations, initial
margin requirements and payment rules on certain securities
transactions.
(b) Scope. (1) This part provides a margin account and four special
purpose accounts in which to record all financial relations between a
customer and a creditor. Any transaction not specifically permitted in a
special purpose account shall be recorded in a margin account.
(2) This part does not preclude any exchange, national securities
association, or creditor from imposing additional requirements or taking
action for its own protection.
(3) This part does not apply to:
(i) Financial relations between a customer and a creditor to the
extent that they comply with a portfolio margining system under rules
approved or amended by the SEC;
(ii) Credit extended by a creditor based on a good faith
determination that the borrower is an exempted borrower;
[[Page 6]]
(iii) Financial relations between a customer and a broker or dealer
registered only under section 15C of the Act; and
(iv) Financial relations between a foreign branch of a creditor and
a foreign person involving foreign securities.
[Reg. T, 63 FR 2820, Jan. 16, 1998]
Sec. 220.2 Definitions.
The terms used in this part have the meanings given them in section
3(a) of the Act or as defined in this section as follows:
Affiliated corporation means a corporation of which all the common
stock is owned directly or indirectly by the firm or general partners
and employees of the firm, or by the corporation or holders of the
controlling stock and employees of the corporation, and the affiliation
has been approved by the creditor's examining authority.
Cash equivalent means securities issued or guaranteed by the United
States or its agencies, negotiable bank certificates of deposit, bankers
acceptances issued by banking institutions in the United States and
payable in the United States, or money market mutual funds.
Covered option transaction means any transaction involving options
or warrants in which the customer's risk is limited and all elements of
the transaction are subject to contemporaneous exercise if:
(1) The amount at risk is held in the account in cash, cash
equivalents, or via an escrow receipt; and
(2) The transaction is eligible for the cash account by the rules of
the registered national securities exchange authorized to trade the
option or warrant or by the rules of the creditor's examining authority
in the case of an unregistered option, provided that all such rules have
been approved or amended by the SEC.
Credit balance means the cash amount due the customer in a margin
account after debiting amounts transferred to the special memorandum
account.
Creditor means any broker or dealer (as defined in sections 3(a)(4)
and 3(a)(5) of the Act), any member of a national securities exchange,
or any person associated with a broker or dealer (as defined in section
3(a)(18) of the Act), except for business entities controlling or under
common control with the creditor.
Current market value of:
(1) A security means:
(i) Throughout the day of the purchase or sale of a security, the
security's total cost of purchase or the net proceeds of its sale
including any commissions charged; or
(ii) At any other time, the closing sale price of the security on
the preceding business day, as shown by any regularly published
reporting or quotation service. If there is no closing sale price, the
creditor may use any reasonable estimate of the market value of the
security as of the close of business on the preceding business day.
(2) Any other collateral means a value determined by any reasonable
method.
Customer excludes an exempted borrower and includes:
(1) Any person or persons acting jointly:
(i) To or for whom a creditor extends, arranges, or maintains any
credit; or
(ii) Who would be considered a customer of the creditor according to
the ordinary usage of the trade;
(2) Any partner in a firm who would be considered a customer of the
firm absent the partnership relationship; and
(3) Any joint venture in which a creditor participates and which
would be considered a customer of the creditor if the creditor were not
a participant.
Debit balance means the cash amount owed to the creditor in a margin
account after debiting amounts transferred to the special memorandum
account.
Delivery against payment, Payment against delivery, or a C.O.D.
transaction refers to an arrangement under which a creditor and a
customer agree that the creditor will deliver to, or accept from, the
customer, or the customer's agent, a security against full payment of
the purchase price.
Equity means the total current market value of security positions
held in the margin account plus any credit balance less the debit
balance in the margin account.
[[Page 7]]
Escrow agreement means any agreement issued in connection with a
call or put option under which a bank or any person designated as a
control location under paragraph (c) of SEC Rule 15c3-3 (17 CFR
240.15c3-3(c)), holding the underlying asset or required cash or cash
equivalents, is obligated to deliver to the creditor (in the case of a
call option) or accept from the creditor (in the case of a put option)
the underlying asset or required cash or cash equivalent against payment
of the exercise price upon exercise of the call or put.
Examining authority means:
(1) The national securities exchange or national securities
association of which a creditor is a member; or
(2) If a member of more than one self-regulatory organization, the
organization designated by the SEC as the examining authority for the
creditor.
Exempted borrower means a member of a national securities exchange
or a registered broker or dealer, a substantial portion of whose
business consists of transactions with persons other than brokers or
dealers, and includes a borrower who:
(1) Maintains at least 1000 active accounts on an annual basis for
persons other than brokers, dealers, and persons associated with a
broker or dealer;
(2) Earns at least $10 million in gross revenues on an annual basis
from transactions with persons other than brokers, dealers, and persons
associated with a broker or dealer; or
(3) Earns at least 10 percent of its gross revenues on an annual
basis from transactions with persons other than brokers, dealers, and
persons associated with a broker or dealer.
Exempted securities mutual fund means any security issued by an
investment company registered under section 8 of the Investment Company
Act of 1940 (15 U.S.C. 80a-8), provided the company has at least 95
percent of its assets continuously invested in exempted securities (as
defined in section 3(a)(12) of the Act).
Foreign margin stock means a foreign security that is an equity
security that:
(1) Appears on the Board's periodically published List of Foreign
Margin Stocks; or
(2) Is deemed to have a ``ready market'' under SEC Rule 15c3-1 (17
CFR 240.15c3-1) or a ``no-action'' position issued thereunder.
Foreign person means a person other than a United States person as
defined in section 7(f) of the Act.
Foreign security means a security issued in a jurisdiction other
than the United States.
Good faith with respect to:
(1) Margin means the amount of margin which a creditor would require
in exercising sound credit judgment;
(2) Making a determination or accepting a statement concerning a
borrower means that the creditor is alert to the circumstances
surrounding the credit, and if in possession of information that would
cause a prudent person not to make the determination or accept the
notice or certification without inquiry, investigates and is satisfied
that it is correct.
Margin call means a demand by a creditor to a customer for a deposit
of additional cash or securities to eliminate or reduce a margin
deficiency as required under this part.
Margin deficiency means the amount by which the required margin
exceeds the equity in the margin account.
Margin equity security means a margin security that is an equity
security (as defined in section 3(a)(11) of the Act).
Margin excess means the amount by which the equity in the margin
account exceeds the required margin. When the margin excess is
represented by securities, the current value of the securities is
subject to the percentages set forth in Sec. 220.12 (the Supplement).
Margin security means:
(1) Any security registered or having unlisted trading privileges on
a national securities exchange;
(2) After January 1, 1999, any security listed on the Nasdaq Stock
Market;
(3) Any non-equity security;
(4) Any security issued by either an open-end investment company or
unit investment trust which is registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8);
(5) Any foreign margin stock;
(6) Any debt security convertible into a margin security;
[[Page 8]]
(7) Until January 1, 1999, any OTC margin stock; or
(8) Until January 1, 1999, any OTC security designated as qualified
for trading in the national market system under a designation plan
approved by the Securities and Exchange Commission (NMS security).
Money market mutual fund means any security issued by an investment
company registered under section 8 of the Investment Company Act of 1940
(15 U.S.C. 80a-8) that is considered a money market fund under SEC Rule
2a-7 (17 CFR 270.2a-7).
Non-equity security means a security that is not an equity security
(as defined in section 3(a)(11) of the Act).
Nonexempted security means any security other than an exempted
security (as defined in section 3(a)(12) of the Act).
OTC margin stock means any equity security traded over the counter
that the Board has determined has the degree of national investor
interest, the depth and breadth of market, the availability of
information respecting the security and its issuer, and the character
and permanence of the issuer to warrant being treated like an equity
security treaded on a national securities exchange. An OTC stock is not
considered to be an OTC margin stock unless it appears on the Board's
periodically published list of OTC margin stocks.
Payment period means the number of business days in the standard
securities settlement cycle in the United States, as defined in
paragraph (a) of SEC Rule 15c6-1 (17 CFR 240.15c6-1(a)), plus two
business days.
Purpose credit means credit for the purpose of:
(1) Buying, carrying, or trading in securities; or
(2) Buying or carrying any part of an investment contract security
which shall be deemed credit for the purpose of buying or carrying the
entire security.
Short call or short put means a call option or a put option that is
issued, endorsed, or guaranteed in or for an account.
(1) A short call that is not cash-settled obligates the customer to
sell the underlying asset at the exercise price upon receipt of a valid
exercise notice or as otherwise required by the option contract.
(2) A short put that is not cash-settled obligates the customer to
purchase the underlying asset at the exercise price upon receipt of a
valid exercise notice or as otherwise required by the option contract.
(3) A short call or a short put that is cash-settled obligates the
customer to pay the holder of an in the money long put or long call who
has, or has been deemed to have, exercised the option the cash
difference between the exercise price and the current assigned value of
the option as established by the option contract.
Underlying asset means:
(1) The security or other asset that will be delivered upon exercise
of an option; or
(2) In the case of a cash-settled option, the securities or other
assets which comprise the index or other measure from which the option's
value is derived.
[Reg. T, 63 FR 2821, Jan. 16, 1998]
Sec. 220.3 General provisions.
(a) Records. The creditor shall maintain a record for each account
showing the full details of all transactions.
(b) Separation of accounts--(1) In general. The requirements of one
account may not be met by considering items in any other account. If
withdrawals of cash or securities are permitted under this part, written
entries shall be made when cash or securities are used for purposes of
meeting requirements in another account.
(2) Exceptions. Notwithstanding paragraph (b)(1) of this section:
(i) For purposes of calculating the required margin for a security
in a margin account, assets held in the good faith account pursuant to
Sec. 220.6(e)(1)(i) or (ii) may serve in lieu of margin;
(ii) Transfers may be effected between the margin account and the
special memorandum account pursuant to Sec. Sec. 220.4 and 220.5.
(c) Maintenance of credit. Except as prohibited by this part, any
credit initially extended in compliance with this part may be maintained
regardless of:
[[Page 9]]
(1) Reductions in the customer's equity resulting from changes in
market prices;
(2) Any security in an account ceasing to be margin or exempted; or
(3) Any change in the margin requirements prescribed under this
part.
(d) Guarantee of accounts. No guarantee of a customer's account
shall be given any effect for purposes of this part.
(e) Receipt of funds or securities. (1) A creditor, acting in good
faith, may accept as immediate payment:
(i) Cash or any check, draft, or order payable on presentation; or
(ii) Any security with sight draft attached.
(2) A creditor may treat a security, check or draft as received upon
written notification from another creditor that the specified security,
check, or draft has been sent.
(3) Upon notification that a check, draft, or order has been
dishonored or when securities have not been received within a reasonable
time, the creditor shall take the action required by this part when
payment or securities are not received on time.
(4) To temporarily finance a customer's receipt of securities
pursuant to an employee benefit plan registered on SEC Form S-8 or the
withholding taxes for an employee stock award plan, a creditor may
accept, in lieu of the securities, a properly executed exercise notice,
where applicable, and instructions to the issuer to deliver the stock to
the creditor. Prior to acceptance, the creditor must verify that the
issuer will deliver the securities promptly and the customer must
designate the account into which the securities are to be deposited.
(f) Exchange of securities. (1) To enable a customer to participate
in an offer to exchange securities which is made to all holders of an
issue of securities, a creditor may submit for exchange any securities
held in a margin account, without regard to the other provisions of this
part, provided the consideration received is deposited into the account.
(2) If a nonmargin, nonexempted security is acquired in exchange for
a margin security, its retention, withdrawal, or sale within 60 days
following its acquisition shall be treated as if the security is a
margin security.
(g) Arranging for loans by others. A creditor may arrange for the
extension or maintenance of credit to or for any customer by any person,
provided the creditor does not willfully arrange credit that violates
parts 221 or 224 of this chapter.
(h) Innocent mistakes. If any failure to comply with this part
results from a mistake made in good faith in executing a transaction or
calculating the amount of margin, the creditor shall not be deemed in
violation of this part if, promptly after the discovery of the mistake,
the creditor takes appropriate corrective action.
(i) Foreign currency. (1) Freely convertible foreign currency may be
treated at its U.S. dollar equivalent, provided the currency is marked-
to-market daily.
(2) A creditor may extend credit denominated in any freely
convertible foreign currency.
(j) Exempted borrowers. (1) A member of a national securities
exchange or a registered broker or dealer that has been in existence for
less than one year may meet the definition of exempted borrower based on
a six-month period.
(2) Once a member of a national securities exchange or registered
broker or dealer ceases to qualify as an exempted borrower, it shall
notify its lender of this fact before obtaining additional credit. Any
new extensions of credit to such a borrower, including rollovers,
renewals, and additional draws on existing lines of credit, are subject
to the provisions of this part.
[Reg. T, 63 FR 2822, Jan. 16, 1998]
Sec. 220.4 Margin account.
(a) Margin transactions. (1) All transactions not specifically
authorized for inclusion in another account shall be recorded in the
margin account.
(2) A creditor may establish separate margin accounts for the same
person to:
(i) Clear transactions for other creditors where the transactions
are introduced to the clearing creditor by separate creditors; or
(ii) Clear transactions through other creditors if the transactions
are cleared by separate creditors; or
[[Page 10]]
(iii) Provide one or more accounts over which the creditor or a
third party investment adviser has investment discretion.
(b) Required margin--(1) Applicability. The required margin for each
long or short position in securities is set forth in Sec. 220.12 (the
Supplement) and is subject to the following exceptions and special
provisions.
(2) Short sale against the box. A short sale ``against the box''
shall be treated as a long sale for the purpose of computing the equity
and the required margin.
(3) When-issued securities. The required margin on a net long or net
short commitment in a when-issued security is the margin that would be
required if the security were an issued margin security, plus any
unrealized loss on the commitment or less any unrealized gain.
(4) Stock used as cover. (i) When a short position held in the
account serves in lieu of the required margin for a short put, the
amount prescribed by paragraph (b)(1) of this section as the amount to
be added to the required margin in respect of short sales shall be
increased by any unrealized loss on the position.
(ii) When a security held in the account serves in lieu of the
required margin for a short call, the security shall be valued at no
greater than the exercise price of the short call.
(5) Accounts of partners. If a partner of the creditor has a margin
account with the creditor, the creditor shall disregard the partner's
financial relations with the firm (as shown in the partner's capital and
ordinary drawing accounts) in calculating the margin or equity of the
partner's margin account.
(6) Contribution to joint venture. If a margin account is the
account of a joint venture in which the creditor participates, any
interest of the creditor in the joint account in excess of the interest
which the creditor would have on the basis of its right to share in the
profits shall be treated as an extension of credit to the joint account
and shall be margined as such.
(7) Transfer of accounts. (i) A margin account that is transferred
from one creditor to another may be treated as if it had been maintained
by the transferee from the date of its origin, if the transferee
accepts, in good faith, a signed statement of the transferor (or, if
that is not practicable, of the customer), that any margin call issued
under this part has been satisfied.
(ii) A margin account that is transferred from one customer to
another as part of a transaction, not undertaken to avoid the
requirements of this part, may be treated as if it had been maintained
for the transferee from the date of its origin, if the creditor accepts
in good faith and keeps with the transferee account a signed statement
of the transferor describing the circumstances for the transfer.
(8) Sound credit judgment. In exercising sound credit judgment to
determine the margin required in good faith pursuant to Sec. 220.12
(the Supplement), the creditor shall make its determination for a
specified security position without regard to the customer's other
assets or securities positions held in connection with unrelated
transactions.
(c) When additional margin is required--(1) Computing deficiency.
All transactions on the same day shall be combined to determine whether
additional margin is required by the creditor. For the purpose of
computing equity in an account, security positions are established or
eliminated and a credit or debit created on the trade date of a security
transaction. Additional margin is required on any day when the day's
transactions create or increase a margin deficiency in the account and
shall be for the amount of the margin deficiency so created or
increased.
(2) Satisfaction of deficiency. The additional required margin may
be satisfied by a transfer from the special memorandum account or by a
deposit of cash, margin securities, exempted securities, or any
combination thereof.
(3) Time limits. (i) A margin call shall be satisfied within one
payment period after the margin deficiency was created or increased.
(ii) The payment period may be extended for one or more limited
periods upon application by the creditor to its examining authority
unless the examining authority believes that the creditor is not acting
in good faith or that
[[Page 11]]
the creditor has not sufficiently determined that exceptional
circumstances warrant such action. Applications shall be filed and acted
upon prior to the end of the payment period or the expiration of any
subsequent extension.
(4) Satisfaction restriction. Any transaction, position, or deposit
that is used to satisfy one requirement under this part shall be
unavailable to satisfy any other requirement.
(d) Liquidation in lieu of deposit. If any margin call is not met in
full within the required time, the creditor shall liquidate securities
sufficient to meet the margin call or to eliminate any margin deficiency
existing on the day such liquidation is required, whichever is less. If
the margin deficiency created or increased is $1000 or less, no action
need be taken by the creditor.
(e) Withdrawals of cash or securities. (1) Cash or securities may be
withdrawn from an account, except if:
(i) Additional cash or securities are required to be deposited into
the account for a transaction on the same or a previous day; or
(ii) The withdrawal, together with other transactions, deposits, and
withdrawals on the same day, would create or increase a margin
deficiency.
(2) Margin excess may be withdrawn or may be transferred to the
special memorandum account (Sec. 220.5) by making a single entry to
that account which will represent a debit to the margin account and a
credit to the special memorandum account.
(3) If a creditor does not receive a distribution of cash or
securities which is payable with respect to any security in a margin
account on the day it is payable and withdrawal would not be permitted
under this paragraph (e), a withdrawal transaction shall be deemed to
have occurred on the day the distribution is payable.
(f) Interest, service charges, etc. (1) Without regard to the other
provisions of this section, the creditor, in its usual practice, may
debit the following items to a margin account if they are considered in
calculating the balance of such account:
(i) Interest charged on credit maintained in the margin account;
(ii) Premiums on securities borrowed in connection with short sales
or to effect delivery;
(iii) Dividends, interest, or other distributions due on borrowed
securities;
(iv) Communication or shipping charges with respect to transactions
in the margin account; and
(v) Any other service charges which the creditor may impose.
(2) A creditor may permit interest, dividends, or other
distributions credited to a margin account to be withdrawn from the
account if:
(i) The withdrawal does not create or increase a margin deficiency
in the account; or
(ii) The current market value of any securities withdrawn does not
exceed 10 percent of the current market value of the security with
respect to which they were distributed.
[Reg. T, 63 FR 2823, Jan. 16, 1998]
Sec. 220.5 Special memorandum account.
(a) A special memorandum account (SMA) may be maintained in
conjunction with a margin account. A single entry amount may be used to
represent both a credit to the SMA and a debit to the margin account. A
transfer between the two accounts may be effected by an increase or
reduction in the entry. When computing the equity in a margin account,
the single entry amount shall be considered as a debit in the margin
account. A payment to the customer or on the customer's behalf or a
transfer to any of the customer's other accounts from the SMA reduces
the single entry amount.
(b) The SMA may contain the following entries:
(1) Dividend and interest payments;
(2) Cash not required by this part, including cash deposited to meet
a maintenance margin call or to meet any requirement of a self-
regulatory organization that is not imposed by this part;
(3) Proceeds of a sale of securities or cash no longer required on
any expired or liquidated security position that may be withdrawn under
Sec. 220.4(e); and
(4) Margin excess transferred from the margin account under Sec.
220.4(e)(2).
[Reg. T, 63 FR 2824, Jan. 16, 1998]
[[Page 12]]
Sec. 220.6 Good faith account.
In a good faith account, a creditor may effect or finance customer
transactions in accordance with the following provisions:
(a) Securities entitled to good faith margin--(1) Permissible
transactions. A creditor may effect and finance transactions involving
the buying, carrying, or trading of any security entitled to ``good
faith'' margin as set forth in Sec. 220.12 (the Supplement).
(2) Required margin. The required margin is set forth in Sec.
220.12 (the Supplement).
(3) Satisfaction of margin. Required margin may be satisfied by a
transfer from the special memorandum account or by a deposit of cash,
securities entitled to ``good faith'' margin as set forth in Sec.
220.12 (the Supplement), any other asset that is not a security, or any
combination thereof. An asset that is not a security shall have a margin
value determined by the creditor in good faith.
(b) Arbitrage. A creditor may effect and finance for any customer
bona fide arbitrage transactions. For the purpose of this section, the
term ``bona fide arbitrage'' means:
(1) A purchase or sale of a security in one market together with an
offsetting sale or purchase of the same security in a different market
at as nearly the same time as practicable for the purpose of taking
advantage of a difference in prices in the two markets; or
(2) A purchase of a security which is, without restriction other
than the payment of money, exchangeable or convertible within 90
calendar days of the purchase into a second security together with an
offsetting sale of the second security at or about the same time, for
the purpose of taking advantage of a concurrent disparity in the prices
of the two securities.
(c) ``Prime broker'' transactions. A creditor may effect
transactions for a customer as part of a ``prime broker'' arrangement in
conformity with SEC guidelines.
(d) Credit to ESOPs. A creditor may extend and maintain credit to
employee stock ownership plans without regard to the other provisions of
this part.
(e) Nonpurpose credit. (1) A creditor may:
(i) Effect and carry transactions in commodities;
(ii) Effect and carry transactions in foreign exchange;
(iii) Extend and maintain secured or unsecured nonpurpose credit,
subject to the requirements of paragraph (e)(2) of this section.
(2) Every extension of credit, except as provided in paragraphs
(e)(1)(i) and (e)(1)(ii) of this section, shall be deemed to be purpose
credit unless, prior to extending the credit, the creditor accepts in
good faith from the customer a written statement that it is not purpose
credit. The statement shall conform to the requirements established by
the Board.
[Reg. T, 63 FR 2824, Jan. 16, 1998]
Sec. 220.7 Broker-dealer credit account.
(a) Requirements. In a broker-dealer credit account, a creditor may
effect or finance transactions in accordance with the following
provisions.
(b) Purchase or sale of security against full payment. A creditor
may purchase any security from or sell any security to another creditor
or person regulated by a foreign securities authority under a good faith
agreement to promptly deliver the security against full payment of the
purchase price.
(c) Joint back office. A creditor may effect or finance transactions
of any of its owners if the creditor is a clearing and servicing broker
or dealer owned jointly or individually by other creditors.
(d) Capital contribution. A creditor may extend and maintain credit
to any partner or stockholder of the creditor for the purpose of making
a capital contribution to, or purchasing stock of, the creditor,
affiliated corporation or another creditor.
(e) Emergency and subordinated credit. A creditor may extend and
maintain, with the approval of the appropriate examining authority:
(1) Credit to meet the emergency needs of any creditor; or
(2) Subordinated credit to another creditor for capital purposes, if
the other creditor:
(i) Is an affiliated corporation or would not be considered a
customer of
[[Page 13]]
the lender apart from the subordinated loan; or
(ii) Will not use the proceeds of the loan to increase the amount of
dealing in securities for the account of the creditor, its firm or
corporation or an affiliated corporation.
(f) Omnibus credit (1) A creditor may effect and finance
transactions for a broker or dealer who is registered with the SEC under
section 15 of the Act and who gives the creditor written notice that:
(i) All securities will be for the account of customers of the
broker or dealer; and
(ii) Any short sales effected will be short sales made on behalf of
the customers of the broker or dealer other than partners.
(2) The written notice required by paragraph (f)(1) of this section
shall conform to any SEC rule on the hypothecation of customers'
securities by brokers or dealers.
(g) Special purpose credit. A creditor may extend the following
types of credit with good faith margin:
(1) Credit to finance the purchase or sale of securities for prompt
delivery, if the credit is to be repaid upon completion of the
transaction.
(2) Credit to finance securities in transit or surrendered for
transfer, if the credit is to be repaid upon completion of the
transaction.
(3) Credit to enable a broker or dealer to pay for securities, if
the credit is to be repaid on the same day it is extended.
(4) Credit to an exempted borrower.
(5) Credit to a member of a national securities exchange or
registered broker or dealer to finance its activities as a market maker
or specialist.
(6) Credit to a member of a national securities exchange or
registered broker or dealer to finance its activities as an underwriter.
[Reg. T, 63 FR 2824, Jan. 16, 1998]
Sec. 220.8 Cash account.
(a) Permissible transactions. In a cash account, a creditor, may:
(1) Buy for or sell to any customer any security or other asset if:
(i) There are sufficient funds in the account; or
(ii) The creditor accepts in good faith the customer's agreement
that the customer will promptly make full cash payment for the security
or asset before selling it and does not contemplate selling it prior to
making such payment;
(2) Buy from or sell for any customer any security or other asset
if:
(i) The security is held in the account; or
(ii) The creditor accepts in good faith the customer's statement
that the security is owned by the customer or the customer's principal,
and that it will be promptly deposited in the account;
(3) Issue, endorse, or guarantee, or sell an option for any customer
as part of a covered option transaction; and
(4) Use an escrow agreement in lieu of the cash, cash equivalents or
underlying asset position if:
(i) In the case of a short call or a short put, the creditor is
advised by the customer that the required securities, assets or cash are
held by a person authorized to issue an escrow agreement and the
creditor independently verifies that the appropriate escrow agreement
will be delivered by the person promptly; or
(ii) In the case of a call issued, endorsed, guaranteed, or sold on
the same day the underlying asset is purchased in the account and the
underlying asset is to be delivered to a person authorized to issue an
escrow agreement, the creditor verifies that the appropriate escrow
agreement will be delivered by the person promptly.
(b) Time periods for payment; cancellation or liquidation--(1) Full
cash payment. A creditor shall obtain full cash payment for customer
purchases:
(i) Within one payment period of the date:
(A) Any nonexempted security was purchased;
(B) Any when-issued security was made available by the issuer for
delivery to purchasers;
(C) Any ``when distributed'' security was distributed under a
published plan;
(D) A security owned by the customer has matured or has been
redeemed and a new refunding security of the same issuer has been
purchased by the customer, provided:
[[Page 14]]
(1) The customer purchased the new security no more than 35 calendar
days prior to the date of maturity or redemption of the old security;
(2) The customer is entitled to the proceeds of the redemption; and
(3) The delayed payment does not exceed 103 percent of the proceeds
of the old security.
(ii) In the case of the purchase of a foreign security, within one
payment period of the trade date or within one day after the date on
which settlement is required to occur by the rules of the foreign
securities market, provided this period does not exceed the maximum time
permitted by this part for delivery against payment transactions.
(2) Delivery against payment. If a creditor purchases for or sells
to a customer a security in a delivery against payment transaction, the
creditor shall have up to 35 calendar days to obtain payment if delivery
of the security is delayed due to the mechanics of the transaction and
is not related to the customer's willingness or ability to pay.
(3) Shipment of securities, extension. If any shipment of securities
is incidental to consummation of a transaction, a creditor may extend
the payment period by the number of days required for shipment, but not
by more than one additional payment period.
(4) Cancellation; liquidation; minimum amount. A creditor shall
promptly cancel or otherwise liquidate a transaction or any part of a
transaction for which the customer has not made full cash payment within
the required time. A creditor may, at its option, disregard any sum due
from the customer not exceeding $1000.
(c) 90 day freeze. (1) If a nonexempted security in the account is
sold or delivered to another broker or dealer without having been
previously paid for in full by the customer, the privilege of delaying
payment beyond the trade date shall be withdrawn for 90 calendar days
following the date of sale of the security. Cancellation of the
transaction other than to correct an error shall constitute a sale.
(2) The 90 day freeze shall not apply if:
(i) Within the period specified in paragraph (b)(1) of this section,
full payment is received or any check or draft in payment has cleared
and the proceeds from the sale are not withdrawn prior to such payment
or check clearance; or
(ii) The purchased security was delivered to another broker or
dealer for deposit in a cash account which holds sufficient funds to pay
for the security. The creditor may rely on a written statement accepted
in good faith from the other broker or dealer that sufficient funds are
held in the other cash account.
(d) Extension of time periods; transfers. (1) Unless the creditor's
examining authority believes that the creditor is not acting in good
faith or that the creditor has not sufficiently determined that
exceptional circumstances warrant such action, it may upon application
by the creditor:
(i) Extend any period specified in paragraph (b) of this section;
(ii) Authorize transfer to another account of any transaction
involving the purchase of a margin or exempted security; or
(iii) Grant a waiver from the 90 day freeze.
(2) Applications shall be filed and acted upon prior to the end of
the payment period, or in the case of the purchase of a foreign security
within the period specified in paragraph (b)(1)(ii) of this section, or
the expiration of any subsequent extension.
[Reg. T, 63 FR 2825, Jan. 16, 1998]
Sec. 220.9 Clearance of securities, options, and futures.
(a) Credit for clearance of securities. The provisions of this part
shall not apply to the extension or maintenance of any credit that is
not for more than one day if it is incidental to the clearance of
transactions in securities directly between members of a national
securities exchange or association or through any clearing agency
registered with the SEC.
(b) Deposit of securities with a clearing agency. The provisions of
this part shall not apply to the deposit of securities with an option or
futures clearing agency for the purpose of meeting the deposit
requirements of the agency if:
(1) The clearing agency:
[[Page 15]]
(i) Issues, guarantees performance on, or clears transactions in,
any security (including options on any security, certificate of deposit,
securities index or foreign currency); or
(ii) Guarantees performance of contracts for the purchase or sale of
a commodity for future delivery or options on such contracts;
(2) The clearing agency is registered with the Securities and
Exchange Commission or is the clearing agency for a contract market
regulated by the Commodity Futures Trading Commission; and
(3) The deposit consists of any margin security and complies with
the rules of the clearing agency that have been approved by the
Securities and Exchange Commission or the Commodity Futures Trading
Commission.
[Reg. T, 63 FR 2826, Jan. 16, 1998]
Sec. 220.10 Borrowing and lending securities.
(a) Without regard to the other provisions of this part, a creditor
may borrow or lend securities for the purpose of making delivery of the
securities in the case of short sales, failure to receive securities
required to be delivered, or other similar situations. If a creditor
reasonably anticipates a short sale or fail transaction, such borrowing
may be made up to one standard settlement cycle in advance of trade
date.
(b) A creditor may lend foreign securities to a foreign person (or
borrow such securities for the purpose of relending them to a foreign
person) for any purpose lawful in the country in which they are to be
used.
(c) A creditor that is an exempted borrower may lend securities
without regard to the other provisions of this part and a creditor may
borrow securities from an exempted borrower without regard to the other
provisions of this part.
[Reg. T, 63 FR 2826, Jan. 16, 1998]
Sec. 220.11 Requirements for the list of marginable OTC stocks and the list
of foreign margin stocks.
(a) Requirements for inclusion on the list of marginable OTC stocks.
Except as provided in paragraph (f) of this section, OTC margin stock
shall meet the following requirements:
(1) Four or more dealers stand willing to, and do in fact, make a
market in such stock and regularly submit bona fide bids and offers to
an automated quotations system for their own accounts;
(2) The minimum average bid price of such stock, as determined by
the Board, is at least $5 per share;
(3) The stock is registered under section 12 of the Act, is issued
by an insurance company subject to section 12(g)(2)(G) of the Act, is
issued by a closed-end investment management company subject to
registration pursuant to section 8 of the Investment Company Act of 1940
(15 U.S.C. 80a-8), is an American Depository Receipt (ADR) of a foreign
issuer whose securities are registered under section 12 of the Act, or
is a stock of an issuer required to file reports under section 15(d) of
the Act;
(4) Daily quotations for both bid and asked prices for the stock are
continously available to the general public;
(5) The stock has been publicly traded for at least six months;
(6) The issuer has at least $4 million of capital, surplus, and
undivided profits;
(7) There are 400,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors or
beneficial owners of more than 10 percent of the stock;
(8) There are 1,200 or more holders of record, as defined in SEC
Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers,
directors or beneficial owners of 10 percent or more of the stock, or
the average daily trading volume of such stock as determined by the
Board, is at least 500 shares; and
(9) The issuer or a predecessor in interest has been in existence
for at least three years.
(b) Requirements for continued inclusion on the list of marginable
OTC stocks. Except as provided in paragraph (f) of this section, OTC
margin stock shall meet the following requirements:
(1) Three or more dealers stand willing to, and do in fact, make a
market in such stock and regularly submit
[[Page 16]]
bona fide bids and offers to an automated quotations system for their
own accounts;
(2) The minimum average bid price of such stocks, as determined by
the Board, is at least $2 per share;
(3) The stock is registered as specified in paragraph (a)(3) of this
section;
(4) Daily quotations for both bid and asked prices for the stock are
continuously available to the general public; ;
(5) The issuer has at least $1 million of capital, surplus, and
undivided profits;
(6) There are 300,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors, or
beneficial owners of more than 10 percent of the stock; and
(7) There continue to be 800 or more holders of record, as defined
in SEC Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not
officers, directors, or beneficial owners of 10 percent or more of the
stock, or the average daily trading volume of such stock, as determined
by the Board, is at least 300 shares.
(c) Requirements for inclusion on the list of foreign margin stocks.
Except as provided in paragraph (f) of this section, a foreign security
shall meet the following requirements before being placed on the List of
Foreign Margin Stocks:
(1) The security is an equity security that is listed for trading on
or through the facilities of a foreign securities exchange or a
recognized foreign securities market and has been trading on such
exchange or market for at least six months;
(2) Daily quotations for both bid and asked or last sale prices for
the security provided by the foreign securities exchange or foreign
securities market on which the security is traded are continuously
available to creditors in the United States pursuant to an electronic
quotation system;
(3) The aggregate market value of shares, the ownership of which is
unrestricted, is not less than $1 billion;
(4) The average weekly trading volume of such security during the
preceding six months is either at least 200,000 shares or $1 million;
and
(5) The issuer or a predecessor in interest has been in existence
for at least five years.
(d) Requirements for continued inclusion on the list of foreign
margin stocks. Except as provided in paragraph (f) of this section, a
foreign security shall meet the following requirements to remain on the
List of Foreign Margin Stocks:
(1) The security continues to meet the requirements specified in
paragraphs (c) (1) and (2) of this section;
(2) The aggregate market value of shares, the ownership of which is
unrestricted, is not less than $500 million; and
(3) The average weekly trading volume of such security during the
preceding six months is either at least 100,000 shares or $500,000.
(e) Removal from the list. The Board shall periodically remove from
the lists any stock that:
(1) Ceases to exist or of which the issuer ceases to exist; or
(2) No longer substantially meets the provisions of paragraphs (b)
or (d) of this section or the definition of OTC margin stock.
(f) Discretionary authority of Board. Without regard to other
paragraphs of this section, the Board may add to, or omit or remove from
the list of marginable OTC stocks and the list of foreign margin stocks
an equity security, if in the judgment of the Board, such action is
necessary or appropriate in the public interest.
(g) Unlawful representations. It shall be unlawful for any creditor
to make, or cause to be made, any representation to the effect that the
inclusion of a security on the list of marginable OTC stocks or the list
of foreign margin stocks is evidence that the Board or the SEC has in
any way passed upon the merits of, or given approval to, such security
or any transactions therein. Any statement in an advertisement or other
similar communication containing a reference to the Board in connection
with the lists or stocks on those lists shall be an unlawful
representation.
[Reg. T, 63 FR 2826, Jan. 16, 1998]
[[Page 17]]
Sec. 220.12 Supplement: margin requirements.
The required margin for each security position held in a margin
account shall be as follows:
(a) Margin equity security, except for an exempted security, money
market mutual fund or exempted securities mutual fund, warrant on a
securities index or foreign currency or a long position in an option: 50
percent of the current market value of the security or the percentage
set by the regulatory authority where the trade occurs, whichever is
greater.
(b) Exempted security, non-equity security, money market mutual fund
or exempted securities mutual fund: The margin required by the creditor
in good faith or the percentage set by the regulatory authority where
the trade occurs, whichever is greater.
(c) Short sale of a nonexempted security, except for a non-equity
security:
(1) 150 percent of the current market value of the security; or
(2) 100 percent of the current market value if a security
exchangeable or convertible within 90 calendar days without restriction
other than the payment of money into the security sold short is held in
the account, provided that any long call to be used as margin in
connection with a short sale of the underlying security is an American-
style option issued by a registered clearing corporation and listed or
traded on a registered national securities exchange with an exercise
price that does not exceed the price at which the underlying security
was sold short.
(d) Short sale of an exempted security or non-equity security: 100
percent of the current market value of the security plus the margin
required by the creditor in good faith.
(e) Nonmargin, nonexempted equity security: 100 percent of the
current market value.
(f) Put or call on a security, certificate of deposit, securities
index or foreign currency or a warrant on a securities index or foreign
currency:
(1) In the case of puts and calls issued by a registered clearing
corporation and listed or traded on a registered national securities
exchange or a registered securities association and registered warrants
on a securities index or foreign currency, the amount, or other position
specified by the rules of the registered national securities exchange or
the registered securities association authorized to trade the option or
warrant, provided that all such rules have been approved or amended by
the SEC; or
(2) In the case of all other puts and calls, the amount, or other
position, specified by the maintenance rules of the creditor's examining
authority.
[Reg. T, 63 FR 2827, Jan. 16, 1998]
Interpretations
Sec. 220.101 Transactions of customers who are brokers or dealers.
The Board has recently considered certain questions regarding
transactions of customers who are brokers or dealers.
(a) The first question was whether delivery and payment under Sec.
220.4(f)(3) must be exactly simultaneous (such as in sight draft
shipments), or whether it is sufficient if the broker-dealer customer,
``as promptly as practicable in accordance with the ordinary usage of
the trade,'' mails or otherwise delivers to the creditor a check in
settlement of the transaction, the check being accompanied by
instructions for transfer or delivery of the security. The Board ruled
that the latter method of setting the transaction is permissible.
(b) The second question was, in effect, whether the limitations of
Sec. 220.4(c)(8) apply to the account of a customer who is himself a
broker or dealer. The answer is that the provision applies to any
``special cash account,'' regardless of the type of customer.
(c) The third question was, in effect, whether a purchase and a sale
of an unissued security under Sec. 220.4(f)(3) may be offset against
each other, or whether each must be settled separately by what would
amount to delivery of the security to settle one transaction and its
redelivery to settle the other. The answer is that it is permissible to
offset the transactions against each other without physical delivery and
redelivery of the security.
[11 FR 14155, Dec. 7, 1946]
[[Page 18]]
Sec. 220.102 [Reserved]
Sec. 220.103 Borrowing of securities.
(a) The Board of Governors has been asked for a ruling as to whether
Sec. 220.6(h), which deals with borrowing and lending of securities,
applies to a borrower of securities if the lender is a private
individual, as contrasted with a member of a national securities
exchange or a broker or dealer.
(b) Section 220.6(h) does not require that the lender of the
securities in such a case be a member of a national securities exchange
or a broker or dealer. Therefore, a borrowing of securities may be able
to qualify under the provision even though the lender is a private
individual, and this is true whether the security is registered on a
national securities exchange or is unregistered. In borrowing securities
from a private individual under Sec. 220.6(h), however, it becomes
especially important to bear in mind two limitations that are contained
in the section.
(c) The first limitation is that the section applies only if the
broker borrows the securities for the purpose specified in the
provision, that is, ``for the purpose of making delivery of such
securities in the case of short sales, failure to receive securities he
is required to deliver, or other similar cases''. The present language
of the provision does not require that the delivery for which the
securities are borrowed must be on a transaction which the borrower has
himself made, either as agent or as principal; he may borrow under the
provision in order to relend to someone else for the latter person to
make such a delivery. However, the borrowing must be related to an
actual delivery of the type specified--a delivery in connection with a
specific transaction that has already occurred or is in immediate
prospect. The provision does not authorize a broker to borrow securities
(or make the related deposit) merely in order that he or some other
broker may have the securities ``on hand'' or may anticipate some need
that may or may not arise in the future.
(d) The ruling in the 1940 Federal Reserve Bulletin, at page 647, is
an example of a borrowing which, on the facts as given, did not meet the
requirement. There, the broker wished to borrow stocks with the
understanding that he ``would offer to lend this stock in the `loan
crowd' on a national securities exchange.'' There was no assurance that
the stocks would be used for the purpose specified in Sec. 220.6(h);
they might be, or they might merely be held idle while the person
lending the stocks had the use of the funds deposited against them. The
ruling held in effect that since the borrowing could not qualify under
Sec. 220.6(h) it must comply with other applicable provisions of the
regulation.
(e) The second requirement is that the deposit of cash against the
borrowed securities must be ``bona fide.'' This requirement naturally
cannot be spelled out in detail, but it requires at least that the
purpose of the broker in making the deposit should be to obtain the
securities for the specified purpose, and that he should not use the
arrangement as a means of accommodating a customer who is seeking to
obtain more funds than he could get in a general account.
(f) The Board recognizes that even with these requirements there is
still some possibility that the provision may be misapplied. The Board
is reluctant to impose additional burdens on legitimate transactions by
tightening the provision. If there should be evidence of abuses
developing under the provision, however, it would become necessary to
consider making it more restricted.
[12 FR 5278, Aug. 2, 1947]
Sec. 220.104 [Reserved]
Sec. 220.105 Ninety-day rule in special cash account.
(a) Section 220.4(c)(8) places a limitation on a special cash
account if a security other than an exempted security has been purchased
in the account and ``without having been previously paid for in full by
the customer * * * has been * * * delivered out to any broker or
dealer.'' The limitation is that during the succeeding 90 days the
customer may not purchase a security in the account other than an
exempted security unless funds sufficient for the purpose are held in
the account. In other words, the privilege of delayed
[[Page 19]]
payment in such an account is withdrawn during the 90-day period.
(b) The Board recently considered a question as to whether the
following situation makes an account subject to the 90-day
disqualification: A customer purchases registered security ABC in a
special cash account. The broker executes the order in good faith as a
bona fide cash transaction, expecting to obtain full cash payment
promptly. The next day, the customer sells registered security XYZ in
the account, promising to deposit it promptly in the account. The
proceeds of the sale are equal to or greater than the cost of security
ABC. After both sale and purchase have been made, the customer requests
the broker to deliver security ABC to a different broker, to receive
security XYZ from that broker at about the same time, and to settle with
the other broker--such settlement to be made either by paying the cost
of security XYZ to the other broker and receiving from him the cost of
security ABC, or by merely settling any difference between these
amounts.
(c) The Board expressed the view that the account becomes subject to
the 90-day disqualification in Sec. 220.4(c)(8). In the instant case,
unlike that described at 1940 Federal Reserve Bulletin 772, the security
sold is not held in the account and is not to be deposited in it
unconditionally. It is to be obtained only against the delivery to the
other broker of the security which had been purchased. Hence payment can
not be said to have been made prior to such delivery; the purchased
security has been delivered out to a broker without previously having
been paid for in full, and the account becomes subject to the 90-day
disqualification.
[13 FR 2368, May 1, 1948]
Sec. Sec. 220.106-220.107 [Reserved]
Sec. 220.108 International Bank Securities.
(a) Section 2 of the Act of June 29, 1949 (Pub. L. 142--81st
Congress), amended the Bretton Woods Agreements Act by adding a new
section numbered 15 providing, in part, that--
Any securities issued by International Bank for Reconstruction and
Development (including any guaranty by the bank, whether or not limited
in scope), and any securities guaranteed by the bank as to both
principal and interest, shall be deemed to be exempted securities within
the meaning of * * * paragraph (a)(12) of section 3 of the [Securities
Exchange] Act of June 6, 1934, as amended (15 U.S.C. 78c). * * *.
(b) In response to inquiries with respect to the applicability of
the margin requirements of this part to securities issued or guaranteed
by the International Bank for Reconstruction and Development, the Board
has replied that, as a result of this enactment, securities issued by
the Bank are now classified as exempted securities under Sec. 220.2(e).
Such securities are now in the same category under this part as are
United States Government, State and municipal bonds. Accordingly, the
specific percentage limitations prescribed by this part with respect to
maximum loan value and margin requirements are no longer applicable
thereto.
[14 FR 5505, Sept. 7, 1949]
Sec. 220.109 [Reserved]
Sec. 220.110 Assistance by Federal credit union to its members.
(a) An inquiry was presented recently concerning the application of
this part or part 221 of this subchapter, to a plan proposed by a
Federal credit union to aid its members in purchasing stock of a
corporation whose subsidiary apparently was the employer of all the
credit union's members.
(b) From the information submitted, the plan appeared to contemplate
that the Federal credit union would accept orders from its members for
registered common stock of the parent corporation in multiples of 5
shares; that whenever orders had been so received for a total of 100
shares, the credit union, as agent for such members, would execute the
orders through a brokerage firm with membership on a national securities
exchange; that the brokerage firm would deliver certificates for the
stock, registered in the names of the individual purchasers, to the
credit union against payment by the credit union; that the credit union
would prorate the total amount so paid, including the brokerage fee,
[[Page 20]]
among the individual purchasers according to the number of shares
purchased by them; and that a savings in brokerage fee resulting from
the 100-lot purchases would be passed on by the credit union to the
individual purchasers of the stock. However, amounts of the stock less
than 100 shares would be purchased by the credit union through the
brokerage firm for any members willing to forego such savings.
(c) It appeared further that the Federal credit union members for
whom stock was so purchased would reimburse the credit union (1) by cash
payment, (2) by the proceeds of withdrawn shares of the credit union,
(3) by the proceeds of an installment loan from the credit union
collateraled by the stock purchased, or by (4) by a combination of two
or more of the above methods. To assist the collection of any such loan,
the employer of the credit union members would provide payroll
deductions. Apparently, sales by the credit union of any of the stock
purchased by one of its members would occur only in satisfaction of a
delinquent loan balance. In no case did it appear that the credit union
would make a charge for arranging the execution of transactions in the
stock for its members.
(d) The Board was of the view that, from the facts as presented, it
did not appear that the Federal credit union should be regarded as the
type of institution to which part 221 of this subchapter, in its present
form, applied.
(e) With respect to this part, the question was whether the
activities of the Federal credit union under the proposal, or otherwise,
might be such as to bring it within the meaning of the terms ``broker''
or ``dealer'' as used in the part and the Securities Exchange Act of
1934. The Board observed that this, of course, was a question of fact
that necessarily depended upon the circumstances of the particular case,
including the manner in which the arrangement in question might be
carried out in practice.
(f) On the basis of the information submitted, however, it did not
appear to the Board that the Federal credit union should be regarded as
being subject to this part as a ``broker or dealer who transacts a
business in securities through the medium of'' a member firm solely
because of its activities as contemplated by the proposal in question.
The Board stated that the part rather clearly would not apply if there
appeared to be nothing other than loans by the credit union to its
members to finance purchases made directly by them of stock of the
parent corporation of the employer of the member-borrowers. The
additional fact that the credit union, as agent, would purchase such
stock for its members (even though all such purchases might not be
financed by credit union loans) was not viewed by the Board as
sufficient to make the regulation applicable where, as from the facts
presented, it did not appear that the credit union in any case was to
make any charge or receive any compensation for assisting in such
purchases or that the credit union otherwise was engaged in securities
activities. However, the Board stated that matters of this kind must be
examined closely for any variations that might suggest the
inapplicability of the foregoing.
[18 FR 4592, Aug. 5, 1953]
Sec. 220.111 Arranging for extensions of credit to be made by a bank.
(a) The Board has recently had occasion to express opinions
regarding the requirements which apply when a person subject to this
part (for convenience, called here simply a broker) arranges for a bank
to extend credit.
(b) The matter is treated generally in Sec. 220.7(a) and is also
subject to the general rule of law that any person who aids or abets a
violation of law by another is himself guilty of a violation. It may be
stated as a general principle that any person who arranges for credit to
be extended by someone else has a responsibility so to conduct his
activities as not to be a participant in a violation of this part, which
applies to brokers, or part 221 of this subchapter, which applies to
banks.
(c) More specifically, in arranging an extension of credit that may
be subject to part 221 of this subchapter, a broker must act in good
faith and, therefore, must question the accuracy of any non-purpose
statement (i.e., a statement that the loan is not for the purpose of
[[Page 21]]
purchasing or carrying registered stocks) given in connection with the
loan where the circumstances are such that the broker from any source
knows or has reason to know that the statement is incomplete or
otherwise inaccurate as to the true purpose of the credit. The
requirement of ``good faith'' is of vital importance. While the
application of the requirement will necessarily vary with the facts of
the particular case, the broker, like the bank for whom the loan is
arranged to be made, must be alert to the circumstances surrounding the
loan. Thus, for example, if a broker or dealer is to deliver registered
stocks to secure the loan or is to receive the proceeds of the loan, the
broker arranging the loan and the bank making it would be put on notice
that the loan would probably be subject to part 221 of this subchapter.
In any such circumstances they could not in good faith accept or rely
upon a statement to the contrary without obtaining a reliable and
satisfactory explanation of the situation. The foregoing, of course,
applies the principles contained in Sec. 221.101 of this subchapter.
(d) In addition, when a broker is approached by another broker to
arrange extensions of credit for customers of the approaching broker,
the broker approached has a responsibility not to arrange any extension
of credit which the approaching broker could not himself arrange.
Accordingly, in such cases the statutes and regulations forbid the
approached broker to arrange extensions of credit on unregistered
securities for the purpose of purchasing or carrying either registered
or unregistered securities. The approaching broker would also be
violating the applicable requirements if he initiated or otherwise
participated in any such forbidden transactions.
(e) The expression of views, set forth in this section, to the
effect that certain specific transactions are forbidden, of course,
should not in any way be understood to indicate approval of any other
transactions which are not mentioned.
[18 FR 5505, Sept. 15, 1953]
Sec. 220.112 [Reserved]
Sec. 220.113 Necessity for prompt payment and delivery in special cash
accounts.
(a) The Board of Governors recently received an inquiry concerning
whether purchases of securities by certain municipal employees'
retirement or pension systems on the basis of arrangements for delayed
delivery and payment, might properly be effected by a creditor subject
to this part in a special cash account under Sec. 220.4(c).
(b) It appears that in a typical case the supervisors of the
retirement system meet only once or twice each month, at which times
decisions are made to purchase any securities wished to be acquired for
the system. Although the securities are available for prompt delivery by
the broker-dealer firm selected to effect the system's purchase, it is
arranged in advance with the firm that the system will not accept
delivery and pay for the securities before some date more than seven
business days after the date on which the securities are purchased.
Apparently, such an arrangement is occasioned by the monthly or
semimonthly meetings of the system's supervisors. It was indicated that
a retirement system of this kind may be supervised by officials who
administer it as an incidental part of their regular duties, and that
meetings requiring joint action by two or more supervisors may be
necessary under the system's rules and procedures to authorize issuance
of checks in payment for the securities purchased. It was indicated also
that the purchases do not involve exempted securities, securities of the
kind covered by Sec. 220.4(c)(3), or any shipment of securities as
described in Sec. 220.4(c).
(c) This part provides that a creditor subject thereto may not
effect for a customer a purchase in a special cash account under Sec.
220.4(c) unless the use of the account meets the limitations of Sec.
220.4(a) and the purchase constitutes a ``bona fide cash transaction''
which complies with the eligibility requirements of Sec.
220.4(c)(1)(i). One such requirement is that the purchase be made ``in
reliance upon an agreement accepted by the creditor (broker-dealer) in
good faith'' that the customer
[[Page 22]]
will ``promptly make full cash payment for the security, if funds
sufficient for the purpose are not already in the account; and, subject
to certain exceptions, Sec. 220.4(c)(2) provides that the creditor
shall promptly cancel or liquidate the transaction if payment is not
made by the customer within seven business days after the date of
purchase. As indicated in the Board's interpretation at 1940 Federal
Reserve Bulletin 1172, a necessary part of the customer's undertaking
pursuant to Sec. 220.4(c)(1)(i) is that he ``should have the necessary
means of payment readily available when he purchases a security in the
special cash account. He should expect to pay for it immediately or in
any event within the period (of not more than a very few days) that is
as long as is usually required to carry through the ordinary securities
transaction.''
(d) The arrangements for delayed delivery and payment in the case
presented to the Board and outlined above clearly would be inconsistent
with the requirement of Sec. 220.4(c)(1)(i) that the purchase be made
in reliance upon an agreement accepted by the creditor in good faith
that the customer will ``promptly'' make full cash payment for the
security. Accordingly, the Board said that transactions of the kind in
question would not qualify as a ``bona fide cash transaction'' and,
therefore, could not properly be effected in a special cash account,
unless a contrary conclusion would be justified by the exception in
Sec. 220.4(c)(5).
(e) Section 220.4(c)(5) provides that if the creditor, ``acting in
good faith in accordance with'' Sec. 220.4(c)(1), purchases a security
for a customer ``with the understanding that he is to deliver the
security promptly to the customer, and the full cash payment is to be
made promptly by the customer is to be made against such delivery'', the
creditor may at his option treat the transaction as one to which the
period applicable under Sec. 220.4(c)(2) is not the seven days therein
specified but 35 days after the date of such purchase. It will be
observed that the application of Sec. 220.4 (c)(5) is specifically
conditioned on the creditor acting in good faith in accordance with
Sec. 220.4(c)(1). As noted above, the existence of the arrangements for
delayed delivery and payment in the case presented would prevent this
condition from being met, since the customer could not be regarded as
having agreed to make full cash payment ``promptly''. Furthermore, such
arrangements clearly would be inconsistent with the requirement of Sec.
220.4(c)(5) that the creditor ``deliver the security promptly to the
customer''.
(f) Section 220.4(c)(5) was discussed in the Board's published
interpretation, referred to above, which states that ``it is not the
purpose of (Sec. 220.4 (c)(5)) to allow additional time to customers
for making payment. The `prompt delivery' described in (Sec. 220.4
(c)(5)) is delivery which is to be made as soon as the broker or dealer
can reasonably make it in view of the mechanics of the securities
business and the bona fide usages of the trade. The provision merely
recognizes the fact that in certain circumstances it is an established
bona fide practice in the trade to obtain payment against delivery of
the security to the customer, and the further fact that the mechanics of
the trade, unrelated to the customer's readiness to pay, may sometimes
delay such delivery to the customer''.
(g) In the case presented, it appears that the only reason for the
delay is related solely to the customer's readiness to pay and is in no
way attributable to the mechanics of the securities business.
Accordingly, it is the Board's view that the exception in Sec.
220.4(c)(5) should not be regarded as permitting the transactions in
question to be effected in a special cash account.
[22 FR 5954, July 27, 1957]
Sec. Sec. 220.114-220.116 [Reserved]
Sec. 220.117 Exception to 90-day rule in special cash account.
(a) The Board of Governors has recently interpreted certain of the
provisions of Sec. 220.4(c)(8), with respect to the withdrawal of
proceeds of a sale of stock in a ``special cash account'' when the stock
has been sold out of the account prior to payment for its purchase.
(b) The specific factual situation presented may be summarized as
follows:
[[Page 23]]
Customer purchased stock in a special cash account with a member
firm on Day 1. On Day 3 customer sold the same stock at a profit. On Day
8 customer delivered his check for the cost of the purchase to the
creditor (member firm). On Day 9 the creditor mailed to the customer a
check for the proceeds of the sale.
(c) Section 220.4(c)(8) prohibits a creditor, as a general rule,
from effecting a purchase of a security in a customer's special cash
account if any security has been purchased in that account during the
preceding 90 days and has then been sold in the account or delivered out
to any broker or dealer without having been previously paid for in full
by the customer. One exception to this general rule reads as follows:
* * * The creditor may disregard for the purposes of this
subparagraph (Sec. 220.4(c) (8)) a sale without prior payment provided
full cash payment is received within the period described by
subparagraph (2) of this paragraph (seven days after the date of
purchase) and the customer has not withdrawn the proceeds of sale on or
before the day on which such payment (and also final payment of any
check received in that connection) is received. * * *
(d) Final payment of customer's check: (1) The first question is:
When is the creditor to be regarded as having received ``final payment
of any check received'' in connection with the purchase?
(2) The clear purpose of Sec. 220.4(c) (8) is to prevent the use of
the proceeds of sale of a stock by a customer to pay for its purchase--
i.e., to prevent him from trading on the creditor's funds by being able
to deposit the sale proceeds prior to presentment of his own check to
the drawee bank. Thus, when a customer undertakes to pay for a purchase
by check, that check does not constitute payment for the purchase,
within the language and intent of the above-quoted exception in Sec.
220.4(c)(8), until it has been honored by the drawee bank, indicating
the sufficiency of his account to pay the check.
(3) The phrase ``final payment of any check'' is interpreted as
above notwithstanding Sec. 220.6(f), which provides that:
For the purposes of this part (Regulation T), a creditor may, at his
option (1) treat the receipt in good faith of any check or draft drawn
on a bank which in the ordinary course of business is payable on
presentation, * * * as receipt of payment of the amount of such check,
draft or order; * * *
This is a general provision substantially the same as language found in
section 4(f) of Regulation T as originally promulgated in 1934. The
language of the subject exception to the 90-day rule of Sec.
220.4(c)(8), i.e., the exception based expressly on final ``payment of
any check,'' was added to the regulation in 1949 by an amendment
directed at a specific type of situation. Because the exception is a
special, more recent provision, and because Sec. 220.6(f), if
controlling, would permit the exception to undermine, to some extent,
the effectiveness of the 90-day rule, sound principles of construction
require that the phrase ``final payment of any check'' be given its
literal and intended effect.
(4) There is no fixed period of time from the moment of receipt by
the payee, or of deposit, within which it is certain that any check will
be paid by the drawee bank. Therefore, in the rare case where the
operation of the subject exception to Sec. 220.4(c)(8) is necessary to
avoid application of the 90-day rule, a creditor should ascertain (from
his bank of deposit or otherwise) the fact of payment of a customer's
check given for the purchase. Having so determined the day of final
payment, the creditor can permit withdrawal on any subsequent day.
(e) Mailing as ``withdrawal'': (1) Also presented is the question
whether the mailing to the customer of the creditor's check for the sale
proceeds constitutes a withdrawal of such proceeds by the customer at
the time of mailing so that, if the check for the sale proceeds is
mailed on or before the day on which the customer's check for the
purchase is finally paid, the 90-day rule applies. It may be that a
check mailed one day will not ordinarily be received by the customer
until the next. The Board is of the view, however, that when the check
for sale proceeds is issued and released into the mails, the proceeds
are to be regarded as withdrawn by the customer; a more liberal
interpretation would open a way for circumvention. Accordingly, the
creditor's check should not be mailed nor the sale proceeds otherwise
released to
[[Page 24]]
the customer ``on or before the day'' on which payment for the purchase,
including final payment of any check given for such payment, is received
by the creditor, as determined in accordance with the principles stated
herein.
(2) Applying the above principles to the schedule of transactions
described in the second paragraph of this interpretation, the mailing of
the creditor's check on ``Day 9'' would be consistent with the subject
exception to Sec. 220.4(c)(8), as interpreted herein, only if the
customer's check was paid by the drawee bank on ``Day 8''.
[27 FR 3511, Apr. 12, 1962]
Sec. 220.118 Time of payment for mutual fund shares purchased in a special
cash account.
(a) The Board has recently considered the question whether, in
connection with the purchase of mutual fund shares in a ``special cash
account'' under the provisions of this part 220, the 7-day period with
respect to liquidation for nonpayment is that described in Sec.
220.4(c)(2) or that described in Sec. 220.4(c)(3).
(b) Section 220.4(c)(2) provides as follows:
In case a customer purchases a security (other than an exempted
security) in the special cash account and does not make full cash
payment for the security within 7 days after the date on which the
security is so purchased, the creditor shall, except as provided in
subparagraphs (3)-(7) of this paragraph, promptly cancel or otherwise
liquidate the transaction or the unsettled portion thereof.
Section 220.4(c)(3), one of the exceptions referred to, provides in
relevant part as follows:
If the security when so purchased is an unissued security, the
period applicable to the transaction under subparagraph (2) of this
paragraph shall be 7 days after the date on which the security is made
available by the issuer for delivery to purchasers.
(c) In the case presented, the shares of the mutual fund (open-end
investment company) are technically not issued at the time they are sold
by the underwriter and distributor. Several days may elapse from the
date of sale before a certificate can be delivered by the transfer
agent. The specific inquiry to the Board was, in effect, whether the 7-
day period after which a purchase transaction must be liquidated or
cancelled for nonpayment should run, in the case of mutual fund shares,
from the time when a certificate for the purchased shares is available
for delivery to the purchaser, instead of from the date of the purchase.
(d) Under the general rule of Sec. 220.4 (c)(2) that is applicable
to purchases of outstanding securities, the 7-day period runs from the
date of purchase without regard to the time required for the mechanical
acts of transfer of ownership and delivery of a certificate. This rule
is based on the principles governing the use of special cash accounts in
accordance with which, in the absence of special circumstances, payment
is to be made promptly upon the purchase of securities.
(e) The purpose of Sec. 220.4(c)(3) is to recognize the fact that,
when an issue of securities is to be issued at some fixed future date, a
security that is a part of such issue can be purchased on a ``when-
issued'' basis and that payment may reasonably be delayed until after
such date of issue, subject to other basic conditions for transactions
in a special cash account. Thus, unissued securities should be regarded
as ``made available for delivery to purchasers'' on the date when they
are substantially as available as outstanding securities are available
upon purchase, and this would ordinarily be the designated date of
issuance or, in the case of a stock dividend, the ``payment date''. In
any case, the time required for the mechanics of transfer and delivery
of a certificate is not material under Sec. 220.4(c)(3) any more than
it is under Sec. 220.4(c)(2).
(f) Mutual fund shares are essentially available upon purchase to
the same extent as outstanding securities. The mechanics of their
issuance and of the delivery of certificates are not significantly
different from the mechanics of transfer and delivery of certificates
for shares of outstanding securities, and the issuance of mutual fund
shares is not a future event in a sense that would warrant the extension
of the time for payment beyond that afforded in the case of outstanding
securities. Consequently, the Board has concluded that a purchase of
mutual fund shares
[[Page 25]]
is not a purchase of an ``unissued security'' to which Sec. 220.4(c)(3)
applies, but is a transaction to which Sec. 220.4(c)(2) applies.
[27 FR 10885, Nov. 8, 1962]
Sec. 220.119 Applicability of margin requirements to credit extended to
corporation in connection with retirement of stock.
(a) The Board of Governors has been asked whether part 220 was
violated when a dealer in securities transferred to a corporation 4,161
shares of the stock of such corporation for a consideration of $33,288,
of which only 10 percent was paid in cash.
(b) If the transaction was of a kind that must be included in the
corporation's ``general account'' with the dealer (Sec. 220.3), it
would involve an excessive extension of credit in violation of Sec.
220.3 (b)(1). However, the transaction would be permissible if the
transaction came within the scope of Sec. 220.4(f)(8), which permits a
``creditor'' (such as the dealer) to ``Extend and maintain credit to or
for any customer without collateral or on any collateral whatever for
any purpose other than purchasing or carrying or trading in
securities.'' Accordingly, the crucial question is whether the
corporation, in this transaction, was ``purchasing'' the 4,161 shares of
its stock, within the meaning of that term as used in this part.
(c) Upon first examination, it might seem apparent that the
transaction was a purchase by the corporation. From the viewpoint of the
dealer the transaction was a sale, and ordinarily, at least a sale by
one party connotes a purchase by the other. Furthermore, other indicia
of a sale/purchase transaction were present, such as a transfer of
property for a pecuniary consideration. However, when the underlying
objectives of the margin regulations are considered, it appears that
they do not encompass a transaction of this nature, where securities are
transferred on credit to the issuer thereof for the purpose of
retirement.
(d) Section 7(a) of the Securities Exchange Act of 1934 requires the
Board of Governors to prescribe margin regulations ``For the purpose of
preventing the excessive use of credit for the purchase or carrying of
securities.'' Accordingly, the provisions of this part are not intended
to prevent the use of credit where the transaction will not have the
effect of increasing the volume of credit in the securities markets.
(e) It appears that the instant transaction would have no such
effect. When the transaction was completed, the equity interest of the
dealer was transmuted into a dollar-obligation interest; in lieu of its
status as a stockholder of the corporation, the dealer became a creditor
of that corporation. The corporation did not become the owner of any
securities acquired through the use of credit; its outstanding stock was
simply reduced by 4,161 shares.
(f) The meaning of ``sale'' and ``purchase'' in the Securities
Exchange Act has been considered by the Federal courts in a series of
decisions dealing with corporate ``insiders'' profits under section
16(b) of that Act. Although the statutory purpose sought to be
effectuated in those cases is quite different from the purpose of the
margin regulations, the decisions in question support the propriety of
not regarding a transaction as a ``purchase'' where this accords with
the probable legislative intent, even though, literally, the statutory
definition seems to include the particular transaction. See Roberts v.
Eaton (CA 2 1954) 212 F. 2d 82, and cases and other authorities there
cited. The governing principle, of course, is to effectuate the purpose
embodied in the statutory or regulatory provision being interpreted,
even where that purpose may conflict with the literal words. U.S. v.
Amer. Trucking Ass'ns, 310 U.S. 534, 543 (1940); 2 Sutherland, Statutory
Construction (3d ed. 1943) ch. 45.
(g) There can be little doubt that an extension of credit to a
corporation to enable it to retire debt securities would not be for the
purpose of ``purchasing * * * securities'' and therefore would come
within Sec. 220.4(f)(8), regardless of whether the retirement was
obligatory (e.g., at maturity) or was a voluntary ``call'' by the
issuer. This is true, it is difficult to see any valid distinction, for
this purpose, between (1) voluntary retirement of an indebtedness
security and (2) voluntary retirement of an equity security.
[[Page 26]]
(h) For the reasons indicated above, it is the opinion of the Board
of Governors that the extension of credit here involved is not of the
kind which the margin requirements are intended to regulate and that the
transaction described does not involve an unlawful extension of credit
as far as this part is concerned.
(i) The foregoing interpretation relates, of course, only to cases
of the type described. It should not be regarded as governing any other
situations; for example, the interpretation does not deal with cases
where securities are being transferred to someone other than the issuer,
or to the issuer for a purpose other than immediate retirement. Whether
the margin requirements are inapplicable to any such situations would
depend upon the relevant facts of actual cases presented.
[27 FR 12346, Dec. 13, 1962]
Sec. 220.120 [Reserved]
Sec. 220.121 Applicability of margin requirements to joint account between
two creditors.
(a) The Board has recently been asked whether extensions of credit
in a joint account between two brokerage firms, a member of a national
securities exchange (``Firm X'') and a member of the National
Association of Securities Dealers (``Firm Y'') are subject to the margin
requirements of this part (Regulation T). It is understood that similar
joint accounts are not uncommon, and it appears that the margin
requirements of the regulation are not consistently applied to
extensions of credit in the accounts.
(b) When the account in question was opened, Firm Y deposited $5,000
with Firm X and has made no further deposit in the account, except for
the monthly settlement described below. Both firms have the privilege of
buying and selling specified securities in the account, but it appears
that Firm X initiates most of the transactions therein. Trading volume
may run from half a million to a million dollars a month. Firm X carries
the ``official'' ledger of the account and sends Firm Y a monthly
statement with a complete record of all transactions effected during the
month. Settlement is then made in accordance with the agreement between
the two firms, which provides that profits and losses shall be shared
equally on a fifty-fifty basis. However, all transactions are confirmed
and reconfirmed between the two on a daily basis.
(c) Section 220.3(a) provides that
All financial relations between a creditor and a customer, whether
recorded in one record or in more than one record, shall be included in
and be deemed to be part of the customer's general account with the
creditor, * * *.
and Sec. 220.2(c) defines the term ``customer'' to include
* * * any person, or any group of persons acting jointly, * * * to
or for whom a creditor is extending or maintaining any credit * * *
In the course of a normal month's operations, both Firm X and Firm Y are
at one time or another extending credit to the joint account, since both
make purchases for the account that are not ``settled'' until the
month's end. Consequently, the account would be a ``customer'' within
the above definition.
(d) Section 220.6(b) provides, with respect to the account of a
joint adventure in which a creditor participates, that
* * * the adjusted debit balance of the account shall include, in
addition to the items specified in Sec. 220.3(d), any amount by which
the creditor's contribution to the joint adventure exceeds the
contribution which he would have made if he had contributed merely in
proportion to his right to share in the profits of the joint adventure.
In addition, the final paragraph of Sec. 220.2(c) states that the
definition of ``customer''
* * * includes any joint adventure in which a creditor participates
and which would be considered a customer of the creditor if the creditor
were not a participant.
(e) The above provisions clearly evince the Board's intent that the
regulation shall cover trading accounts in which a creditor
participates. If additional confirmation were needed, it is supplied by
the fact that the Board found it needful specifically to exempt from
ordinary margin requirements
[[Page 27]]
credit extended to certain joint accounts in which a creditor
participates. These include the account in which transactions of odd-lot
dealers may be financed under Sec. 220.4(f) (4), and the specialist's
account under Sec. 220.4(g). Accordingly, the Board concluded that the
joint account between Firm X and Firm Y is a ``customer'' within the
meaning of the regulation, and that extensions of credit in the account
are subject to margin requirements.
[31 FR 7169, May 17, 1966]
Sec. 220.122 ``Deep in the money put and call options'' as extensions of credit.
(a) The Board of Governors has been asked to determine whether the
business of selling instruments described as ``deep in the money put and
call options'' would involve an extension of credit for the purposes of
the Board's regulations governing margin requirements for securities
transactions. Most of such options would be of the ``call'' type, such
as the following proposal that was presented to the Board for its
consideration:
If X stock is selling at $100 per share, the customer would pay
about $3,250 for a contract to purchase 100 shares of X at $70 per share
within a 30-day period. The contract would be guaranteed by an exchange
member, as are standard ``puts'' and ``calls''. When the contract is
made with the customer, the seller, who will also be the writer of the
contract, will immediately purchase 100 shares of X at $100 per share
through the guarantor member firm in a margin account. If the customer
exercises the option, the shares will be delivered to him; if the option
is not exercised, the writer will sell the shares in the margin account
to close out the transaction. As a practical matter, it is anticipated
that the customer will exercise the option in almost every case.
(b) An ordinary ``put'' is an option given to a person to sell to
the writer of the put a specified amount of securities at a stated price
within a certain time. A ``call'' is an option given to a person to buy
from the writer a specified amount of securities at a stated price
within a certain time. To be freely saleable, options must be indorsed,
or guaranteed, by a member firm of the exchange on which the security is
registered. The guarantor charges a fee for this service.
(c) The option embodied in the normal put or call is exercisable
either at the market price of the security at the time the option is
written, or some ``points away'' from the market. The price of a normal
option is modest by comparison with the margin required to take a
position. Writers of normal options are persons who are satisfied with
the current price of a security, and are prepared to purchase or sell at
that price, with the small profit provided by the fee. Moreover, since a
large proportion of all options are never exercised, a person who
customarily writes normal options can anticipate that the fee would be
clear profit in many cases, and he will not be obligated to buy or sell
the stock in question.
(d) The stock exchanges require that the writer of an option deposit
and maintain in his margin account with the indorser 30 percent of the
current market price in the case of a call (unless he has a long
position in the stock) and 25 percent in the case of a put (unless he
has a short position in the stock). Many indorsing firms in fact require
larger deposits. Under Sec. 220.3(a) of Regulation T, all financial
relations between a broker and his customer must be included in the
customer's general account, unless specifically eligible for one of the
special accounts authorized by Sec. 220.4. Accordingly, the writer, as
a customer of the member firm, must make a deposit, which is included in
his general account.
(e) In order to prevent the deposit from being available against
other margin purchases, and in effect counted twice, Sec. 220.3(d)(5)
requires that in computing the customer's adjusted debit balance, there
shall be included ``the amount of any margin customarily required by the
creditor in connection with his endorsement or guarantee of any put,
call, or other option''. No other margin deposit is required in
connection with a normal put or call option under Regulation T.
(f) Turning to the ``deep in the money'' proposed option contract
described above, the price paid by the buyer can be divided into (1) a
deposit of 30 percent of the current market
[[Page 28]]
value of the stock, and (2) an additional fixed charge, or fee. To the
extent that the price of the stock rose during the 30 ensuing days the
proposed instrument would produce results similar to those in the case
of an ordinary profitable call, and the contract right would be
exercised. But even if the price fell, unlike the situation with a
normal option, the buyer would still be virtually certain to exercise
his right to purchase before it expired, in order to minimize his loss.
The result would be that the buyer would not have a genuine choice
whether or not to buy. Rather, the instrument would have made it
possible for him, in effect, to purchase stock as of the time the
contract was written by depositing 30 percent of the stock's current
market price.
(g) It was suggested that the proposed contract is not unusual,
since there are examples of ordinary options selling at up to 28 percent
of current market value. However, such examples are of options running
for 12 months, and reflect expectations of changes in the price of the
stock over that period. The 30-day contracts discussed above are not
comparable to such 12-month options, because instances of true
expectations of price changes of this magnitude over a 30-day period
would be exceedingly rare. And a contract that does not reflect such
true expectations of price change, plus a reasonable fee for the
services of the writer, is not an option in the accepted meaning of the
term.
(h) Because of the virtual certainty that the contract right would
be exercised under the proposal described above, the writer would buy
the stock in a margin account with an indorsing firm immediately on
writing the contract. The indorsing firm would extend credit in the
amount of 20 percent of the current market price of the stock, the
maximum permitted by the current Sec. 220.8 (supplement to Regulation
T). The writer would deposit the 30 percent supplied by the buyer, and
furnish the remaining 50 percent out of his own working capital. His
account with the indorsing firm would thus be appropriately margined.
(i) As to the buyer, however, the writer would function as a broker.
In effect, he would purchase the stock for the account, or use, of the
buyer, on what might be described as a deferred payment arrangement.
Like an ordinary broker, the writer of the contract described above
would put up funds to pay for the difference between the price of
securities the customer wished to purchase and the customer's own
contribution. His only risk would be that the price of the securities
would decline in excess of the customer's contribution. True, he would
be locked in, and could not liquidate the customer's collateral for 30
days even if the market price should fall in excess of 30 percent, but
the risk of such a decline is extremely slight.
(j) Like any other broker who extends credit in a margin account,
the writer who was in the business of writing and selling such a
contract would be satisfied with a fixed predetermined amount of return
on his venture, since he would realize only the fee charged. Unlike a
writer of ordinary puts and calls, he would not receive a substantial
part of his income from fees on unexercised contract rights. The
similarity of his activities to those of a broker, and the dissimilarity
to a writer of ordinary options, would be underscored by the fact that
his fee would be a fixed predetermined amount of return similar to an
interest charge, rather than a fee arrived at individually for each
transaction according to the volatility of the stock and other
individual considerations.
(k) The buyer's general account with the writer would in effect
reflect a debit for the purchase price of the stock and, on the credit
side, a deposit of cash in the amount of 30 percent of that price, plus
an extension of credit for the remaining 70 percent, rather than the
maximum permissible 20 percent.
(l) For the reasons stated above, the Board concluded that the
proposed contracts would involve extensions of credit by the writer as
broker in an amount exceeding that permitted by the current supplement
to Regulation T. Accordingly, the writing of such contracts by a
brokerage firm is presently prohibited by such regulation, and any
brokerage firm that endorses such a contract would be arranging for
[[Page 29]]
credit in an amount greater than the firm itself could extend, a
practice that is prohibited by Sec. 220.7(a).
[35 FR 3280, Feb. 21, 1970]
Sec. 220.123 Partial delayed issue contracts covering nonconvertible bonds.
(a) During recent years, it has become customary for portions of new
issues of nonconvertible bonds and preferred stocks to be sold subject
to partial delayed issue contracts, which have customarily been referred
to in the industry as ``delayed delivery'' contracts, and the Board of
Governors has been asked for its views as to whether such transactions
involve any violations of the Board's margin regulations.
(b) The practice of issuing a portion of a debt (or equivalent)
security issue at a date subsequent to the main underwriting has arisen
where market conditions made it difficult or impossible, in a number of
instances, to place an entire issue simultaneously. In instances of this
kind, institutional investors (e.g., insurance companies or pension
funds) whose cash flow is such that they expect to have funds available
some months in the future, have been willing to subscribe to a portion,
to be issued to them at a future date. The issuer has been willing to
agree to issue the securities in two or more stages because it did not
immediately need the proceeds to be realized from the deferred portion,
because it could not raise funds on better terms, or because it
preferred to have a certain portion of the issue taken down by an
investor of this type.
(c) In the case of such a delayed issue contract, the underwriter is
authorized to solicit from institutional customers offers to purchase
from the issuer, pursuant to contracts of the kind described above, and
the agreement becomes binding at the underwriters' closing, subject to
specified conditions. When securities are issued pursuant to the
agreement, the purchase price includes accrued interest or dividends,
and until they are issued to it, the purchaser does not, in the case of
bonds, have rights under the trust indenture, or, in the case of
preferred stocks, voting rights.
(d) Securities sold pursuant to such arrangements are high quality
debt issues (or their equivalent). The purchasers buy with a view to
investment and do not resell or otherwise dispose of the contract prior
to its completion. Delayed issue arrangements are not acceptable to
issuers unless a substantial portion of an issue, not less than 10
percent, is involved.
(e) Sections 3(a) (13) and (14) of the Securities Exchange Act of
1934 provide that an agreement to purchase is equivalent to a purchase,
and an agreement to sell to a sale. The Board has hitherto expressed the
view that credit is extended at the time when there is a firm agreement
to extend such credit (1968 Federal Reserve Bulletin 328; 12 CFR
207.101; ] 6800 Published Interpretations of the Board of Governors).
Accordingly, in instances of the kind described above, the issuer may be
regarded as extending credit to the institutional purchaser at the time
of the underwriters' closing, when the obligations of both become fixed.
(f) Section 220.7(a) of the Board's Regulation T (12 CFR 220.7(a)),
with an exception not applicable here, forbids a creditor subject to
that regulation to arrange for credit on terms on which the creditor
could not itself extend the credit. Sections 220.4(c) (1) and (2) (12
CFR 220.4(c) (1) and (2)) provide that a creditor may not sell
securities to a customer except in good faith reliance upon an agreement
that the customer will promptly, and in no event in more than 7 full
business days, make full cash payment for the securities. Since the
underwriters in question are creditors subject to the regulation, unless
some specific exception applies, they are forbidden to arrange for the
credit described above. This result follows because payment is not made
until more than 7 full business days have passed from the time the
credit is extended.
(g) However, Sec. 220.4(c)(3) provides that:
If the security when so purchased is an unissued security, the
period applicable to the transaction under subparagraph (2) of this
paragraph shall be 7 days after the date on which the security is made
available by the issuer for delivery to purchasers.
[[Page 30]]
(h) In interpreting Sec. 220.4(c)(3), the Board has stated that the
purpose of the provision:
* * * is to recognize the fact that, when an issue of securities is
to be issued at some future fixed date, a security that is part of such
issue can be purchased on a ``when-issued'' basis and that payment may
reasonably be delayed until after such date of issue, subject to other
basic conditions for transactions in a special cash account. (1962
Federal Reserve Bulletin 1427; 12 CFR 220.118; ] 5996, Published
Interpretations of the Board of Governors.)
In that situation, the Board distinguished the case of mutual fund
shares, which technically are not issued until the certificate can be
delivered by the transfer agent. The Board held that mutual fund shares
must be regarded as issued at the time of purchase because they are:
* * * essentially available upon purchase to the same extent as
outstanding securities. The mechanics of their issuance and of the
delivery of certificates are not significantly different from the
mechanics of transfer and delivery of certificates for shares of
outstanding securities, and the issuance of mutual fund shares is not a
future event in the sense that would warrant the extension of the time
for payment beyond that afforded in the case of outstanding securities.
(ibid.)
The issuance of debt securities subject to delayed issue contracts, by
contrast with that of mutual fund shares, which are in a status of
continual underwriting, is a specific single event taking place at a
future date fixed by the issuer with a view to its need for funds and
the availability of those funds under current market conditions.
(i) For the reasons stated above the Board concluded that the
nonconvertible debt and preferred stock subject to delayed issue
contracts of the kind described above should not be regarded as having
been issued until delivered, pursuant to the agreement, to the
institutional purchaser. This interpretation does not apply, of course,
to fact situations different from that described in this section.
[36 FR 2777, Feb. 10, 1971]
Sec. 220.124 Installment sale of tax-shelter programs as ``arranging'' for credit.
(a) The Board has been asked whether the sale by brokers and dealers
of tax-shelter programs containing a provision that payment for the
program may be made in installments would constitute ``arranging'' for
credit in violation of this part 220. For the purposes of this
interpretation, the term ``tax-shelter program'' means a program which
is required to be registered pursuant to section 5 of the Securities Act
of 1933 (15 U.S.C. section 77e), in which tax benefits, such as the
ability to deduct substantial amounts of depreciation or oil exploration
expenses, are made available to a person investing in the program. The
programs may take various legal forms and can relate to a variety of
industries including, but not limited to, oil and gas exploration
programs, real estate syndications (except real estate investment
trusts), citrus grove developments and cattle programs.
(b) The most common type of tax-shelter program takes the form of a
limited partnership. In the case of the programs under consideration,
the investor would commit himself to purchase and the partnership would
commit itself to sell the interests. The investor would be entitled to
the benefits, and become subject to the risks of ownership at the time
the contract is made, although the full purchase price is not then
required to be paid. The balance of the purchase price after the
downpayment usually is payable in installments which range from 1 to 10
years depending on the program. Thus, the partnership would be extending
credit to the purchaser until the time when the latter's contractual
obligation has been fulfilled and the final payment made.
(c) With an exception not applicable here, Sec. 220.7(a) of
Regulation T provides that:
A creditor [broker or dealer] may arrange for the extension or
maintenance of credit to or for any customer of such creditor by any
person upon the same terms and conditions as those upon which the
creditor, under the provisions of this part, may himself extend or
maintain such credit to such customer, but only such terms and
conditions * * *
[[Page 31]]
(d) In the case of credit for the purpose of purchasing or carrying
securities (purpose credit), Sec. 220.8 of the regulation (the
Supplement to Regulation T) does not permit any loan value to be given
securities that are not registered on a national securities exchange,
included on the Board's OTC Margin List, or exempted by statute from the
regulation.
(e) The courts have consistently held investment programs such as
those described above to be ``securities'' for purpose of both the
Securities Act of 1933 and the Securities Exchange Act of 1934. The
courts have also held that the two statutes are to be construed
together. Tax-shelter programs, accordingly, are securities for purposes
of Regulation T. They also are not registered on a national securities
exchange, included on the Board's OTC Margin List, or exempted by
statute from the regulation.
(f) Accordingly, the Board concludes that the sale by a broker/
dealer of tax-shelter programs containing a provision that payment for
the program may be made in installments would constitute ``arranging''
for the extension of credit to purchase or carry securities in violation
of the prohibitions of Sec. Sec. 220.7(a) and 220.8 of Regulation T.
[37 FR 6568, Mar. 31, 1972]
Sec. 220.125-220.126 [Reserved]
Sec. 220.127 Independent broker/dealers arranging credit in connection with
the sale of insurance premium funding programs.
(a) The Board's September 5, 1972, clarifying amendment to Sec.
220.4(k) set forth that creditors who arrange credit for the acquisition
of mutual fund shares and insurance are also permitted to sell mutual
fund shares without insurance under the provisions of the special cash
account. It should be understood, of course, that such account provides
a relatively short credit period of up to 7 business days even with so-
called cash transactions. This amendment was in accordance with the
Board's understanding in 1969, when the insurance premium funding
provisions were adopted in Sec. 220.4(k), that firms engaged in a
general securities business would not also be engaged in the sale and
arranging of credit in connection with such insurance premium funding
programs.
(b) The 1972 amendment eliminated from Sec. 220.4(k) the
requirement that, to be eligible for the provisions of the section, a
creditor had to be the issuer, or a subsidiary or affiliate of the
issuer, of programs which combine the acquisition of both mutual fund
shares and insurance. Thus the amendment permits an independent broker/
dealer to sell such a program and to arrange for financing in that
connection. In reaching such decision, the Board again relied upon the
earlier understanding that independent broker/dealers who would sell
such programs would not be engaged in transacting a general securities
business.
(c) In response to a specific view recently expressed, the Board
agrees that under Regulation T:
* * * a broker/dealer dealing in special insurance premium funding
products can only extend credit in connection with such products or in
connection with the sale of shares of registered investment companies
under the cash accounts * * * (and) cannot engage in the general
securities business or sell any securities other than shares * * * (in)
registered investment companies through a cash account or any other
manner involving the extension of credit.
(d) There is a way, of course, as has been indicated, that an
independent broker/dealer might be able to sell other than shares of
registered investment companies without creating any conflict with the
regulation. Such sales could be executed on a ``funds on hand'' basis
and in the case of payment by check, would have to include the
collection of such check. It is understood from industry sources,
however, that few if any independent broker/dealers engage solely in a
``fund on hand'' type of operation.
[38 FR 11066, May 4, 1973]
Sec. 220.128 Treatment of simultaneous long and short positions in the same
margin account when put or call options or combinations thereof on such stock
are also outstanding in the account.
(a) The Board was recently asked whether under Regulation T,
``Credit by Brokers and Dealers'' (12 CFR part
[[Page 32]]
220), if there are simultaneous long and short positions in the same
security in the same margin account (often referred to as a short sale
``against the box''), such positions may be used to supply the place of
the deposit of margin ordinarily required in connection with the
guarantee by a creditor of a put or call option or combination thereof
on such stock.
(b) The applicable provisions of regulation T are Sec. 220.3(d)(3)
and (5) and Sec. 220.3(g)(4) and (5) which provide as follows:
(d) * * * the adjusted debit balance of a general account * * *
shall be calculated by taking the sum of the following items:
* * * * *
(3) The current market value of any securities (other than unissued
securities) sold short in the general account plus, for each security
(other than an exempted security), such amount as the board shall
prescribe from time to time in Sec. 220.8(d) (the supplement to
regulation T) as the margin required for such short sales, except that
such amount so prescribed in such Sec. 220.8(d) need not be included
when there are held in the general account * * * the same securities or
securities exchangeable or convertible within 90 calendar days, without
restriction other than the payment of money, into such securities sold
short;
* * * * *
(5) The amount of any margin customarily required by the creditor in
connection with his endorsement or guarantee of any put, call, or other
option;
* * * * *
(g) * * * (4) Any transaction which serves to meet the requirements
of paragraph (e) of this section or otherwise serves to permit any
offsetting transaction in an account shall, to that extent, be
unavailable to permit any other transaction in such account.
(5) For the purposes of this part (regulation T), if a security has
maximum loan value under paragraph (c)(1) of this section in a general
account, or under Sec. 220.4(j) in a special convertible debt security
account, a sale of the same security (even though not the same
certificate) in such account shall be deemed to be a long sale and shall
not be deemed to be or treated as a short sale.
(c) Rule 431 of the New York Stock Exchange requires that a creditor
obtain a minimum deposit of 25 percent of the current market value of
the optioned stock in connection with his issuance or guarantee of a
put, and at least 30 percent in the case of a call (and that such
position be ``marked to the market''), but permits a short position in
the stock to serve in lieu of the required deposit in the case of a put
and a long position to serve in the case of a call. Thus, where the
appropriate position is held in an account, that position may serve as
the margin required by Sec. 220.3(d)(5).
(d) In a short sale ``against the box,'' however, the customer is
both long and short the same security. He may have established either
position, properly margined, prior to taking the other, or he may have
deposited fully paid securities in his margin account on the same day he
makes a short sale of such securities. In either case, he will have
directed his broker to borrow securities elsewhere in order to make
delivery on the short sale rather than using his long position for this
purpose (see also 17 CFR 240.3b-3).
(e) Generally speaking, a customer makes a short sale ``against the
box'' for tax reasons. Regulation T, however, provides in Sec. 220.3(g)
that the two positions must be ``netted out'' for the purposes of the
calculations required by the regulation. Thus, the board concludes that
neither position would be available to serve as the deposit of margin
required in connection with the endorsement by the creditor of an
option.
(f) A similar conclusion obtains under Sec. 220.3(d)(3). That
section provides, in essence, that the margin otherwise required in
connection with a short sale need not be included in the account if the
customer has in the account a long position in the same security. In
Sec. 220.3(g) (4), however, it is provided that ``[A]ny transaction
which * * * serves to permit any offsetting transaction in an account
shall, to that extent, be unavailable to permit any other transaction in
such account.'' Thus, if a customer has, for example, a long position in
a security and that long position has been used to supply the margin
required in connection with
[[Page 33]]
a short sale of the same security, then the long position is unavailable
to serve as the margin required in connection with the creditor's
endorsement of a call option on such security.
(g) A situation was also described in which a customer has purported
to establish simultaneous offsetting long and short positions by
executing a ``cross'' or wash sale of the security on the same day. In
this situation, no change in the beneficial ownership of stock has taken
place. Since there is no actual ``contra'' party to either transaction,
and no stock has been borrowed or delivered to accomplish the short
sale, such fictitious positions would have no value for purposes of the
Board's margin regulations. Indeed, the adoption of such a scheme in
connection with an overall strategy involving the issuance, endorsement,
or guarantee of put or call options or combinations thereof appears to
be manipulative and may have been employed for the purpose of
circumventing the requirements of the regulations.
[38 FR 12098, May 9, 1973]
Sec. Sec. 220.129-220.130 [Reserved]
Sec. 220.131 Application of the arranging section to broker-dealer
activities under SEC Rule 144A.
(a) The Board has been asked whether the purchase by a broker-dealer
of debt securities for resale in reliance on Rule 144A of the Securities
and Exchange Commission (17 CFR 230.144A) \1\ may be considered an
arranging of credit permitted as an ``investment banking service'' under
Sec. 220.13(a) of Regulation T.
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\1\ Rule 144A, 17 CFR 230.144A, was originally published in the
Federal Register at 55 FR 17933, April 30, 1990.
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(b) SEC Rule 144A provides a safe harbor exemption from the
registration requirements of the Securities Act of 1933 for resales of
restricted securities to qualified institutional buyers, as defined in
the rule. In general, a qualified institutional buyer is an
institutional investor that in the aggregate owns and invests on a
discretionary basis at least $100 million in securities of issuers that
are not affiliated with the buyer. Registered broker-dealers need only
own and invest on a discretionary basis at least $10 million of
securities in order to purchase as principal under the rule. Section
4(2) of the Securities Act of 1933 provides an exemption from the
registration requirements for ``transactions by an issuer not involving
any public offering.'' Securities acquired in a transaction under
section 4(2) cannot be resold without registration under the Act or an
exemption therefrom. Rule 144A provides a safe harbor exemption for
resales of such securities. Accordingly, broker-dealers that previously
acted only as agents in intermediating between issuers and purchasers of
privately-placed securities, due to the lack of such a safe harbor, now
may purchase privately-placed securities from issuers as principal and
resell such securities to ``qualified institutional buyers'' under Rule
144A.
(c) The Board has consistently treated the purchase of a privately-
placed debt security as an extension of credit subject to the margin
regulations. If the issuer uses the proceeds to buy securities, the
purchase of the privately-placed debt security by a creditor represents
an extension of ``purpose credit'' to the issuer. Section 7(c) of the
Securities Exchange Act of 1934 prohibits the extension of purpose
credit by a creditor if the credit is unsecured, secured by collateral
other than securities, or secured by any security (other than an
exempted security) in contravention of Federal Reserve regulations. If a
debt security sold pursuant to Rule 144A represents purpose credit and
is not properly collateralized by securities, the statute and Regulation
T can be viewed as preventing the broker-dealer from taking the security
into inventory in spite of the fact that the broker-dealer intends to
immediately resell the debt security.
(d) Under Sec. 220.13 of Regulation T, a creditor may arrange
credit it cannot itself extend if the arrangement is an ``investment
banking service'' and the credit does not violate Regulations G and U.
Investment banking services are defined to include, but not be limited
to, ``underwritings, private placements, and advice and other services
in connection with exchange offers, mergers, or acquisitions, except for
[[Page 34]]
underwritings that involve the public distribution of an equity security
with installment or other deferred-payment provisions.'' To comply with
Regulations G and U where the proceeds of debt securities sold under
Rule 144A may be used to purchase or carry margin stock and the debt
securities are secured in whole or in part, directly or indirectly by
margin stock (see 12 CFR 207.2(f), 207.112, and 221.2(g)), the margin
requirements of the regulations must be met.
(e) The SEC's objective in adopting Rule 144A is to achieve ``a more
liquid and efficient institutional resale market for unregistered
securities.'' To further this objective, the Board believes it is
appropriate for Regulation T purposes to characterize the participation
of broker-dealers in this unique and limited market as an ``investment
banking service.'' The Board is therefore of the view that the purchase
by a creditor of debt securities for resale pursuant to SEC Rule 144A
may be considered an investment banking service under the arranging
section of Regulation T. The market-making activities of broker-dealers
who hold themselves out to other institutions as willing to buy and sell
Rule 144A securities on a regular and continuous basis may also be
considered an arranging of credit permissible under Sec. 220.13(a) of
Regulation T.
[Reg. T, 55 FR 29566, July 20, 1990]
Sec. 220.132 Credit to brokers and dealers.
For text of this interpretation, see Sec. 207.114 of this
subchapter.
[Reg. T, 61 FR 60167, Nov. 26, 1996]
PART 221_CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR THE
PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)--Table of
Contents
Sec.
221.1 Authority, purpose, and scope.
221.2 Definitions.
221.3 General requirements.
221.4 Employee stock option, purchase, and ownership plans.
221.5 Special purpose loans to brokers and dealers.
221.6 Exempted transactions.
221.7 Supplement: Maximum loan value of margin stock and other
collateral.
Interpretations
221.101 Determination and effect of purpose of loan.
221.102 Application to committed credit where funds are disbursed
thereafter.
221.103 Loans to brokers or dealers.
221.104 Federal credit unions.
221.105 Arranging for extensions of credit to be made by a bank.
221.106 Reliance in ``good faith'' on statement of purpose of loan.
221.107 Arranging loan to purchase open-end investment company shares.
221.108 Effect of registration of stock subsequent to making of loan.
221.109 Loan to open-end investment company.
221.110 Questions arising under this part.
221.111 Contribution to joint venture as extension of credit when the
contribution is disproportionate to the contributor's share in
the venture's profits or losses.
221.112 Loans by bank in capacity as trustee.
221.113 Loan which is secured indirectly by stock.
221.114 Bank loans to purchase stock of American Telephone and Telegraph
Company under Employees' Stock Plan.
221.115 Accepting a purpose statement through the mail without benefit
of face-to-face interview.
221.116 Bank loans to replenish working capital used to purchase mutual
fund shares.
221.117 When bank in ``good faith'' has not relied on stock as
collateral.
221.118 Bank arranging for extension of credit by corporation.
221.119 Applicability of plan-lender provisions to financing of stock
options and stock purchase rights qualified or restricted
under Internal Revenue Code.
221.120 Allocation of stock collateral to purpose and nonpurpose credits
to same customer.
221.121 Extension of credit in certain stock option and stock purchase
plans.
221.122 Applicability of margin requirements to credit in connection
with Insurance Premium Funding Programs.
221.123 Combined credit for exercising employee stock options and paying
income taxes incurred as a result of such exercise.
221.124 Purchase of debt securities to finance corporate takeovers.
221.125 Credit to brokers and dealers.
Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.
[[Page 35]]
Source: Reg. U, 63 FR 2827, Jan. 16, 1998, unless otherwise noted.
Sec. 221.1 Authority, purpose, and scope.
(a) Authority. Regulation U (this part) is issued by the Board of
Governors of the Federal Reserve System (the Board) pursuant to the
Securities Exchange Act of 1934 (the Act) (15 U.S.C. 78a et seq.).
(b) Purpose and scope. (1) This part imposes credit restrictions
upon persons other than brokers or dealers (hereinafter lenders) that
extend credit for the purpose of buying or carrying margin stock if the
credit is secured directly or indirectly by margin stock. Lenders
include ``banks'' (as defined in Sec. 221.2) and other persons who are
required to register with the Board under Sec. 221.3(b). Lenders may
not extend more than the maximum loan value of the collateral securing
such credit, as set by the Board in Sec. 221.7 (the Supplement).
(2) This part does not apply to clearing agencies regulated by the
Securities and Exchange Commission or the Commodity Futures Trading
Commission that accept deposits of margin stock in connection with:
(i) The issuance of, or guarantee of, or the clearance of
transactions in, any security (including options on any security,
certificate of deposit, securities index or foreign currency); or
(ii) The guarantee of contracts for the purchase or sale of a
commodity for future delivery or options on such contracts.
(3) This part does not apply to credit extended to an exempted
borrower.
(c) Availability of forms. The forms referenced in this part are
available from the Federal Reserve Banks.
Sec. 221.2 Definitions.
The terms used in this part have the meanings given them in section
3(a) of the Act or as defined in this section as follows:
Affiliate means:
(1) For banks:
(i) Any bank holding company of which a bank is a subsidiary within
the meaning of the Bank Holding Company Act of 1956, as amended (12
U.S.C. 1841(d));
(ii) Any other subsidiary of such bank holding company; and
(iii) Any other corporation, business trust, association, or other
similar organization that is an affiliate as defined in section 2(b) of
the Banking Act of 1933 (12 U.S.C. 221a(c));
(2) For nonbank lenders, affiliate means any person who, directly or
indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with the lender.
Bank--(1) Bank. Has the meaning given to it in section 3(a)(6) of
the Act (15 U.S.C. 78c(a)(6)) and includes:
(i) Any subsidiary of a bank;
(ii) Any corporation organized under section 25(a) of the Federal
Reserve Act (12 U.S.C. 611); and
(iii) Any agency or branch of a foreign bank located within the
United States.
(2) Bank does not include:
(i) Any savings and loan association;
(ii) Any credit union;
(iii) Any lending institution that is an instrumentality or agency
of the United States; or
(iv) Any member of a national securities exchange.
Carrying credit is credit that enables a customer to maintain,
reduce, or retire indebtedness originally incurred to purchase a
security that is currently a margin stock.
Current market value of:
(1) A security means:
(i) If quotations are available, the closing sale price of the
security on the preceding business day, as appearing on any regularly
published reporting or quotation service; or
(ii) If there is no closing sale price, the lender may use any
reasonable estimate of the market value of the security as of the close
of business on the preceding business day; or
(iii) If the credit is used to finance the purchase of the security,
the total cost of purchase, which may include any commissions charged.
(2) Any other collateral means a value determined by any reasonable
method.
Customer excludes an exempted borrower and includes any person or
persons acting jointly, to or for whom a lender extends or maintains
credit.
[[Page 36]]
Examining authority means:
(1) The national securities exchange or national securities
association of which a broker or dealer is a member; or
(2) If a member of more than one self-regulatory organization, the
organization designated by the Securities and Exchange Commission as the
examining authority for the broker or dealer.
Exempted borrower means a member of a national securities exchange
or a registered broker or dealer, a substantial portion of whose
business consists of transactions with persons other than brokers or
dealers, and includes a borrower who:
(1) Maintains at least 1000 active accounts on an annual basis for
persons other than brokers, dealers, and persons associated with a
broker or dealer;
(2) Earns at least $10 million in gross revenues on an annual basis
from transactions with persons other than brokers, dealers, and persons
associated with a broker or dealer; or
(3) Earns at least 10 percent of its gross revenues on an annual
basis from transactions with persons other than brokers, dealers, and
persons associated with a broker-dealer.
Good faith with respect to:
(1) The loan value of collateral means that amount (not exceeding
100 per cent of the current market value of the collateral) which a
lender, exercising sound credit judgment, would lend, without regard to
the customer's other assets held as collateral in connection with
unrelated transactions.
(2) Making a determination or accepting a statement concerning a
borrower means that the lender or its duly authorized representative is
alert to the circumstances surrounding the credit, and if in possession
of information that would cause a prudent person not to make the
determination or accept the notice or certification without inquiry,
investigates and is satisfied that it is correct;
In the ordinary course of business means occurring or reasonably
expected to occur in carrying out or furthering any business purpose, or
in the case of an individual, in the course of any activity for profit
or the management or preservation of property.
Indirectly secured. (1) Includes any arrangement with the customer
under which:
(i) The customer's right or ability to sell, pledge, or otherwise
dispose of margin stock owned by the customer is in any way restricted
while the credit remains outstanding; or
(ii) The exercise of such right is or may be cause for accelerating
the maturity of the credit.
(2) Does not include such an arrangement if:
(i) After applying the proceeds of the credit, not more than 25
percent of the value (as determined by any reasonable method) of the
assets subject to the arrangement is represented by margin stock;
(ii) It is a lending arrangement that permits accelerating the
maturity of the credit as a result of a default or renegotiation of
another credit to the customer by another lender that is not an
affiliate of the lender;
(iii) The lender holds the margin stock only in the capacity of
custodian, depositary, or trustee, or under similar circumstances, and,
in good faith, has not relied upon the margin stock as collateral; or
(iv) The lender, in good faith, has not relied upon the margin stock
as collateral in extending or maintaining the particular credit.
Lender means:
(1) Any bank; or
(2) Any person subject to the registration requirements of this
part.
Margin stock means:
(1) Any equity security registered or having unlisted trading
privileges on a national securities exchange;
(2) Any OTC security designated as qualified for trading in the
National Market System under a designation plan approved by the
Securities and Exchange Commission (NMS security);
(3) Any debt security convertible into a margin stock or carrying a
warrant or right to subscribe to or purchase a margin stock;
(4) Any warrant or right to subscribe to or purchase a margin stock;
or
(5) Any security issued by an investment company registered under
section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other
than:
[[Page 37]]
(i) A company licensed under the Small Business Investment Company
Act of 1958, as amended (15 U.S.C. 661); or
(ii) A company which has at least 95 percent of its assets
continuously invested in exempted securities (as defined in 15 U.S.C.
78c(a)(12)); or
(iii) A company which issues face-amount certificates as defined in
15 U.S.C. 80a-2(a)(15), but only with respect of such securities; or
(iv) A company which is considered a money market fund under SEC
Rule 2a-7 (17 CFR 270.2a-7).
Maximum loan value is the percentage of current market value
assigned by the Board under Sec. 221.7 (the Supplement) to specified
types of collateral. The maximum loan value of margin stock is stated as
a percentage of its current market value. Puts, calls and combinations
thereof that do not qualify as margin stock have no loan value. All
other collateral has good faith loan value.
Nonbank lender means any person subject to the registration
requirements of this part.
Purpose credit is any credit for the purpose, whether immediate,
incidental, or ultimate, of buying or carrying margin stock.
Sec. 221.3 General requirements.
(a) Extending, maintaining, and arranging credit--(1) Extending
credit. No lender, except a plan-lender, as defined in Sec. 221.4(a),
shall extend any purpose credit, secured directly or indirectly by
margin stock, in an amount that exceeds the maximum loan value of the
collateral securing the credit.
(2) Maintaining credit. A lender may continue to maintain any credit
initially extended in compliance with this part, regardless of:
(i) Reduction in the customer's equity resulting from change in
market prices;
(ii) Change in the maximum loan value prescribed by this part; or
(iii) Change in the status of the security (from nonmargin to
margin) securing an existing purpose credit.
(3) Arranging credit. No lender may arrange for the extension or
maintenance of any purpose credit, except upon the same terms and
conditions under which the lender itself may extend or maintain purpose
credit under this part.
(b) Registration of nonbank lenders; termination of registration;
annual report--(1) Registration. Every person other than a person
subject to part 220 of this chapter or a bank who, in the ordinary
course of business, extends or maintains credit secured, directly or
indirectly, by any margin stock shall register on Federal Reserve Form
FR G-1 (OMB control number 7100-0011) within 30 days after the end of
any calendar quarter during which:
(i) The amount of credit extended equals $200,000 or more; or
(ii) The amount of credit outstanding at any time during that
calendar quarter equals $500,000 or more.
(2) Deregistration. A registered nonbank lender may apply to
terminate its registration, by filing Federal Reserve Form FR G-2 (OMB
control number 7100-0011), if the lender has not, during the preceding
six calendar months, had more than $200,000 of such credit outstanding.
Registration shall be deemed terminated when the application is approved
by the Board.
(3) Annual report. Every registered nonbank lender shall, within 30
days following June 30 of every year, file Form FR G-4 (OMB control
number 7100-0011).
(4) Where to register and file applications and reports.
Registration statements, applications to terminate registration, and
annual reports shall be filed with the Federal Reserve Bank of the
district in which the principal office of the lender is located.
(c) Purpose statement--(1) General rule--(i) Banks. Except for
credit extended under paragraph (c)(2) of this section, whenever a bank
extends credit secured directly or indirectly by any margin stock, in an
amount exceeding $100,000, the bank shall require its customer to
execute Form FR U-1 (OMB No. 7100-0115), which shall be signed and
accepted by a duly authorized officer of the bank acting in good faith.
(ii) Nonbank lenders. Except for credit extended under paragraph
(c)(2) of this section or Sec. 221.4, whenever a nonbank lender extends
credit secured directly or indirectly by any margin stock, the
[[Page 38]]
nonbank lender shall require its customer to execute Form FR G-3 (OMB
control number 7100-0018), which shall be signed and accepted by a duly
authorized representative of the nonbank lender acting in good faith.
(2) Purpose statement for revolving-credit or multiple-draw
agreements or financing of securities purchases on a payment-against-
delivery basis--(i) Banks. If a bank extends credit, secured directly or
indirectly by any margin stock, in an amount exceeding $100,000, under a
revolving-credit or other multiple-draw agreement, Form FR U-1 must be
executed at the time the credit arrangement is originally established
and must be amended as described in paragraph (c)(2)(iv) of this section
for each disbursement if all of the collateral for the agreement is not
pledged at the time the agreement is originally established.
(ii) Nonbank lenders. If a nonbank lender extends credit, secured
directly or indirectly by any margin stock, under a revolving-credit or
other multiple-draw agreement, Form FR G-3 must be executed at the time
the credit arrangement is originally established and must be amended as
described in paragraph (c)(2)(iv) of this section for each disbursement
if all of the collateral for the agreement is not pledged at the time
the agreement is originally established.
(iii) Collateral. If a purpose statement executed at the time the
credit arrangement is initially made indicates that the purpose is to
purchase or carry margin stock, the credit will be deemed in compliance
with this part if:
(A) The maximum loan value of the collateral at least equals the
aggregate amount of funds actually disbursed; or
(B) At the end of any day on which credit is extended under the
agreement, the lender calls for additional collateral sufficient to
bring the credit into compliance with Sec. 221.7 (the Supplement).
(iv) Amendment of purpose statement. For any purpose credit
disbursed under the agreement, the lender shall obtain and attach to the
executed Form FR U-1 or FR G-3 a current list of collateral which
adequately supports all credit extended under the agreement.
(d) Single credit rule. (1) All purpose credit extended to a
customer shall be treated as a single credit, and all the collateral
securing such credit shall be considered in determining whether or not
the credit complies with this part, except that syndicated loans need
not be aggregated with other unrelated purpose credit extended by the
same lender.
(2) A lender that has extended purpose credit secured by margin
stock may not subsequently extend unsecured purpose credit to the same
customer unless the combined credit does not exceed the maximum loan
value of the collateral securing the prior credit.
(3) If a lender extended unsecured purpose credit to a customer
prior to the extension of purpose credit secured by margin stock, the
credits shall be combined and treated as a single credit solely for the
purposes of the withdrawal and substitution provision of paragraph (f)
of this section.
(4) If a lender extends purpose credit secured by any margin stock
and non-purpose credit to the same customer, the lender shall treat the
credits as two separate loans and may not rely upon the required
collateral securing the purpose credit for the nonpurpose credit.
(e) Exempted borrowers. (1) An exempted borrower that has been in
existence for less than one year may meet the definition of exempted
borrower based on a six-month period.
(2) Once a member of a national securities exchange or registered
broker or dealer ceases to qualify as an exempted borrower, it shall
notify its lenders of this fact. Any new extensions of credit to such a
borrower, including rollovers, renewals, and additional draws on
existing lines of credit, are subject to the provisions of this part.
(f) Withdrawals and substitutions. (1) A lender may permit any
withdrawal or substitution of cash or collateral by the customer if the
withdrawal or substitution would not:
(i) Cause the credit to exceed the maximum loan value of the
collateral; or
(ii) Increase the amount by which the credit exceeds the maximum
loan value of the collateral.
[[Page 39]]
(2) For purposes of this section, the maximum loan value of the
collateral on the day of the withdrawal or substitution shall be used.
(g) Exchange offers. To enable a customer to participate in a
reorganization, recapitalization or exchange offer that is made to
holders of an issue of margin stock, a lender may permit substitution of
the securities received. A nonmargin, nonexempted security acquired in
exchange for a margin stock shall be treated as if it is margin stock
for a period of 60 days following the exchange.
(h) Renewals and extensions of maturity. A renewal or extension of
maturity of a credit need not be considered a new extension of credit if
the amount of the credit is increased only by the addition of interest,
service charges, or taxes with respect to the credit.
(i) Transfers of credit. (1) A transfer of a credit between
customers or between lenders shall not be considered a new extension of
credit if:
(i) The original credit was extended by a lender in compliance with
this part or by a lender subject to part 207 of this chapter in effect
prior to April 1, 1998, (See part 207 appearing in the 12 CFR parts 200
to 219 edition revised as of January 1, 1997), in a manner that would
have complied with this part;
(ii) The transfer is not made to evade this part;
(iii) The amount of credit is not increased; and
(iv) The collateral for the credit is not changed.
(2) Any transfer between customers at the same lender shall be
accompanied by a statement by the transferor customer describing the
circumstances giving rise to the transfer and shall be accepted and
signed by a representative of the lender acting in good faith. The
lender shall keep such statement with its records of the transferee
account.
(3) When a transfer is made between lenders, the transferee shall
obtain a copy of the Form FR U-1 or Form FR G-3 originally filed with
the transferor and retain the copy with its records of the transferee
account. If no form was originally filed with the transferor, the
transferee may accept in good faith a statement from the transferor
describing the purpose of the loan and the collateral securing it.
(j) Action for lender's protection. Nothing in this part shall
require a bank to waive or forego any lien or prevent a bank from taking
any action it deems necessary in good faith for its protection.
(k) Mistakes in good faith. A mistake in good faith in connection
with the extension or maintenance of credit shall not be a violation of
this part.
Sec. 221.4 Employee stock option, purchase, and ownership plans.
(a) Plan-lender; eligible plan. (1) Plan-lender means any
corporation, (including a wholly-owned subsidiary, or a lender that is a
thrift organization whose membership is limited to employees and former
employees of the corporation, its subsidiaries or affiliates) that
extends or maintains credit to finance the acquisition of margin stock
of the corporation, its subsidiaries or affiliates under an eligible
plan.
(2) Eligible plan. An eligible plan means any employee stock option,
purchase, or ownership plan adopted by a corporation and approved by its
stockholders that provides for the purchase of margin stock of the
corporation, its subsidiaries, or affiliates.
(b) Credit to exercise rights under or finance an eligible plan. (1)
If a plan-lender extends or maintains credit under an eligible plan, any
margin stock that directly or indirectly secured that credit shall have
good faith loan value.
(2) Credit extended under this section shall be treated separately
from credit extended under any other section of this part except Sec.
221.3(b)(1) and (b)(3).
(c) Credit to ESOPs. A nonbank lender may extend and maintain
purpose credit without regard to the provisions of this part, except for
Sec. 221.3(b)(1) and (b)(3), if such credit is extended to an employee
stock ownership plan (ESOP) qualified under section 401 of the Internal
Revenue Code, as amended (26 U.S.C. 401).
[[Page 40]]
Sec. 221.5 Special purpose loans to brokers and dealers.
(a) Special purpose loans. A lender may extend and maintain purpose
credit to brokers and dealers without regard to the limitations set
forth in Sec. Sec. 221.3 and 221.7, if the credit is for any of the
specific purposes and meets the conditions set forth in paragraph (c) of
this section.
(b) Written notice. Prior to extending credit for more than a day
under this section, the lender shall obtain and accept in good faith a
written notice or certification from the borrower as to the purposes of
the loan. The written notice or certification shall be evidence of
continued eligibility for the special credit provisions until the
borrower notifies the lender that it is no longer eligible or the lender
has information that would cause a reasonable person to question whether
the credit is being used for the purpose specified.
(c) Types of special purpose credit. The types of credit that may be
extended and maintained on a good faith basis are as follows:
(1) Hypothecation loans. Credit secured by hypothecated customer
securities that, according to written notice received from the broker or
dealer, may be hypothecated by the broker or dealer under Securities and
Exchange Commission (SEC) rules.
(2) Temporary advances in payment-against-delivery transactions.
Credit to finance the purchase or sale of securities for prompt
delivery, if the credit is to be repaid upon completion of the
transaction.
(3) Loans for securities in transit or transfer. Credit to finance
securities in transit or surrendered for transfer, if the credit is to
be repaid upon completion of the transaction.
(4) Intra-day loans. Credit to enable a broker or dealer to pay for
securities, if the credit is to be repaid on the same day it is
extended.
(5) Arbitrage loans. Credit to finance proprietary or customer bona
fide arbitrage transactions. For the purpose of this section bona fide
arbitrage means:
(i) Purchase or sale of a security in one market, together with an
offsetting sale or purchase of the same security in a different market
at nearly the same time as practicable, for the purpose of taking
advantage of a difference in prices in the two markets; or
(ii) Purchase of a security that is, without restriction other than
the payment of money, exchangeable or convertible within 90 calendar
days of the purchase into a second security, together with an offsetting
sale of the second security at or about the same time, for the purpose
of taking advantage of a concurrent disparity in the price of the two
securities.
(6) Market maker and specialist loans. Credit to a member of a
national securities exchange or registered broker or dealer to finance
its activities as a market maker or specialist.
(7) Underwriter loans. Credit to a member of a national securities
exchange or registered broker or dealer to finance its activities as an
underwriter.
(8) Emergency loans. Credit that is essential to meet emergency
needs of the broker-dealer business arising from exceptional
circumstances.
(9) Capital contribution loans. Capital contribution loans include:
(i) Credit that Board has exempted by order upon a finding that the
exemption is necessary or appropriate in the public interest or for the
protection of investors, provided the Securities Investor Protection
Corporation certifies to the Board that the exemption is appropriate; or
(ii) Credit to a customer for the purpose of making a subordinated
loan or capital contribution to a broker or dealer in conformity with
the SEC's net capital rules and the rules of the broker's or dealer's
examining authority, provided:
(A) The customer reduces the credit by the amount of any reduction
in the loan or contribution to the broker or dealer; and
(B) The credit is not used to purchase securities issued by the
broker or dealer in a public distribution.
(10) Credit to clearing brokers or dealers. Credit to a member of a
national securities exchange or registered broker or dealer whose
nonproprietary business is limited to financing and carrying the
accounts of registered market makers.
[[Page 41]]
Sec. 221.6 Exempted transactions.
A bank may extend and maintain purpose credit without regard to the
provisions of this part if such credit is extended:
(a) To any bank;
(b) To any foreign banking institution;
(c) Outside the United States;
(d) To an employee stock ownership plan (ESOP) qualified under
section 401 of the Internal Revenue Code (26 U.S.C. 401);
(e) To any plan lender as defined in Sec. 221.4(a) to finance an
eligible plan as defined in Sec. 221.4(b), provided the bank has no
recourse to any securities purchased pursuant to the plan;
(f) To any customer, other than a broker or dealer, to temporarily
finance the purchase or sale of securities for prompt delivery, if the
credit is to be repaid in the ordinary course of business upon
completion of the transaction and is not extended to enable the customer
to pay for securities purchased in an account subject to part 220 of
this chapter;
(g) Against securities in transit, if the credit is not extended to
enable the customer to pay for securities purchased in an account
subject to part 220 of this chapter; or
(h) To enable a customer to meet emergency expenses not reasonably
foreseeable, and if the extension of credit is supported by a statement
executed by the customer and accepted and signed by an officer of the
bank acting in good faith. For this purpose, emergency expenses include
expenses arising from circumstances such as the death or disability of
the customer, or some other change in circumstances involving extreme
hardship, not reasonably foreseeable at the time the credit was
extended. The opportunity to realize monetary gain or to avoid loss is
not a ``change in circumstances'' for this purpose.
Sec. 221.7 Supplement: Maximum loan value of margin stock and other
collateral.
(a) Maximum loan value of margin stock. The maximum loan value of
any margin stock is fifty per cent of its current market value.
(b) Maximum loan value of nonmargin stock and all other collateral.
The maximum loan value of nonmargin stock and all other collateral
except puts, calls, or combinations thereof is their good faith loan
value.
(c) Maximum loan value of options. Except for options that qualify
as margin stock, puts, calls, and combinations thereof have no loan
value.
Interpretations
Sec. 221.101 Determination and effect of purpose of loan.
(a) Under this part the original purpose of a loan is controlling.
In other words, if a loan originally is not for the purpose of
purchasing or carrying margin stock, changes in the collateral for the
loan do not change its exempted character.
(b) However, a so-called increase in the loan is necessarily on an
entirely different basis. So far as the purpose of the credit is
concerned, it is a new loan, and the question of whether or not it is
subject to this part must be determined accordingly.
(c) Certain facts should also be mentioned regarding the
determination of the purpose of a loan. Section 221.3(c) provides in
that whenever a lender is required to have its customer execute a
``Statement of Purpose for an Extension of Credit Secured by Margin
Stock,'' the statement must be accepted by the lender ``acting in good
faith.'' The requirement of ``good faith'' is of vital importance here.
Its application will necessarily vary with the facts of the particular
case, but it is clear that the bank must be alert to the circumstances
surrounding the loan. For example, if the loan is to be made to a
customer who is not a broker or dealer in securities, but such a broker
or dealer is to deliver margin stock to secure the loan or is to receive
the proceeds of the loan, the bank would be put on notice that the loan
would probably be subject to this part. It could not accept in good
faith a statement to the contrary without obtaining a reliable and
satisfactory explanation of the situation.
(d) Furthermore, the purpose of a loan means just that. It cannot be
altered by some temporary application of
[[Page 42]]
the proceeds. For example, if a borrower is to purchase Government
securities with the proceeds of a loan, but is soon thereafter to sell
such securities and replace them with margin stock, the loan is clearly
for the purpose of purchasing or carrying margin stock.
Sec. 221.102 Application to committed credit where funds are disbursed
thereafter.
The Board has concluded that the date a commitment to extend credit
becomes binding should be regarded as the date when the credit is
extended, since:
(a) On that date the parties should be aware of law and facts
surrounding the transaction; and
(b) Generally, the date of contract is controlling for purposes of
margin regulations and Federal securities law, regardless of the
delivery of cash or securities.
Sec. 221.103 Loans to brokers or dealers.
Questions have arisen as to the adequacy of statements received by
lending banks under Sec. 221.3(c), ``Purpose Statement,'' in the case
of loans to brokers or dealers secured by margin stock where the
proceeds of the loans are to be used to finance customer transactions
involving the purchasing or carrying of margin stock. While some such
loans may qualify for exemption under Sec. Sec. 221.1(b)(2), 221.4,
221.5 or 221.6, unless they do qualify for such an exemption they are
subject to this part. For example, if a loan so secured is made to a
broker to furnish cash working capital for the conduct of his brokerage
business (i.e., for purchasing and carrying securities for the account
of customers), the maximum loan value prescribed in Sec. 221.7 (the
Supplement) would be applicable unless the loan should be of a kind
exempted under this part. This result would not be affected by the fact
that the margin stock given as security for the loan was or included
margin stock owned by the brokerage firm. In view of the foregoing, the
statement referred to in Sec. 221.3(c) which the lending bank must
accept in good faith in determining the purpose of the loan would be
inadequate if the form of statement accepted or used by the bank failed
to call for answers which would indicate whether or not the loan was of
the kind discussed elsewhere in this section.
Sec. 221.104 Federal credit unions.
For text of the interpretation on Federal credit unions, see 12 CFR
220.110.
Sec. 221.105 Arranging for extensions of credit to be made by a bank.
For text of the interpretation on Arranging for extensions of credit
to be made by a bank, see 12 CFR 220.111.
Sec. 221.106 Reliance in ``good faith'' on statement of purpose of loan.
(a) Certain situations have arisen from time to time under this part
wherein it appeared doubtful that, in the circumstances, the lending
banks may have been entitled to rely upon the statements accepted by
them in determining whether the purposes of certain loans were such as
to cause the loans to be not subject to the part.
(b) The use by a lending bank of a statement in determining the
purpose of a particular loan is, of course, provided for by Sec.
221.3(c). However, under that paragraph a lending bank may accept such
statement only if it is ``acting in good faith.'' As the Board stated in
the interpretation contained in Sec. 221.101, the ``requirement of
`good faith' is of vital importance''; and, to fulfill such requirement,
``it is clear that the bank must be alert to the circumstances
surrounding the loan.''
(c) Obviously, such a statement would not be accepted by the bank in
``good faith'' if at the time the loan was made the bank had knowledge,
from any source, of facts or circumstances which were contrary to the
natural purport of the statement, or which were sufficient reasonably to
put the bank on notice of the questionable reliability or completeness
of the statement.
(d) Furthermore, the same requirement of ``good faith'' is to be
applied whether the statement accepted by the bank is signed by the
borrower or by an officer of the bank. In either case, ``good faith''
requires the exercise of special diligence in any instance in which the
borrower is not personally
[[Page 43]]
known to the bank or to the officer who processes the loan.
(e) The interpretation set forth in Sec. 221.101 contains an
example of the application of the ``good faith'' test. There it was
stated that ``if the loan is to be made to a customer who is not a
broker or dealer in securities, but such a broker or dealer is to
deliver margin stock to secure the loan or is to receive the proceeds of
the loan, the bank would be put on notice that the loan would probably
be subject to this part. It could not accept in good faith a statement
to the contrary without obtaining a reliable and satisfactory
explanation of the situation''.
(f) Moreover, and as also stated by the interpretation contained in
Sec. 221.101, the purpose of a loan, of course, ``cannot be altered by
some temporary application of the proceeds. For example, if a borrower
is to purchase Government securities with the proceeds of a loan, but is
soon thereafter to sell such securities and replace them with margin
stock, the loan is clearly for the purpose of purchasing or carrying
margin stock''. The purpose of a loan therefore, should not be
determined upon a narrow analysis of the immediate use to which the
proceeds of the loan are put. Accordingly, a bank acting in ``good
faith'' should carefully scrutinize cases in which there is any
indication that the borrower is concealing the true purpose of the loan,
and there would be reason for special vigilance if margin stock is
substituted for bonds or nonmargin stock soon after the loan is made, or
on more than one occasion.
(g) Similarly, the fact that a loan made on the borrower's signature
only, for example, becomes secured by margin stock shortly after the
disbursement of the loan usually would afford reasonable grounds for
questioning the bank's apparent reliance upon merely a statement that
the purpose of the loan was not to purchase or carry margin stock.
(h) The examples in this section are, of course, by no means
exhaustive. They simply illustrate the fundamental fact that no
statement accepted by a lender is of any value for the purposes of this
part unless the lender accepting the statement is ``acting in good
faith'', and that ``good faith'' requires, among other things,
reasonable diligence to learn the truth.
Sec. 221.107 Arranging loan to purchase open-end investment company shares.
For text of the interpretation on Arranging loan to purchase open-
end investment company shares, see 12 CFR 220.112.
Sec. 221.108 Effect of registration of stock subsequent to making of loan.
(a) The Board recently was asked whether a loan by a bank to enable
the borrower to purchase a newly issued nonmargin stock during the
initial over-the-counter trading period prior to the stock becoming
registered (listed) on a national securities exchange would be subject
to this part. The Board replied that, until such stock qualifies as
margin stock, this would not be applicable to such a loan.
(b) The Board has now been asked what the position of the lending
bank would be under this part if, after the date on which the stock
should become registered, such bank continued to hold a loan of the kind
just described. It is assumed that the loan was in an amount greater
than the maximum loan value for the collateral specified in this part.
(c) If the stock should become registered, the loan would then be
for the purpose of purchasing or carrying a margin stock, and, if
secured directly or indirectly by any margin stock, would be subject to
this part as from the date the stock was registered. Under this part,
this does not mean that the bank would have to obtain reduction of the
loan in order to reduce it to an amount no more than the specified
maximum loan value. It does mean, however, that so long as the loan
balance exceeded the specified maximum loan value, the bank could not
permit any withdrawals or substitutions of collateral that would
increase such excess; nor could the bank increase the amount of the loan
balance unless there was provided additional collateral having a maximum
loan value at least equal to the amount of the increase. In other words,
as from the date the stock should become a
[[Page 44]]
margin stock, the loan would be subject to this part in exactly the same
way, for example, as a loan subject to this part that became under-
margined because of a decline in the current market value of the loan
collateral or because of a decrease by the Board in the maximum loan
value of the loan collateral.
Sec. 221.109 Loan to open-end investment company.
In response to a question regarding a possible loan by a bank to an
open-end investment company that customarily purchases stocks registered
on a national securities exchange, the Board stated that in view of the
general nature and operations of such a company, any loan by a bank to
such a company should be presumed to be subject to this part as a loan
for the purpose of purchasing or carrying margin stock. This would not
be altered by the fact that the open-end company had used, or proposed
to use, its own funds or proceeds of the loan to redeem some of its own
shares, since mere application of the proceeds of a loan to some other
use cannot prevent the ultimate purpose of a loan from being to purchase
or carry registered stocks.
Sec. 221.110 Questions arising under this part.
(a) This part governs ``any purpose credit'' extended by a lender
``secured directly or indirectly by margin stock'' and defines ``purpose
credit'' as ``any credit for the purpose, whether immediate, incidental,
or ultimate, of buying or carrying margin stock, `` with certain
exceptions, and provides that the maximum loan value of such margin
stock shall be a fixed percentage ``of its current market value.''
(b) The Board of Governors has had occasion to consider the
application of the language in paragraph (a) of this section to the two
following questions:
(1) Loan secured by stock. First, is a loan to purchase or carry
margin stock subject to this part where made in unsecured form, if
margin stock is subsequently deposited as security with the lender, and
surrounding circumstances indicate that the parties originally
contemplated that the loan should be so secured? The Board answered that
in a case of this kind, the loan would be subject to this part, for the
following reasons:
(i) The Board has long held, in the closely related purpose area,
that the original purpose of a loan should not be determined upon a
narrow analysis of the technical circumstances under which a loan is
made. Instead, the fundamental purpose of the loan is considered to be
controlling. Indeed, ``the fact that a loan made on the borrower's
signature only, for example, becomes secured by registered stock shortly
after the disbursement of the loan'' affords reasonable grounds for
questioning whether the bank was entitled to rely upon the borrower's
statement as to the purpose of the loan. 1953 Fed. Res. Bull. 951 (See,
Sec. 221.106).
(ii) Where security is involved, standards of interpretation should
be equally searching. If, for example, the original agreement between
borrower and lender contemplated that the loan should be secured by
margin stock, and such stock is in fact delivered to the bank when
available, the transaction must be regarded as fundamentally a secured
loan. This view is strengthened by the fact that this part applies to a
loan ``secured directly or indirectly by margin stock.''
(2) Loan to acquire controlling shares. (i) The second question is
whether this part governs a margin stock-secured loan made for the
business purpose of purchasing a controlling interest in a corporation,
or whether such a loan would be exempt on the ground that this part is
directed solely toward purchases of stock for speculative or investment
purposes. The Board answered that a margin stock-secured loan for the
purpose of purchasing or carrying margin stock is subject to this part,
regardless of the reason for which the purchase is made.
(ii) The answer is required, in the Board's view, since the language
of this part is explicitly inclusive, covering ``any purpose credit,
secured directly or indirectly by margin stock.'' Moreover, the
withdrawal in 1945 of the original section 2(e) of this part, which
exempted ``any loan for the purpose of purchasing a stock from or
through a person who is not a member of a national securities exchange .
. .'' plainly
[[Page 45]]
implies that transactions of the sort described are now subject to the
general prohibition of Sec. 221.3(a).
Sec. 221.111 Contribution to joint venture as extension of credit when the
contribution is disproportionate to the contributor's share in the venture's
profits or losses.
(a) The Board considered the question whether a joint venture,
structured so that the amount of capital contribution to the venture
would be disproportionate to the right of participation in profits or
losses, constitutes an ``extension of credit'' for the purpose of this
part.
(b) An individual and a corporation plan to establish a joint
venture to engage in the business of buying and selling securities,
including margin stock. The individual would contribute 20 percent of
the capital and receive 80 percent of the profits or losses; the
corporate share would be the reverse. In computing profits or losses,
each participant would first receive interest at the rate of 8 percent
on his respective capital contribution. Although purchases and sales
would be mutually agreed upon, the corporation could liquidate the joint
portfolio if the individual's share of the losses equaled or exceeded
his 20 percent contribution to the venture. The corporation would hold
the securities, and upon termination of the venture, the assets would
first be applied to repayment of capital contributions.
(c) In general, the relationship of joint venture is created when
two or more persons combine their money, property, or time in the
conduct of some particular line of trade or some particular business and
agree to share jointly, or in proportion to capital contributed, the
profits and losses of the undertaking.
(d) The incidents of the joint venture described in paragraph (b) of
this section, however, closely parallel those of an extension of margin
credit, with the corporation as lender and the individual as borrower.
The corporation supplies 80 percent of the purchase price of securities
in exchange for a net return of 8 percent of the amount advanced plus 20
percent of any gain. Like a lender of securities credit, the corporation
is insulated against loss by retaining the right to liquidate the
collateral before the securities decline in price below the amount of
its contribution. Conversely, the individual--like a customer who
borrows to purchase securities--puts up only 20 percent of their cost,
is entitled to the principal portion of any appreciation in their value,
bears the principal risk of loss should that value decline, and does not
stand to gain or lose except through a change in value of the securities
purchased.
(e) The Board is of the opinion that where the right of an
individual to share in profits and losses of such a joint venture is
disproportionate to his contribution to the venture:
(1) The joint venture involves an extension of credit by the
corporation to the individual;
(2) The extension of credit is to purchase or carry margin stock,
and is collateralized by such margin stock; and
(3) If the corporation is not a broker or dealer subject to
Regulation T (12 CFR part 220), the credit is of the kind described by
Sec. 221.3(a).
Sec. 221.112 Loans by bank in capacity as trustee.
(a) The Board's advice has been requested whether a bank's
activities in connection with the administration of an employees'
savings plan are subject to this part.
(b) Under the plan, any regular, full-time employee may participate
by authorizing the sponsoring company to deduct a percentage of his
salary and wages and transmit the same to the bank as trustee. Voluntary
contributions by the company are allocated among the participants. A
participant may direct that funds held for him be invested by the
trustee in insurance, annuity contracts, Series E Bonds, or in one or
more of three specified securities which are listed on a stock exchange.
Loans to purchase the stocks may be made to participants from funds of
the trust, subject to approval of the administrative committee, which is
composed of five participants, and of the trustee. The bank's right to
approve is said to be restricted to the
[[Page 46]]
mechanics of making the loan, the purpose being to avoid cumbersome
procedures.
(c) Loans are secured by the credit balance of the borrowing
participants in the savings fund, including stock, but excluding (in
practice) insurance and annuity contracts and government securities.
Additional stocks may be, but, in practice, have not been pledged as
collateral for loans. Loans are not made, under the plan, from bank
funds, and participants do not borrow from the bank upon assignment of
the participants' accounts in the trust.
(d) It is urged that loans under the plan are not subject to this
part because a loan should not be considered as having been made by a
bank where the bank acts solely in its capacity of trustee, without
exercise of any discretion.
(e) The Board reviewed this question upon at least one other
occasion, and full consideration has again been given to the matter.
After considering the arguments on both sides, the Board has reaffirmed
its earlier view that, in conformity with an interpretation not
published in the Code of Federal Regulations which was published at page
874 of the 1946 Federal Reserve Bulletin (See 12 CFR 261.10(f) for
information on how to obtain Board publications.), this part applies to
the activities of a bank when it is acting in its capacity as trustee.
Although the bank in that case had at best a limited discretion with
respect to loans made by it in its capacity as trustee, the Board
concluded that this fact did not affect the application of the
regulation to such loans.
Sec. 221.113 Loan which is secured indirectly by stock.
(a) A question has been presented to the Board as to whether a loan
by a bank to a mutual investment fund is ``secured * * * indirectly by
margin stock'' within the meaning of Sec. 221.(3)(a), so that the loan
should be treated as subject to this part.
(b) Briefly, the facts are as follows. Fund X, an open-end
investment company, entered into a loan agreement with Bank Y, which was
(and still is) custodian of the securities which comprise the portfolio
of Fund X. The agreement includes the following terms, which are
material to the question before the Board:
(1) Fund X agrees to have an ``asset coverage'' (as defined in the
agreements) of 400 percent of all its borrowings, including the proposed
borrowing, at the time when it takes down any part of the loan.
(2) Fund X agrees to maintain an ``asset coverage'' of at least 300
percent of its borrowings at all times.
(3) Fund X agrees not to amend its custody agreement with Bank Y, or
to substitute another custodian without Bank Y's consent.
(4) Fund X agrees not to mortgage, pledge, or otherwise encumber any
of its assets elsewhere than with Bank Y.
(c) In Sec. 221.109 the Board stated that because of ``the general
nature and operations of such a company'', any ``loan by a bank to an
open-end investment company that customarily purchases margin stock * *
* should be presumed to be subject to this part as a loan for the
purpose of purchasing or carrying margin stock'' (purpose credit). The
Board's interpretation went on to say that: ``this would not be altered
by the fact that the open-end company had used, or proposed to use, its
own funds or proceeds of the loan to redeem some of its own shares * *
*.''
(d) Accordingly, the loan by Bank Y to Fund X was and is a ``purpose
credit''. However, a loan by a bank is not subject to this part unless:
it is a purpose credit; and it is ``secured directly or indirectly by
margin stock''. In the present case, the loan is not ``secured
directly'' by stock in the ordinary sense, since the portfolio of Fund X
is not pledged to secure the credit from Bank Y. But the word
``indirectly'' must signify some form of security arrangement other than
the ``direct'' security which arises from the ordinary ``transaction
that gives recourse against a particular chattel or land or against a
third party on an obligation'' described in the American Law Institute's
Restatement of the Law of Security, page 1. Otherwise the word
``indirectly'' would be superfluous, and a regulation, like a statute,
must be construed if possible to give meaning to every word.
[[Page 47]]
(e) The Board has indicated its view that any arrangement under
which margin stock is more readily available as security to the lending
bank than to other creditors of the borrower may amount to indirect
security within the meaning of this part. In an interpretation published
at Sec. 221.110 it stated: ``The Board has long held, in the * * *
purpose area, that the original purpose of a loan should not be
determined upon a narrow analysis of the technical circumstances under
which a loan is made * * * . Where security is involved, standards of
interpretation should be equally searching.'' In its pamphlet issued for
the benefit and guidance of banks and bank examiners, entitled
``Questions and Answers Illustrating Application of Regulation U'', the
Board said: ``In determining whether a loan is ``indirectly'' secured,
it should be borne in mind that the reason the Board has thus far
refrained * * * from regulating loans not secured by stock has been to
simplify operations under the regulation. This objective of simplifying
operations does not apply to loans in which arrangements are made to
retain the substance of stock collateral while sacrificing only the
form''.
(f) A wide variety of arrangements as to collateral can be made
between bank and borrower which will serve, to some extent, to protect
the interest of the bank in seeing that the loan is repaid, without
giving the bank a conventional direct ``security'' interest in the
collateral. Among such arrangements which have come to the Board's
attention are the following:
(1) The borrower may deposit margin stock in the custody of the
bank. An arrangement of this kind may not, it is true, place the bank in
the position of a secured creditor in case of bankruptcy, or even of
conflicting claims, but it is likely effectively to strengthen the
bank's position. The definition of indirectly secured in Sec. 221.2,
which provides that a loan is not indirectly secured if the lender
``holds the margin stock only in the capacity of custodian, depositary
or trustee, or under similar circumstances, and, in good faith has not
relied upon the margin stock as collateral,'' does not exempt a deposit
of this kind from the impact of the regulation unless it is clear that
the bank ``has not relied'' upon the margin stock deposited with it.
(2) A borrower may not deposit his margin stock with the bank, but
agree not to pledge or encumber his assets elsewhere while the loan is
outstanding. Such an agreement may be difficult to police, yet it serves
to some extent to protect the interest of the bank if only because the
future credit standing and business reputation of the borrower will
depend upon his keeping his word. If the assets covered by such an
agreement include margin stock, then, the credit is ``indirectly
secured'' by the margin stock within the meaning of this part.
(3) The borrower may deposit margin stock with a third party who
agrees to hold the stock until the loan has been paid off. Here, even
though the parties may purport to provide that the stock is not
``security'' for the loan (for example, by agreeing that the stock may
not be sold and the proceeds applied to the debt if the borrower fails
to pay), the mere fact that the stock is out of the borrower's control
for the duration of the loan serves to some extent to protect the bank.
(g) The three instances described in paragraph (f) of this section
are merely illustrative. Other methods, or combinations of methods, may
serve a similar purpose. The conclusion that any given arrangement makes
a credit ``indirectly secured'' by margin stock may, but need not, be
reinforced by facts such as that the stock in question was purchased
with proceeds of the loan, that the lender suggests or insists upon the
arrangement, or that the loan would probably be subject to criticism by
supervisory authorities were it not for the protective arrangement.
(h) Accordingly, the Board concludes that the loan by Bank Y to Fund
X is indirectly secured by the portfolio of the fund and must be treated
by the bank as a regulated loan.
Sec. 221.114 Bank loans to purchase stock of American Telephone and
Telegraph Company under Employees' Stock Plan.
(a) The Board of Governors interpreted this part in connection with
proposed loans by a bank to persons who are purchasing shares of stock
of
[[Page 48]]
American Telephone and Telegraph Company pursuant to its Employees'
Stock Plan.
(b) According to the current offering under the Plan, an employee of
the AT&T system may purchase shares through regular deductions from his
pay over a period of 24 months. At the end of that period, a certificate
for the appropriate number of shares will be issued to the participating
employee by AT&T. Each employee is entitled to purchase, as a maximum,
shares that will cost him approximately three-fourths of his annual base
pay. Since the program extends over two years, it follows that the
payroll deductions for this purpose may be in the neighborhood of 38
percent of base pay and a larger percentage of ``take-home pay.''
Deductions of this magnitude are in excess of the saving rate of many
employees.
(c) Certain AT&T employees, who wish to take advantage of the
current offering under the Plan, are the owners of shares of AT&T stock
that they purchased under previous offerings. A bank proposed to receive
such stock as collateral for a ``living expenses'' loan that will be
advanced to the employee in monthly installments over the 24-month
period, each installment being in the amount of the employee's monthly
payroll deduction under the Plan. The aggregate amount of the advances
over the 24-month period would be substantially greater than the maximum
loan value of the collateral as prescribed in Sec. 221.7 (the
Supplement).
(d) In the opinion of the Board of Governors, a loan of the kind
described would violate this part if it exceeded the maximum loan value
of the collateral. The regulation applies to any margin stock-secured
loan for the purpose of purchasing or carrying margin stock (Sec.
221.3(a)). Although the proposed loan would purport to be for living
expenses, it seems quite clear, in view of the relationship of the loan
to the Employees' Stock Plan, that its actual purpose would be to enable
the borrower to purchase AT&T stock, which is margin stock. At the end
of the 24-month period the borrower would acquire a certain number of
shares of that stock and would be indebted to the lending bank in an
amount approximately equal to the amount he would pay for such shares.
In these circumstances, the loan by the bank must be regarded as a loan
``for the purpose of purchasing'' the stock, and therefore it is subject
to the limitations prescribed by this part. This conclusion follows from
the provisions of this part, and it may also be observed that a contrary
conclusion could largely defeat the basic purpose of the margin
regulations.
(e) Accordingly, the Board concluded that a loan of the kind
described may not be made in an amount exceeding the maximum loan value
of the collateral, as prescribed by the current Sec. 221.7 (the
Supplement).
Sec. 221.115 Accepting a purpose statement through the mail without benefit
of face-to-face interview.
(a) The Board has been asked whether the acceptance of a purpose
statement submitted through the mail by a lender subject to the
provisions of this part will meet the good faith requirement of Sec.
221.3(c). Section 221.3(c) states that in connection with any credit
secured by collateral which includes any margin stock, a nonbank lender
must obtain a purpose statement executed by the borrower and accepted by
the lender in good faith. Such acceptance requires that the lender be
alert to the circumstances surrounding the credit and if further
information suggests inquiry, he must investigate and be satisfied that
the statement is truthful.
(b) The lender is a subsidiary of a holding company which also has
another subsidiary which serves as underwriter and investment advisor to
various mutual funds. The sole business of the lender will be to make
``non-purpose'' consumer loans to shareholders of the mutual funds, such
loans to be collateralized by the fund shares. Most mutual funds shares
are margin stock for purposes of this part. Solicitation and acceptance
of these consumer loans will be done principally through the mail and
the lender wishes to obtain the required purpose statement by mail
rather than by a face-to-face interview. Personal interviews are not
practicable for the lender because shareholders of the funds are
scattered throughout the country. In order to
[[Page 49]]
provide the same safeguards inherent in face-to-face interviews, the
lender has developed certain procedures designed to satisfy the good
faith acceptance requirement of this part.
(c) The purpose statement will be supplemented with several
additional questions relevant to the prospective borrower's investment
activities such as purchases of any security within the last 6 months,
dollar amount, and obligations to purchase or pay for previous
purchases; present plans to purchase securities in the near future,
participations in securities purchase plans, list of unpaid debts, and
present income level. Some questions have been modified to facilitate
understanding but no questions have been deleted. If additional inquiry
is indicated by the answers on the form, a loan officer of the lender
will interview the borrower by telephone to make sure the loan is ``non-
purpose''. Whenever the loan exceeds the ``maximum loan value'' of the
collateral for a regulated loan, a telephone interview will be done as a
matter of course.
(d) One of the stated purposes of Regulation X (12 CFR part 224) was
to prevent the infusion of unregulated credit into the securities
markets by borrowers falsely certifying the purpose of a loan. The Board
is of the view that the existence of Regulation X (12 CFR part 224),
which makes the borrower liable for willful violations of the margin
regulations, will allow a lender subject to this part to meet the good
faith acceptance requirement of Sec. 221.3(c) without a face-to-face
interview if the lender adopts a program, such as the one described in
paragraph (c) of this section, which requires additional detailed
information from the borrower and proper procedures are instituted to
verify the truth of the information received. Lenders intending to
embark on a similar program should discuss proposed plans with their
district Federal Reserve Bank. Lenders may have existing or future loans
with the prospective customers which could complicate the efforts to
determine the true purpose of the loan.
Sec. 221.116 Bank loans to replenish working capital used to purchase mutual
fund shares.
(a) In a situation considered by the Board of Governors, a business
concern (X) proposed to purchase mutual fund shares, from time to time,
with proceeds from its accounts receivable, then pledge the shares with
a bank in order to secure working capital. The bank was prepared to lend
amounts equal to 70 percent of the current value of the shares as they
were purchased by X. If the loans were subject to this part, only 50
percent of the current market value of the shares could be lent.
(b) The immediate purpose of the loans would be to replenish X's
working capital. However, as time went on, X would be acquiring mutual
fund shares at a cost that would exceed the net earnings it would
normally have accumulated, and would become indebted to the lending bank
in an amount approximately 70 percent of the prices of said shares.
(c) The Board held that the loans were for the purpose of purchasing
the shares, and therefore subject to the limitations prescribed by this
part. As pointed out in Sec. 221.114 with respect to a similar program
for putting a high proportion of cash income into stock, the borrowing
against the margin stock to meet needs for which the cash would
otherwise have been required, a contrary conclusion could largely defeat
the basic purpose of the margin regulations.
(d) Also considered was an alternative proposal under which X would
deposit proceeds from accounts receivable in a time account for 1 year,
before using those funds to purchase mutual fund shares. The Board held
that this procedure would not change the situation in any significant
way. Once the arrangement was established, the proceeds would be flowing
into the time account at the same time that similar amounts were
released to purchase the shares, and over any extended period of time
the result would be the same. Accordingly, the Board concluded that bank
loans made under the alternative proposal would similarly be subject to
this part.
[[Page 50]]
Sec. 221.117 When bank in ``good faith'' has not relied on stock as
collateral.
(a) The Board has received questions regarding the circumstances in
which an extension or maintenance of credit will not be deemed to be
``indirectly secured'' by stock as indicated by the phrase, ``if the
lender, in good faith, has not relied upon the margin stock as
collateral,'' contained in paragraph (2)(iv) of the definition of
indirectly secured in Sec. 221.2.
(b) In response, the Board noted that in amending this portion of
the regulation in 1968 it was indicated that one of the purposes of the
change was to make clear that the definition of indirectly secured does
not apply to certain routine negative covenants in loan agreements.
Also, while the question of whether or not a bank has relied upon
particular stock as collateral is necessarily a question of fact to be
determined in each case in the light of all relevant circumstances, some
indication that the bank had not relied upon stock as collateral would
seem to be afforded by such circumstances as the fact that:
(1) The bank had obtained a reasonably current financial statement
of the borrower and this statement could reasonably support the loan;
and
(2) The loan was not payable on demand or because of fluctuations in
market value of the stock, but instead was payable on one or more fixed
maturities which were typical of maturities applied by the bank to loans
otherwise similar except for not involving any possible question of
stock collateral.
Sec. 221.118 Bank arranging for extension of credit by corporation.
(a) The Board considered the questions whether:
(1) The guaranty by a corporation of an ``unsecured'' bank loan to
exercise an option to purchase stock of the corporation is an
``extension of credit'' for the purpose of this part;
(2) Such a guaranty is given ``in the ordinary course of business''
of the corporation, as defined in Sec. 221.2; and
(3) The bank involved took part in arranging for such credit on
better terms than it could extend under the provisions of this part.
(b) The Board understood that any officer or employee included under
the corporation's stock option plan who wished to exercise his option
could obtain a loan for the purchase price of the stock by executing an
unsecured note to the bank. The corporation would issue to the bank a
guaranty of the loan and hold the purchased shares as collateral to
secure it against loss on the guaranty. Stock of the corporation is
registered on a national securities exchange and therefore qualifies as
``margin stock'' under this part.
(c) A nonbank lender is subject to the registration and other
requirements of this part if, in the ordinary course of his business, he
extends credit on collateral that includes any margin stock in the
amount of $200,000 or more in any calendar quarter, or has such credit
outstanding in any calendar quarter in the amount of $500,000 or more.
The Board understood that the corporation in question had sufficient
guaranties outstanding during the applicable calendar quarter to meet
the dollar thresholds for registration.
(d) In the Board's judgment a person who guarantees a loan, and
thereby becomes liable for the amount of the loan in the event the
borrower should default, is lending his credit to the borrower. In the
circumstances described, such a lending of credit must be considered an
``extension of credit'' under this part in order to prevent
circumvention of the regulation's limitation on the amount of credit
that can be extended on the security of margin stock.
(e) Under Sec. 221.2, the term in the ordinary course of business
means ``occurring or reasonably expected to occur in carrying out or
furthering any business purpose. * * *'' In general, stock option plans
are designed to provide a company's employees with a proprietary
interest in the company in the form of ownership of the company's stock.
Such plans increase the company's ability to attract and retain able
personnel and, accordingly, promote the interest of the company and its
stockholders, while at the same time providing the company's employees
with additional incentive to work toward
[[Page 51]]
the company's future success. An arrangement whereby participating
employees may finance the exercise of their options through an unsecured
bank loan guaranteed by the company, thereby facilitating the employees'
acquisition of company stock, is likewise designed to promote the
company's interest and is, therefore, in furtherance of a business
purpose.
(f) For the reasons indicated, the Board concluded that under the
circumstances described a guaranty by the corporation constitutes credit
extended in the ordinary course of business under this part, that the
corporation is required to register pursuant to Sec. 221.3(b), and that
such guaranties may not be given in excess of the maximum loan value of
the collateral pledged to secure the guaranty.
(g) Section 221.3(a)(3) provides that ``no lender may arrange for
the extension or maintenance of any purpose credit, except upon the same
terms and conditions on which the lender itself may extend or maintain
purpose credit under this part''. Since the Board concluded that the
giving of a guaranty by the corporation to secure the loan described
above constitutes an extension of credit, and since the use of a
guaranty in the manner described could not be effectuated without the
concurrence of the bank involved, the Board further concluded that the
bank took part in ``arranging'' for the extension of credit in excess of
the maximum loan value of the margin stock pledged to secure the
guaranties.
Sec. 221.119 Applicability of plan-lender provisions to financing of stock
options and stock purchase rights qualified or restricted under Internal
Revenue Code.
(a) The Board has been asked whether the plan-lender provisions of
Sec. 221.4(a) and (b) were intended to apply to the financing of stock
options restricted or qualified under the Internal Revenue Code where
such options or the option plan do not provide for such financing.
(b) It is the Board's experience that in some nonqualified plans,
particularly stock purchase plans, the credit arrangement is distinct
from the plan. So long as the credit extended, and particularly, the
character of the plan-lender, conforms with the requirements of the
regulation, the fact that option and credit are provided for in separate
documents is immaterial. It should be emphasized that the Board does not
express any view on the preferability of qualified as opposed to
nonqualified options; its role is merely to prevent excessive credit in
this area.
(c) Section 221.4(a) provides that a plan-lender may include a
wholly-owned subsidiary of the issuer of the collateral (taking as a
whole, corporate groups including subsidiaries and affiliates). This
clarifies the Board's intent that, to qualify for special treatment
under that section, the lender must stand in a special employer-employee
relationship with the borrower, and a special relationship of issuer
with regard to the collateral. The fact that the Board, for convenience
and practical reasons, permitted the employing corporation to act
through a subsidiary or other entity should not be interpreted to mean
the Board intended the lender to be other than an entity whose
overriding interests were coextensive with the issuer. An independent
corporation, with independent interests was never intended, regardless
of form, to be at the base of exempt stock-plan lending.
Sec. 221.120 Allocation of stock collateral to purpose and nonpurpose
credits to same customer.
(a) A bank proposes to extend two credits (Credits A and B) to its
customer. Although the two credits are proposed to be extended at the
same time, each would be evidenced by a separate agreement. Credit A
would be extended for the purpose of providing the customer with working
capital (nonpurpose credit), collateralized by margin stock. Credit B
would be extended for the purpose of purchasing or carrying margin stock
(purpose credit), without collateral or on collateral other than stock.
(b) This part allows a bank to extend purpose and nonpurpose credits
simultaneously or successively to the same customer. This rule is
expressed in Sec. 221.3(d)(4) which provides in substance that for any
nonpurpose credit to the same customer, the lender shall in good faith
require as much collateral
[[Page 52]]
not already identified to the customer's purpose credit as the lender
would require if it held neither the purpose loan nor the identified
collateral. This rule in Sec. 221.3(d)(4) also takes into account that
the lender would not necessarily be required to hold collateral for the
nonpurpose credit if, consistent with good faith banking practices, it
would normally make this kind of nonpurpose loan without collateral.
(c) The Board views Sec. 221.3(d)(4), when read in conjunction with
Sec. 221.3(c) and (f), as requiring that whenever a lender extends two
credits to the same customer, one a purpose credit and the other
nonpurpose, any margin stock collateral must first be identified with
and attributed to the purpose loan by taking into account the maximum
loan value of such collateral as prescribed in Sec. 221.7 (the
Supplement).
(d) The Board is further of the opinion that under the foregoing
circumstances Credit B would be indirectly secured by stock, despite the
fact that there would be separate loan agreements for both credits. This
conclusion flows from the circumstance that the lender would hold in its
possession stock collateral to which it would have access with respect
to Credit B, despite any ostensible allocation of such collateral to
Credit A.
Sec. 221.121 Extension of credit in certain stock option and stock purchase
plans.
Questions have been raised as to whether certain stock option and
stock purchase plans involve extensions of credit subject to this part
when the participant is free to cancel his participation at any time
prior to full payment, but in the event of cancellation the participant
remains liable for damages. It thus appears that the participant has the
opportunity to gain and bears the risk of loss from the time the
transaction is executed and payment is deferred. In some cases brought
to the Board's attention damages are related to the market price of the
stock, but in others, there may be no such relationship. In either of
these circumstances, it is the Board's view that such plans involve
extensions of credit. Accordingly, where the security being purchased is
a margin security and the credit is secured, directly or indirectly, by
any margin security, the creditor must register and the credit must
conform with either the regular margin requirements of Sec. 221.3(a) or
the special ``plan-lender'' provisions set forth in Sec. 221.4,
whichever is applicable. This assumes, of course, that the amount of
credit extended is such that the creditor is subject to the registration
requirements of Sec. 221.3(b).
Sec. 221.122 Applicability of margin requirements to credit in connection
with Insurance Premium Funding Programs.
(a) The Board has been asked numerous questions regarding purpose
credit in connection with insurance premium funding programs. The
inquiries are included in a set of guidelines in the format of questions
and answers. (The guidelines are available pursuant to the Board's Rules
Regarding Availability of Information, 12 CFR part 261.) A glossary of
terms customarily used in connection with insurance premium funding
credit activities is included in the guidelines. Under a typical
insurance premium funding program, a borrower acquires mutual fund
shares for cash, or takes fund shares which he already owns, and then
uses the loan value (currently 50 percent as set by the Board) to buy
insurance. Usually, a funding company (the issuer) will sell both the
fund shares and the insurance through either independent broker/dealers
or subsidiaries or affiliates of the issuer. A typical plan may run for
10 or 15 years with annual insurance premiums due. To illustrate,
assuming an annual insurance premium of $300, the participant is
required to put up mutual fund shares equivalent to 250 percent of the
premium or $600 ($600 x 50 percent loan value equals $300 the amount of
the insurance premium which is also the amount of the credit extended).
(b) The guidelines referenced in paragraph (a) of this section also:
(1) Clarify an earlier 1969 Board interpretation to show that the
public offering price of mutual fund shares (which includes the front
load, or sales commission) may be used as a measure of their current
market value when the shares serve as collateral on a purpose
[[Page 53]]
credit throughout the day of the purchase of the fund shares; and
(2) Relax a 1965 Board position in connection with accepting purpose
statements by mail.
(c) It is the Board's view that when it is clearly established that
a purpose statement supports a purpose credit then such statement
executed by the borrower may be accepted by mail, provided it is
received and also executed by the lender before the credit is extended.
Sec. 221.123 Combined credit for exercising employee stock options and
paying income taxes incurred as a result of such exercise.
(a) Section 221.4(a) and (b), which provides special treatment for
credit extended under employee stock option plans, was designed to
encourage their use in recognition of their value in giving an employee
a proprietary interest in the business. Taking a position that might
discourage the exercise of options because of tax complications would
conflict with the purpose of Sec. 221.4(a) and (b).
(b) Accordingly, the Board has concluded that the combined loans for
the exercise of the option and the payment of the taxes in connection
therewith under plans complying with Sec. 221.4(a)(2) may be regarded
as purpose credit within the meaning of Sec. 221.2.
Sec. 221.124 Purchase of debt securities to finance corporate takeovers.
(a) Petitions have been filed with the Board raising questions as to
whether the margin requirements in this part apply to two types of
corporate acquisitions in which debt securities are issued to finance
the acquisition of margin stock of a target company.
(b) In the first situation, the acquiring company, Company A,
controls a shell corporation that would make a tender offer for the
stock of Company B, which is margin stock (as defined in Sec. 221.2).
The shell corporation has virtually no operations, has no significant
business function other than to acquire and hold the stock of Company B,
and has substantially no assets other than the margin stock to be
acquired. To finance the tender offer, the shell corporation would issue
debt securities which, by their terms, would be unsecured. If the tender
offer is successful, the shell corporation would seek to merge with
Company B. However, the tender offer seeks to acquire fewer shares of
Company B than is necessary under state law to effect a short form
merger with Company B, which could be consummated without the approval
of shareholders or the board of directors of Company B.
(c) The purchase of the debt securities issued by the shell
corporation to finance the acquisition clearly involves purpose credit
(as defined in Sec. 221.2). In addition, such debt securities would be
purchased only by sophisticated investors in very large minimum
denominations, so that the purchasers may be lenders for purposes of
this part. See Sec. 221.3(b). Since the debt securities contain no
direct security agreement involving the margin stock, applicability of
the lending restrictions of this part turns on whether the arrangement
constitutes an extension of credit that is secured indirectly by margin
stock.
(d) As the Board has recognized, indirect security can encompass a
wide variety of arrangements between lenders and borrowers with respect
to margin stock collateral that serve to protect the lenders' interest
in assuring that a credit is repaid where the lenders do not have a
conventional direct security interest in the collateral. See Sec.
221.124. However, credit is not ``indirectly secured'' by margin stock
if the lender in good faith has not relied on the margin stock as
collateral extending or maintaining credit. See Sec. 221.2.
(e) The Board is of the view that, in the situation described in
paragraph (b) of this section, the debt securities would be presumed to
be indirectly secured by the margin stock to be acquired by the shell
acquisition vehicle. The staff has previously expressed the view that
nominally unsecured credit extended to an investment company, a
substantial portion of whose assets consist of margin stock, is
indirectly secured by the margin stock. See Federal Reserve Regulatory
Service 5-917.12. (See 12 CFR 261.10(f) for information on how to obtain
Board publications.) This opinion notes that the investment company has
substantially no assets other than margin stock to
[[Page 54]]
support indebtedness and thus credit could not be extended to such a
company in good faith without reliance on the margin stock as
collateral.
(f) The Board believes that this rationale applies to the debt
securities issued by the shell corporation described in paragraph (b) of
this section. At the time the debt securities are issued, the shell
corporation has substantially no assets to support the credit other than
the margin stock that it has acquired or intends to acquire and has no
significant business function other than to hold the stock of the target
company in order to facilitate the acquisition. Moreover, it is possible
that the shell may hold the margin stock for a significant and
indefinite period of time, if defensive measures by the target prevent
consummation of the acquisition. Because of the difficulty in predicting
the outcome of a contested takeover at the time that credit is committed
to the shell corporation, the Board believes that the purchasers of the
debt securities could not, in good faith, lend without reliance on the
margin stock as collateral. The presumption that the debt securities are
indirectly secured by margin stock would not apply if there is specific
evidence that lenders could in good faith rely on assets other than
margin stock as collateral, such as a guaranty of the debt securities by
the shell corporation's parent company or another company that has
substantial non-margin stock assets or cash flow. This presumption would
also not apply if there is a merger agreement between the acquiring and
target companies entered into at the time the commitment is made to
purchase the debt securities or in any event before loan funds are
advanced. In addition, the presumption would not apply if the obligation
of the purchasers of the debt securities to advance funds to the shell
corporation is contingent on the shell's acquisition of the minimum
number of shares necessary under applicable state law to effect a merger
between the acquiring and target companies without the approval of
either the shareholders or directors of the target company. In these two
situations where the merger will take place promptly, the Board believes
the lenders could reasonably be presumed to be relying on the assets of
the target for repayment.
(g) In addition, the Board is of the view that the debt securities
described in paragraph (b) of this section are indirectly secured by
margin stock because there is a practical restriction on the ability of
the shell corporation to dispose of the margin stock of the target
company. Indirectly secured is defined in Sec. 221.2 to include any
arrangement under which the customer's right or ability to sell, pledge,
or otherwise dispose of margin stock owned by the customer is in any way
restricted while the credit remains outstanding. The purchasers of the
debt securities issued by a shell corporation to finance a takeover
attempt clearly understand that the shell corporation intends to acquire
the margin stock of the target company in order to effect the
acquisition of that company. This understanding represents a practical
restriction on the ability of the shell corporation to dispose of the
target's margin stock and to acquire other assets with the proceeds of
the credit.
(h) In the second situation, Company C, an operating company with
substantial assets or cash flow, seeks to acquire Company D, which is
significantly larger than Company C. Company C establishes a shell
corporation that together with Company C makes a tender offer for the
shares of Company D, which is margin stock. To finance the tender offer,
the shell corporation would obtain a bank loan that complies with the
margin lending restrictions of this part and Company C would issue debt
securities that would not be directly secured by any margin stock. The
Board is of the opinion that these debt securities should not be
presumed to be indirectly secured by the margin stock of Company D,
since, as an operating business, Company C has substantial assets or
cash flow without regard to the margin stock of Company D. Any
presumption would not be appropriate because the purchasers of the debt
securities may be relying on assets other than margin stock of Company D
for repayment of the credit.
[[Page 55]]
Sec. 221.125 Credit to brokers and dealers.
(a) The National Securities Markets Improvement Act of 1996 (Pub. L.
104-290, 110 Stat. 3416) restricts the Board's margin authority by
repealing section 8(a) of the Securities Exchange Act of 1934 (the
Exchange Act) and amending section 7 of the Exchange Act (15 U.S.C. 78g)
to exclude the borrowing by a member of a national securities exchange
or a registered broker or dealer ``a substantial portion of whose
business consists of transactions with persons other than brokers or
dealers'' and borrowing by a member of a national securities exchange or
a registered broker or dealer to finance its activities as a market
maker or an underwriter. Notwithstanding this exclusion, the Board may
impose such rules and regulations if it determines they are ``necessary
or appropriate in the public interest or for the protection of
investors.''
(b) The Board has not found that it is necessary or appropriate in
the public interest or for the protection of investors to impose rules
and regulations regarding loans to brokers and dealers covered by the
National Securities Markets Improvement Act of 1996.
PART 222_FAIR CREDIT REPORTING (REGULATION V)--Table of Contents
Subpart A_General Provisions
Sec.
222.1 Purpose, scope, and effective dates.
222.2 Examples.
222.3 Definitions.
Subparts B-C [Reserved]
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.
Subparts E-H [Reserved]
Subpart I--Duties of Users of Consumer Reports Regarding Identity Theft
222.80-82 [Reserved]
222.83 Disposal of consumer information.
Appendix A to Part 222 [Reserved]
Appendix B to Part 222--Model Notices of Furnishing Negative Information
Authority: 15 U.S.C. 1681b and 1681s; Secs. 3, 214, and 217, Pub. L.
108-159, 117 Stat. 1952.
Source: 68 FR 74469, Dec. 24, 2003, unless otherwise noted.
Subpart A_General Provisions
Sec. 222.1 Purpose, scope, and effective dates.
(a) [Reserved]
(b) Scope. (1) [Reserved]
(2) Institutions covered. (i) Except as otherwise provided in this
part, the regulations in this part apply to banks that are members of
the Federal Reserve System (other than national banks), branches and
Agencies of foreign banks (other than Federal branches, Federal
Agencies, and insured State branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, organizations
operating under section 25 or 25A of the Federal Reserve Act (12 U.S.C.
601 et seq., and 611 et seq.), and bank holding companies and affiliates
of such holding companies (other than depository institutions and
consumer reporting agencies).
(ii) For purposes of Appendix B to this part, financial institutions
as defined in section 509 of the Gramm-Leach-Bliley Act (12 U.S.C.
6809), may use the model notices in Appendix B to this part to comply
with the notice requirement in section 623(a)(7) of the Fair Credit
Reporting Act (15 U.S.C. 1681s-2(a)(7)).
(c) Effective dates. The applicable provisions of the Fair and
Accurate Credit Transactions Act of 2003 (FACT Act), Pub. L. 108-159,
117 Stat. 1952, shall be effective in accordance with the following
schedule:
(1) Provisions effective December 31, 2003.
(i) Sections 151(a)(2), 212(e), 214(c), 311(b), and 711, concerning
the relation to state laws; and
(ii) Each of the provisions of the FACT Act that authorizes an
agency to issue a regulation or to take other action to implement the
applicable provision of the FACT Act or the applicable provision of the
Fair Credit Reporting Act, as amended by the FACT Act, but
[[Page 56]]
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;
(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]
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.
As used in this part, unless the context requires 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
[[Page 57]]
(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.
[70 FR 70678, Nov. 22, 2005]
Subparts B-C [Reserved]
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
[[Page 58]]
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 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
[[Page 59]]
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 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
[[Page 60]]
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 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
[[Page 61]]
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. 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.
[[Page 62]]
(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 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
[[Page 63]]
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;
(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.
Subparts E-H [Reserved]
Subpart I_Duties of Users of Consumer Reports Regarding Identity Theft
Source: 69 FR 77618, Dec. 28, 2004, unless otherwise noted.
Sec. 222.80-82 [Reserved]
Sec. 222.83 Disposal of consumer information.
(a) Definitions as used in this section. (1) You means member banks
of the Federal Reserve System (other than national banks) and their
respective operating subsidiaries, branches and agencies of foreign
banks (other than Federal branches, Federal agencies and insured State
branches of foreign banks), commercial lending companies owned or
controlled by foreign banks, and organizations operating under section
25 or 25A of the Federal Reserve Act (12 U.S.C. 601 et seq., 611 et
seq.).
(b) In general. You must properly dispose of any consumer
information that you maintain or otherwise possess in accordance with
the Interagency Guidelines Establishing Information Security Standards,
as required under sections 208.3(d) (Regulation H), 211.5(l) and
211.24(i) (Regulation K) of this chapter, to the extent that you are
covered by the scope of the Guidelines.
(c) Rule of construction. Nothing in this section shall be construed
to:
(1) Require you to maintain or destroy any record pertaining to a
consumer that is not imposed under any other law; or
(2) Alter or affect any requirement imposed under any other
provision of law to maintain or destroy such a record.
Appendix A to Part 222 [Reserved]
Appendix B to Part 222--Model Notices of Furnishing Negative Information
a. Although use of the model notices is not required, a financial
institution that is subject to section 623(a)(7) of the FCRA shall be
deemed to be in compliance with the notice requirement in section
623(a)(7) of the FCRA if the institution properly uses the model notices
in this appendix (as applicable).
b. A financial institution may use Model Notice B-1 if the
institution provides the notice prior to furnishing negative information
to a nationwide consumer reporting agency.
c. A financial institution may use Model Notice B-2 if the
institution provides the notice after furnishing negative information to
a nationwide consumer reporting agency.
d. Financial institutions may make certain changes to the language
or format of the model notices without losing the safe harbor from
liability provided by the model notices. The changes to the model
notices may not be so extensive as to affect the substance, clarity, or
meaningful sequence of the language in the model notices. Financial
institutions making such extensive revisions will lose the safe harbor
from liability that this appendix provides. Acceptable changes include,
for example,
1. Rearranging the order of the references to ``late payment(s),''
or ``missed payment(s)''
2. Pluralizing the terms ``credit bureau,'' ``credit report,'' and
``account''
3. Specifying the particular type of account on which information
may be furnished, such as ``credit card account''
4. Rearranging in Model Notice B-1 the phrases ``information about
your account'' and ``to credit bureaus'' such that it would read ``We
may report to credit bureaus information about your account.''
Model Notice B-1
We may report information about your account to credit bureaus. Late
payments, missed payments, or other defaults on your account may be
reflected in your credit report.
Model Notice B-2
We have told a credit bureau about a late payment, missed payment or
other default on your account. This information may be reflected in your
credit report.
[69 FR 33285, June 15, 2004]
[[Page 64]]
PART 223_TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION
W)--Table of Contents
Subpart A_Introduction and Definitions
Sec.
223.1 Authority, purpose, and scope.
223.2 What is an ``affiliate'' for purposes of sections 23A and 23B and
this part?
223.3 What are the meanings of the other terms used in sections 23A and
23B and this part?
Subpart B_General Provisions of Section 23A
223.11 What is the maximum amount of covered transactions that a member
bank may enter into with any single affiliate?
223.12 What is the maximum amount of covered transactions that a member
bank may enter into with all affiliates?
223.13 What safety and soundness requirement applies to covered
transactions?
223.14 What are the collateral requirements for a credit transaction
with an affiliate?
223.15 May a member bank purchase a low-quality asset from an affiliate?
223.16 What transactions by a member bank with any person are treated as
transactions with an affiliate?
Subpart C_Valuation and Timing Principles Under Section 23A
223.21 What valuation and timing principles apply to credit
transactions?
223.22 What valuation and timing principles apply to asset purchases?
223.23 What valuation and timing principles apply to purchases of and
investments in securities issued by an affiliate?
223.24 What valuation principles apply to extensions of credit secured
by affiliate securities?
Subpart D_Other Requirements Under Section 23A
223.31 How does section 23A apply to a member bank's acquisition of an
affiliate that becomes an operating subsidiary of the member
bank after the acquisition?
223.32 What rules apply to financial subsidiaries of a member bank?
223.33 What rules apply to derivative transactions?
Subpart E_Exemptions from the Provisions of Section 23A
223.41 What covered transactions are exempt from the quantitative limits
and collateral requirements?
223.42 What covered transactions are exempt from the quantitative
limits, collateral requirements, and low-quality asset
prohibition?
223.43 What are the standards under which the Board may grant additional
exemptions from the requirements of section 23A?
Subpart F_General Provisions of Section 23B
223.51 What is the market terms requirement of section 23B?
223.52 What transactions with affiliates or others must comply with
section 23B's market terms requirement?
223.53 What asset purchases are prohibited by section 23B?
223.54 What advertisements and statements are prohibited by section 23B?
223.55 What are the standards under which the Board may grant exemptions
from the requirements of section 23B?
Subpart G_Application of Sections 23A and 23B to U.S. Branches and
Agencies of Foreign Banks
223.61 How do sections 23A and 23B apply to U.S. branches and agencies
of foreign banks?
Subpart H_Miscellaneous Interpretations
223.71 How do sections 23A and 23B apply to transactions in which a
member bank purchases from one affiliate an asset relating to
another affiliate?
Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e),
1828(j), and 1468(a).
Source: 67 FR 76604, Dec. 12, 2002, unless otherwise noted.
Subpart A_Introduction and Definitions
Sec. 223.1 Authority, purpose, and scope.
(a) Authority. The Board of Governors of the Federal Reserve System
(Board) has issued this part (Regulation W) under the authority of
sections 23A(f) and 23B(e) of the Federal Reserve Act (12 U.S.C.
371c(f), 371c-1(e)).
(b) Purpose. Sections 23A and 23B of the Federal Reserve Act (12
U.S.C. 371c, 371c-1) establish certain quantitative limits and other
prudential requirements for loans, purchases of assets, and certain
other transactions between a member bank and its affiliates. This
regulation implements sections 23A and 23B by defining terms used in the
[[Page 65]]
statute, explaining the statute's requirements, and exempting certain
transactions.
(c) Scope. Sections 23A and 23B and this regulation apply by their
terms to ``member banks''--that is, any national bank, State bank, trust
company, or other institution that is a member of the Federal Reserve
System. In addition, the Federal Deposit Insurance Act (12 U.S.C.
1828(j)) applies sections 23A and 23B to insured State nonmember banks
in the same manner and to the same extent as if they were member banks.
The Home Owners' Loan Act (12 U.S.C. 1468(a)) also applies sections 23A
and 23B to insured savings associations in the same manner and to the
same extent as if they were member banks (and imposes two additional
restrictions).
Sec. 223.2 What is an ``affiliate'' for purposes of sections 23A and 23B and
this part?
(a) For purposes of this part and except as provided in paragraphs
(b) and (c) of this section, ``affiliate'' with respect to a member bank
means:
(1) Parent companies. Any company that controls the member bank;
(2) Companies under common control by a parent company. Any company,
including any subsidiary of the member bank, that is controlled by a
company that controls the member bank;
(3) Companies under other common control. Any company, including any
subsidiary of the member bank, that is controlled, directly or
indirectly, by trust or otherwise, by or for the benefit of shareholders
who beneficially or otherwise control, directly or indirectly, by trust
or otherwise, the member bank or any company that controls the member
bank;
(4) Companies with interlocking directorates. Any company in which a
majority of its directors, trustees, or general partners (or individuals
exercising similar functions) constitute a majority of the persons
holding any such office with the member bank or any company that
controls the member bank;
(5) Sponsored and advised companies. Any company, including a real
estate investment trust, that is sponsored and advised on a contractual
basis by the 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
[[Page 66]]
(C) A person that is not affiliated or associated with the holding
company owns or controls more than 50 percent of the voting shares of
the company, and officers and employees of the holding company do not
constitute a majority of the directors or trustees (or individuals
exercising similar functions) of the company.
(iv) Application of rule to private equity funds. A holding company
will not be deemed to own or control the equity capital of a company for
purposes of paragraph (a)(9)(i) of this section solely by virtue of an
investment made by the holding company in a private equity fund (as
defined in the merchant banking subpart of the Board's Regulation Y (12
CFR 225.173(a))) that owns or controls the equity capital of the company
unless the holding company controls the private equity fund under 12 CFR
225.173(d)(4).
(v) Definition. For purposes of this paragraph (a)(9), ``holding
company'' with respect to a member bank means a company that controls
the member bank, or a company that is controlled by shareholders that
control the member bank, and all subsidiaries of the company (including
any depository institution that is a subsidiary of the company).
(10) Partnerships associated with the member bank or an affiliate.
Any partnership for which the member bank or any affiliate of the member
bank serves as a general partner or for which the member bank or any
affiliate of the member bank causes any director, officer, or employee
of the member bank or affiliate to serve as a general partner;
(11) Subsidiaries of affiliates. Any subsidiary of a company
described in paragraphs (a)(1) through (10) of this section; and
(12) Other companies. Any company that the Board determines by
regulation or order, or that the appropriate Federal banking agency for
the member bank determines by order, to have a relationship with the
member bank, or any affiliate of the member bank, such that covered
transactions by the member bank with that company may be affected by the
relationship to the detriment of the member bank.
(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.
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Sec. 223.3 What are the meanings of the other terms used in sections 23A and
23B and this part?
For purposes of this part:
(a) Aggregate amount of covered transactions means the amount of the
covered transaction about to be engaged in added to the current amount
of all outstanding covered transactions.
(b) Appropriate Federal banking agency with respect to a member bank
or other depository institution has the same meaning as in section 3 of
the Federal Deposit Insurance Act (12 U.S.C. 1813).
(c) ``Bank holding company'' has the same meaning as in 12 CFR
225.2.
(d) ``Capital stock and surplus'' means the sum of:
(1) A member bank's tier 1 and tier 2 capital under the risk-based
capital guidelines of the appropriate Federal banking agency, based on
the member bank's most recent consolidated Report of Condition and
Income filed under 12 U.S.C. 1817(a)(3);
(2) The balance of a member bank's allowance for loan and lease
losses not included in its tier 2 capital under the risk-based capital
guidelines of the appropriate Federal banking agency, based on the
member bank's most recent consolidated Report of Condition and Income
filed under 12 U.S.C. 1817(a)(3); and
(3) The amount of any investment by a member bank in a financial
subsidiary that counts as a covered transaction and is required to be
deducted from the member bank's capital for regulatory capital purposes.
(e) Carrying value with respect to a security means (unless
otherwise provided) the value of the security on the financial
statements of the member bank, determined in accordance with GAAP.
(f) Company means a corporation, partnership, limited liability
company, business trust, association, or similar organization and,
unless specifically excluded, includes a member bank and a depository
institution.
(g) Control--(1) In general. ``Control'' by a company or shareholder
over another company means that:
(i) The company or shareholder, directly or indirectly, or acting
through 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;
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(2) A purchase of, or an investment in, a security issued by the
affiliate;
(3) A purchase of an asset from the affiliate, including an asset
subject to recourse or an agreement to repurchase, except such purchases
of real and personal property as may be specifically exempted by the
Board by order or regulation;
(4) The acceptance of a security issued by the affiliate as
collateral for an extension of credit to any person or company; and
(5) The issuance of a guarantee, acceptance, or letter of credit,
including an endorsement or standby letter of credit, on behalf of the
affiliate, a confirmation of a letter of credit issued by the affiliate,
and a cross-affiliate netting arrangement.
(i) Credit transaction with an affiliate means:
(1) An extension of credit to the affiliate;
(2) An issuance of a guarantee, acceptance, or letter of credit,
including an endorsement or standby letter of credit, on behalf of the
affiliate and a confirmation of a letter of credit issued by the
affiliate; and
(3) A cross-affiliate netting arrangement.
(j) Cross-affiliate netting arrangement means an arrangement among a
member bank, one or more affiliates of the member bank, and one or more
nonaffiliates of the member bank in which:
(1) A nonaffiliate is permitted to deduct any obligations of an
affiliate of the member bank to the nonaffiliate when settling the
nonaffiliate's obligations to the member bank; or
(2) The member bank is permitted or required to add any obligations
of its affiliate to a nonaffiliate when determining the member bank's
obligations to the nonaffiliate.
(k) ``Depository institution'' means, unless otherwise noted, an
insured depository institution (as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813)), but does not include any branch
of a foreign bank. For purposes of this definition, an operating
subsidiary of a depository institution is treated as part of the
depository institution.
(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
[[Page 69]]
that is conducted under terms and conditions that differ from those that
govern the conduct of such activity by national banks; and
(ii) Is not a subsidiary that a national bank is specifically
authorized to own or control by the express terms of a Federal statute
(other than 12 U.S.C. 24a), and not by implication or interpretation.
(2) Exceptions. ``Financial subsidiary'' does not include:
(i) A subsidiary of a member bank that is considered a financial
subsidiary under paragraph (p)(1) of this section solely because the
subsidiary engages in the sale of insurance as agent or broker in a
manner that is not permitted for national banks; and
(ii) A subsidiary of a State bank (other than a subsidiary described
in section 46(a) of the Federal Deposit Insurance Act (12 U.S.C.
1831w(a))) that is considered a financial subsidiary under paragraph
(p)(1) of this section solely because the subsidiary engages in one or
more of the following activities:
(A) An activity that the State bank may engage in directly under
applicable Federal and State law and that is conducted under the same
terms and conditions that govern the conduct of the activity by the
State bank; and
(B) An activity that the subsidiary was authorized by applicable
Federal and State law to engage in prior to December 12, 2002, and that
was lawfully engaged in by the subsidiary on that date.
(3) Subsidiaries of financial subsidiaries. If a company is a
financial subsidiary under paragraphs (p)(1) and (p)(2) of this section,
any subsidiary of such a company is also a financial subsidiary.
(q) ``Foreign bank'' and an ``agency,'' ``branch,'' or ``commercial
lending company'' of a foreign bank have the same meanings as in section
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
(r) ``GAAP'' means U.S. generally accepted accounting principles.
(s) ``General purpose credit card'' has the meaning specified in
paragraph (c)(4)(ii) of Sec. 223.16.
(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
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States or its agencies'' includes those obligations listed in 12 CFR
201.108(b) and any additional obligations as determined by the Board.
The term does not include Federal Housing Administration or Veterans
Administration loans.
(aa) ``Operating subsidiary'' with respect to a member bank or other
depository institution means any subsidiary of the member bank or
depository institution other than a subsidiary described in paragraphs
(b)(1)(i) through (v) of Sec. 223.2.
(bb) ``Person'' means an individual, company, trust, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization, or
any other form of entity.
(cc) ``Principal underwriter'' has the meaning specified in
paragraph (c)(1) of Sec. 223.53.
(dd) ``Purchase of an asset'' by a member bank from an affiliate
means the acquisition by a member bank of an asset from an affiliate in
exchange for cash or any other consideration, including an assumption of
liabilities. The merger of an affiliate into a member bank is a purchase
of assets by the member bank from an affiliate if the member bank
assumes any liabilities of the affiliate or pays any other form of
consideration in the transaction.
(ee) Riskless principal. A company is ``acting exclusively as a
riskless principal'' if, after receiving an order to buy (or sell) a
security from a customer, the company purchases (or sells) the security
in the secondary market for its own account to offset a contemporaneous
sale to (or purchase from) the customer.
(ff) ``Securities'' means stocks, bonds, debentures, notes, or
similar obligations (including commercial paper).
(gg) ``Securities affiliate'' with respect to a member bank means:
(1) An affiliate of the member bank that is registered with the
Securities and Exchange Commission as a broker or dealer; or
(2) Any other securities broker or dealer affiliate of a member bank
that is approved by the Board.
(hh) ``State bank'' has the same meaning as in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813).
(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
[[Page 71]]
that each of its credit transactions with an affiliate is secured by the
amount of collateral required by paragraph (b) of this section at the
time of the transaction.
(b) Amount of collateral required--(1) The rule. A credit
transaction described in paragraph (a) of this section must be secured
by collateral having a market value equal to at least:
(i) 100 percent of the amount of the transaction, if the collateral
is:
(A) Obligations of the United States or its agencies;
(B) Obligations fully guaranteed by the United States or its
agencies as to principal and interest;
(C) Notes, drafts, bills of exchange, or bankers' acceptances that
are eligible for rediscount or purchase by a Federal Reserve Bank; or
(D) A segregated, earmarked deposit account with the member bank
that is for the sole purpose of securing credit transactions between the
member bank and its affiliates and is identified as such;
(ii) 110 percent of the amount of the transaction, if the collateral
is obligations of any State or political subdivision of any State;
(iii) 120 percent of the amount of the transaction, if the
collateral is other debt instruments, including loans and other
receivables; or
(iv) 130 percent of the amount of the transaction, if the collateral
is stock, leases, or other real or personal property.
(2) Example. A member bank makes a $1,000 loan to an affiliate. The
affiliate posts as collateral for the loan $500 in U.S. Treasury
securities, $480 in corporate debt securities, and $130 in real estate.
The loan satisfies the collateral requirements of this section because
$500 of the loan is 100 percent secured by obligations of the United
States, $400 of the loan is 120 percent secured by debt instruments, and
$100 of the loan is 130 percent secured by real estate.
(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.
[[Page 72]]
(f) Inapplicability of the collateral requirements to certain
transactions. The collateral requirements of this section do not apply
to the following transactions.
(1) Acceptances. An acceptance that already is fully secured either
by attached documents or by other property that is involved in the
transaction and has an ascertainable market value.
(2) The unused portion of certain extensions of credit. The unused
portion of an extension of credit to an affiliate as long as the member
bank does not have any legal obligation to advance additional funds
under the extension of credit until the affiliate provides the amount of
collateral required by paragraph (b) of this section with respect to the
entire used portion (including the amount of the requested advance) of
the extension of credit.
(3) Purchases of affiliate debt securities in the secondary market.
The purchase of a debt security issued by an affiliate as long as the
member bank purchases the debt security from a nonaffiliate in a bona
fide secondary market transaction.
Sec. 223.15 May a member bank purchase a low-quality asset from an
affiliate?
(a) In general. A member bank may not purchase a low-quality asset
from an affiliate unless, pursuant to an independent credit evaluation,
the member bank had committed itself to purchase the asset before the
time the asset was acquired by the affiliate.
(b) Exemption for renewals of loan participations involving problem
loans. The prohibition contained in paragraph (a) of this section does
not apply to the renewal of, or extension of additional credit with
respect to, a member bank's participation in a loan to a nonaffiliate
that was originated by an affiliate if:
(1) The loan was not a low-quality asset at the time the member bank
purchased its participation;
(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:
[[Page 73]]
(i) The proceeds of the extension of credit are used to purchase an
asset through an affiliate of the member bank, and the affiliate is
acting exclusively as an agent or broker in the transaction; and
(ii) The asset purchased by the nonaffiliate is not issued,
underwritten, or sold as principal by any affiliate of the member bank.
(2) The interpretation set forth in paragraph (b)(1) of this section
does not apply to the extent of any agency fee, brokerage commission, or
other compensation received by an affiliate from the proceeds of the
extension of credit. The receipt of such compensation may qualify,
however, for the exemption contained in paragraph (c)(2) of this
section.
(c) Exemptions. Notwithstanding paragraph (a) of this section, the
following transactions are not subject to the quantitative limits of
Sec. Sec. 223.11 and 223.12 or the collateral requirements of Sec.
223.14. The transactions are, however, subject to the safety and
soundness requirement of Sec. 223.13 and the market terms requirement
and other provisions of subpart F (implementing section 23B).
(1) Certain riskless principal transactions. An extension of credit
by a member bank to a nonaffiliate, if:
(i) The proceeds of the extension of credit are used to purchase a
security through a securities affiliate of the member bank, and the
securities affiliate is acting exclusively as a riskless principal in
the transaction;
(ii) The security purchased by the nonaffiliate is not issued,
underwritten, or sold as principal (other than as riskless principal) by
any affiliate of the member bank; and
(iii) Any riskless principal mark-up or other compensation received
by the securities affiliate from the proceeds of the extension of credit
meets the market terms standard set forth in paragraph (c)(2) of this
section.
(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
[[Page 74]]
(C) The member bank presents information to the Board that
demonstrates, to the Board's satisfaction, that less than 25 percent of
the total value of products and services purchased with the card by all
cardholders are and would be purchases of products and services from one
or more affiliates of the member bank.
(iii) Calculating compliance. To determine whether a credit card
qualifies as a general purpose credit card under the standard set forth
in paragraph (c)(4)(ii)(A) of this section, a member bank must compute
compliance on a monthly basis, based on cardholder purchases that were
financed by the credit card during the preceding 12 calendar months. If
a credit card has qualified as a general purpose credit card for 3
consecutive months but then ceases to qualify in the following month,
the member bank may continue to treat the credit card as a general
purpose credit card for such month and three additional months (or such
longer period as may be permitted by the Board).
(iv) Example of calculating compliance with the 25 percent test. A
member bank seeks to qualify a credit card as a general purpose credit
card under paragraph (c)(4)(ii)(A) of this section. The member bank
assesses its compliance under paragraph (c)(4)(iii) of this section on
the 15th day of every month (for the preceding 12 calendar months). The
credit card qualifies as a general purpose credit card for at least
three consecutive months. On June 15, 2005, however, the member bank
determines that, for the 12-calendar-month period from June 1, 2004,
through May 31, 2005, 27 percent of the total value of products and
services purchased with the card by all cardholders were purchases of
products and services from an affiliate of the member bank. Unless the
credit card returns to compliance with the 25 percent limit by the 12-
calendar-month period ending August 31, 2005, 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
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member bank must value the covered transaction at $300 throughout the
life of the facility.
(iii) Guarantee. A member bank has issued a guarantee to a
nonaffiliate on behalf of an affiliate under which the member bank would
be obligated to pay the nonaffiliate $500 if the affiliate defaults on
an issuance of debt securities. The member bank must value the guarantee
at $500 throughout the life of the guarantee.
(iv) Acquisition of a loan to an affiliate. A member bank purchases
from a nonaffiliate a fixed-rate loan to an affiliate. The loan has an
outstanding principal amount of $100 but, due to movements in the
general level of interest rates since the time of the loan's
origination, the member bank is able to purchase the loan for $90. The
member bank initially must value the credit transaction at $90 (and must
ensure that the credit transaction complies with the collateral
requirements of Sec. 223.14 at the time of its acquisition of the
loan).
(b) Timing--(1) In general. A member bank engages in a credit
transaction with an affiliate at the time during the day that:
(i) The member bank becomes legally obligated to make an extension
of credit to, issue a guarantee, acceptance, or letter of credit on
behalf of, or confirm a letter of credit issued by, an affiliate;
(ii) The member bank enters into a cross-affiliate netting
arrangement; or
(iii) The member bank acquires an extension of credit to, or
guarantee, acceptance, or letter of credit issued on behalf of, an
affiliate.
(2) Credit transactions by a member bank with a nonaffiliate that
becomes an affiliate of the member bank.
(i) In general. A credit transaction with a nonaffiliate becomes a
covered transaction at the time that the nonaffiliate becomes an
affiliate of the member bank. The member bank must 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
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Sec. 223.14 promptly after the stock acquisition.
Sec. 223.22 What valuation and timing principles apply to asset purchases?
(a) Valuation--(1) In general. Except as provided in paragraph
(a)(2) of this section, a purchase of an asset by a member bank from an
affiliate must be valued initially at the total amount of consideration
given (including liabilities assumed) by the member bank in exchange for
the asset. The value of the covered transaction after the purchase may
be reduced to reflect amortization or depreciation of the asset, to the
extent that such reductions are consistent with GAAP.
(2) Exceptions. (i) Purchase of an extension of credit to an
affiliate. A purchase from an affiliate of an extension of credit to an
affiliate must be valued in accordance with Sec. 223.21, unless the
note or obligation evidencing the extension of credit is a security
issued by an affiliate (in which case the transaction must be valued in
accordance with Sec. 223.23).
(ii) Purchase of a security issued by an affiliate. A purchase from
an affiliate of a security issued by an affiliate must be valued in
accordance with Sec. 223.23.
(iii) Transfer of a subsidiary. A transfer to a member bank of
securities issued by an affiliate that is treated as a purchase of
assets from an affiliate under Sec. 223.31 must be valued in accordance
with paragraph (b) of Sec. 223.31.
(iv) Purchase of a line of credit. A purchase from an affiliate of a
line of credit, revolving credit facility, or other similar credit
arrangement for a nonaffiliate must be valued initially at the total
amount of consideration given by the member bank in exchange for the
asset plus any additional amount that the member bank could be required
to provide to the borrower under the terms of the credit arrangement.
(b) Timing--(1) In general. A purchase of an asset from an affiliate
remains a 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
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security, reduced to reflect amortization of the security to the extent
consistent with GAAP; or
(ii) The carrying value of the security.
(2) Examples. The following are examples of how to value a member
bank's purchase of or investment in securities issued by an affiliate
(other than a financial subsidiary of the member bank).
(i) Purchase of the debt securities of an affiliate. The parent
holding company of a member bank owns 100 percent of the shares of a
mortgage company. The member bank purchases debt securities issued by
the mortgage company for $600. The initial carrying value of the
securities is $600. The member bank initially must value the investment
at $600.
(ii) Purchase of the shares of an affiliate. The parent holding
company of a member bank owns 51 percent of the shares of a mortgage
company. The member bank purchases an additional 30 percent of the
shares of the mortgage company from a third party for $100. The initial
carrying value of the shares is $100. The member bank initially must
value the investment at $100. Going forward, if the member bank's
carrying value of the shares declines to $40, the member bank must
continue to value the investment at $100.
(iii) Contribution of the shares of an affiliate. The parent holding
company of a member bank owns 100 percent of the shares of a mortgage
company and contributes 30 percent of the shares to the member bank. The
member bank gives no consideration in exchange for the shares. If the
initial carrying value of the shares is $300, then the member 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
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be used to purchase the eligible affiliated mutual fund securities
collateral or will otherwise be used for the benefit of or transferred
to an affiliate of the member bank.
(2) Definition. ``Eligible affiliated mutual fund securities'' with
respect to a member bank are securities issued by an affiliate of the
member bank that is an open-end investment company registered with the
Securities and Exchange Commission under the Investment Company Act of
1940 (15 U.S.C. 80a-1 et seq.), if:
(i) The securities issued by the investment company:
(A) Meet the market quotation standard contained in paragraph (e) of
Sec. 223.42;
(B) Meet the standards set forth in paragraphs (f)(1) and (5) of
Sec. 223.42; or
(C) Have closing prices that are made public through a mutual fund
``supermarket'' website maintained by an unaffiliated securities broker-
dealer or mutual fund distributor; and
(ii) The member bank and its affiliates do not own or control in the
aggregate more than 5 percent of any class of voting securities or of
the equity capital of the investment company (excluding securities held
by the member bank or an affiliate in good faith in a fiduciary
capacity, unless the member bank or affiliate holds the securities for
the benefit of the member bank or affiliate, or the shareholders,
employees, or subsidiaries of the member bank or affiliate).
(3) Example. A member bank proposes to lend $100 to a nonaffiliate
secured exclusively by eligible affiliated mutual fund securities. The
member bank knows that the nonaffiliate intends to use all the loan
proceeds to purchase 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
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mortgage company has total assets of $300,000 and total liabilities of
$100,000. The mortgage company's assets do not include any loans to an
affiliate of the member bank or any other asset that would represent a
separate covered transaction for the member bank upon consummation of
the share transfer. As a result of the transaction, the mortgage company
becomes an operating subsidiary of the member bank. The transaction is
treated as a purchase of the assets of the mortgage company by the
member bank from an affiliate under paragraph (a) of this section. The
member bank initially must value the transaction at $100,000, the total
amount of the liabilities of the mortgage company. Going forward, if the
member bank pays off the liabilities, the member bank must continue to
value the covered transaction at $100,000. If the member bank, however,
sells $15,000 of the transferred assets of the mortgage company or if
$15,000 of the transferred assets amortize, the member bank may value
the covered transaction at $85,000.
(d) Exemption for step transactions. A transaction described in
paragraph (a) of this section is exempt from the requirements of this
regulation (other than the safety and soundness requirement of Sec.
223.13 and the market terms requirement of Sec. 223.51) if:
(1) The member bank acquires the securities issued by the
transferred company within one business day (or such longer period, up
to three months, as may be permitted by the member bank's appropriate
Federal banking agency) after the company becomes an affiliate of the
member bank;
(2) The member bank acquires all the securities of the transferred
company that were transferred in connection with the transaction that
made the 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
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security, reduced to reflect amortization of the security to the extent
consistent with GAAP; and
(ii) The carrying value of the security (adjusted so as not to
reflect the member bank's pro rata portion of any earnings retained or
losses incurred by the financial subsidiary after the member bank's
acquisition of the security).
(2) Carrying value of an investment in a consolidated financial
subsidiary. If a financial subsidiary is consolidated with its parent
member bank under GAAP, the carrying value of the member bank's
investment in securities issued by the financial subsidiary shall be
equal to the carrying value of the securities on parent-only financial
statements of the member bank, determined in accordance with GAAP
(adjusted so as not to reflect the member bank's pro rata portion of any
earnings retained or losses incurred by the financial subsidiary after
the member bank's acquisition of the securities).
(3) Examples of the valuation of purchases of and investments in the
securities of a financial subsidiary. The following are examples of how
a member bank must value its purchase of or investment in securities
issued by a financial subsidiary of the member bank. Each example
involves a securities underwriter that becomes a financial subsidiary of
the member bank after the transactions described below.
(i) Initial valuation. (A) Direct acquisition by a member bank. A
member bank pays $500 to acquire 100 percent of the shares of a
securities underwriter. The initial carrying value of the shares on the
member bank's parent-only GAAP financial statements is $500. The member
bank initially must value the investment at $500.
(B) Contribution of a financial subsidiary to a member bank. The
parent 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.
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Sec. 223.33 What rules apply to derivative transactions?
(a) Market terms requirement. Derivative transactions between a
member bank and its affiliates (other than depository institutions) are
subject to the market terms requirement of Sec. 223.51.
(b) Policies and procedures. A member bank must establish and
maintain policies and procedures reasonably designed to manage the
credit exposure arising from its derivative transactions with affiliates
in a safe and sound manner. The policies and procedures must at a
minimum provide for:
(1) Monitoring and controlling the credit exposure arising at any
one time from the member bank's derivative transactions with each
affiliate and all affiliates in the aggregate (through, among other
things, imposing appropriate credit limits, mark-to-market requirements,
and collateral requirements); and
(2) Ensuring that the member bank's derivative transactions with
affiliates comply with the market terms requirement of Sec. 223.51.
(c) Credit derivatives. A credit derivative between a member bank
and a nonaffiliate in which the member bank provides credit protection
to the nonaffiliate with respect to an obligation of an affiliate of the
member bank is a guarantee by a member bank on behalf of an affiliate
for purposes of this regulation. Such derivatives would include:
(1) An agreement under which the member bank, in exchange for a fee,
agrees to compensate the nonaffiliate for any default of the underlying
obligation of the affiliate; and
(2) An agreement under which the member bank, in exchange for
payments based on the total return of the underlying obligation of the
affiliate, agrees to pay the nonaffiliate a spread 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:
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(i) To make quarterly cash contributions to the member bank, for a
two-year period following the member bank's purchase, equal to the book
value plus any write-downs taken by the member bank, of any transferred
assets that have become low-quality assets during the quarter; or
(ii) To repurchase, on a quarterly basis for a two-year period
following the member bank's purchase, at a price equal to the book value
plus any write-downs taken by the member bank, any transferred assets
that have become low-quality assets during the quarter;
(4) The member bank's top-tier holding company complies with the
commitment made under paragraph (d)(3) of this section;
(5) A majority of the member bank's directors reviews and approves
the transaction before consummation;
(6) The value of the covered transaction (as computed under this
part), when aggregated with the value of any other covered transactions
(as computed under this part) engaged in by the member bank under this
exemption during the preceding 12 calendar months, represents less than
10 percent of the member bank's capital stock and surplus (or such
higher amount, up to 25 percent of the member bank's capital stock and
surplus, as may be permitted by the member bank's appropriate Federal
banking agency after conducting a review of the member bank's financial
condition and the quality of the assets transferred to the member bank);
and
(7) The holding company and all its subsidiary member banks and
other subsidiary depository institutions are well capitalized and well
managed and would remain well capitalized upon consummation of the
transaction.
Sec. 223.42 What covered transactions are exempt from the quantitative
limits, collateral requirements, and low-quality asset prohibition?
The following transactions are not subject to the quantitative
limits of 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.
[[Page 83]]
(f) Purchasing certain marketable securities. Purchasing a security
from a securities affiliate, if:
(1) The security has a ``ready market,'' as defined in 17 CFR
240.15c3-1(c)(11)(i);
(2) The security is eligible for a State member bank to purchase
directly, subject to the same terms and conditions that govern the
investment activities of a State member bank, and the member bank
records the transaction as a purchase of a security for purposes of its
Call Report, consistent with the requirements for a State member bank;
(3) The security is not a low-quality asset;
(4) The member bank does not purchase the security during an
underwriting, or within 30 days of an underwriting, if an affiliate is
an underwriter of the security, unless the security is purchased as part
of an issue of obligations of, or obligations fully guaranteed as to
principal and interest by, the United States or its agencies;
(5) The security's price is quoted routinely on an unaffiliated
electronic service that provides indicative data from real-time
financial networks, provided that:
(i) The price paid by the member bank is at or below the current
market quotation for the security; and
(ii) The size of the transaction executed by the member bank does
not cast material doubt on the appropriateness of relying on the current
market quotation for the security; and
(6) The member bank maintains, for a period of two years, records
and supporting information that are sufficient to enable the appropriate
Federal banking agency to ensure the member bank's compliance with the
terms of this exemption.
(g) Purchasing municipal securities. Purchasing a municipal security
from a securities affiliate if:
(1) The security is rated by a nationally recognized statistical
rating organization or is part of an issue of securities that does not
exceed $25 million;
(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
[[Page 84]]
in writing in connection with its review of the formation of the member
bank.
(j) Transactions approved under the Bank Merger Act. Any merger or
consolidation between a member bank and an affiliated depository
institution or U.S. branch or agency of a foreign bank, or any
acquisition of assets or assumption of deposit liabilities by a member
bank from an affiliated depository institution or U.S. branch or agency
of a foreign bank, if the transaction has been approved by the
responsible Federal banking agency pursuant to the Bank Merger Act (12
U.S.C. 1828(c)).
(k) Purchasing an extension of credit from an affiliate. Purchasing
from an affiliate, on a nonrecourse basis, an extension of credit, if:
(1) The extension of credit was originated by the affiliate;
(2) The member bank makes an independent evaluation of the
creditworthiness of the borrower before the affiliate makes or commits
to make the extension of credit;
(3) The member bank commits to purchase the extension of credit
before the affiliate makes or commits to make the extension of credit;
(4) The member bank does not make a blanket advance commitment to
purchase extensions of credit from the affiliate; and
(5) The dollar amount of the extension of credit, when aggregated
with the dollar amount of all other extensions of credit purchased from
the affiliate during the preceding 12 calendar months by the member bank
and its depository institution affiliates, does not represent more than
50 percent (or such lower percent as is imposed by the member bank's
appropriate Federal banking agency) of the dollar amount of extensions
of credit originated by the affiliate during the preceding 12 calendar
months.
(l) Intraday extensions of credit--(1) In general. An intraday
extension of credit to an affiliate, if the member bank:
(i) Has established and maintains policies and procedures reasonably
designed to manage the credit exposure arising from the member bank's
intraday extensions of credit to affiliates in a safe and sound manner,
including policies and procedures for:
(A) Monitoring and controlling the credit exposure arising at any
one time from the member bank's intraday extensions of credit to each
affiliate and all affiliates in the aggregate; and
(B) Ensuring that any intraday extension of credit by the member
bank to an affiliate complies with the market terms requirement of Sec.
223.51;
(ii) Has no reason to believe that the affiliate will have
difficulty repaying the extension of credit in accordance with its
terms; and
(iii) Ceases to treat any such extension of credit (regardless of
jurisdiction) as an intraday extension of credit at the end of the
member bank's business day in the United States.
(2) Definition. Intraday extension of credit by a member bank to an
affiliate means an extension of credit by a member bank to an affiliate
that the member bank expects to be repaid, sold, or terminated, or to
qualify for a complete exemption under this regulation, by the end of
its business day in the United States.
(m) Riskless principal transactions. Purchasing a security from a
securities affiliate of the member bank if:
(1) The member bank or the securities affiliate is acting
exclusively as a riskless principal in the transaction; and
(2) The security purchased is not issued, underwritten, or sold as
principal (other than as riskless principal) by any affiliate of the
member bank.
Sec. 223.43 What are the standards under which the Board may grant
additional exemptions from the requirements of section 23A?
(a) The standards. The Board may, at its discretion, by regulation
or order, exempt transactions or relationships from the requirements of
section 23A and subparts B, C, and D of this part if it finds such
exemptions to be in the public interest and consistent with the purposes
of section 23A.
(b) Procedure. A member bank may request an exemption from the
requirements of section 23A and subparts B, C, and D of this part by
submitting a written request to the General Counsel of the Board. Such a
request must:
[[Page 85]]
(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
(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
[[Page 86]]
(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 issued by an affiliate,
or entering into a cross-affiliate netting arrangement, to the extent
such transaction satisfies the quantitative limits of Sec. Sec. 223.11
and 223.12 and the collateral requirements of Sec. 223.14, and is
otherwise permitted under this regulation; or
(2) Making reference to such a guarantee, acceptance, letter of
credit, or cross-affiliate netting arrangement if otherwise required by
law.
Sec. 223.55 What are the standards under which the Board may grant
exemptions from the requirements of section 23B?
The Board may prescribe regulations to exempt transactions or
relationships from the requirements of section 23B and subpart F of this
part if it finds such exemptions to be in the public interest and
consistent with the purposes of section 23B.
Subpart G_Application of Sections 23A and 23B to U.S. Branches and
Agencies of Foreign Banks
Sec. 223.61 How do sections 23A and 23B apply to U.S. branches and agencies
of foreign banks?
(a) Applicability of sections 23A and 23B to foreign banks engaged
in underwriting insurance, underwriting or dealing in securities,
merchant banking, or insurance company investment in the United States.
Except as provided in this subpart, sections 23A and 23B of the Federal
Reserve Act and the provisions of this regulation apply to each U.S.
branch, agency, or commercial lending company of a foreign bank in the
same manner and to the same extent as if the branch, agency, or
commercial lending company were a member bank.
(b) Affiliate defined. For purposes of this subpart, any company
that would be an affiliate of a U.S. branch, agency, or commercial
lending company of a foreign bank if such branch, agency, or commercial
lending company were a member bank is an affiliate of the branch,
agency, or commercial lending company if the company also is:
(1) Directly engaged in the United States in any of the following
activities:
[[Page 87]]
(i) Insurance underwriting pursuant to section 4(k)(4)(B) of the
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(B));
(ii) Securities underwriting, dealing, or market making pursuant to
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C.
1843(k)(4)(E));
(iii) Merchant banking activities pursuant to section 4(k)(4)(H) of
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) (but only to the
extent that the proceeds of the transaction are used for the purpose of
funding the affiliate's merchant banking activities);
(iv) Insurance company investment activities pursuant to section
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I)); or
(v) Any other activity designated by the Board;
(2) A portfolio company (as defined in the merchant banking subpart
of Regulation Y (12 CFR 225.177(c))) controlled by the foreign bank or
an affiliate of the foreign bank or a company that would be an affiliate
of the branch, agency, or commercial lending company of the foreign bank
under paragraph (a)(9) of Sec. 223.2 if such branch, agency, or
commercial lending company were a member bank; or
(3) A subsidiary of an affiliate described in paragraph (b)(1) or
(2) of this section.
(c) Capital stock and surplus. For purposes of this subpart, the
``capital stock and surplus'' of a U.S. branch, agency, or commercial
lending company of a foreign bank will be determined by reference to the
capital of the foreign bank as calculated under its home country capital
standards.
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
[[Page 88]]
an affiliate that is not a sister bank (even if the extension of credit
was purchased from a sister bank).
PART 224_BORROWERS OF SECURITIES CREDIT (REGULATION X)--Table of Contents
Sec.
224.1 Authority, purpose, and scope.
224.2 Definitions.
224.3 Margin regulations to be applied by nonexempted borrowers.
Authority: 15 U.S.C. 78g.
Source: Reg. X, 48 FR 56572, Dec. 22, 1983, unless otherwise noted.
Editorial Note: See the List of CFR Sections Affected, which appears
in the Finding Aids section of the printed volume and on GPO Access, for
FR citations to Part 224 OTC Margin Stocks changes.
Sec. 224.1 Authority, purpose, and scope.
(a) Authority and purpose. Regulation X (this part) is issued by the
Board of Governors of the Federal Reserve System (the Board) under the
Securities Exchange Act of 1934, as amended (the Act) (15 U.S.C. 78a et
seq.). This part implements section 7(f) of the Act (15 U.S.C. 78g(f)),
the purpose of which is to require that credit obtained within or
outside the United States complies with the limitations of the Board's
Margin Regulations T and U (12 CFR parts 220 and 221, respectively).
(b) Scope and exemptions. The Act and this part apply the Board's
margin regulations to United States persons and foreign persons
controlled by or acting on behalf of or in conjunction with United
States persons (hereinafter borrowers), who obtain credit outside the
United States to purchase or carry United States securities, or within
the United States to purchase or carry any securities (both types of
credit are hereinafter referred to as purpose credit). The following
borrowers are exempt from the Act and this part:
(1) Any borrower who obtains purpose credit within the United
States, unless the borrower willfully causes the credit to be extended
in contravention of Regulations T or U.
(2) Any borrower whose permanent residence is outside the United
States and who does not obtain or have outstanding, during any calendar
year, a total of more than $100,000 in purpose credit obtained outside
the United States; and
(3) Any borrower who is exempt by Order upon terms and conditions
set by the Board.
[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839,
Jan. 16, 1998]
Sec. 224.2 Definitions.
The terms used in this part have the meanings given to them in
sections 3(a) and 7(f) of the Act, and in Regulations T and U. Section
7(f) of the Act contains the following definitions:
(a) United States person includes a person which is organized or
exists under the laws of any State or, in the case of a natural person,
a citizen or resident of the United States; a domestic estate; or a
trust in which one or more of the foregoing persons has a cumulative
direct or indirect beneficial interest in excess of 50 per centum of the
valve of the trust.
(b) United States security means a security (other than an exempted
security) issued by a person incorporated under the laws of any State,
or whose principal place of business is within a State.
(c) Foreign person controlled by a United States person includes any
noncorporate entity in which United States persons directly or
indirectly have more than a 50 per centum beneficial interest, and any
corporation in which one or more United States persons, directly or
indirectly, own stock possessing more than 50 per centum of the total
combined voting power of all classes of stock entitled to vote, or more
than 50 per centum of the total value of shares of all classes of stock.
[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839,
Jan. 16, 1998]
Sec. 224.3 Margin regulations to be applied by nonexempted borrowers.
(a) Credit transactions outside the United States. No borrower shall
obtain purpose credit from outside the United States unless it conforms
to the following margin regulations:
(1) Regulation T (12 CFR part 220) if the credit is obtained from a
foreign branch of a broker-dealer;
[[Page 89]]
(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.
Subpart B_Acquisition of Bank Securities or Assets
225.11 Transactions requiring Board approval.
225.12 Transactions not requiring Board approval.
225.13 Factors considered in acting on bank acquisition proposals.
225.14 Expedited action for certain bank acquisitions by well-run bank
holding companies.
225.15 Procedures for other bank acquisition proposals.
225.16 Public notice, comments, hearings, and other provisions governing
applications and notices.
225.17 Notice procedure for one-bank holding company formations.
Subpart C_Nonbanking Activities and Acquisitions by Bank Holding
Companies
225.21 Prohibited nonbanking activities and acquisitions; exempt bank
holding companies.
225.22 Exempt nonbanking activities and acquisitions.
225.23 Expedited action for certain nonbanking proposals by well-run
bank holding companies.
225.24 Procedures for other nonbanking proposals.
225.25 Hearings, alteration of activities, and other matters.
225.26 Factors considered in acting on nonbanking proposals.
225.27 Procedures for determining scope of nonbanking activities.
225.28 List of permissible nonbanking activities.
Subpart D_Control and Divestiture Proceedings
225.31 Control proceedings.
Subpart E_Change in Bank Control
225.41 Transactions requiring prior notice.
225.42 Transactions not requiring prior notice.
225.43 Procedures for filing, processing, publishing, and acting on
notices.
225.44 Reporting of stock loans.
Subpart F_Limitations on Nonbank Banks
225.52 Limitation on overdrafts.
Subpart G_Appraisal Standards for Federally Related Transactions
225.61 Authority, purpose, and scope.
225.62 Definitions.
225.63 Appraisals required; transactions requiring a State certified or
licensed appraiser.
225.64 Minimum appraisal standards.
225.65 Appraiser independence.
225.66 Professional association membership; competency.
225.67 Enforcement.
Subpart H_Notice of Addition or Change of Directors and Senior Executive
Officers
225.71 Definitions.
225.72 Director and officer appointments; prior notice requirement.
225.73 Procedures for filing, processing, and acting on notices;
standards for disapproval; waiver of notice.
Subpart I_Financial Holding Companies
225.81 What is a financial holding company?
[[Page 90]]
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.
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.
[[Page 91]]
Subpart J_Merchant Banking Investments
225.170 What type of investments are permitted by this subpart, and
under what conditions may they be made?
225.171 What are the limitations on managing or operating a portfolio
company held as a merchant banking investment?
225.172 What are the holding periods permitted for merchant banking
investments?
225.173 How are investments in private equity funds treated under this
subpart?
225.174 What aggregate thresholds apply to merchant banking investments?
225.175 What risk management, record keeping and reporting policies are
required to make merchant banking investments?
225.176 How do the statutory cross marketing and sections 23A and B
limitations apply to merchant banking investments?
225.177 Definitions.
Conditions to Orders
225.200 Conditions to Board's section 20 orders.
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
Appendix B to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies and State Member Banks: Leverage Measure
Appendix C to Part 225--Small Bank Holding Company Policy Statement
Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Tier 1 Leverage Measure
Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Market Risk Measure
Appendix F to Part 225--Interagency Guidelines Establishing Information
Security Standards
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906, 3907,
and 3909; 15 U.S.C. 1681s, 1681w, 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.
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.
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\1\ Code of Federal Regulations, title 12, chapter II, part 225.
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(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).
[[Page 92]]
(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) Appendix A to the regulation contains the Board's Risk-Based
Capital Adequacy Guidelines for bank holding companies.
(12) Appendix B contains the Board's Capital Adequacy Guidelines for
measuring leverage for bank holding companies and state member banks.
(13) Appendix C contains the Board's policy statement governing
small bank holding companies.
(14) Appendix D contains the Board's Capital Adequacy Guidelines for
measuring tier 1 leverage for bank holding companies.
(15) Appendix E contains the Board's Capital Adequacy Guidelines for
measuring market risk of bank holding companies.
(16) Appendix F contains the Interagency Guidelines Establishing
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]
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
[[Page 93]]
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:
(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
[[Page 94]]
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, 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:
[[Page 95]]
(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:
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\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.
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(i) On a consolidated basis, the bank holding company maintains a
total risk-based capital ratio of 10.0 percent or greater, as defined in
Appendix A of this part;
(ii) On a consolidated basis, the bank holding company maintains a
Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined in
Appendix A of this part; and
(iii) The bank holding company is not subject to any written
agreement, order, capital directive, or prompt corrective action
directive issued by the Board to meet and maintain a specific capital
level for any capital measure.
(2) Insured and uninsured depository institution--(i) Insured
depository institution. In the case of an insured depository
institution, ``well capitalized'' means that the institution has and
maintains at least the capital levels required to be well capitalized
under the capital adequacy regulations or guidelines applicable to the
institution that have been adopted by the appropriate Federal banking
agency for the institution under section 38 of the Federal Deposit
Insurance Act (12 U.S.C. 1831o).
(ii) Uninsured depository institution. In the case of a depository
institution the deposits of which are not insured by the Federal Deposit
Insurance Corporation, ``well capitalized'' means that the institution
has and maintains at least the capital levels required for an insured
depository institution to be well capitalized.
(3) Foreign banks--(i) Standards applied. For purposes of
determining whether a foreign banking organization qualifies under
paragraph (r)(1) of this section:
(A) A foreign banking organization whose home country supervisor, as
defined in Sec. 211.21 of the Board's Regulation K (12 CFR 211.21), has
adopted capital standards consistent in all respects with the Capital
Accord of the Basle Committee on Banking Supervision (Basle Accord) may
calculate its capital ratios under the home country standard; and
(B) A foreign banking organization whose home country supervisor has
not adopted capital standards consistent in all respects with the Basle
Accord shall obtain a determination from the Board that its capital is
equivalent to the capital that would be required of a U.S. banking
organization under paragraph (r)(1) of this section.
(ii) Branches and agencies. For purposes of determining, under
paragraph (r)(1) of this section, whether a branch or agency of a
foreign banking organization is well-capitalized, the branch or agency
shall be deemed to have the
[[Page 96]]
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
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
[[Page 97]]
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.
(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).
[[Page 98]]
(5) Disapproval and hearing. (i) The Board shall notify the bank
holding company in writing of the reasons for a decision to disapprove
any proposed purchase or redemption. Within 10 calendar days of receipt
of a notice of disapproval by the Board, the bank holding company may
submit a written request for a hearing.
(ii) The Board shall order a hearing within 10 calendar days of
receipt of the request if it finds that material facts are in dispute,
or if it otherwise appears appropriate. Any hearing conducted under this
paragraph shall be held in accordance with the Board's Rules of Practice
for Formal Hearings (12 CFR part 263).
(iii) At the conclusion of the hearing, the Board shall by order
approve or disapprove the proposed purchase or redemption on the basis
of the record of the hearing.
(6) Exception for well-capitalized bank holding companies. A bank
holding company is not required to obtain prior Board approval for the
redemption or purchase of its equity securities under this section
provided:
(i) Both before and immediately after the redemption, the bank
holding company is well-capitalized;
(ii) The bank holding company is well-managed; and
(iii) The bank holding company is not the subject of any unresolved
supervisory issues.
(c) Deposit insurance. Every bank that is a bank holding company or
a subsidiary of a bank holding company shall obtain Federal Deposit
Insurance and shall remain an insured bank as defined in section 3(h) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
(d) Acting as transfer agent or clearing agent. A bank holding
company or any nonbanking subsidiary that is a ``bank,'' as defined in
section 3(a)(6) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(6)), and that is a transfer 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
[[Page 99]]
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]
Sec. 225.5 Registration, reports, and inspections.
(a) Registration of bank holding companies. Each company shall
register within 180 days after becoming a bank holding company by
furnishing information in the manner and form prescribed by the Board. A
company that receives the Board's prior approval under subpart B of this
part to become a bank holding company may complete this registration
requirement through submission of its first annual report to the Board
as required by paragraph (b) of this section.
(b) Reports of bank holding companies. Each bank holding company
shall furnish, in the manner and form prescribed by the Board, an annual
report of the company's operations for the fiscal year in which it
becomes a bank holding company, and for each fiscal year during which it
remains a bank holding company. Additional information and reports shall
be furnished as the Board may require.
(c) Examinations and inspections. The Board may examine or inspect
any bank holding company and each of its subsidiaries and prepare a
report of their operations and activities. With respect to a foreign
banking organization, the Board may also examine any branch or agency of
a foreign bank in any state of the United States and may examine or
inspect each of the organization's subsidiaries in the United States and
prepare reports of their operations and activities. The Board shall
rely, as far as possible, on the reports of examination made by the
primary federal or state supervisor of the subsidiary bank of the bank
holding company or of the branch or agency of the foreign bank.
Sec. 225.6 Penalties for violations.
(a) Criminal and civil penalties. (1) Section 8 of the BHC Act
provides criminal penalties for willful violation, and civil penalties
for violation, by any company or individual, of the BHC Act or any
regulation or order issued under it, or for making a false entry in any
book, report, or statement of a bank holding company.
(2) Civil money penalty assessments for violations of the BHC Act
shall be made in accordance with subpart C of the Board's Rules of
Practice for Hearings (12 CFR part 263, subpart C). For any willful
violation of the Bank Control Act or any regulation or order issued
under it, the Board may assess a civil penalty as provided in 12 U.S.C.
1817(j)(15).
(b) Cease-and-desist proceedings. For any violation of the BHC Act,
the Bank Control Act, this regulation, or any order or notice issued
thereunder, the Board may institute a cease-and-desist proceeding in
accordance with the Financial Institutions Supervisory Act of 1966, as
amended (12 U.S.C. 1818(b) et seq.).
Sec. 225.7 Exceptions to tying restrictions.
(a) Purpose. This section establishes exceptions to the anti-tying
restrictions of section 106 of the Bank Holding Company Act Amendments
of 1970 (12 U.S.C. 1971, 1972(1)). These exceptions are in addition to
those in section 106. The section also restricts tying of electronic
benefit transfer services by bank
[[Page 100]]
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
(ii) An individual who is a citizen of a foreign country and is not
resident in the United States.
(c) Limitations on exceptions. Any exception granted pursuant to
this section shall terminate upon a finding by the Board that the
arrangement is resulting in anti-competitive practices. The eligibility
of a bank to operate under any exception granted pursuant to this
section shall terminate upon a finding by the Board that its exercise of
this authority is resulting in anti-competitive practices.
(d) Extension of statute to electronic benefit transfer services. A
bank holding company or nonbank subsidiary of a bank holding company
that provides electronic benefit transfer services shall be subject to
the anti-tying restrictions applicable to such services set forth in
section 7(i)(11) of the Food Stamp Act of 1977 (7 U.S.C. 2016(i)(11)).
(e) For purposes of this section, bank has the meaning given that
term in section 106(a) of the Bank Holding Company Act Amendments of
1970 (12 U.S.C. 1971), but shall also include a United States branch,
agency, or commercial lending company subsidiary of a foreign bank that
is subject to section 106 pursuant to section 8(d) of the International
Banking Act of 1978 (12 U.S.C. 3106(d)), and any company made subject to
section 106 by section 4(f)(9) or 4(h) of the BHC Act.
Subpart B_Acquisition of Bank Securities or Assets
Source: Reg. Y, 62 FR 9324, Feb. 28, 1997, unless otherwise noted.
Sec. 225.11 Transactions requiring Board approval.
The following transactions require the Board's prior approval under
section 3 of the Bank Holding Company Act except as exempted under Sec.
225.12 or as otherwise covered by Sec. 225.17 of this subpart:
(a) Formation of bank holding company. Any action that causes a bank
or other company to become a bank holding company.
(b) Acquisition of subsidiary bank. Any action that causes a bank to
become a subsidiary of a bank holding company.
(c) Acquisition of control of bank or bank holding company
securities. (1) The acquisition by a bank holding company of direct or
indirect ownership or control of any voting securities of a bank or bank
holding company, if the acquisition results in the company's control of
more than 5 percent of the outstanding shares of any class of voting
securities of the bank or bank holding company.
(2) An acquisition includes the purchase of additional securities
through the exercise of preemptive rights, but does not include
securities received in
[[Page 101]]
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 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
[[Page 102]]
company or the merger of holding companies, and the bank is not operated
by the acquiring bank holding company as a separate entity other than as
the survivor of the merger, consolidation, or asset purchase;
(ii) The transaction requires the prior approval of a federal
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));
(iii) The transaction does not involve the acquisition of any
nonbank company that would require prior approval under section 4 of the
BHC Act (12 U.S.C. 1843);
(iv) Both before and after the transaction, the acquiring bank
holding company meets the Board's Capital Adequacy Guidelines
(Appendixes A, B, C, D, and E of this part);
(v) At least 10 days prior to the transaction, the acquiring bank
holding company has provided to the Reserve Bank written notice of the
transaction that contains:
(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\
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\1\ In the case of a transaction that results in the formation or
designation of a new bank holding company, the new bank holding company
must complete the registration requirements described in Sec. 225.5.
---------------------------------------------------------------------------
(C) The transfer of control or ownership of a subsidiary bank or a
subsidiary holding company between one subsidiary holding company and
another subsidiary holding company or the bank holding company.
(ii) A transaction described in paragraph (d)(3)(i) of this section
qualifies for this exception if:
(A) The transaction represents solely a corporate reorganization
involving companies and insured depository institutions that, both
preceding and following the transaction, are lawfully controlled and
operated by the bank holding company;
(B) The transaction does not involve the acquisition of additional
voting shares of an insured depository institution that, prior to the
transaction, was less than majority owned by the bank holding company;
(C) The bank holding company is not organized in mutual form; and
(D) Both before and after the transaction, the bank holding company
meets the Board's Capital Adequacy Guidelines (Appendixes A, B, C, D,
and E of this part).
(e) Holding securities in escrow. The holding of any voting
securities of a bank or bank holding company in an escrow arrangement
for the benefit of an applicant pending the Board's action on an
application for approval of the proposed acquisition, if title to the
securities and the voting rights remain with the seller and payment for
the securities has not been made to the seller.
(f) Acquisition of foreign banking organization. The acquisition of
a foreign banking organization where the foreign banking organization
does not directly or indirectly own or control a bank in the United
States, unless the acquisition is also by a foreign banking organization
and otherwise subject to Sec. 225.11(f) of this subpart.
Sec. 225.13 Factors considered in acting on bank acquisition proposals.
(a) Factors requiring denial. As specified in section 3(c) of the
BHC Act, the Board may not approve any application under this subpart
if:
(1) The transaction would result in a monopoly or would further any
combination or conspiracy to monopolize, or to attempt to monopolize,
the business of banking in any part of the United States;
(2) The effect of the transaction may be substantially to lessen
competition in any section of the country, tend to
[[Page 103]]
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 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
[[Page 104]]
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 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
[[Page 105]]
(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 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
[[Page 106]]
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.
(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
[[Page 107]]
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);
(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.
[[Page 108]]
(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 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
[[Page 109]]
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\
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\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\
---------------------------------------------------------------------------
\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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(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).
---------------------------------------------------------------------------
(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
[[Page 110]]
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 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
[[Page 111]]
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
(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
[[Page 112]]
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.
(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
[[Page 113]]
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
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:
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\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.
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(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
[[Page 114]]
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:
(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:
[[Page 115]]
(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;
(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
[[Page 116]]
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 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.
[[Page 117]]
(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) 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
[[Page 118]]
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.
(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
[[Page 119]]
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 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.
[[Page 120]]
(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.
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\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.
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(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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(3) Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing such property
if:
(i) The lease is on a nonoperating basis; \5\
---------------------------------------------------------------------------
\5\ The requirement that the lease be on a nonoperating basis means
that the bank holding company may not, directly or indirectly, engage in
operating, servicing, maintaining, or repairing leased property during
the lease term. For purposes of the leasing of automobiles, the
requirement that the lease be on a nonoperating basis means that the
bank holding company may not, directly or indirectly: (1) Provide
servicing, repair, or maintenance of the leased vehicle during the lease
term; (2) purchase parts and accessories in bulk or for an individual
vehicle after the lessee has taken delivery of the vehicle; (3) provide
the loan of an automobile during servicing of the leased vehicle; (4)
purchase insurance for the lessee; or (5) provide for the renewal of the
vehicle's license merely as a service to the lessee where the lessee
could renew the license without authorization from the lessor. The bank
holding company may arrange for a third party to provide these services
or products.
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(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
[[Page 121]]
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.
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(iv) Providing information, statistical forecasting, and advice with
respect to any transaction in foreign exchange, swaps, and similar
transactions, commodities, and any forward contract, option, future,
option on a future, and similar instruments;
(v) Providing educational courses, and instructional materials to
consumers on individual financial management matters; and
(vi) Providing tax-planning and tax-preparation services to any
person.
(7) Agency transactional services for customer investments--(i)
Securities brokerage. Providing securities brokerage services (including
securities clearing and/or securities execution services on an
exchange), whether alone or in combination with investment advisory
services, and incidental activities (including related securities credit
activities and custodial services), if the securities brokerage services
are restricted to buying and selling securities solely as agent for the
account of customers and do not include securities underwriting or
dealing.
(ii) Riskless principal transactions. Buying and selling in the
secondary market all types of securities on the order of customers as a
``riskless principal'' to the extent of engaging in a transaction in
which the company, after receiving an order to buy (or sell) a security
from a customer, purchases (or sells) the security for its own account
to offset a contemporaneous sale to (or purchase from) the customer.
This does not include:
(A) Selling bank-ineligible securities \7\ at the order of a
customer that is the issuer of the securities, or selling bank-
ineligible securities in any transaction where the company has a
contractual agreement to place the securities as agent of the issuer; or
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\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
[[Page 122]]
or any of its affiliates acts as underwriter (during the period of the
underwriting or for 30 days thereafter) or dealer.\8\
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\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;
(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
[[Page 123]]
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.
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\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.
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(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\
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\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).
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(1) On any matter to unaffiliated depository institutions, including
commercial banks, savings and loan associations, savings banks, credit
unions, industrial banks, Morris Plan banks, cooperative banks,
industrial loan companies, trust companies, and branches or agencies of
foreign banks;
(2) On any financial, economic, accounting, or audit matter to any
other company.
(B) A company conducting management consulting activities under this
subparagraph and any affiliate of such company may not:
(1) Own or control, directly or indirectly, more than 5 percent of
the voting securities of the client institution; and
(2) Allow a management official, as defined in 12 CFR 212.2(h), of
the company or any of its affiliates to serve as a management official
of the client institution, except where such interlocking relationship
is permitted pursuant to an exemption granted under 12 CFR 212.4(b) or
otherwise permitted by the Board.
(C) A company conducting management consulting activities may
provide management consulting services to customers not described in
paragraph (b)(9)(i)(A)(1) of this section or regarding matters not
described in paragraph (b)(9)(i)(A)(2) of this section, if the total
annual revenue derived from those management consulting services does
not exceed 30 percent of the company's total annual revenue derived from
management consulting activities.
(ii) Employee benefits consulting services. Providing consulting
services to employee benefit, compensation and insurance plans,
including designing plans, assisting in the implementation of plans,
providing administrative services to plans, and developing employee
communication programs for plans.
(iii) Career counseling services. Providing career counseling
services to:
(A) A financial organization \12\ and individuals currently employed
by, or recently displaced from, a financial organization;
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\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)).
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[[Page 124]]
(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\
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\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.
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(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.
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\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.
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(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:
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\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.
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(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
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\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.
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(C) The applicant commits to notify borrowers in writing that:
(1) They are not required to purchase such insurance from the
applicant;
(2) Such insurance does not insure any interest of the borrower in
the collateral; and
(3) The applicant will accept more comprehensive property insurance
in place of such single-interest insurance.
(iii) Insurance in small towns. Engaging in any insurance agency
activity in a place where the bank holding company or a subsidiary of
the bank holding company has a lending office and that:
(A) Has a population not exceeding 5,000 (as shown in the preceding
decennial census); or
(B) Has inadequate insurance agency facilities, as determined by the
Board, after notice and opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982. Engaging
in any specific insurance-agency activity \17\ if
[[Page 125]]
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.
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(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 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,
[[Page 126]]
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).
(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
[[Page 127]]
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, 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:
[[Page 128]]
(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\
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\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.
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(d) Rebuttable presumption of concerted action. The following
persons shall be presumed to be acting in concert for purposes of this
subpart:
(1) A company and any controlling shareholder, partner, trustee, or
management official of the company, if both the company and the person
own voting securities of the state member bank or bank holding company;
(2) An individual and the individual's immediate family;
(3) Companies under common control;
(4) Persons that are parties to any agreement, contract,
understanding, relationship, or other arrangement, whether written or
otherwise, regarding the acquisition, voting, or transfer of control of
voting securities of a state member bank or bank holding company, other
than through a revocable proxy as described in Sec. 225.42(a)(5) of
this subpart;
(5) Persons that have made, or propose to make, a joint filing under
sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78n), and the rules promulgated thereunder by the Securities and
Exchange Commission; and
(6) A person and any trust for which the person serves as trustee.
(e) Acquisitions of loans in default. The Board presumes an
acquisition of a loan in default that is secured by voting securities of
a state member bank or bank holding company to be an acquisition of the
underlying securities for purposes of this section.
(f) Other transactions. Transactions other than those set forth in
paragraph (c) of this section resulting in a person's control of less
than 25 percent of a class of voting securities of a state member bank
or bank holding company are not deemed by the Board to constitute
control for purposes of the Bank Control Act.
(g) Rebuttal of presumptions. Prior notice to the Board is not
required for any acquisition of voting securities
[[Page 129]]
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 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
[[Page 130]]
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.
(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
[[Page 131]]
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 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
[[Page 132]]
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.
(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
[[Page 133]]
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 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.
[[Page 134]]
(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.
(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.
[[Page 135]]
(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 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
[[Page 136]]
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
(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.
[[Page 137]]
(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]
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;
[[Page 138]]
(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.
(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
[[Page 139]]
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]
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
[[Page 140]]
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 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:
[[Page 141]]
(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 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,
[[Page 142]]
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 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
[[Page 143]]
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 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
[[Page 144]]
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.
(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
[[Page 145]]
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.
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
[[Page 146]]
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.
(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
[[Page 147]]
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));
(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
[[Page 148]]
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.
(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
[[Page 149]]
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 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
[[Page 150]]
(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.
(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.
[[Page 151]]
(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 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;
[[Page 152]]
(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 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:
[[Page 153]]
(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 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
[[Page 154]]
(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 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
[[Page 155]]
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.
(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.
[[Page 156]]
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 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
[[Page 157]]
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 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
[[Page 158]]
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 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
[[Page 159]]
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 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
[[Page 160]]
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 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
[[Page 161]]
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.
(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.
[[Page 162]]
(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 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
[[Page 163]]
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 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
[[Page 164]]
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 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.
[[Page 165]]
(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 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
[[Page 166]]
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 * * *.''
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,
[[Page 167]]
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]
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
[[Page 168]]
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 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
[[Page 169]]
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 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
[[Page 170]]
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 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.
[[Page 171]]
(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,
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
[[Page 172]]
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 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)
[[Page 173]]
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]
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
[[Page 174]]
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 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
[[Page 175]]
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 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
[[Page 176]]
(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
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
[[Page 177]]
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 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\
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\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.
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(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
[[Page 178]]
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.
(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
[[Page 179]]
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.
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\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.
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(b) Each participating holding company would own no more than 5
percent of the outstanding voting shares of the company. However, the
investment of each holding company would be represented by a separate
class of voting security, so that each stockholder would own 100 percent
of its respective class. The participating companies would execute a
formal ``Agreement Among Stockholders'' under which each would agree to
use its best efforts at all times to direct or recommend to customers
and clients the placement of their life, accident and health insurance
directly or indirectly with the company. Such credit-related insurance
placed with the company would be identified in the records of the
company as having been originated by the respective stockholder. A
separate capital account would be maintained for each stockholder
consisting of the original capital contribution increased or decreased
from time to time by the net profit or loss resulting from the insurance
business attributable to each stockholder. Thus, each stockholder would
receive a return on its investment based upon the claims experience and
profitability of the insurance business that it had itself generated.
Dividends declared by the board of directors of the company would be
payable to each stockholder only out of the earned surplus reflected in
the respective stockholder's capital account.
(c) It has been requested that the Board issue an interpretation
that section 4(c)(6) of the Act provides an exemption under which
participating bank holding companies may acquire such interests in the
company without prior approval of the Board.
(d) On the basis of a careful review of the documents submitted, in
light of the purposes and provisions of the Act, the Board has concluded
that section 4(c)(6) of the Act is inapplicable to this proposal and
that a bank holding company must obtain the approval of the Board before
participating in such a proposal in the manner described. The Board's
conclusion is based upon the following considerations:
(1) Section 2(a)(2)(A) of the Act provides that a company is deemed
to have control over a second company if it owns or controls ``25 per
centum or more of any class of voting securities'' of the second
company. In the case presented, the stock interest of each participant
would be evidenced by a different class of stock and each would
accordingly, own 100 percent of a class of voting securities of the
company. Thus, each of the stockholders would be deemed to ``control''
the company and prior Board approval would be required
[[Page 180]]
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.
(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]
[[Page 181]]
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 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
[[Page 182]]
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
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
[[Page 183]]
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, after
opportunity for hearing, ``that the transferor is not in fact capable of
controlling the transferee.'' \2\
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\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).
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(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
[[Page 184]]
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\
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\3\ It should be noted, however, that the Board will require
termination of any interlocking management relationships between the
divesting company and the transferee or the divested company as a
precondition of finding that a divestiture is complete. Similarly, the
retention of an economic interest in the divested company that would
create an incentive for the divesting company to attempt to influence
the management of the divested company will preclude a finding that the
divestiture is complete. (See the Board's Order in the matter of
``International Bank'', 1977 Federal Reserve Bulletin 1106, 1113.)
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(c) In the course of administering section 2(g)(3) the Board has had
several occasions to consider the scope of that section. In addition,
questions have been raised by and with the Board's staff as to coverage
of the section. Accordingly, the Board believes it would be useful to
set forth the following interpretations of section 2(g)(3):
(1) The terms transferor and transferee, as used in section 2(g)(3),
include parents and subsidiaries of each. Thus, for example, where a
transferee is indebted to a subsidiary of the transferor, or where a
specified interlocking relationship exists between the transferor or
transferee and a subsidiary of the other (or between subsidiaries of
each), the presumption arises. Similarly, if a parent of the transferee
is indebted to a parent of the transferor, the presumption arises. The
presumption of continued control also arises where an interlock or debt
relationship is retained between the divesting company and the company
being divested, since the divested company will be or may be viewed as a
subsidiary of the transferee or group of transferees.
(2) The terms officers, directors, and trustees, as used in section
2(g)(3), include persons performing functions normally associated with
such positions (including general partners in a partnership and limited
partners having a right to participate in the management of the affairs
of the partnership) as well as persons holding such positions in an
advisory or honorary capacity. The presumption arises not only where the
transferee or transferred company has an officer, director or trustee in
common with the transferor, but where the transferee himself holds such
a position with the transferor. \4\ It should be noted that where a
transfer takes the form of a pro-rata distribution, or spin-off, of
shares to a company's shareholders, officers and directors of the
transferor company are likely to receive a portion of such shares. The
presumption of continued control would, of course, attach to any shares
transferred to officers and directors of the divesting company, whether
by spinoff or outright sale. However, the presumption will be of legal
significance--and will thus require an application under section
2(g)(3)--only where the total number of shares subject to the
presumption exceeds one of the applicable thresholds in the Act. For
example, where officers and directors of a one-bank holding company
receive in the aggregate 25 percent or more of the stock of a bank
subsidiary being divested by the holding company, the holding company
would be presumed to continue to control the divested bank. In such a
case it would be necessary for the divesting company to demonstrate that
it no longer controls either the divested bank or the officer/director
transferees. However, if officers and directors were to receive in the
aggregate less than 25 percent of the bank's stock (and no other shares
were subject to the presumption), section 2(g)(3) would not have the
legal effect of presuming continued control of
[[Page 185]]
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.
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\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.
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(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 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
[[Page 186]]
such an application and has referred the matter to the Board for
decision.\6\
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\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.''
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(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 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.
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\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.
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(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
[[Page 187]]
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 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
[[Page 188]]
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 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
[[Page 189]]
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 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;
[[Page 190]]
(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 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
[[Page 191]]
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
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,
[[Page 192]]
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).
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\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).
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(b) Congressional findings. (1) At the outset, the Board notes that
the scope and application of the Act's limitations on nonbank banks must
be guided by the Congressional findings set out in section 4(f)(3) of
the BHC Act. Congress was aware that these nonbank banks had been
acquired by companies that engage in a wide range of nonbanking
activities, such as retailing and general securities activities that are
forbidden to bank holding companies under section 4 of the BHC Act. In
section 4(f)(3), Congress found that nonbank banks controlled by
grandfathered nonbanking companies may, because of their relationships
with affiliates, be involved in conflicts of interest, concentration of
resources, or other effects adverse to bank safety and soundness.
Congress also found that nonbank banks may be able to compete unfairly
against banks controlled by bank holding companies by combining banking
services with financial services not permissible for bank holding
companies. Section 4(f)(3) states that the purpose of the nonbank bank
limitations is to minimize any such potential adverse effects or
inequities by restricting the activities of nonbank banks until further
Congressional action in the area of bank powers could be undertaken.
Similarly, the Senate Report accompanying CEBA states that the
restrictions CEBA places on nonbank banks ``will help prevent existing
nonbank banks from changing their basic character * * * while Congress
considers proposals for comprehensive legislation; from drastically
eroding the separation of banking and commerce; and from increasing the
potential for unfair competition, conflicts of interest, undue
concentration of resources, and other adverse effects.'' S. Rep. No.
100-19, 100th Cong., 1st Sess. 12 (1987). See also H. Rep. No. 100-261,
100th Cong., 1st Sess. 124 (1987) (the ``Conference Report'').
(2) Thus, Congress explicitly recognized in the statute itself that
nonbanking companies controlling grandfathered nonbank banks, which
include the many of the nation's largest commercial and financial
organizations, were being accorded a significant competitive advantage
that could not be matched by bank holding companies because of the
general prohibition against nonbanking activities in section 4 of the
BHC Act. Congress recognized that this inequality in regulatory approach
could inflict serious competitive harm on regulated bank holding
companies as the grandfathered entities sought to exploit potential
synergies between banking and commercial products and services. See
Conference Report at 125-126. The basic and stated purpose of the
restrictions on grandfathered nonbank banks is to minimize these
potential anticompetitive effects.
[[Page 193]]
(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 not conduct as of March 5, 1987. The debates and Senate and
Conference Reports on CEBA confirm that Congress intended the activity
limitation to prevent a grandfathered nonbank bank from converting
itself into a full-service bank by both offering demand deposits and
engaging in the business of making commercial loans.\4\ Thus, these
types of transactions provide a clear guide as to the type of banking
transactions that would constitute activities under CEBA and the degree
of specificity intended by Congress in interpreting that term.
---------------------------------------------------------------------------
\4\ Conference Report at 124-25; S. Rep. No. 100-19 at 12, 32; H.
Rep. No. 99-175, 99th Cong., 1st Sess. 3 (1985) (``the activities
limitation is to prevent an institution engaged in a limited range of
functions from expanding into new areas and becoming, in essence, a
full-service bank''); 133 Cong. Rec. S4054 (daily ed. March 27, 1987);
(Comments of Senator Proxmire).
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(iii) It is also clear that the activity limitation was not intended
simply to prevent a nonbank bank from both accepting demand deposits and
making commercial loans; it has a broader scope and purpose. If Congress
had meant the term to refer to just these two activities, it would have
used the restriction it used in another section of CEBA dealing with
nonbank banks owned by bank holding companies which has this result,
i.e., the nonbank bank could not engage in any activity that would have
caused it to become a bank under the prior bank definition in the Act.
See 12 U.S.C. 1843(g)(1)(A). Indeed, an earlier version of CEBA under
consideration by the Senate Banking Committee contained such a provision
for nonbank banks owned by commercial holding companies, which was
deleted in favor of the broader activity limitation actually enacted.
Committee Print No. 1, (Feb. 17, 1987). In this regard, both the Senate
Report and Conference Report refer to demand deposit-taking and
commercial lending as examples of activities that could be affected by
the activity limitation, not
[[Page 194]]
as the sole activities to be limited by the provision.\5\
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\5\ Conference Report at 124-125; S. Rep. No. 100-19 at 32.
---------------------------------------------------------------------------
(iv) Finally, additional guidance as to the meaning of the term
activity is provided by the statutory context in which the term appears.
The activity limitation is contained in section 4 of the BHC Act, which
regulates the investments and activities of bank holding companies and
their nonbank subsidiaries. The Board believes it reasonable to conclude
that by placing the CEBA activity limitation in section 4 of the BHC
Act, Congress meant that Board and judicial decisions regarding the
meaning of the term activity in that section be looked to for guidance.
This is particularly appropriate given the fact that grandfathered
nonbank banks, whether owned by bank holding companies or unregulated
holding companies, were treated as nonbank companies and not banks
before enactment of CEBA.
(v) This interpretation of the term activity draws support from
comments by Senator Proxmire during the Senate's consideration of the
provision that the term was not intended to apply ``on a product-by-
product, customer-by-customer basis.'' 133 Cong. Rec. S4054-5 (daily ed.
March 27, 1987). This is the same manner in which the Board has
interpreted the term activity in the nonbanking provision of section 4
as referring to generic categories of activities, not to discrete
products and services.
(vi) Accordingly, consistent with the terms and purposes of the
legislation and the Congressional intent to minimize unfair competition
and the other adverse effects set out in the CEBA findings, the Board
concludes that the term activity as used in section 4(f)(3) means any
line of banking or nonbanking business. This definition does not,
however, envision a product-by-product approach to the activity
limitation. The Board believes it would be helpful to describe the
application of the activity limitation in the context of the following
major categories of activities: deposit-taking, lending, trust, and
other activities engaged in by banks.
(2) Deposit-taking activities. (i) With respect to deposit-taking,
the Board believes that the activity limitation in section 4(f)(3)
generally refers to three types of activity: demand deposit-taking; non-
demand deposit-taking with a third party payment capability; and time
and savings deposit-taking without third party payment powers. As
previously discussed, it is clear from the terms and intent of CEBA that
the activity limitation would prevent, and was designed to prevent,
nonbank banks that prior to the enactment of CEBA had refrained from
accepting demand deposits in order to avoid coverage as a bank under the
BHC Act, from starting to take these deposits after enactment of CEBA
and thus becoming full-service banks. Accordingly, CEBA requires that
the taking of demand deposits be treated as a separate activity.
(ii) The Board also considers nondemand deposits withdrawable by
check or other similar means for payment to third parties or others to
constitute a separate line of business for purposes of applying the
activity limitation. In this regard, the Board has previously recognized
that this line of businesss constitutes a permissible but separate
activity under section 4 of the BHC Act. Furthermore, the offering of
accounts with transaction capability requires different expertise and
systems than non-transaction deposit-taking and represented a distinct
new activity that traditionally separated banks from thrift and similar
institutions.
(iii) Support for this view may also be found in the House Banking
Committee report on proposed legislation prior to CEBA that contained a
similar prohibition on new activities for nonbank banks. In discussing
the activity limitation, the report recognized a distinction between
demand deposits and accounts with transaction capability and those
without transaction capability:
With respect to deposits, the Committee recognizes that it is
legitimate for an institution currently involved in offering demand
deposits or other third party transaction accounts to make use of new
technologies that are in the process of replacing the existing check-
based, paper payment system. Again, however, the Committee does not
believe
[[Page 195]]
that technology should be used as a lever for an institution that was
only incidentally involved in the payment system to transform itself
into a significant offeror of transaction account capability. \6\
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\6\ H. Rep. No. 99-175, 99th Cong., 1st Sess. 13 (1985).
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(iv) Finally, this distinction between demand and nondemand
checkable accounts and accounts not subject to withdrawal by check was
specifically recognized by Congress in the redefinition of the term bank
in CEBA to include an institution that takes demand deposits or
``deposits that the depositor may withdraw by check or other means for
payment to third parties or others'' as well as in various exemptions
from that definition for trust companies, credit card banks, and certain
industrial banks. \7\
---------------------------------------------------------------------------
\7\ See 12 U.S.C. 1841(c)(2) (D), (F), (H), and (I).
---------------------------------------------------------------------------
(v) Thus, an institution that as of March 5, 1987, offered only time
and savings accounts that were not withdrawable by check for payment to
third parties could not thereafter begin offering accounts with
transaction capability, for example, NOW accounts or other types of
transaction accounts.
(3) Lending. As noted, the CEBA activity limitation does not treat
lending as a single activity; it clearly distinguishes between
commercial and other types of lending. This distinction is also
reflected in the definition of bank in the BHC Act in effect both prior
to and after enactment of CEBA as well as in various of the exceptions
from this definition. In addition, commercial lending is a specialized
form of lending involving different techniques and analysis from other
types of lending. Based upon these factors, the Board would view
commercial lending as a separate and distinct activity for purposes of
the activity limitation in section 4(f)(3). The Board's decisions under
section 4 of the BHC Act have not generally differentiated between types
of commercial lending, and thus the Board would view commercial lending
as a single activity for purposes of CEBA. Thus, a nonbank bank that
made commercial loans as of March 5, 1987, could make any type of
commercial loan thereafter.
(i) Commercial lending. For purposes of the activity limitation, a
commercial loan is defined in accordance with the Supreme Court's
decision in Board of Governors v. Dimension Financial Corporation, 474
U.S. 361 (1986), as a direct loan to a business customer for the purpose
of providing funds for that customer's business. In this regard, the
Board notes that whether a particular transaction is a commercial loan
must be determined not from the face of the instrument, but from the
application of the definition of commercial loan in the Dimension
decision to that transaction. Thus, certain transactions of the type
mentioned in the Board's ruling at issue in Dimension and in the Senate
and Conference Reports in the CEBA legislation \8\ would be commercial
loans if they meet the test for commercial loans established in
Dimension. Under this test, a commercial loan would not include, for
example, an open-market investment in a commercial entity that does not
involve a borrower-lender relationship or negotiation of credit terms,
such as a money market transaction.
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\8\ S. Rep. No. 100-19 at 31; Conference Report at 123.
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(ii) Other lending. Based upon the guidance in the Act as to the
degree of specificity required in applying the activity limitation with
respect to lending, the Board believes that, in addition to commercial
lending, there are three other types of lending activities: consumer
mortgage lending, consumer credit card lending, and other consumer
lending. Mortgage lending and credit card lending are recognized,
discrete lines of banking and business activity, involving techniques
and processes that are different from and more specialized than those
required for general consumer lending. For example, these activities
are, in many cases, conducted by specialized institutions, such as
mortgage companies and credit card institutions, or through separate
organizational structures within an institution, particularly in the
case of mortgage lending. Additionally, the Board's decisions under
section 4 of the Act have recognized mortgage banking and credit card
lending as separate activities for bank holding companies.
[[Page 196]]
The Board's Regulation Y reflects this specialization, noting as
examples of permissible lending activity: consumer finance, credit card
and mortgage lending. 12 CFR 225.25(b)(1). Finally, CEBA itself
recognizes the specialized nature of credit card lending by exempting an
institution specializing in that activity from the bank definition. For
purpose of the activity limitation, a consumer mortgage loan will mean
any loan to an individual that is secured by real estate and that is not
a commercial loan. A credit card loan would be any loan made to an
individual by means of a credit card that is not a commercial loan.
(4) Trust activities. Under section 4 of the Act, the Board has
historically treated trust activities as a single activity and has not
differentiated the function on the basis of whether the customer was an
individual or a business. See 12 CFR 225.25(b)(3). Similarly, the trust
company exemption from the bank definition in CEBA makes no distinction
between various types of trust activities. Accordingly, the Board would
view trust activities as a separate activity without additional
differentiation for purposes of the activity limitation in section
4(f)(3).
(5) Other activities. With respect to activities other than the
various traditional deposit-taking, lending or trust activities, the
Board believes it appropriate, for the reasons discussed above, to apply
the activity limitation in section 4(f)(3) as the term activity
generally applies in other provisions of section 4 of the BHC Act. Thus,
a grandfathered nonbank bank could not, for example, commence after
March 5, 1987, any of the following activities (unless it was engaged in
such an activity as of that date): discount securities brokerage, full-
service securities brokerage investment advisory services, underwriting
or dealing in government securities as permissible for member banks,
foreign exchange transaction services, real or personal property
leasing, courier services, data processing for third parties, insurance
agency activities,\9\ real estate development, real estate brokerage,
real estate syndication, insurance underwriting, management consulting,
futures commission merchant, or activities of the general type listed in
Sec. 225.25(b) of Regulation Y.
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\9\ In this area, section 4 of the Act does not treat all insurance
agency activities as a single activity. Thus, for example, the Act
treats the sale of credit-related life, accident and health insurance as
a separate activity from general insurance agency activities. See 12
U.S.C. 1843(c)(8).
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(6) Meaning of engaged in. In order to be engaged in an activity, a
nonbank bank must demonstrate that it had a program in place to provide
a particular product or service included within the grandfathered
activity to a customer and that it was in fact offering the product or
service to customers as of March 5, 1987. Thus, a nonbank bank is not
engaged in an activity as of March 5, 1987, if the product or service in
question was in a planning state as of that date and had not been
offered or delivered to a customer. Consistent with prior Board
interpretations of the term activity in the grandfather provisions of
section 4, the Board does not believe that a company may be engaged in
an activity on the basis of a single isolated transaction that was not
part of a program to offer the particular product or to conduct in the
activity on an ongoing basis. For example, a nonbank bank that held an
interest in a single real estate project would not thereby be engaged in
real estate development for purposes of this provision, unless evidence
was presented indicating the interest was held under a program to
commence a real estate development business.
(7) Meaning of as of The Board believes that the grandfather date
``as of March 5, 1987'' as used throughout section 4(f)(3) should refer
to activities engaged in on March 5, 1987, or a reasonably short period
preceding this date not exceeding 13 months. 133 Cong. Rec. S3957 (daily
ed. March 26, 1987). (Remarks of Senators Dodd and Proxmire). Activities
that the institution had terminated prior to March 5, 1988, however,
would not be considered to have been conducted or engaged in as of March
5. For example, if within 13 months of March 5, 1987, the nonbank bank
had terminated its commercial lending activity in order to avoid the
[[Page 197]]
bank definition in the Act, the nonbank bank could not recommence that
activity after enactment of CEBA.
(d) Cross-marketing limitation--(1) In general. Section 4(f)(3) also
limits cross-marketing activities by nonbank banks and their affiliates.
Under this provision, a nonbank bank may not offer or market a product
or service of an affiliate unless the product or service may be offered
by bank holding companies generally under section 4(c)(8) of the BHC
Act. In addition, a nonbank bank may not permit any of its products or
services to be offered or marketed by or through a nonbank affiliate
unless the affiliate engages only in activities permissible for a bank
holding company under section 4(c)(8). These limitations are subject to
an exception for products or services that were being so offered or
marketed as of March 5, 1987, but only in the same manner in which they
were being offered or marketed as of that date.
(2) Examples of impermissible cross-marketing. The Conference Report
illustrates the application of this limitation to the following two
covered transactions: (i) products and services of an affiliate that
bank holding companies may not offer under the BHC Act, and (ii)
products and services of the nonbank bank. In the first case, the
restrictions would prohibit, for example, a company from marketing life
insurance or automotive supplies through its affiliate nonbank bank
because these products are not generally permissible under the BHC Act.
Conference Report at 126. In the second case, a nonbank bank may not
permit its products or services to be offered or marketed through a life
insurance affiliate or automobile parts retailer because these
affiliates engage in activities prohibited under the BHC Act. Id.
(3) Permissible cross-marketing. On the other hand, a nonbank bank
could offer to its customers consumer loans from an affiliated mortgage
banking or consumer finance company. These affiliates could likewise
offer their customers the nonbank bank's products or services provided
the affiliates engaged only in activities permitted for bank holding
companies under the closely-related-to-banking standard of section
4(c)(8) of the BHC Act. If the affiliate is engaged in both permissible
and impermissible activities within the meaning of section 4(c)(8) of
the BHC Act, however, the affiliate could not offer or market the
nonbank bank's products or services.
(4) Product approach to cross-marketing restriction. (i) Unlike the
activity restrictions, the cross-marketing restrictions of CEBA apply by
their terms to individual products and services. Thus, an affiliate of a
nonbank bank that was engaged in activities that are not permissible for
bank holding companies and that was marketing a particular product or
service of a nonbank bank on the grandfather date could continue to
market that product and, as discussed below, could change the terms and
conditions of the loan. The nonbank affiliate could not, however, begin
to offer or market another product or service of the nonbank bank.
(ii) The Board believes that the term product or service must be
interpreted in light of its accepted ordinary commercial usage. In some
instances, commercial usage has identified a group of products so
closely related that they constitute a product line (e.g., certificates
of deposit) and differences in versions of the product (e.g., a one-year
certificate of deposit) simply represent a difference in the terms of
the product.\10\ This approach is consistent with the treatment in
CEBA's legislative history of certificates of deposit as a product line
rather than each particular type of CD as a separate product.\11\
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\10\ American Bankers Association, Banking Terminology (1981).
\11\ During the Senate debates on CEBA, Senator Proxmire in response
to a statement from Senator Cranston that the joint-marketing
restrictions do not lock into place the specific terms or conditions of
the particular grandfathered product or service, stated:
That is correct. For example, if a nonbank bank was jointly
marketing on March 5, 1987, a 3 year, $5,000 certificate of deposit,
this bill would not prohibit offering in the same manner a 1 year,
$2,000 certificate of deposit with a different interest rate. 133 Cong.
Rec. S3959 (daily ed. March 26, 1987).
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(iii) In the area of consumer lending, the Board believes the
following provide examples of different consumer loan products: mortgage
loans to finance the purchase of the borrower's
[[Page 198]]
residence, unsecured consumer loans, consumer installment loans secured
by the personal property to be purchased (e.g. automobile, boat or home
appliance loans), or second mortgage loans.\12\ Under this
interpretation, a nonbank bank that offered automobile loans through a
nonbank affiliate on the grandfather date could market boat loans,
appliance loans or any type of secured consumer installment loan through
that affiliate. It could not, however, market unsecured consumer loans,
home mortgage loans or other types of consumer loans.
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\12\ In this regard, the Supreme Court in United States v.
Philadelphia National Bank, noted that ``the principal banking products
are of course various types of credit, for example: unsecured personal
and business loans, mortgage loans, loans secured by securities or
accounts receivable, automobile installment and consumer goods,
installment loans, tuition financing, bank credit cards, revolving
credit funds.'' 374 U.S. 321, 326 n.5 (1963).
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(iv) In other areas, the Board believes that the determination as to
what constitutes a product or service should be made on a case-by-case
basis consistent with the principles that the terms product or service
must be interpreted in accordance with their ordinary commercial usage
and must be narrower in scope than the definition of activity.
Essentially, the concept applied in this analysis is one of permitting
the continuation of the specific product marketing activity that was
undertaken as of March 5, 1987. Thus, for example, while insurance
underwriting may constitute a separate activity under CEBA, a nonbank
bank could not market a life insurance policy issued by the affiliate if
on the grandfather date it had only marketed homeowners' policies issued
by the affiliate.
(5) Change in terms and conditions permitted. (i) The cross-
marketing restrictions would not limit the ability of the institution to
change the specific terms and conditions of a particular grandfathered
product or service. The Conference Report indicates a legislative intent
not to lock into place the specific terms or conditions of a
grandfathered product or service. Conference Report at 126. For example,
a nonbank bank marketing a three-year, $5,000 certificate of deposit
through an affiliate under the exemption could offer a one-year $2,000
certificate of deposit with a different interest rate after the
grandfather date. See footnote 11 above. Modifications that alter the
type of product, however, are not permitted. Thus, a nonbank bank that
marketed through affiliates on March 5, 1987, only certificates of
deposit could not commence marketing MMDA's or NOW accounts after the
grandfather date.
(ii) General changes in the character of the product or service as
the result of market or technological innovation are similarly permitted
to the extent that they do not transform a grandfathered product into a
new product. Thus, an unsecured line of credit could not be modified to
include a lien on the borrower's residence without becoming a new
product.
(6) Meaning of offer or market. In the Board's opinion, the terms
offer or market in the cross-marketing restrictions refer to the
presentation to a customer of an institution's products or service
through any type of program, including telemarketing, advertising
brochures, direct mailing, personal solicitation, customer referrals, or
joint-marketing agreements or presentations. An institution must have
offered or actually marketed the product or service on March 5 or
shortly before that date (as discussed above) to qualify for the
grandfather privilege. Thus, if the cross-marketing program was in the
planning stage on March 5, 1987, the program would not quality for
grandfather treatment under CEBA.
(7) Limitations on cross-marketing to in the same manner. (i) The
cross-marketing restriction in section 4(f)(3) contains a grandfather
provision that permits products or services that would otherwise be
prohibited from being offered or marketed under the provision to
continue to be offered or marketed by a particular entity if the
products or services were being so offered or marketed as of March 5,
1987, but ``only in the same manner in which they were being offered or
marketed as of that date.'' Thus, to qualify for the grandfather
provision, the manner of offering or marketing the otherwise prohibited
product or service must remain the same as on the grandfather date.
[[Page 199]]
(ii) In interpreting this provision, the Board notes that Congress
designed the joint-marketing restrictions to prevent the significant
risk to the public posed by the conduct of such activities by insured
banks affiliated with companies engaged in general commerce, to ensure
objectivity in the credit-granting process and to ``minimize the unfair
competitive advantage that grandfathered commercial companies owning
nonbank banks might otherwise engage over regulated bank holding
companies and our competing commercial companies that have no subsidiary
bank.'' Conference Report at 125-126. The Board believes that
determinations regarding the manner of cross-marketing of a particular
product or service may best be accomplished by applying the limitation
to the particular facts in each case consistent with the stated purpose
of this provision of CEBA and the general principle that grandfather
restrictions and exceptions to general prohibitions must be narrowly
construed in order to prevent the exception from nullifying the rule.
Essentially, as in the scope of the term ``product or service'', the
guiding principle of Congressional intent with respect to this term is
to permit only the continuation of the specific types of cross-marketing
activity that were undertaken as of March 5, 1987.
(8) Eligibility for cross-marketing grandfather exemption. The
Conference Report also clarifies that entitlement to an exemption to
continue to cross-market products and services otherwise prohibited by
the statute applies only to the specific company that was engaged in the
activity as of March 5, 1987. Conference Report at 126. Thus, an
affiliate that was not engaged in cross-marketing products or services
as of the grandfather date may not commence these activities under the
exemption even if such activities were being conducted by another
affiliate. Id.; see also S. Rep. No. 100-19 at 33-34.
(e) Eligibility for grandfathered nonbank bank status. In reviewing
the reports required by CEBA, the Board notes that a number of
institutions that had not commenced business operations on August 10,
1987, the date of enactment of CEBA, claimed grandfather privileges
under section 4(f)(3) of CEBA. To qualify for grandfather privileges
under section 4(f)(3), the institution must have ``bec[o]me a bank as a
result of the enactment of [CEBA]'' and must have been controlled by a
nonbanking company on March 5, 1987. 12 U.S.C. 1843(f)(1)(A). An
institution that did not have FDIC insurance on August 10, 1987, and
that did not accept demand deposits or transaction accounts or engage in
the business of commercial lending on that date, would not have become a
bank as a result of enactment of CEBA. Thus, institutions that had not
commenced operations on August 10, 1987, could not qualify for
grandfather privileges under section 4(f)(3) of CEBA. This view is
supported by the activity limitations of section 4(f)(3), which, as
noted, limit the activities of grandfathered nonbank banks to those in
which they were lawfully engaged as of March 5, 1987. A nonbank bank
that had not commenced conducting business activities on March 5, 1987,
could not after enactment of CEBA engage in any activities under this
provision.
[Reg. Y, 53 FR 37746, Sept. 28, 1988, as amended by Reg. Y, 62 FR 9343,
Feb. 28, 1997]
Subpart J_Merchant Banking Investments
Source: Reg. Y, 66 FR 8484, Jan. 31, 2001, unless otherwise noted.
Sec. 225.170 What type of investments are permitted by this subpart, and
under what conditions may they be made?
(a) What types of investments are permitted by this subpart? Section
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) and
this subpart authorize a financial holding company, directly or
indirectly and as principal or on behalf of one or more persons, to
acquire or control any amount of shares, assets or ownership interests
of a company or other entity that is engaged in any activity not
otherwise authorized for the financial holding company under section 4
of the Bank Holding Company Act. For purposes of this subpart, shares,
assets or ownership interests acquired or controlled under section
4(k)(4)(H) and this subpart are
[[Page 200]]
referred to as ``merchant banking investments.'' A financial holding
company may not directly or indirectly acquire or control any merchant
banking investment except in compliance with the requirements of this
subpart.
(b) Must the investment be a bona fide merchant banking investment?
The acquisition or control of shares, assets or ownership interests
under this subpart is not permitted unless it is part of a bona fide
underwriting or merchant or investment banking activity.
(c) What types of ownership interests may be acquired? Shares,
assets or ownership interests of a company or other entity include any
debt or equity security, warrant, option, partnership interest, trust
certificate or other instrument representing an ownership interest in
the company or entity, whether voting or nonvoting.
(d) Where in a financial holding company may merchant banking
investments be made? A financial holding company and any subsidiary
(other than a depository institution or subsidiary of a depository
institution) may acquire or control merchant banking investments. A
financial holding company and its subsidiaries may not acquire or
control merchant banking investments on behalf of a depository
institution or subsidiary of a depository institution.
(e) May assets other than shares be held directly? A financial
holding company may not under this subpart acquire or control assets,
other than debt or equity securities or other ownership interests in a
company, unless:
(1) The assets are held by or promptly transferred to a portfolio
company;
(2) The portfolio company maintains policies, books and records,
accounts, and other indicia of corporate, partnership or limited
liability organization and operation that are separate from the
financial holding company and limit the legal liability of the financial
holding company for obligations of the portfolio company; and
(3) The portfolio company has management that is separate from the
financial holding company to the extent required by Sec. 225.171.
(f) What type of affiliate is required for a financial holding
company to make merchant banking investments? A financial holding
company may not acquire or control merchant banking investments under
this subpart unless the financial holding company qualifies under at
least one of the following paragraphs:
(1) Securities affiliate. The financial holding company is or has an
affiliate that is registered under the Securities Exchange Act of 1934
(15 U.S.C. 78c, 78o, 78o-4) as:
(i) A broker or dealer; or
(ii) A municipal securities dealer, including a separately
identifiable department or division of a bank that is registered as a
municipal securities dealer.
(2) Insurance affiliate with an investment adviser affiliate. The
financial holding company controls:
(i) An insurance company that is predominantly engaged in
underwriting life, accident and health, or property and casualty
insurance (other than credit-related insurance), or providing and
issuing annuities; and
(ii) A company that:
(A) Is registered with the Securities and Exchange Commission as an
investment adviser under the Investment Advisers Act of 1940 (15 U.S.C.
80b-1 et seq.); and
(B) Provides investment advice to an insurance company.
Sec. 225.171 What are the limitations on managing or operating a portfolio
company held as a merchant banking investment?
(a) May a financial holding company routinely manage or operate a
portfolio company? Except as permitted in paragraph (e) of this section,
a financial holding company may not routinely manage or operate any
portfolio company.
(b) When does a financial holding company routinely manage or
operate a company?
(1) Examples of routine management or operation--(i) Executive
officer interlocks at the portfolio company. A financial holding company
routinely manages or operates a portfolio company if any director,
officer or employee of the financial holding company serves as or has
the responsibilities of an executive officer of the portfolio company.
(ii) Interlocks by executive officers of the financial holding
company.--
[[Page 201]]
(A) Prohibition. A financial holding company routinely manages or
operates a portfolio company if any executive officer of the financial
holding company serves as or has the responsibilities of an officer or
employee of the portfolio company.
(B) Definition. For purposes of paragraph (b)(1)(ii)(A) of this
section, the term ``financial holding company'' includes the financial
holding company and only the following subsidiaries of the financial
holding company:
(1) A securities broker or dealer registered under the Securities
Exchange Act of 1934;
(2) A depository institution;
(3) An affiliate that engages in merchant banking activities under
this subpart or insurance company investment activities under section
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I));
(4) A small business investment company (as defined in section
302(b) of the Small Business Investment Act of 1958 (15 U.S.C. 682(b))
controlled by the financial holding company or by any depository
institution controlled by the financial holding company; and
(5) Any other affiliate that engages in significant equity
investment activities that are subject to a special capital charge under
the capital adequacy rules or guidelines of the Board.
(iii) Covenants regarding ordinary course of business. A financial
holding company routinely manages or operates a portfolio company if any
covenant or other contractual arrangement exists between the financial
holding company and the portfolio company that would restrict the
portfolio company's ability to make routine business decisions, such as
entering into transactions in the ordinary course of business or hiring
officers or employees other than executive officers.
(2) Presumptions of routine management or operation. A financial
holding company is presumed to routinely manage or operate a portfolio
company if:
(i) Any director, officer, or employee of the financial holding
company serves as or has the responsibilities of an officer (other than
an executive officer) or employee of the portfolio company; or
(ii) Any officer or employee of the portfolio company is supervised
by any director, officer, or employee of the financial holding company
(other than in that individual's capacity as a director of the portfolio
company).
(c) How may a financial holding company rebut a presumption that it
is routinely managing or operating a portfolio company? A financial
holding company may rebut a presumption that it is routinely managing or
operating a portfolio company under paragraph (b)(2) of this section by
presenting information to the Board demonstrating to the Board's
satisfaction that the financial holding company is not routinely
managing or operating the portfolio company.
(d) What arrangements do not involve routinely managing or operating
a portfolio company?--(1) Director representation at portfolio
companies. A financial holding company may select any or all of the
directors of a portfolio company or have one or more of its directors,
officers, or employees serve as directors of a portfolio company if:
(i) The portfolio company employs officers and employees responsible
for routinely managing and operating the company; and
(ii) The financial holding company does not routinely manage or
operate the portfolio company, except as permitted in paragraph (e) of
this section.
(2) Covenants or other provisions regarding extraordinary events. A
financial holding company may, by virtue of covenants or other written
agreements with a portfolio company, restrict the ability of the
portfolio company, or require the portfolio company to consult with or
obtain the approval of the financial holding company, to take actions
outside of the ordinary course of the business of the portfolio company.
Examples of the types of actions that may be subject to these types of
covenants or agreements include, but are not limited to, the following:
(i) The acquisition of significant assets or control of another
company by the portfolio company or any of its subsidiaries;
(ii) Removal or selection of an independent accountant or auditor or
investment banker by the portfolio company;
[[Page 202]]
(iii) Significant changes to the business plan or accounting methods
or policies of the portfolio company;
(iv) Removal or replacement of any or all of the executive officers
of the portfolio company;
(v) The redemption, authorization or issuance of any equity or debt
securities (including options, warrants or convertible shares) of the
portfolio company or any borrowing by the portfolio company outside of
the ordinary course of business;
(vi) The amendment of the articles of incorporation or by-laws (or
similar governing documents) of the portfolio company; and
(vii) The sale, merger, consolidation, spin-off, recapitalization,
liquidation, dissolution or sale of substantially all of the assets of
the portfolio company or any of its significant subsidiaries.
(3) Providing advisory and underwriting services to, and having
consultations with, a portfolio company. A financial holding company
may:
(i) Provide financial, investment and management consulting advice
to a portfolio company in a manner consistent with and subject to any
restrictions on such activities contained in Sec. Sec. 225.28(b)(6) or
225.86(b)(1) of this part (12 CFR 225.28(b)(6) and 225.86(b)(1));
(ii) Provide assistance to a portfolio company in connection with
the underwriting or private placement of its securities, including
acting as the underwriter or placement agent for such securities; and
(iii) Meet with the officers or employees of a portfolio company to
monitor or provide advice with respect to the portfolio company's
performance or activities.
(e) When may a financial holding company routinely manage or operate
a portfolio company?--(1) Special circumstances required. A financial
holding company may routinely manage or operate a portfolio company only
when intervention by the financial holding company is necessary or
required to obtain a reasonable return on the financial holding
company's investment in the portfolio company upon resale or other
disposition of the investment, such as to avoid or address a significant
operating loss or in connection with a loss of senior management at the
portfolio company.
(2) Duration Limited. A financial holding company may routinely
manage or operate a portfolio company only for the period of time as may
be necessary to address the cause of the financial holding company's
involvement, to obtain suitable alternative management arrangements, to
dispose of the investment, or to otherwise obtain a reasonable return
upon the resale or disposition of the investment.
(3) Notice required for extended involvement. A financial holding
company may not routinely manage or operate a portfolio company for a
period greater than nine months without prior written notice to the
Board.
(4) Documentation required. A financial holding company must
maintain and make available to the Board upon request a written record
describing its involvement in routinely managing or operating a
portfolio company.
(f) May a depository institution or its subsidiary routinely manage
or operate a portfolio company?--(1) In general. A depository
institution and a subsidiary of a depository institution may not
routinely manage or operate a portfolio company in which an affiliated
company owns or controls an interest under this subpart.
(2) Definition applying provisions governing routine management or
operation. For purposes of this section other than paragraph (e) and for
purposes of Sec. 225.173(d), a financial holding company includes a
depository institution controlled by the financial holding company and a
subsidiary of such a depository institution.
(3) Exception for certain subsidiaries of depository institutions.
For purposes of paragraph (e) of this section, a financial holding
company includes a financial subsidiary held in accordance with section
5136A of the Revised Statutes (12 U.S.C. 24a) or section 46 of the
Federal Deposit Insurance Act (12 U.S.C. 1831w), and a subsidiary that
is a small business investment company and that is held in accordance
with the Small Business Investment Act (15 U.S.C. 661 et seq.), and such
a subsidiary may, in accordance with the limitations set forth in this
section, routinely manage or operate a portfolio company in
[[Page 203]]
which an affiliated company owns or controls an interest under this
subpart.
Sec. 225.172 What are the holding periods permitted for merchant banking
investments?
(a) Must investments be made for resale? A financial holding company
may own or control shares, assets and ownership interests pursuant to
this subpart only for a period of time to enable the sale or disposition
thereof on a reasonable basis consistent with the financial viability of
the financial holding company's merchant banking investment activities.
(b) What period of time is generally permitted for holding merchant
banking investments?--(1) In general. Except as provided in this section
or Sec. 225.173, a financial holding company may not, directly or
indirectly, own, control or hold any share, asset or ownership interest
pursuant to this subpart for a period that exceeds 10 years.
(2) Ownership interests acquired from or transferred to companies
held under this subpart. For purposes of paragraph (b)(1) of this
section, shares, assets or ownership interests--
(i) Acquired by a financial holding company from a company in which
the financial holding company held an interest under this subpart will
be considered to have been acquired by the financial holding company on
the date that the share, asset or ownership interest was acquired by the
company; and
(ii) Acquired by a company from a financial holding company will be
considered to have been acquired by the company on the date that the
share, asset or ownership interest was acquired by the financial holding
company if--
(A) The financial holding company held the share, asset, or
ownership interest under this subpart; and
(B) The financial holding company holds an interest in the acquiring
company under this subpart.
(3) Interests previously held by a financial holding company under
limited authority. For purposes of paragraph (b)(1) of this section, any
shares, assets, or ownership interests previously owned or controlled,
directly or indirectly, by a financial holding company under any other
provision of the Federal banking laws that imposes a limited holding
period will if acquired under this subpart be considered to have been
acquired by the financial holding company under this subpart on the date
the financial holding company first acquired ownership or control of the
shares, assets or ownership interests under such other provision of law.
For purposes of this paragraph (b)(3), a financial holding company
includes a depository institution controlled by the financial holding
company and any subsidiary of such a depository institution.
(4) Approval required to hold interests held in excess of time
limit. A financial holding company may seek Board approval to own,
control or hold shares, assets or ownership interests of a company under
this subpart for a period that exceeds the period specified in paragraph
(b)(1) of this section. A request for approval must:
(i) Be submitted to the Board at least 90 days prior to the
expiration of the applicable time period;
(ii) Provide the reasons for the request, including information that
addresses the factors in paragraph (b)(5) of this section; and
(iii) Explain the financial holding company's plan for divesting the
shares, assets or ownership interests.
(5) Factors governing Board determinations. In reviewing any
proposal under paragraph (b)(4) of this section, the Board may consider
all the facts and circumstances related to the investment, including:
(i) The cost to the financial holding company of disposing of the
investment within the applicable period;
(ii) The total exposure of the financial holding company to the
company and the risks that disposing of the investment may pose to the
financial holding company;
(iii) Market conditions;
(iv) The nature of the portfolio company's business;
(v) The extent and history of involvement by the financial holding
company in the management and operations of the company; and
(vi) The average holding period of the financial holding company's
merchant banking investments.
[[Page 204]]
(6) Restrictions applicable to investments held beyond time period.
A financial holding company that directly or indirectly owns, controls
or holds any share, asset or ownership interest of a company under this
subpart for a total period that exceeds the period specified in
paragraph (b)(1) of this section must--
(i) For purposes of determining the financial holding company's
regulatory capital, apply to the financial holding company's adjusted
carrying value of such shares, assets, or ownership interests a capital
charge determined by the Board that must be:
(A) Higher than the maximum marginal Tier 1 capital charge
applicable under the Board's capital adequacy rules or guidelines (see
12 CFR 225 Appendix A) to merchant banking investments held by that
financial holding company; and
(B) In no event less than 25 percent of the adjusted carrying value
of the investment; and
(ii) Abide by any other restrictions that the Board may impose in
connection with granting approval under paragraph (b)(4) of this
section.
Sec. 225.173 How are investments in private equity funds treated under this
subpart?
(a) What is a private equity fund? For purposes of this subpart, a
``private equity fund'' is any company that:
(1) Is formed for the purpose of and is engaged exclusively in the
business of investing in shares, assets, and ownership interests of
financial and nonfinancial companies for resale or other disposition;
(2) Is not an operating company;
(3) No more than 25 percent of the total equity of which is held,
owned or controlled, directly or indirectly, by the financial holding
company and its directors, officers, employees and principal
shareholders;
(4) Has a maximum term of not more than 15 years; and
(5) Is not formed or operated for the purpose of making investments
inconsistent with the authority granted under section 4(k)(4)(H) of the
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) or evading the
limitations governing merchant banking investments contained in this
subpart.
(b) What form may a private equity fund take? A private equity fund
may be a corporation, partnership, limited liability company or other
type of company that issues ownership interests in any form.
(c) What is the holding period permitted for interests in private
equity funds?--(1) In general. A financial holding company may own,
control or hold any interest in a private equity fund under this subpart
and any interest in a portfolio company that is owned or controlled by a
private equity fund in which the financial holding company owns or
controls any interest under this subpart for the duration of the fund,
up to a maximum of 15 years.
(2) Request to hold interest for longer period. A financial holding
company may seek Board approval to own, control or hold an interest in
or held through a private equity fund for a period longer than the
duration of the fund in accordance with Sec. 225.172(b) of this
subpart.
(3) Application of rules. The rules described in Sec. 225.172(b)(2)
and (3) governing holding periods of interests acquired, transferred or
previously held by a financial holding company apply to interests in,
held through, or acquired from a private equity fund.
(d) How do the restrictions on routine management and operation
apply to private equity funds and investments held through a private
equity fund?--(1) Portfolio companies held through a private equity
fund. A financial holding company may not routinely manage or operate a
portfolio company that is owned or controlled by a private equity fund
in which the financial holding company owns or controls any interest
under this subpart, except as permitted under Sec. 225.171(e).
(2) Private equity funds controlled by a financial holding company.
A private equity fund that is controlled by a financial holding company
may not routinely manage or operate a portfolio company, except as
permitted under Sec. 225.171(e).
(3) Private equity funds that are not controlled by a financial
holding company. A private equity fund may routinely manage or operate a
portfolio
[[Page 205]]
company so long as no financial holding company controls the private
equity fund or as permitted under Sec. 225.171(e).
(4) When does a financial holding company control a private equity
fund? A financial holding company controls a private equity fund for
purposes of this subpart if the financial holding company, including any
director, officer, employee or principal shareholder of the financial
holding company:
(i) Serves as a general partner, managing member, or trustee of the
private equity fund (or serves in a similar role with respect to the
private equity fund);
(ii) Owns or controls 25 percent or more of any class of voting
shares or similar interests in the private equity fund;
(iii) In any manner selects, controls or constitutes a majority of
the directors, trustees or management of the private equity fund; or
(iv) Owns or controls more than 5 percent of any class of voting
shares or similar interests in the private equity fund and is the
investment adviser to the fund.
Sec. 225.174 What aggregate thresholds apply to merchant banking
investments?
(a) In general. A financial holding company may not, without Board
approval, directly or indirectly acquire any additional shares, assets
or ownership interests under this subpart or make any additional capital
contribution to any company the shares, assets or ownership interests of
which are held by the financial holding company under this subpart if
the aggregate carrying value of all merchant banking investments held by
the financial holding company under this subpart exceeds:
(1) 30 percent of the Tier 1 capital of the financial holding
company; or
(2) After excluding interests in private equity funds, 20 percent of
the Tier 1 capital of the financial holding company.
(b) How do these thresholds apply to a private equity fund?
Paragraph (a) of this section applies to the interest acquired or
controlled by the financial holding company under this subpart in a
private equity fund. Paragraph (a) of this section does not apply to any
interest in a company held by a private equity fund or to any interest
held by a person that is not affiliated with the financial holding
company.
(c) How long do these thresholds remain in effect? This Sec.
225.174 shall cease to be effective on the date that a final rule issued
by the Board that specifically addresses the appropriate regulatory
capital treatment of merchant banking investments becomes effective.
Sec. 225.175 What risk management, record keeping and reporting policies are
required to make merchant banking investments?
(a) What internal controls and records are necessary?--(1) General.
A financial holding company, including a private equity fund controlled
by a financial holding company, that makes investments under this
subpart must establish and maintain policies, procedures, records and
systems reasonably designed to conduct, monitor and manage such
investment activities and the risks associated with such investment
activities in a safe and sound manner, including policies, procedures,
records and systems reasonably designed to:
(i) Monitor and assess the carrying value, market value and
performance of each investment and the aggregate portfolio;
(ii) Identify and manage the market, credit, concentration and other
risks associated with such investments;
(iii) Identify, monitor and assess the terms, amounts and risks
arising from transactions and relationships (including contingent fees
or contingent interests) with each company in which the financial
holding company holds an interest under this subpart;
(iv) Ensure the maintenance of corporate separateness between the
financial holding company and each company in which the financial
holding company holds an interest under this subpart and protect the
financial holding company and its depository institution subsidiaries
from legal liability for the operations conducted and financial
obligations of each such company; and
(v) Ensure compliance with this part and any other provisions of law
governing transactions and relationships
[[Page 206]]
with companies in which the financial holding company holds an interest
under this subpart (e.g., fiduciary principles or sections 23A and 23B
of the Federal Reserve Act (12 U.S.C. 371c, 371c-1), if applicable).
(2) Availability of records. A financial holding company must make
the policies, procedures and records required by paragraph (a)(1) of
this section available to the Board or the appropriate Reserve Bank upon
request.
(b) What periodic reports must be filed? A financial holding company
must provide reports to the appropriate Reserve Bank in such format and
at such times as the Board may prescribe.
(c) Is notice required for the acquisition of companies?--(1)
Fulfillment of statutory notice requirement. Except as required in
paragraph (c)(2) of this section, no post-acquisition notice under
section 4(k)(6) of the Bank Holding Company Act (12 U.S.C. 1843(k)(6))
is required by a financial holding company in connection with an
investment made under this subpart if the financial holding company has
previously filed a notice under Sec. 225.87 indicating that it had
commenced merchant banking investment activities under this subpart.
(2) Notice of large individual investments. A financial holding
company must provide written notice to the Board on the appropriate form
within 30 days after acquiring more than 5 percent of the voting shares,
assets or ownership interests of any company under this subpart,
including an interest in a private equity fund, at a total cost to the
financial holding company that exceeds the lesser of 5 percent of the
Tier 1 capital of the financial holding company or $200 million.
Sec. 225.176 How do the statutory cross marketing and sections 23A and B
limitations apply to merchant banking investments?
(a) Are cross marketing activities prohibited?--(1) In general. A
depository institution, including a subsidiary of a depository
institution, controlled by a financial holding company may not:
(i) Offer or market, directly or through any arrangement, any
product or service of any company if more than 5 percent of the
company's voting shares, assets or ownership interests are owned or
controlled by the financial holding company pursuant to this subpart; or
(ii) Allow any product or service of the depository institution,
including any product or service of a subsidiary of the depository
institution, to be offered or marketed, directly or through any
arrangement, by or through any company described in paragraph (a)(1)(i)
of this section.
(2) How are certain subsidiaries treated? For purposes of paragraph
(a)(1) of this section, a subsidiary of a depository institution does
not include a financial subsidiary held in accordance with section 5136A
of the Revised Statutes (12 U.S.C. 24a) or section 46 of the Federal
Deposit Insurance Act. (12 U.S.C. 1831w), any company held by a company
owned in accordance with section 25 or 25A of the Federal Reserve Act
(12 U.S.C. 601 et seq.; 12 U.S.C. 611 et seq.), or any company held by a
small business investment company owned in accordance with the Small
Business Investment Act of 1958 (15 U.S.C. 661 et seq.).
(3) How do the cross marketing restrictions apply to private equity
funds? The restriction contained in paragraph (a)(1) of this section
does not apply to:
(i) Portfolio companies held by a private equity fund that the
financial holding company does not control; or
(ii) The sale, offer or marketing of any interest in a private
equity fund, whether or not controlled by the financial holding company.
(b) When are companies held under section 4(k)(4)(H) affiliates
under sections 23A and B?--(1) Rebuttable presumption of control. The
following rebuttable presumption of control shall apply for purposes of
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c, 371c-
1): if a financial holding company directly or indirectly owns or
controls more than 15 percent of the total equity of a company pursuant
to this subpart, the company shall be presumed to be an affiliate of any
member bank that is affiliated with the financial holding company.
(2) Request to rebut presumption. A financial holding company may
rebut
[[Page 207]]
this presumption by providing information acceptable to the Board
demonstrating that the financial holding company does not control the
company.
(3) Presumptions that control does not exist. Absent evidence to the
contrary, the presumption in paragraph (b)(1) of this section will be
considered to have been rebutted without Board approval under paragraph
(b)(2) of this section if any one of the following requirements are met:
(i) No officer, director or employee of the financial holding
company serves as a director, trustee, or general partner (or individual
exercising similar functions) of the company;
(ii) A person that is not affiliated or associated with the
financial holding company owns or controls a greater percentage of the
equity capital of the portfolio company than the amount owned or
controlled by the financial holding company, and no more than one
officer or employee of the holding company serves as a director or
trustee (or individual exercising similar functions) of the company; or
(iii) A person that is not affiliated or associated with the
financial holding company owns or controls more than 50 percent of the
voting shares of the portfolio company, and officers and employees of
the holding company do not constitute a majority of the directors or
trustees (or individuals exercising similar functions) of the company.
(4) Convertible instruments. For purposes of paragraph (b)(1) of
this section, equity capital includes options, warrants and any other
instrument convertible into equity capital.
(5) Application of presumption to private equity funds. A financial
holding company will not be presumed to own or control the equity
capital of a company for purposes of paragraph (b)(1) of this section
solely by virtue of an investment made by the financial holding company
in a private equity fund that owns or controls the equity capital of the
company unless the financial holding company controls the private equity
fund as described in Sec. 225.173(d)(4).
(6) Application of sections 23A and B to U.S. branches and agencies
of foreign banks. Sections 23A and 23B of the Federal Reserve Act (12
U.S.C. 371c, 371c-1) shall apply to all covered transactions between
each U.S. branch and agency of a foreign bank that acquires or controls,
or that is affiliated with a company that acquires or controls, merchant
banking investments and--
(i) Any portfolio company that the foreign bank or affiliated
company controls or is presumed to control under paragraph (b)(1) of
this section; and
(ii) Any company that the foreign bank or affiliated company
controls or is presumed to control under paragraph (b)(1) of this
section if the company is engaged in acquiring or controlling merchant
banking investments and the proceeds of the covered transaction are used
for the purpose of funding the company's merchant banking investment
activities.
Sec. 225.177 Definitions.
(a) What do references to a financial holding company include?--(1)
Except as otherwise expressly provided, the term ``financial holding
company'' as used in this subpart means the financial holding company
and all of its subsidiaries, including a private equity fund or other
fund controlled by the financial holding company.
(2) Except as otherwise expressly provided, the term ``financial
holding company'' does not include a depository institution or
subsidiary of a depository institution or any portfolio company
controlled directly or indirectly by the financial holding company.
(b) What do references to a depository institution include? For
purposes of this subpart, the term ``depository institution'' includes a
U.S. branch or agency of a foreign bank.
(c) What is a portfolio company? A portfolio company is any company
or entity:
(1) That is engaged in any activity not authorized for the financial
holding company under section 4 of the Bank Holding Company Act (12
U.S.C. 1843); and
(2) Any shares, assets or ownership interests of which are held,
owned or controlled directly or indirectly by the financial holding
company pursuant to
[[Page 208]]
this subpart, including through a private equity fund that the financial
holding company controls.
(d) Who are the executive officers of a company?--(1) An executive
officer of a company is any person who participates or has the authority
to participate (other than in the capacity as a director) in major
policymaking functions of the company, whether or not the officer has an
official title, the title designates the officer as an assistant, or the
officer serves without salary or other compensation.
(2) The term ``executive officer'' does not include--
(i) Any person, including a person with an official title, who may
exercise a certain measure of discretion in the performance of his
duties, including the discretion to make decisions in the ordinary
course of the company's business, but who does not participate in the
determination of major policies of the company and whose decisions are
limited by policy standards fixed by senior management of the company;
or
(ii) Any person who is excluded from participating (other than in
the capacity of a director) in major policymaking functions of the
company by resolution of the board of directors or by the bylaws of the
company and who does not in fact participate in such policymaking
functions.
Conditions to Orders
Sec. 225.200 Conditions to Board's section 20 orders.
(a) Introduction. Under section 20 of the Glass-Steagall Act (12
U.S.C. 377) and section 4(c)(8) of the Bank Holding Company Act (12
U.S.C. 1843(c)(8)), a nonbank subsidiary of a bank holding company may
to a limited extent underwrite and deal in securities for which
underwriting and dealing by a member bank is prohibited. Pursuant to the
Securities Act of 1933 and the Securities Exchange Act of 1934, these
so-called section 20 subsidiaries are required to register with the SEC
as broker-dealers and are subject to all the financial reporting, anti-
fraud and financial responsibility rules applicable to broker-dealers.
In addition, transactions between insured depository institutions and
their section 20 affiliates are restricted by sections 23A and 23B of
the Federal Reserve Act (12 U.S.C. 371c and 371c-1). The Board expects a
section 20 subsidiary, like any other subsidiary of a bank holding
company, to be operated prudently. Doing so would include observing
corporate formalities (such as the maintenance of separate accounting
and corporate records), and instituting appropriate risk management,
including independent trading and exposure limits consistent with parent
company guidelines.
(b) Conditions. As a condition of each order approving establishment
of a section 20 subsidiary, a bank holding company shall comply with the
following conditions.
(1) Capital. (i) A bank holding company shall maintain adequate
capital on a fully consolidated basis. If operating a section 20
authorized to underwrite and deal in all types of debt and equity
securities, a bank holding company shall maintain strong capital on a
fully consolidated basis.
(ii) In the event that a bank or thrift affiliate of a section 20
subsidiary shall become less than well capitalized (as defined in
section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o), and
the bank holding company shall fail to restore it promptly to the well
capitalized level, the Board may, in its discretion, reimpose the
funding, credit extension and credit enhancement firewalls contained in
its 1989 order allowing underwriting and dealing in bank-ineligible
securities,\1\ or order the bank holding company to divest the section
20 subsidiary.
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\1\ Firewalls 5-8, 19, 21 and 22 of J.P. Morgan & Co., The Chase
Manhattan Corp., Bankers Trust New York Corp., Citicorp, and Security
Pacific Corp., 75 Federal Reserve Bulletin 192, 214-16 (1989).
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(iii) A foreign bank that operates a branch or agency in the United
States shall maintain strong capital on a fully consolidated basis at
levels above the minimum levels required by the Basle Capital Accord. In
the event that the Board determines that the foreign bank's capital has
fallen below these levels and the foreign bank fails to restore its
capital position promptly, the Board may, in its discretion, reimpose
the funding, credit extension and credit
[[Page 209]]
enhancement firewalls contained in its 1990 order allowing foreign banks
to underwrite and deal in bank-ineligible securities,\2\ or order the
foreign bank to divest the section 20 subsidiary.
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\2\ Firewalls 5-8, 19, 21 and 22 of Canadian Imperial Bank of
Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank PLC,
76 Federal Reserve Bulletin 158, (1990).
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(2) Internal controls. (i) Each bank holding company or foreign bank
shall cause its subsidiary banks, thrifts, branches or agencies \3\ to
adopt policies and procedures, including appropriate limits on exposure,
to govern their participation in transactions underwritten or arranged
by a section 20 affiliate.
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\3\ The terms ``branch'' and ``agency'' refer to a U.S. branch and
agency of a foreign bank.
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(ii) Each bank holding company or foreign bank shall ensure that an
independent and thorough credit evaluation has been undertaken in
connection with participation by a bank, thrift, or branch or agency in
such transactions, and that adequate documentation of that evaluation is
maintained for review by examiners of the appropriate federal banking
agency and the Federal Reserve.
(3) Interlocks restriction. (i) Directors, officers or employees of
a bank or thrift subsidiary of a bank holding company, or a bank or
thrift subsidiary or branch or agency of a foreign bank, shall not serve
as a majority of the board of directors or the chief executive officer
of an affiliated section 20 subsidiary.
(ii) Directors, officers or employees of a section 20 subsidiary
shall not serve as a majority of the board of directors or the chief
executive officer of an affiliated bank or thrift subsidiary or branch
or agency, except that the manager of a branch or agency may act as a
director of the underwriting subsidiary.
(iii) For purposes of this standard, the manager of a branch or
agency of a foreign bank generally will be considered to be the chief
executive officer of the branch or agency.
(4) Customer disclosure--(i) Disclosure to section 20 customers. A
section 20 subsidiary shall provide, in writing, to each of its retail
customers,\4\ at the time an investment account is opened, the same
minimum disclosures, and obtain the same customer acknowledgment,
described in the Interagency Statement on Retail Sales of Nondeposit
Investment Products (Statement) as applicable in such situations. These
disclosures must be provided regardless of whether the section 20
subsidiary is itself engaged in activities through arrangements with a
bank that is covered by the Statement.
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\4\ For purposes of this operating standard, a retail customer is
any customer that is not an ``accredited investor'' as defined in 17 CFR
230.501(a).
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(ii) Disclosures accompanying investment advice. A director,
officer, or employee of a bank, thrift, branch or agency may not express
an opinion on the value or the advisability of the purchase or the sale
of a bank-ineligible security that he or she knows is being underwritten
or dealt in by a section 20 affiliate unless he or she notifies the
customer of the affiliate's role.
(5) Intra-day credit. Any intra-day extension of credit to a section
20 subsidiary by an affiliated bank, thrift, branch or agency shall be
on market terms consistent with section 23B of the Federal Reserve Act.
(6) Restriction on funding purchases of securities during
underwriting period. No bank, thrift, branch or agency shall knowingly
extend credit to a customer secured by, or for the purpose of
purchasing, any bank-ineligible security that a section 20 affiliate is
underwriting or has underwritten within the past 30 days, unless:
(i) The extension of credit is made pursuant to, and consistent with
any conditions imposed in a preexisting line of credit that was not
established in contemplation of the underwriting; or
(ii) The extension of credit is made in connection with clearing
transactions for the section 20 affiliate.
(7) Reporting requirement. (i) Each bank holding company or foreign
bank shall submit quarterly to the appropriate Federal Reserve Bank any
FOCUS report filed with the NASD or other self-regulatory organizations,
and any information required by the
[[Page 210]]
Board to monitor compliance with these operating standards and section
20 of the Glass-Steagall Act, on forms provided by the Board.
(ii) In the event that a section 20 subsidiary is required to
furnish notice concerning its capitalization to the Securities and
Exchange Commission pursuant to 17 CFR 240.17a-11, a copy of the notice
shall be filed concurrently with the appropriate Federal Reserve Bank.
(8) Foreign banks. A foreign bank shall ensure that any extension of
credit by its branch or agency to a section 20 affiliate, and any
purchase by such branch or agency, as principal or fiduciary, of
securities for which a section 20 affiliate is a principal underwriter,
conforms to sections 23A and 23B of the Federal Reserve Act, and that
its branches and agencies not advertise or suggest that they are
responsible for the obligations of a section 20 affiliate, consistent
with section 23B(c) of the Federal Reserve Act.
[62 FR 45306, Aug. 27, 1997, as amended by Reg. Y, 63 FR 14804, Mar. 27,
1998]
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
I. Overview
The Board of Governors of the Federal Reserve System has adopted a
risk-based capital measure to assist in the assessment of the capital
adequacy of bank holding companies (banking organizations).\1\ The
principal objectives of this measure are to: (i) Make regulatory capital
requirements more sensitive to differences in risk profiles among
banking organizations; (ii) factor off-balance sheet exposures into the
assessment of capital adequacy; (iii) minimize disincentives to holding
liquid, low-risk assets; and (iv) achieve greater consistency in the
evaluation of the capital adequacy of major banking organizations
throughout the world.\2\
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\1\ Supervisory ratios that relate capital to total assets for bank
holding companies are outlined in appendices B and D of this part.
\2\ The risk-based capital measure is based upon a framework
developed jointly by supervisory authorities from the countries
represented on the Basle Committee on Banking Regulations and
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the
Group of Ten Central Bank Governors. The framework is described in a
paper prepared by the BSC entitled ``International Convergence of
Capital Measurement,'' July 1988.
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The risk-based capital guidelines include both a definition of
capital and a framework for calculating weighted risk assets by
assigning assets and off-balance sheet items to broad risk categories.
An institution's risk-based capital ratio is calculated by dividing its
qualifying capital (the numerator of the ratio) by its weighted risk
assets (the denominator).\3\ The definition of qualifying capital is
outlined below in section II, and the procedures for calculating
weighted risk assets are discussed in section III. Attachment I
illustrates a sample calculation of weighted risk assets and the risk-
based capital ratio.
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\3\ Banking organizations will initially be expected to utilize
period-end amounts in calculating their risk-based capital ratios. When
necessary and appropriate, ratios based on average balances may also be
calculated on a case-by-case basis. Moreover, to the extent banking
organizations have data on average balances that can be used to
calculate risk-based ratios, the Federal Reserve will take such data
into account.
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In addition, when certain organizations that engage in trading
activities calculate their risk-based capital ratio under this appendix
A, they must also refer to appendix E of this part, which incorporates
capital charges for certain market risks into the risk-based capital
ratio. When calculating their risk-based capital ratio under this
appendix A, such organizations are required to refer to appendix E of
this part for supplemental rules to determine qualifying and excess
capital, calculate risk-weighted assets, calculate market risk
equivalent assets, and calculate risk-based capital ratios adjusted for
market risk.
The risk-based capital guidelines also establish a schedule for
achieving a minimum supervisory standard for the ratio of qualifying
capital to weighted risk assets and provide for transitional
arrangements during a phase-in period to facilitate adoption and
implementation of the measure at the end of 1992. These interim
standards and transitional arrangements are set forth in section IV.
The risk-based guidelines apply on a consolidated basis to any bank
holding company with consolidated assets of $500 million or more. The
risk-based guidelines also apply on a consolidated basis to any bank
holding company with consolidated assets of less than $500 million if
the holding company (i) is engaged in significant nonbanking activities
either directly or through a nonbank subsidiary; (ii) conducts
significant off-balance sheet activities (including
[[Page 211]]
securitization and asset management or administration) either directly
or through a nonbank subsidiary; or (iii) has a material amount of debt
or equity securities outstanding (other than trust preferred securities)
that are registered with the Securities and Exchange Commission (SEC).
The Federal Reserve may apply the risk-based guidelines at its
discretion to any bank holding company, regardless of asset size, if
such action is warranted for supervisory purposes.\4\
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\4\ [Reserved]
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The risk-based guidelines are to be used in the inspection and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. Thus, in considering an application filed
by a bank holding company, the Federal Reserve will take into account
the organization's risk-based capital ratio, the reasonableness of its
capital plans, and the degree of progress it has demonstrated toward
meeting the interim and final risk-based capital standards.
The risk-based capital ratio focuses principally on broad categories
of credit risk, although the framework for assigning assets and off-
balance sheet items to risk categories does incorporate elements of
transfer risk, as well as limited instances of interest rate and market
risk. The risk-based ratio does not, however, incorporate other factors
that can affect an organization's financial condition. These factors
include overall interest rate exposure; liquidity, funding and market
risks; the quality and level of earnings; investment or loan portfolio
concentrations; the quality of loans and investments; the effectiveness
of loan and investment policies; and management's ability to monitor and
control financial and operating risks.
In addition to evaluating capital ratios, an overall assessment of
capital adequacy must take account of these other factors, including, in
particular, the level and severity of problem and classified assets. For
this reason, the final supervisory judgment on an organization's capital
adequacy may differ significantly from conclusions that might be drawn
solely from the level of the organization's risk-based capital ratio.
The risk-based capital guidelines establish minimum ratios of
capital to weighted risk assets. In light of the considerations just
discussed, banking organizations generally are expected to operate well
above the minimum risk-based ratios. In particular, banking
organizations contemplating significant expansion proposals are expected
to maintain strong capital levels substantially above the minimum ratios
and should not allow significant diminution of financial strength below
these strong levels to fund their expansion plans. Institutions with
high or inordinate levels of risk are also expected to operate above
minimum capital standards. In all cases, institutions should hold
capital commensurate with the level and nature of the risks to which
they are exposed. Banking organizations that do not meet the minimum
risk-based standard, or that are otherwise considered to be inadequately
capitalized, are expected to develop and implement plans acceptable to
the Federal Reserve for achieving adequate levels of capital within a
reasonable period of time.
The Board will monitor the implementation and effect of these
guidelines in relation to domestic and international developments in the
banking industry. When necessary and appropriate, the Board will
consider the need to modify the guidelines in light of any significant
changes in the economy, financial markets, banking practices, or other
relevant factors.
II. Definition of Qualifying Capital for the Risk Based Capital Ratio
(i) A banking organization's qualifying total capital consists of
two types of capital components: ``core capital elements'' (tier 1
capital elements) and ``supplementary capital elements'' (tier 2 capital
elements). These capital elements and the various limits, restrictions,
and deductions to which they are subject, are discussed below. To
qualify as an element of tier 1 or tier 2 capital, an instrument must be
fully paid up and effectively unsecured. Accordingly, if a banking
organization has purchased, or has directly or indirectly funded the
purchase of, its own capital instrument, that instrument generally is
disqualified from inclusion in regulatory capital. A qualifying tier 1
or tier 2 capital instrument must be subordinated to all senior
indebtedness of the organization. If issued by a bank, it also must be
subordinated to claims of depositors. In addition, the instrument must
not contain or be covered by any covenants, terms, or restrictions that
are inconsistent with safe and sound banking practices.
(ii) On a case-by-case basis, the Federal Reserve may determine
whether, and to what extent, any instrument that does not fit wholly
within the terms of a capital element set forth below, or that does not
have the characteristics or the ability to absorb losses commensurate
with the capital treatment specified below, will qualify as an element
of tier 1 or tier 2 capital. In making such a determination, the Federal
Reserve will consider the similarity of the instrument to instruments
explicitly addressed in the guidelines; the ability of the instrument to
absorb losses, particularly while the organization operates as a going
concern; the maturity and redemption features of the instrument; and
other relevant terms and factors.
[[Page 212]]
(iii) The redemption of capital instruments before stated maturity
could have a significant impact on an organization's overall capital
structure. Consequently, an organization should consult with the Federal
Reserve before redeeming any equity or other capital instrument included
in tier 1 or tier 2 capital prior to stated maturity if such redemption
could have a material effect on the level or composition of the
organization's capital base. Such consultation generally would not be
necessary when the instrument is to be redeemed with the proceeds of, or
replaced by, a like amount of a capital instrument that is of equal or
higher quality with regard to terms and maturity and the Federal Reserve
considers the organization's capital position to be fully sufficient.
A. The Definition and Components of Qualifying Capital
1. Tier 1 capital. Tier 1 capital generally is defined as the sum of
core capital elements less any amounts of goodwill, other intangible
assets, interest-only strips receivables, deferred tax assets,
nonfinancial equity investments, and other items that are required to be
deducted in accordance with section II.B. of this appendix. Tier 1
capital must represent at least 50 percent of qualifying total capital.
a. Core capital elements (tier 1 capital elements). The elements
qualifying for inclusion in the tier 1 component of a banking
organization's qualifying total capital are:
i. Qualifying common stockholders' equity;
ii. Qualifying noncumulative perpetual preferred stock (including
related surplus);
iii. Minority interest related to qualifying common or noncumulative
perpetual preferred stock directly issued by a consolidated U.S.
depository institution or foreign bank subsidiary (Class A minority
interest); and
iv. Restricted core capital elements. The aggregate of these items
is limited within tier 1 capital as set forth in section II.A.1.b. of
this appendix. These elements are defined to include:
(1) Qualifying cumulative perpetual preferred stock (including
related surplus);
(2) Minority interest related to qualifying cumulative perpetual
preferred stock directly issued by a consolidated U.S. depository
institution or foreign bank subsidiary (Class B minority interest);
(3) Minority interest related to qualifying common stockholders'
equity or perpetual preferred stock issued by a consolidated subsidiary
that is neither a U.S. depository institution nor a foreign bank (Class
C minority interest); and
(4) Qualifying trust preferred securities.
b. Limits on restricted core capital elements--i. Limits. (1) The
aggregate amount of restricted core capital elements that may be
included in the tier 1 capital of a banking organization must not exceed
25 percent of the sum of all core capital elements, including restricted
core capital elements, net of goodwill less any associated deferred tax
liability. Stated differently, the aggregate amount of restricted core
capital elements is limited to one-third of the sum of core capital
elements, excluding restricted core capital elements, net of goodwill
less any associated deferred tax liability.
(2) In addition, the aggregate amount of restricted core capital
elements (other than qualifying mandatory convertible preferred
securities \5\) that may be included in the tier 1 capital of an
internationally active banking organization \6\ must not exceed 15
percent of the sum of all core capital elements, including restricted
core capital elements, net of goodwill less any associated deferred tax
liability.
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\5\ Qualifying mandatory convertible preferred securities generally
consist of the joint issuance by a bank holding company to investors of
trust preferred securities and a forward purchase contract, which the
investors fully collateralize with the securities, that obligates the
investors to purchase a fixed amount of the bank holding company's
common stock, generally in three years. A bank holding company wishing
to issue mandatorily convertible preferred securities and include them
in tier 1 capital must consult with the Federal Reserve prior to
issuance to ensure that the securities' terms are consistent with tier 1
capital treatment.
\6\ For this purpose, an internationally active banking organization
is a banking organization that (1) as of its most recent year-end FR Y-
9C reports total consolidated assets equal to $250 billion or more or
(2) on a consolidated basis, reports total on-balance-sheet foreign
exposure of $10 billion or more on its filings of the most recent year-
end FFIEC 009 Country Exposure Report.
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(3) Amounts of restricted core capital elements in excess of this
limit generally may be included in tier 2 capital. The excess amounts of
restricted core capital elements that are in the form of Class C
minority interest and qualifying trust preferred securities are subject
to further limitation within tier 2 capital in accordance with section
II.A.2.d.iv. of this appendix. A banking organization may attribute
excess amounts of restricted core capital elements first to any
qualifying cumulative perpetual preferred stock or to Class B minority
interest, and second to qualifying trust preferred securities or to
Class C minority interest, which are subject to a tier 2 sublimit.
ii. Transition.
(1) The quantitative limits for restricted core capital elements set
forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix become
effective on March 31, 2009. Prior to
[[Page 213]]
that time, a banking organization with restricted core capital elements
in amounts that cause it to exceed these limits must consult with the
Federal Reserve on a plan for ensuring that the banking organization is
not unduly relying on these elements in its capital base and, where
appropriate, for reducing such reliance to ensure that the organization
complies with these limits as of March 31, 2009.
(2) Until March 31, 2009, the aggregate amount of qualifying
cumulative perpetual preferred stock (including related surplus) and
qualifying trust preferred securities that a banking organization may
include in tier 1 capital is limited to 25 percent of the sum of the
following core capital elements: qualifying common stockholders' equity,
Qualifying noncumulative and cumulative perpetual preferred stock
(including related surplus), qualifying minority interest in the equity
accounts of consolidated subsidiaries, and qualifying trust preferred
securities. Amounts of qualifying cumulative perpetual preferred stock
(including related surplus) and qualifying trust preferred securities in
excess of this limit may be included in tier 2 capital.
(3) Until March 31, 2009, internationally active banking
organizations generally are expected to limit the amount of qualifying
cumulative perpetual preferred stock (including related surplus) and
qualifying trust preferred securities included in tier 1 capital to 15
percent of the sum of core capital elements set forth in section
II.A.1.b.ii.2. of this appendix.
c. Definitions and requirements for core capital elements--i.
Qualifying common stockholders' equity.
(1) Definition. Qualifying common stockholders' equity is limited to
common stock; related surplus; and retained earnings, including capital
reserves and adjustments for the cumulative effect of foreign currency
translation, net of any treasury stock, less net unrealized holding
losses on available-for-sale equity securities with readily determinable
fair values. For this purpose, net unrealized holding gains on such
equity securities and net unrealized holding gains (losses) on
available-for-sale debt securities are not included in qualifying common
stockholders' equity.
(2) Restrictions on terms and features. A capital instrument that
has a stated maturity date or that has a preference with regard to
liquidation or the payment of dividends is not deemed to be a component
of qualifying common stockholders' equity, regardless of whether or not
it is called common equity. Terms or features that grant other
preferences also may call into question whether the capital instrument
would be deemed to be qualifying common stockholders' equity. Features
that require, or provide significant incentives for, the issuer to
redeem the instrument for cash or cash equivalents will render the
instrument ineligible as a component of qualifying common stockholders'
equity.
(3) Reliance on voting common stockholders' equity. Although section
II.A.1. of this appendix allows for the inclusion of elements other than
common stockholders' equity within tier 1 capital, voting common
stockholders' equity, which is the most desirable capital element from a
supervisory standpoint, generally should be the dominant element within
tier 1 capital. Thus, banking organizations should avoid over-reliance
on preferred stock and nonvoting elements within tier 1 capital. Such
nonvoting elements can include portions of common stockholders' equity
where, for example, a banking organization has a class of nonvoting
common equity, or a class of voting common equity that has substantially
fewer voting rights per share than another class of voting common
equity. Where a banking organization relies excessively on nonvoting
elements within tier 1 capital, the Federal Reserve generally will
require the banking organization to allocate a portion of the nonvoting
elements to tier 2 capital.
ii. Qualifying perpetual preferred stock.
(1) Qualifying requirements. Perpetual preferred stock qualifying
for inclusion in tier 1 capital has no maturity date and cannot be
redeemed at the option of the holder. Perpetual preferred stock will
qualify for inclusion in tier 1 capital only if it can absorb losses
while the issuer operates as a going concern.
(2) Restrictions on terms and features. Perpetual preferred stock
included in tier 1 capital may not have any provisions restricting the
banking organization's ability or legal right to defer or waive
dividends, other than provisions requiring prior or concurrent deferral
or waiver of payments on more junior instruments, which the Federal
Reserve generally expects in such instruments consistent with the notion
that the most junior capital elements should absorb losses first.
Dividend deferrals or waivers for preferred stock, which the Federal
Reserve expects will occur either voluntarily or at its direction when
an organization is in a weakened condition, must not be subject to
arrangements that would diminish the ability of the deferral to shore up
the banking organization's resources. Any perpetual preferred stock with
a feature permitting redemption at the option of the issuer may qualify
as tier 1 capital only if the redemption is subject to prior approval of
the Federal Reserve. Features that require, or create significant
incentives for the issuer to redeem the instrument for cash or cash
equivalents will render the instrument ineligible for inclusion in tier
1 capital. For example, perpetual preferred stock that has a credit-
sensitive dividend feature--that is, a dividend rate that is reset
periodically based, in whole or
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in part, on the banking organization's current credit standing--
generally does not qualify for inclusion in tier 1 capital.\7\
Similarly, perpetual preferred stock that has a dividend rate step-up or
a market value conversion feature--that is, a feature whereby the holder
must or can convert the preferred stock into common stock at the market
price prevailing at the time of conversion--generally does not qualify
for inclusion in tier 1 capital.\8\ Perpetual preferred stock that does
not qualify for inclusion in tier 1 capital generally will qualify for
inclusion in tier 2 capital.
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\7\ Traditional floating-rate or adjustable-rate perpetual preferred
stock (that is, perpetual preferred stock in which the dividend rate is
not affected by the issuer's credit standing or financial condition but
is adjusted periodically in relation to an independent index based
solely on general market interest rates), however, generally qualifies
for inclusion in tier 1 capital provided all other requirements are met.
\8\ Traditional convertible perpetual preferred stock, which the
holder must or can convert into a fixed number of common shares at a
preset price, generally qualifies for inclusion in tier 1 capital
provided all other requirements are met.
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(3) Noncumulative and cumulative features. Perpetual preferred stock
that is noncumulative generally may not permit the accumulation or
payment of unpaid dividends in any form, including in the form of common
stock. Perpetual preferred stock that provides for the accumulation or
future payment of unpaid dividends is deemed to be cumulative,
regardless of whether or not it is called noncumulative.
iii. Qualifying minority interest. Minority interest in the common
and preferred stockholders' equity accounts of a consolidated subsidiary
(minority interest) represents stockholders' equity associated with
common or preferred equity instruments issued by a banking
organization's consolidated subsidiary that are held by investors other
than the banking organization. Minority interest is included in tier 1
capital because, as a general rule, it represents equity that is freely
available to absorb losses in the issuing subsidiary. Nonetheless,
minority interest typically is not available to absorb losses in the
banking organization as a whole, a feature that is a particular concern
when the minority interest is issued by a subsidiary that is neither a
U.S. depository institution nor a foreign bank. For this reason, this
appendix distinguishes among three types of qualifying minority
interest. Class A minority interest is minority interest related to
qualifying common and noncumulative perpetual preferred equity
instruments issued directly (that is, not through a subsidiary) by a
consolidated U.S. depository institution \9\ or foreign bank \10\
subsidiary of a banking organization. Class A minority interest is not
subject to a formal limitation within tier 1 capital. Class B minority
interest is minority interest related to qualifying cumulative perpetual
preferred equity instruments issued directly by a consolidated U.S.
depository institution or foreign bank subsidiary of a banking
organization. Class B minority interest is a restricted core capital
element subject to the limitations set forth in section II.A.1.b.i. of
this appendix, but is not subject to a tier 2 sub-limit. Class C
minority interest is minority interest related to qualifying common or
perpetual preferred stock issued by a banking organization's
consolidated subsidiary that is neither a U.S. depository institution
nor a foreign bank. Class C minority interest is eligible for inclusion
in tier 1 capital as a restricted core capital element and is subject to
the limitations set forth in sections II.A.1.b.i. and II.A.2.d.iv. of
this appendix. Minority interest in small business investment companies,
investment funds that hold nonfinancial equity investments (as defined
in section II.B.5.b. of this appendix), and subsidiaries engaged in
nonfinancial activities are not included in the banking organization's
tier 1 or total capital if the banking organization's interest in the
company or fund is held under one of the legal authorities listed in
section II.B.5.b. of this appendix. In addition, minority interest in
consolidated asset-backed commercial paper programs (ABCP) (as defined
in section III.B.6. of this appendix) that are sponsored by a banking
organization are not included in the organization's tier 1 or total
capital if the organization excludes the consolidated assets of such
programs from risk-weighted assets pursuant to section III.B.6. of this
appendix.
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\9\ U.S. depository institutions are defined to include branches
(foreign and domestic) of federally insured banks and depository
institutions chartered and headquartered in the 50 states of the United
States, the District of Columbia, Puerto Rico, and U.S. territories and
possessions. The definition encompasses banks, mutual or stock savings
banks, savings or building and loan associations, cooperative banks,
credit unions, and international banking facilities of domestic banks.
\10\ For this purpose, a foreign bank is defined as an institution
that engages in the business of banking; is recognized as a bank by the
bank supervisory or monetary authorities of the country of its
organization or principal banking operations; receives deposits to a
substantial extent in the regular course of business; and has the power
to accept demand deposits.
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iv. Qualifying trust preferred securities.
[[Page 215]]
(1) A banking organization that wishes to issue trust preferred
securities and include them in tier 1 capital must first consult with
the Federal Reserve. Trust preferred securities are defined as undated
preferred securities issued by a trust or similar entity sponsored (but
generally not consolidated) by a banking organization that is the sole
common equity holder of the trust. Qualifying trust preferred securities
must allow for dividends to be deferred for at least twenty consecutive
quarters without an event of default, unless an event of default leading
to acceleration permitted under section II.A.1.c.iv.(2) has occurred.
The required notification period for such deferral must be reasonably
short, no more than 15 business days prior to the payment date.
Qualifying trust preferred securities are otherwise subject to the same
restrictions on terms and features as qualifying perpetual preferred
stock under section II.A.1.c.ii.(2) of this appendix.
(2) The sole asset of the trust must be a junior subordinated note
issued by the sponsoring banking organization that has a minimum
maturity of thirty years, is subordinated with regard to both
liquidation and priority of periodic payments to all senior and
subordinated debt of the sponsoring banking organization (other than
other junior subordinated notes underlying trust preferred securities).
Otherwise the terms of a junior subordinated note must mirror those of
the preferred securities issued by the trust.\11\ The note must comply
with section II.A.2.d. of this appendix and the Federal Reserve's
subordinated debt policy statement set forth in 12 CFR 250.166 \12\
except that the note may provide for an event of default and the
acceleration of principal and accrued interest upon (a) nonpayment of
interest for 20 or more consecutive quarters or (b) termination of the
trust without redemption of the trust preferred securities, distribution
of the notes to investors, or assumption of the obligation by a
successor to the banking organization.
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\11\ Under generally accepted accounting principles, the trust
issuing the preferred securities generally is not consolidated on the
banking organization's balance sheet; rather the underlying subordinated
note is recorded as a liability on the organization's balance sheet.
Only the amount of the trust preferred securities issued, which
generally is equal to the amount of the underlying subordinated note
less the amount of the sponsoring banking organization's common equity
investment in the trust (which is recorded as an asset on the banking
organization's consolidated balance sheet), may be included in tier 1
capital. Because this calculation method effectively deducts the banking
organization's common stock investment in the trust in computing the
numerator of the capital ratio, the common equity investment in the
trust should be excluded from the calculation of risk-weighted assets in
accordance with footnote 17 of this appendix. Where a banking
organization has issued trust preferred securities as part of a pooled
issuance, the organization generally must not buy back a security issued
from the pool. Where a banking organization does hold such a security
(for example, as a result of an acquisition of another banking
organization), the amount of the trust preferred securities includable
in regulatory capital must, consistent with section II.(i) of this
appendix, be reduced by the notional amount of the banking
organization's investment in the security issued by the pooling entity.
\12\ Trust preferred securities issued before April 15, 2005,
generally would be includable in tier 1 capital despite noncompliance
with sections II.A.1.c.iv. or II.A.2.d. of this appendix or 12 CFR
250.166 provided the non-complying terms of the instrument (i) have been
commonly used by banking organizations, (ii) do not provide an
unreasonably high degree of protection to the holder in circumstances
other than bankruptcy of the banking organization, and (iii) do not
effectively allow a holder in due course of the note to stand ahead of
senior or subordinated debt holders in the event of bankruptcy of the
banking organization.
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(3) In the last five years before the maturity of the note, the
outstanding amount of the associated trust preferred securities is
excluded from tier 1 capital and included in tier 2 capital, where the
trust preferred securities are subject to the amortization provisions
and quantitative restrictions set forth in sections II.A.2.d.iii. and
iv. of this appendix as if the trust preferred securities were limited-
life preferred stock.
2. Supplementary capital elements (tier 2 capital elements). The
tier 2 component of an institution's qualifying capital may consist of
the following items that are defined as supplementary capital elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below);
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below);
(iii) Hybrid capital instruments (as defined below), perpetual debt,
and mandatory convertible debt securities;
(iv) Term subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limitations discussed below);
(v) Unrealized holding gains on equity securities (subject to
limitations discussed in section II.A.2.e. of this appendix).
The maximum amount of tier 2 capital that may be included in an
institution's
[[Page 216]]
qualifying total capital is limited to 100 percent of tier 1 capital
(net of goodwill, other intangible assets, interest-only strips
receivables and nonfinancial equity investments that are required to be
deducted in accordance with section II.B. of this appendix A).
The elements of supplementary capital are discussed in greater
detail below.
a. Allowance for loan and lease losses. Allowances for loan and
lease losses are reserves that have been established through a charge
against earnings to absorb future losses on loans or lease financing
receivables. Allowances for loan and lease losses exclude ``allocated
transfer risk reserves,'' \13\ and reserves created against identified
losses.
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\13\ Allocated transfer risk reserves are reserves that have been
established in accordance with Section 905(a) of the International
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain
assets whose value U.S. supervisory authorities have found to be
significantly impaired by protracted transfer risk problems.
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During the transition period, the risk-based capital guidelines
provide for reducing the amount of this allowance that may be included
in an institution's total capital. Initially, it is unlimited. However,
by year-end 1990, the amount of the allowance for loan and lease losses
that will qualify as capital will be limited to 1.5 percent of an
institution's weighted risk assets. By the end of the transition period,
the amount of the allowance qualifying for inclusion in Tier 2 capital
may not exceed 1.25 percent of weighted risk assets.\14\
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\14\ The amount of the allowance for loan and lease losses that may
be included in Tier 2 capital is based on a percentage of gross weighted
risk assets. A banking organization may deduct reserves for loan and
lease losses in excess of the amount permitted to be included in Tier 2
capital, as well as allocated transfer risk reserves, from the sum of
gross weighted risk assets and use the resulting net sum of weighted
risk assets in computing the denominator of the risk-based capital
ratio.
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b. Perpetual preferred stock. Perpetual preferred stock (and related
surplus) that meets the requirements set forth in section
II.A.1.c.ii.(1) of this appendix is eligible for inclusion in tier 2
capital without limit.\15\
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\15\ Long-term preferred stock with an original maturity of 20 years
or more (including related surplus) will also qualify in this category
as an element of tier 2 capital. If the holder of such an instrument has
the right to require the issuer to redeem, repay, or repurchase the
instrument prior to the original stated maturity, maturity would be
defined for risk-based capital purposes as the earliest possible date on
which the holder can put the instrument back to the issuing banking
organization. In the last five years before the maturity of the stock,
it must be treated as limited-life preferred stock, subject to the
amortization provisions and quantitative restrictions set forth in
sections II.A.2.d.iii. and iv. of this appendix.
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c. Hybrid capital instruments, perpetual debt, and mandatory
convertible debt securities. Hybrid capital instruments include
instruments that are essentially permanent in nature and that have
certain characteristics of both equity and debt. Such instruments may be
included in Tier 2 without limit. The general criteria hybrid capital
instruments must meet in order to qualify for inclusion in Tier 2
capital are listed below:
(1) The instrument must be unsecured; fully paid-up and subordinated
to general creditors. If issued by a bank, it must also be subordinated
to claims or depositors.
(2) The instrument must not be redeemable at the option of the
holder prior to maturity, except with the prior approval of the Federal
Reserve. (Consistent with the Board's criteria for perpetual debt and
mandatory convertible securities, this requirement implies that holders
of such instruments may not accelerate the payment of principal except
in the event of bankruptcy, insolvency, or reorganization.)
(3) The instrument must be available to participate in losses while
the issuer is operating as a going concern. (Term subordinated debt
would not meet this requirement.) To satisfy this requirement, the
instrument must convert to common or perpetual preferred stock in the
event that the accumulated losses exceed the sum of the retained
earnings and capital surplus accounts of the issuer.
(4) The instrument must provide the option for the issuer to defer
interest payments if: a) the issuer does not report a profit in the
preceding annual period (defined as combined profits for the most recent
four quarters), and b) the issuer eliminates cash dividends on common
and preferred stock.
Perpetual debt and mandatory convertible debt securities that meet
the criteria set forth in 12 CFR part 225, appendix B, also qualify as
unlimited elements of Tier 2 capital for bank holding companies.
d. Subordinated debt and intermediate-term preferred stock--i. Five-
year minimum maturity. Subordinated debt and intermediate-term preferred
stock must have an original weighted average maturity of at least five
years to qualify as tier 2 capital. If the holder has the option to
require the issuer to redeem, repay, or repurchase the instrument prior
to the original stated maturity, maturity would be defined, for risk-
based capital purposes, as the earliest possible date on which the
holder can put the instrument back to the issuing banking organization.
[[Page 217]]
ii. Other restrictions on subordinated debt. Subordinated debt
included in tier 2 capital must comply with the Federal Reserve's
subordinated debt policy statement set forth in 12 CFR 250.166.\16\
Accordingly, such subordinated debt must meet the following
requirements:
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\16\ The subordinated debt policy statement set forth in 12 CFR
250.166 notes that certain terms found in subordinated debt may provide
protection to investors without adversely affecting the overall benefits
of the instrument to the issuing banking organization and, thus, would
be acceptable for subordinated debt included in capital. For example, a
provision that prohibits a bank holding company from merging,
consolidating, or selling substantially all of its assets unless the new
entity redeems or assumes the subordinated debt or that designates the
failure to pay principal and interest on a timely basis as an event of
default would be acceptable, so long as the occurrence of such events
does not allow the debt holders to accelerate the payment of principal
or interest on the debt.
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(1) The subordinated debt must be unsecured.
(2) The subordinated debt must clearly state on its face that it is
not a deposit and is not insured by a Federal agency.
(3) The subordinated debt must not have credit-sensitive features or
other provisions that are inconsistent with safe and sound banking
practice.
(4) Subordinated debt issued by a subsidiary U.S. depository
institution or foreign bank of a bank holding company must be
subordinated in right of payment to the claims of all the institution's
general creditors and depositors, and generally must not contain
provisions permitting debt holders to accelerate payment of principal or
interest upon the occurrence of any event other than receivership of the
institution. Subordinated debt issued by a bank holding company or its
subsidiaries that are neither U.S. depository institutions nor foreign
banks must be subordinated to all senior indebtedness of the issuer;
that is, the debt must be subordinated at a minimum to all borrowed
money, similar obligations arising from off-balance sheet guarantees and
direct credit substitutes, and obligations associated with derivative
products such as interest rate and foreign exchange contracts, commodity
contracts, and similar arrangements. Subordinated debt issued by a bank
holding company or any of its subsidiaries that is not a U.S. depository
institution or foreign bank must not contain provisions permitting debt
holders to accelerate the payment of principal or interest upon the
occurrence of any event other than the bankruptcy of the bank holding
company or the receivership of a major subsidiary depository
institution. Thus, a provision permitting acceleration in the event that
any other affiliate of the bank holding company issuer enters into
bankruptcy or receivership makes the instrument ineligible for inclusion
in tier 2 capital.
iii. Discounting in last five years. As a limited-life capital
instrument approaches maturity, it begins to take on characteristics of
a short-term obligation. For this reason, the outstanding amount of term
subordinated debt and limited-life preferred stock eligible for
inclusion in tier 2 capital is reduced, or discounted, as these
instruments approach maturity: one-fifth of the outstanding amount is
excluded each year during the instrument's last five years before
maturity. When remaining maturity is less than one year, the instrument
is excluded from tier 2 capital.
iv. Limits. The aggregate amount of term subordinated debt
(excluding mandatory convertible debt) and limited-life preferred stock
as well as, beginning March 31, 2009, qualifying trust preferred
securities and Class C minority interest in excess of the limits set
forth in section II.A.1.b.i. of this appendix that may be included in
tier 2 capital is limited to 50 percent of tier 1 capital (net of
goodwill and other intangible assets required to be deducted in
accordance with section II.B.1.b. of this appendix). Amounts of these
instruments in excess of this limit, although not included in tier 2
capital, will be taken into account by the Federal Reserve in its
overall assessment of a banking organization's funding and financial
condition.
e. Unrealized gains on equity securities and unrealized gains
(losses) on other assets. Up to 45 percent of pretax net unrealized
holding gains (that is, the excess, if any, of the fair value over
historical cost) on available-for-sale equity securities with readily
determinable fair values may be included in supplementary capital.
However, the Federal Reserve may exclude all or a portion of these
unrealized gains from Tier 2 capital if the Federal Reserve determines
that the equity securities are not prudently valued. Unrealized gains
(losses) on other types of assets, such as bank premises and available-
for-sale debt securities, are not included in supplementary capital, but
the Federal Reserve may take these unrealized gains (losses) into
account as additional factors when assessing an institution's overall
capital adequacy.
f. Revaluation reserves. i. Such reserves reflect the formal balance
sheet restatement or revaluation for capital purposes of asset carrying
values to reflect current market values. The Federal Reserve generally
has not included unrealized asset appreciation in capital ratio
calculations, although it has long taken such values into account as a
separate factor in assessing the overall financial strength of a banking
organization.
[[Page 218]]
ii. Consistent with long-standing supervisory practice, the excess
of market values over book values for assets held by bank holding
companies will generally not be recognized in supplementary capital or
in the calculation of the risk-based capital ratio. However, all bank
holding companies are encouraged to disclose their equivalent of
premises (building) and security revaluation reserves. The Federal
Reserve will consider any appreciation, as well as any depreciation, in
specific asset values as additional considerations in assessing overall
capital strength and financial condition.
B. Deductions from Capital and Other Adjustments
Certain assets are deducted from an organization's capital for the
purpose of calculating the risk-based capital ratio.\17\ These assets
include:
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\17\ Any assets deducted from capital in computing the numerator of
the ratio are not included in weighted risk assets in computing the
denominator of the ratio.
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(i)(a) Goodwill--deducted from the sum of core capital elements.
(b) Certain identifiable intangible assets, that is, intangible
assets other than goodwill--deducted from the sum of core capital
elements in accordance with section II.B.1.b. of this appendix.
(c) Certain credit-enhancing interest-only strips receivables--
deducted from the sum of core capital elements in accordance with
sections II.B.1.c. through e. of this appendix.
(ii) Investments in banking and finance subsidiaries that are not
consolidated for accounting or supervisory purposes, and investments in
other designated subsidiaries or associated companies at the discretion
of the Federal Reserve--deducted from total capital components (as
described in greater detail below).
(iii) Reciprocal holdings of capital instruments of banking
organizations--deducted from total capital components.
(iv) Deferred tax assets--portions are deducted from the sum of core
capital elements in accordance with section II.B.4. of this Appendix A.
(v) Nonfinancial equity investments--portions are deducted from the
sum of core capital elements in accordance with section II.B.5 of this
appendix A.
1. Goodwill and other intangible assets--a. Goodwill. Goodwill is an
intangible asset that represents the excess of the purchase price over
the fair market value of identifiable assets acquired less liabilities
assumed in acquisitions accounted for under the purchase method of
accounting. Any goodwill carried on the balance sheet of a bank holding
company after December 31, 1992, will be deducted from the sum of core
capital elements in determining Tier 1 capital for ratio calculation
purposes. Any goodwill in existence before March 12, 1988, is
``grandfathered'' during the transition period and is not deducted from
core capital elements until after December 31, 1992. However, bank
holding company goodwill acquired as a result of a merger or acquisition
that was consummated on or after March 12, 1988, is deducted
immediately.
b. Other intangible assets. i. All servicing assets, including
servicing assets on assets other than mortgages (i.e., nonmortgage
servicing assets), are included in this appendix as identifiable
intangible assets. The only types of identifiable intangible assets that
may be included in, that is, not deducted from, an organization's
capital are readily marketable mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships. The total
amount of these assets that may be included in capital is subject to the
limitations described below in sections II.B.1.d. and e. of this
appendix.
ii. The treatment of identifiable intangible assets set forth in
this section generally will be used in the calculation of a bank holding
company's capital ratios for supervisory and applications purposes.
However, in making an overall assessment of a bank holding company's
capital adequacy for applications purposes, the Board may, if it deems
appropriate, take into account the quality and composition of an
organization's capital, together with the quality and value of its
tangible and intangible assets.
c. Credit-enhancing interest-only strips receivables (I/Os) i.
Credit-enhancing I/Os are on-balance sheet assets that, in form or in
substance, represent a contractual right to receive some or all of the
interest due on transferred assets and expose the bank holding company
to credit risk directly or indirectly associated with transferred assets
that exceeds a pro rata share of the bank holding company's claim on the
assets, whether through subordination provisions or other credit
enhancement techniques. Such I/Os, whether purchased or retained,
including other similar ``spread'' assets, may be included in, that is,
not deducted from, a bank holding company's capital subject to the
limitations described below in sections II.B.1.d. and e. of this
appendix.
ii. Both purchased and retained credit-enhancing I/Os, on a non-tax
adjusted basis, are included in the total amount that is used for
purposes of determining whether a bank holding company exceeds the tier
1 limitation described below in this section. In determining whether an
I/O or other types of spread assets serve as a credit enhancement, the
Federal Reserve will look to the economic substance of the transaction.
d. Fair value limitation. The amount of mortgage servicing assets,
nonmortgage
[[Page 219]]
servicing assets, and purchased credit card relationships that a bank
holding company may include in capital shall be the lesser of 90 percent
of their fair value, as determined in accordance with section II.B.1.f.
of this appendix, or 100 percent of their book value, as adjusted for
capital purposes in accordance with the instructions to the Consolidated
Financial Statements for Bank Holding Companies (FR Y-9C Report). The
amount of credit-enhancing I/Os that a bank holding company may include
in capital shall be its fair value. If both the application of the
limits on mortgage servicing assets, nonmortgage servicing assets, and
purchased credit card relationships and the adjustment of the balance
sheet amount for these assets would result in an amount being deducted
from capital, the bank holding company would deduct only the greater of
the two amounts from its core capital elements in determining tier 1
capital.
e. Tier 1 capital limitation. i. The total amount of mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships that may be included in capital, in the aggregate,
cannot exceed 100 percent of tier 1 capital. Nonmortgage servicing
assets and purchased credit card relationships are subject, in the
aggregate, to a separate sublimit of 25 percent of tier 1 capital. In
addition, the total amount of credit-enhancing I/Os (both purchased and
retained) that may be included in capital cannot exceed 25 percent of
tier 1 capital.\18\
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\18\ Amounts of servicing assets, purchased credit card
relationships, and credit-enhancing I/Os (both retained and purchased)
in excess of these limitations, as well as all other identifiable
intangible assets, including core deposit intangibles and favorable
leaseholds, are to be deducted from a bank holding company's core
capital elements in determining tier 1 capital. However, identifiable
intangible assets (other than mortgage servicing assets and purchased
credit card relationships) acquired on or before February 19, 1992,
generally will not be deducted from capital for supervisory purposes,
although they will continue to be deducted for applications purposes.
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ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, purchased credit card
relationships, and credit-enhancing I/Os, tier 1 capital is defined as
the sum of core capital elements, net of goodwill, and net of all
identifiable intangible assets other than mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card relationships,
but prior to the deduction of any disallowed mortgage servicing assets,
any disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing I/Os (both
purchased and retained), any disallowed deferred tax assets, and any
nonfinancial equity investments.
iii. Bank holding companies may elect to deduct disallowed mortgage
servicing assets, disallowed nonmortgage servicing assets, and
disallowed credit-enhancing I/Os (both purchased and retained) on a
basis that is net of any associated deferred tax liability. Deferred tax
liabilities netted in this manner cannot also be netted against
deferred-tax assets when determining the amount of deferred-tax assets
that are dependent upon future taxable income.
f. Valuation. Bank holding companies must review the book value of
all intangible assets at least quarterly and make adjustments to these
values as necessary. The fair value of mortgage servicing assets,
nonmortgage servicing assets, purchased credit card relationships, and
credit-enhancing I/Os also must be determined at least quarterly. This
determination shall include adjustments for any significant changes in
original valuation assumptions, including changes in prepayment
estimates or account attrition rates. Examiners will review both the
book value and the fair value assigned to these assets, together with
supporting documentation, during the inspection process. In addition,
the Federal Reserve may require, on a case-by-case basis, an independent
valuation of a bank holding company's intangible assets or credit-
enhancing I/Os.
g. Growing organizations. Consistent with long-standing Board
policy, banking organizations experiencing substantial growth, whether
internally or by acquisition, are expected to maintain strong capital
positions substantially above minimum supervisory levels, without
significant reliance on intangible assets or credit-enhancing I/Os.
2. Investments in certain subsidiaries-- a. Unconsolidated banking
or finance subsidiaries. The aggregate amount of investments in banking
or finance subsidiaries \19\ whose financial statements are not
consolidated for accounting or regulatory reporting purposes, regardless
of whether the investment is made by the parent bank holding company or
its direct or indirect subsidiaries, will be
[[Page 220]]
deducted from the consolidated parent banking organization's total
capital components.\20\ Generally, investments for this purpose are
defined as equity and debt capital investments and any other instruments
that are deemed to be capital in the particular subsidiary.
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\19\ For this purpose, a banking and finance subsidiary generally is
defined as any company engaged in banking or finance in which the parent
institution holds directly or indirectly more than 50 percent of the
outstanding voting stock, or which is otherwise controlled or capable of
being controlled by the parent institution. For purposes of this
section, the definition of banking and finance subsidiary does not
include a trust or other special purpose entity used to issue trust
preferred securities.
\20\ An exception to this deduction would be made in the case of
shares acquired in the regular course of securing or collecting a debt
previously contracted in good faith. The requirements for consolidation
are spelled out in the instructions to the FR Y-9C Report.
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Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to the subsidiary
that are not deemed to be capital will generally not be deducted from an
organization's capital. Rather, such advances generally will be included
in the parent banking organization's consolidated assets and be assigned
to the 100 percent risk category, unless such obligations are backed by
recognized collateral or guarantees, in which case they will be assigned
to the risk category appropriate to such collateral or guarantees. These
advances may, however, also be deducted from the consolidated parent
banking organization's capital if, in the judgment of the Federal
Reserve, the risks stemming from such advances are comparable to the
risks associated with capital investments or if the advances involve
other risk factors that warrant such an adjustment to capital for
supervisory purposes. These other factors could include, for example,
the absence of collateral support.
Inasmuch as the assets of unconsolidated banking and finance
subsidiaries are not fully reflected in a banking organization's
consolidated total assets, such assets may be viewed as the equivalent
of off-balance sheet exposures since the operations of an unconsolidated
subsidiary could expose the parent organization and its affiliates to
considerable risk. For this reason, it is generally appropriate to view
the capital resources invested in these unconsolidated entities as
primarily supporting the risks inherent in these off-balance sheet
assets, and not generally available to support risks or absorb losses
elsewhere in the organization.
b. Other subsidiaries and investments. The deduction of investments,
regardless of whether they are made by the parent bank holding company
or by its direct or indirect subsidiaries, from a consolidated banking
organization's capital will also be applied in the case of any
subsidiaries, that, while consolidated for accounting purposes, are not
consolidated for certain specified supervisory or regulatory purposes,
such as to facilitate functional regulation. For this purpose, aggregate
capital investments (that is, the sum of any equity or debt instruments
that are deemed to be capital) in these subsidiaries will be deducted
from the consolidated parent banking organization's total capital
components.\21\
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\21\ Investments in unconsolidated subsidiaries will be deducted
from both Tier 1 and Tier 2 capital. As a general rule, one-half (50
percent) of the aggregate amount of capital investments will be deducted
from the bank holding company's Tier 1 capital and one-half (50 percent)
from its Tier 2 capital. However, the Federal Reserve may, on a case-by-
case basis, deduct a proportionately greater amount from Tier 1 if the
risks associated with the subsidiary so warrant. If the amount
deductible from Tier 2 capital exceeds actual Tier 2 capital, the excess
would be deducted from Tier 1 capital. Bank holding companies' risk-
based capital ratios, net of these deductions, must exceed the minimum
standards set forth in section IV.
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Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to such subsidiaries
that are not deemed to be capital will generally not be deducted from
capital. Rather, such advances will normally be included in the parent
banking organization's consolidated assets and assigned to the 100
percent risk category, unless such obligations are backed by recognized
collateral or guarantees, in which case they will be assigned to the
risk category appropriate to such collateral or guarantees. These
advances may, however, be deducted from the consolidated parent banking
organization's capital if, in the judgment of the Federal Reserve, the
risks stemming from such advances are comparable to the risks associated
with capital investments or if such advances involve other risk factors
that warrant such an adjustment to capital for supervisory purposes.
These other factors could include, for example, the absence of
collateral support.\22\
---------------------------------------------------------------------------
\22\ In assessing the overall capital adequacy of a banking
organization, the Federal Reserve may also consider the organization's
fully consolidated capital position.
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In general, when investments in a consolidated subsidiary are
deducted from a consolidated parent banking organization's capital, the
subsidiary's assets will also be excluded from the consolidated assets
of the parent banking organization in order to assess the latter's
capital adequacy.\23\
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\23\ If the subsidiary's assets are consolidated with the parent
banking organization for financial reporting purposes, this adjustment
will involve excluding the subsidiary's assets on a line-by-line basis
from the consolidated parent organization's assets. The parent banking
organization's capital ratio will then be calculated on a consolidated
basis with the exception that the assets of the excluded subsidiary will
not be consolidated with the remainder of the parent banking
organization.
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[[Page 221]]
The Federal Reserve may also deduct from a banking organization's
capital, on a case-by-case basis, investments in certain other
subsidiaries in order to determine if the consolidated banking
organization meets minimum supervisory capital requirements without
reliance on the resources invested in such subsidiaries.
The Federal Reserve will not automatically deduct investments in
other unconsolidated subsidiaries or investments in joint ventures and
associated companies.\24\ Nonetheless, the resources invested in these
entities, like investments in unconsolidated banking and finance
subsidiaries, support assets not consolidated with the rest of the
banking organization's activities and, therefore, may not be generally
available to support additional leverage or absorb losses elsewhere in
the banking organization. Moreover, experience has shown that banking
organizations stand behind the losses of affiliated institutions, such
as joint ventures and associated companies, in order to protect the
reputation of the organization as a whole. In some cases, this has led
to losses that have exceeded the investments in such organizations.
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\24\ The definition of such entities is contained in the
instructions to the Consolidated Financial Statements for Bank Holding
Companies. Under regulatory reporting procedures, associated companies
and joint ventures generally are defined as companies in which the
banking organization owns 20 to 50 percent of the voting stock.
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For this reason, the Federal Reserve will monitor the level and
nature of such investments for individual banking organizations and may,
on a case-by-case basis, deduct such investments from total capital
components, apply an appropriate risk-weighted capital charge against
the organization's proportionate share of the assets of its associated
companies, require a line-by-line consolidation of the entity (in the
event that the parent's control over the entity makes it the functional
equivalent of a subsidiary), or otherwise require the organization to
operate with a risk-based capital ratio above the minimum.
In considering the appropriateness of such adjustments or actions,
the Federal Reserve will generally take into account whether:
(1) The parent banking organization has significant influence over
the financial or managerial policies or operations of the subsidiary,
joint venture, or associated company;
(2) The banking organization is the largest investor in the
affiliated company; or
(3) Other circumstances prevail that appear to closely tie the
activities of the affiliated company to the parent banking organization.
3. Reciprocal holdings of banking organizations' capital
instruments. Reciprocal holdings of banking organizations' capital
instruments (that is, instruments that qualify as Tier 1 or Tier 2
capital) will be deducted from an organization's total capital
components for the purpose of determining the numerator of the risk-
based capital ratio.
Reciprocal holdings are cross-holdings resulting from formal or
informal arrangements in which two or more banking organizations swap,
exchange, or otherwise agree to hold each other's capital instruments.
Generally, deductions will be limited to intentional cross-holdings. At
present, the Board does not intend to require banking organizations to
deduct non-reciprocal holdings of such capital instruments.\25\
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\25\ Deductions of holdings of capital securities also would not be
made in the case of interstate ``stake out'' investments that comply
with the Board's Policy Statement on Nonvoting Equity Investments, 12
CFR 225.143 (Federal Reserve Regulatory Service 4-172.1; 68 Federal
Reserve Bulletin 413 (1982)). In addition, holdings of capital
instruments issued by other banking organizations but taken in
satisfaction of debts previously contracted would be exempt from any
deduction from capital. The Board intends to monitor nonreciprocal
holdings of other banking organizations' capital instruments and to
provide information on such holdings to the Basle Supervisors' Committee
as called for under the Basle capital framework.
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4. Deferred-tax assets. a. The amount of deferred-tax assets that is
dependent upon future taxable income, net of the valuation allowance for
deferred-tax assets, that may be included in, that is, not deducted
from, a bank holding company's capital may not exceed the lesser of:
i. The amount of these deferred-tax assets that the bank holding
company is expected to realize within one year of the calendar quarter-
end date, based on its projections of future taxable income for that
year,\26\ or
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\26\ To determine the amount of expected deferred-tax assets
realizable in the next 12 months, an institution should assume that all
existing temporary differences fully reverse as of the report date.
Projected future taxable income should not include net operating loss
carry-forwards to be used during that year or the amount of existing
temporary differences a bank holding company expects to reverse within
the year. Such projections should include the estimated effect of tax-
planning strategies that the organization expects to implement to
realize net operating losses or tax-credit carry-forwards that would
otherwise expire during the year. Institutions do not have to prepare a
new 12-month projection each quarter. Rather, on interim report dates,
institutions may use the future-taxable income projections for their
current fiscal year, adjusted for any significant changes that have
occurred or are expected to occur.
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[[Page 222]]
ii. 10 percent of tier 1 capital.
b. The reported amount of deferred-tax assets, net of any valuation
allowance for deferred-tax assets, in excess of the lesser of these two
amounts is to be deducted from a banking organization's core capital
elements in determining tier 1 capital. For purposes of calculating the
10 percent limitation, tier 1 capital is defined as the sum of core
capital elements, net of goodwill and net of all identifiable intangible
assets other than mortgage servicing assets, nonmortgage servicing
assets, and purchased credit card relationships, but prior to the
deduction of any disallowed mortgage servicing assets, any disallowed
nonmortgage servicing assets, any disallowed purchased credit card
relationships, any disallowed credit-enhancing I/Os, any disallowed
deferred-tax assets, and any nonfinancial equity investments. There
generally is no limit in tier 1 capital on the amount of deferred-tax
assets that can be realized from taxes paid in prior carry-back years or
from future reversals of existing taxable temporary differences.
5. Nonfinancial equity investments--a. General. A bank holding
company must deduct from its core capital elements the sum of the
appropriate percentages (as determined below) of the adjusted carrying
value of all nonfinancial equity investments held by the parent bank
holding company or by its direct or indirect subsidiaries. For purposes
of this section II.B.5, investments held by a bank holding company
include all investments held directly or indirectly by the bank holding
company or any of its subsidiaries.
b. Scope of nonfinancial equity investments. A nonfinancial equity
investment means any equity investment held by the bank holding company:
under the merchant banking authority of section 4(k)(4)(H) of the BHC
Act and subpart J of the Board's Regulation Y (12 CFR 225.175 et seq.);
under section 4(c)(6) or 4(c)(7) of BHC Act in a nonfinancial company or
in a company that makes investments in nonfinancial companies; in a
nonfinancial company through a small business investment company (SBIC)
under section 302(b) of the Small Business Investment Act of 1958; \27\
in a nonfinancial company under the portfolio investment provisions of
the Board's Regulation K (12 CFR 211.8(c)(3)); or in a nonfinancial
company under section 24 of the Federal Deposit Insurance Act (other
than section 24(f)).\28\ A nonfinancial company is an entity that
engages in any activity that has not been determined to be financial in
nature or incidental to financial activities under section 4(k) of the
Bank Holding Company Act (12 U.S.C. 1843(k)).
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\27\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in an SBIC that is not consolidated with
the parent banking organization is treated as a nonfinancial equity
investment.
\28\ See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C.
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a. In a case in which
the Board of Directors of the FDIC, acting directly in exceptional cases
and after a review of the proposed activity, has permitted a lesser
capital deduction for an investment approved by the Board of Directors
under section 24 of the Federal Deposit Insurance Act, such deduction
shall also apply to the consolidated bank holding company capital
calculation so long as the bank's investments under section 24 and SBIC
investments represent, in the aggregate, less than 15 percent of the
Tier 1 capital of the bank.
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c. Amount of deduction from core capital. i. The bank holding
company must deduct from its core capital elements the sum of the
appropriate percentages, as set forth in Table 1, of the adjusted
carrying value of all nonfinancial equity investments held by the bank
holding company. The amount of the percentage deduction increases as the
aggregate amount of nonfinancial equity investments held by the bank
holding company increases as a percentage of the bank holding company's
Tier 1 capital.
Table 1--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Core Capital
directly or indirectly by the bank Elements (as a percentage of
holding company (as a percentage of the the adjusted carrying value
Tier 1 capital of the parent banking of the investment)
organization)\1\
------------------------------------------------------------------------
Less than 15 percent..................... 8 percent.
15 percent to 24.99 percent.............. 12 percent.
25 percent and above..................... 25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit enhancing I/Os (both purchased and retained),
any disallowed deferred tax assets, and any nonfinancial equity
investments.
ii. These deductions are applied on a marginal basis to the portions
of the adjusted
[[Page 223]]
carrying value of nonfinancial equity investments that fall within the
specified ranges of the parent holding company's Tier 1 capital. For
example, if the adjusted carrying value of all nonfinancial equity
investments held by a bank holding company equals 20 percent of the Tier
1 capital of the bank holding company, then the amount of the deduction
would be 8 percent of the adjusted carrying value of all investments up
to 15 percent of the company's Tier 1 capital, and 12 percent of the
adjusted carrying value of all investments in excess of 15 percent of
the company's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under this paragraph is excluded
from the bank holding company's risk-weighted assets for purposes of
computing the denominator of the company's risk-based capital ratio.\29\
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\29\ For example, if 8 percent of the adjusted carrying value of a
nonfinancial equity investment is deducted from Tier 1 capital, the
entire adjusted carrying value of the investment will be excluded from
risk-weighted assets in calculating the denominator for the risk-based
capital ratio.
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iv. As noted in section I, this appendix establishes minimum risk-
based capital ratios and banking organizations are at all times expected
to maintain capital commensurate with the level and nature of the risks
to which they are exposed. The risk to a banking organization from
nonfinancial equity investments increases with its concentration in such
investments and strong capital levels above the minimum requirements are
particularly important when a banking organization has a high degree of
concentration in nonfinancial equity investments (e.g., in excess of 50
percent of Tier 1 capital). The Federal Reserve intends to monitor
banking organizations and apply heightened supervision to equity
investment activities as appropriate, including where the banking
organization has a high degree of concentration in nonfinancial equity
investments, to ensure that each organization maintains capital levels
that are appropriate in light of its equity investment activities. The
Federal Reserve also reserves authority to impose a higher capital
charge in any case where the circumstances, such as the level of risk of
the particular investment or portfolio of investments, the risk
management systems of the banking organization, or other information,
indicate that a higher minimum capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for nonfinancial
equity investments that are held by a bank holding company through one
or more SBICs that are consolidated with the bank holding company or in
one or more SBICs that are not consolidated with the bank holding
company to the extent that all such investments, in the aggregate, do
not exceed 15 percent of the aggregate of the bank holding company's pro
rata interests in the Tier 1 capital of its subsidiary banks. Any
nonfinancial equity investment that is held through or in an SBIC and
not required to be deducted from Tier 1 capital under this section
II.B.5.d. will be assigned a 100 percent risk-weight and included in the
parent holding company's consolidated risk-weighted assets.\30\
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\30\ If a bank holding company has an investment in an SBIC that is
consolidated for accounting purposes but that is not wholly owned by the
bank holding company, the adjusted carrying value of the bank holding
company's nonfinancial equity investments through the SBIC is equal to
the holding company's proportionate share of the adjusted carrying value
of the SBIC's equity investments in nonfinancial companies. The
remainder of the SBIC's adjusted carrying value (i.e. the minority
interest holders' proportionate share) is excluded from the risk-
weighted assets of the bank holding company. If a bank holding company
has an investment in a SBIC that is not consolidated for accounting
purposes and has current information that identifies the percentage of
the SBIC's assets that are equity investments in nonfinancial companies,
the bank holding company may reduce the adjusted carrying value of its
investment in the SBIC proportionately to reflect the percentage of the
adjusted carrying value of the SBIC's assets that are not equity
investments in nonfinancial companies. If a bank holding company reduces
the adjusted carrying value of its investment in a non-consolidated SBIC
to reflect financial investments of the SBIC, the amount of the
adjustment will be risk weighted at 100 percent and included in the
bank's risk-weighted assets.
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ii. To the extent the adjusted carrying value of all nonfinancial
equity investments that a bank holding company holds through one or more
SBICs that are consolidated with the bank holding company or in one or
more SBICs that are not consolidated with the bank holding company
exceeds, in the aggregate, 15 percent of the aggregate Tier 1 capital of
the company's subsidiary banks, the appropriate percentage of such
amounts (as set forth in Table 1) must be deducted from the bank holding
company's core capital elements. In addition, the aggregate adjusted
carrying value of all nonfinancial equity investments held through a
consolidated SBIC and in a non-consolidated SBIC (including any
investments for which no deduction is required) must be included in
determining, for purposes of Table 1, the total amount of nonfinancial
equity investments
[[Page 224]]
held by the bank holding company in relation to its Tier 1 capital.
e. Transition provisions. No deduction under this section II.B.5 is
required to be made with respect to the adjusted carrying value of any
nonfinancial equity investment (or portion of such an investment) that
was made by the bank holding company prior to March 13, 2000, or that
was made after such date pursuant to a binding written commitment \31\
entered into by the bank holding company prior to March 13, 2000,
provided that in either case the bank holding company has continuously
held the investment since the relevant investment date.\32\ For purposes
of this section II.B.5.e., a nonfinancial equity investment made prior
to March 13, 2000, includes any shares or other interests received by
the bank holding company through a stock split or stock dividend on an
investment made prior to March 13, 2000, provided the bank holding
company provides no consideration for the shares or interests received
and the transaction does not materially increase the bank'' holding
company's proportional interest in the company. The exercise on or after
March 13, 2000, of options or warrants acquired prior to March 13, 2000,
is not considered to be an investment made prior to March 13, 2000, if
the bank holding company provides any consideration for the shares or
interests received upon exercise of the options or warrants. Any
nonfinancial equity investment (or portion thereof) that is not required
to be deducted from Tier 1 capital under this section II.B.5.e. must be
included in determining the total amount of nonfinancial equity
investments held by the bank holding company in relation to its Tier 1
capital for purposes of Table 1. In addition, any nonfinancial equity
investment (or portion thereof) that is not required to be deducted from
Tier 1 capital under this section II.B.5.e. will be assigned a 100-
percent risk weight and included in the bank holding company's
consolidated risk-weighted assets.
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\31\ A ``binding written commitment'' means a legally binding
written agreement that requires the banking organization to acquire
shares or other equity of the company, or make a capital contribution to
the company, under terms and conditions set forth in the agreement.
Options, warrants, and other agreements that give a banking organization
the right to acquire equity or make an investment, but do not require
the banking organization to take such actions, are not considered a
binding written commitment for purposes of this section II.B.5.
\32\ For example, if a bank holding company made an equity
investment in 100 shares of a nonfinancial company prior to March 13,
2000, that investment would not be subject to a deduction under this
section II.B.5. However, if the bank holding company made any additional
equity investment in the company after March 13, 2000, such as by
purchasing additional shares of the company (including through the
exercise of options or warrants acquired before or after March 13, 2000)
or by making a capital contribution to the company, and such investment
was not made pursuant to a binding written commitment entered into
before March 13, 2000, the adjusted carrying value of the additional
investment would be subject to a deduction under this section II.B.5. In
addition, if the bank holding company sold and repurchased shares of the
company after March 13, 2000, the adjusted carrying value of the re-
acquired shares would be subject to a deduction under this section
II.B.5.
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f. Adjusted carrying value. i. For purposes of this section II.B.5.,
the ``adjusted carrying value'' of investments is the aggregate value at
which the investments are carried on the balance sheet of the
consolidated bank holding company reduced by any unrealized gains on
those investments that are reflected in such carrying value but excluded
from the bank holding company's Tier 1 capital and associated deferred
tax liabilities. For example, for investments held as available-for-sale
(AFS), the adjusted carrying value of the investments would be the
aggregate carrying value of the investments (as reflected on the
consolidated balance sheet of the bank holding company) less any
unrealized gains on those investments that are included in other
comprehensive income and not reflected in Tier 1 capital, and associated
deferred tax liabilities.\33\
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\33\ Unrealized gains on AFS investments may be included in
supplementary capital to the extent permitted under section II.A.2.e of
this appendix A. In addition, the unrealized losses on AFS equity
investments are deducted from Tier 1 capital in accordance with section
II.A.1.a of this appendix A.
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ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that is
consolidated for accounting purposes under generally accepted accounting
principles, the parent banking organization's adjusted carrying value of
the investment is determined under the equity method of accounting (net
of any intangibles associated with the investment that are deducted from
the consolidated bank holding company's core capital in accordance with
section II.B.1 of this Appendix). Even though the assets of the
nonfinancial company are consolidated for accounting purposes, these
assets (as well as the credit equivalent amounts of the company's off-
balance sheet items) should be excluded from the banking organization's
risk-
[[Page 225]]
weighted assets for regulatory capital purposes.
g. Equity investments. For purposes of this section II.B.5, an
equity investment means any equity instrument (including common stock,
preferred stock, partnership interests, interests in limited liability
companies, trust certificates and warrants and call options that give
the holder the right to purchase an equity instrument), any equity
feature of a debt instrument (such as a warrant or call option), and any
debt instrument that is convertible into equity where the instrument or
feature is held under one of the legal authorities listed in section
II.B.5.b. of this appendix. An investment in any other instrument
(including subordinated debt) may be treated as an equity investment if,
in the judgment of the Federal Reserve, the instrument is the functional
equivalent of equity or exposes the state member bank to essentially the
same risks as an equity instrument.
Attachment II--Summary of Definition of Qualifying Capital for Bank
Holding Companies*
[Using the Year-End 1992 Standard]
------------------------------------------------------------------------
Components Minimum requirements
------------------------------------------------------------------------
CORE CAPITAL (Tier 1).................. Must equal or exceed 4% of
weighted-risk assets.
Common stockholders' equity........ No limit.
Qualifying noncumulative perpetual No limit; bank holding
preferred stock. companies should avoid undue
reliance on preferred stock in
tier 1.
Qualifying cumulative perpetual Limited to 25% of the sum of
preferred stock. common stock, qualifying
perpetual stock, and minority
interests.
Minority interest in equity Organizations should avoid
accounts of consolidated using minority interests to
subsidiaries. introduce elements not
otherwise qualifying for tier
1 capital.
Less: Goodwill, other intangible
assets, credit-enhancing interest-only
strips and nonfinancial equity
investments required to be deducted
from capital \1\
SUPPLEMENTARY CAPITAL (Tier 2)......... Total of tier 2 is limited to
100% of tier 1. \2\
Allowance for loan and lease losses Limited to 1.25% of weighted-
risk assets. \2\
Perpetual preferred stock.......... No limit within tier 2.
Hybrid capital instruments and No limit within tier 2.
equity contract notes.
Subordinated debt and intermediate- Subordinated debt and
term preferred stock (original intermediate-term preferred
weighted average maturity of 5 stock are limited to 50% of
years or more). tier 1 \2\; amortized for
capital purposes as they
approach maturity.
Revaluation reserves (equity and Not included; organizations
building). encouraged to disclose; may be
evaluated on a case-by-case
basis for international
comparisons; and taken into
account in making an overall
assessment of capital.
DEDUCTIONS (from sum of tier 1 and tier
2)
Investments in unconsolidated As a general rule, one-half of
subsidiaries. the aggregate investments will
be deducted from tier 1
capital and one-half from tier
2 capital. \3\
Reciprocal holdings of banking
organizations' capital securities
Other deductions (such as other On a case-by-case basis or as a
subsidiaries or joint ventures) as matter of policy after a
determined by supervisory formal rulemaking.
authority.
TOTAL CAPITAL (tier 1 + tier 2- Must equal or exceed 8% of
deductions). weighted-risk assets.
------------------------------------------------------------------------
\1\ Requirements for the deduction of other intangible assets and
residual interests are set forth in section II.B.1. of this appendix.
\2\ Amounts in excess of limitations are permitted but do not qualify as
capital.
\3\ A proportionately greater amount may be deducted from tier 1
capital, if the risks associated with the subsidiary so warrant.
* See discussion in section II of the guidelines for a complete
description of the requirements for, and the limitations on, the
components of qualifying capital.
III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet
Items
A. Procedures
Assets and credit equivalent amounts of off-balance sheet items of
bank holding companies are assigned to one of several broad risk
categories, according to the obligor, or, if relevant, the guarantor or
the nature of the collateral. The aggregate dollar value of the amount
in each category is then multiplied by the risk weight associated with
that category. The resulting weighted values from each of the risk
categories are added together, and this sum is the banking
organization's total weighted risk assets that comprise the denominator
of the risk-based capital ratio. Attachment I provides a sample
calculation.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the ``credit equivalent amount'' of off-balance
sheet items is determined, in most cases, by multiplying the off-balance
sheet item by a credit conversion factor. Second, the credit equivalent
amount is treated like any balance sheet asset and generally is assigned
to the appropriate risk category according to the obligor, or, if
relevant, the guarantor or the nature of the collateral.
[[Page 226]]
In general, if a particular item qualifies for placement in more
than one risk category, it is assigned to the category that has the
lowest risk weight. A holding of a U.S. municipal revenue bond that is
fully guaranteed by a U.S. bank, for example, would be assigned the 20
percent risk weight appropriate to claims guaranteed by U.S. banks,
rather than the 50 percent risk weight appropriate to U.S. municipal
revenue bonds.\34\
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\34\ An investment in shares of a fund whose portfolio consists
primarily of various securities or money market instruments that, if
held separately, would be assigned to different risk categories,
generally is assigned to the risk category appropriate to the highest
risk-weighted asset that the fund is permitted to hold in accordance
with the stated investment objectives set forth in the prospectus. An
organization may, at its option, assign a fund investment on a pro rata
basis to different risk categories according to the investment limits in
the fund's prospectus. In no case will an investment in shares in any
fund be assigned to a total risk weight of less than 20 percent. If an
organization chooses to assign a fund investment on a pro rata basis,
and the sum of the investment limits of assets in the fund's prospectus
exceeds 100 percent, the organization must assign risk weights in
descending order. If, in order to maintain a necessary degree of short-
term liquidity, a fund is permitted to hold an insignificant amount of
its assets in short-term, highly liquid securities of superior credit
quality that do not qualify for a preferential risk weight, such
securities generally will be disregarded when determining the risk
category into which the organization's holding in the overall fund
should be assigned. The prudent use of hedging instruments by a fund to
reduce the risk of its assets will not increase the risk weighting of
the fund investment. For example, the use of hedging instruments by a
fund to reduce the interest rate risk of its government bond portfolio
will not increase the risk weight of that fund above the 20 percent
category. Nonetheless, if a fund engages in any activities that appear
speculative in nature or has any other characteristics that are
inconsistent with the preferential risk weighting assigned to the fund's
assets, holdings in the fund will be assigned to the 100 percent risk
category.
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The Federal Reserve will, on a case-by-case basis, determine the
appropriate risk weight for any asset or credit equivalent amount of an
off-balance sheet item that does not fit wholly within the terms of one
of the risk weight categories set forth below or that imposes risks on a
bank holding company that are incommensurate with the risk weight
otherwise specified below for the asset or off-balance sheet item. In
addition, the Federal Reserve will, on a case-by-case basis, determine
the appropriate credit conversion factor for any off-balance sheet item
that does not fit wholly within the terms of one of the credit
conversion factors set forth below or that imposes risks on a banking
organization that are incommensurate with the credit conversion factors
otherwise specified below for the off-balance sheet item. In making such
a determination, the Federal Reserve will consider the similarity of the
asset or off-balance sheet item to assets or off-balance sheet items
explicitly treated in the guidelines, as well as other relevant factors.
B. Collateral, Guarantees, and Other Considerations
1. Collateral. The only forms of collateral that are formally
recognized by the risk-based capital framework are: Cash on deposit in a
subsidiary lending institution; securities issued or guaranteed by the
central governments of the OECD-based group of countries,\35\ U.S.
Government agencies, or U.S. Government-sponsored agencies; and
securities issued by multilateral lending institutions or regional
development banks. Claims fully secured by such collateral generally are
assigned to the 20 percent risk-weight category. Collateralized
transactions meeting all the conditions described in section III.C.1.
may be assigned a zero percent risk weight.
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\35\ The OECD-based group of countries comprises all full members of
the Organization for Economic Cooperation and Development (OECD)
regardless of entry date, as well as countries that have concluded
special lending arrangements with the International Monetary Fund (IMF)
associated with the IMF's General Arrangements to Borrow, but excludes
any country that has rescheduled its external sovereign debt within the
previous five years. As of November 1995, the OECD included the
following countries: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United
States; and Saudi Arabia had concluded special lending arrangements with
the IMF associated with the IMF's General Arrangements to Borrow. A
rescheduling of external sovereign debt generally would include any
renegotiation of terms arising from a country's inability or
unwillingness to meet its external debt service obligations, but
generally would not include renegotiations of debt in the normal course
of business, such as a renegotiation to allow the borrower to take
advantage of a decline in interest rates or other change in market
conditions.
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[[Page 227]]
With regard to collateralized claims that may be assigned to the 20
percent risk-weight category, the extent to which qualifying securities
are recognized as collateral is determined by their current market
value. If such a claim is only partially secured, that is, the market
value of the pledged securities is less than the face amount of a
balance-sheet asset or an off-balance-sheet item, the portion that is
covered by the market value of the qualifying collateral is assigned to
the 20 percent risk category, and the portion of the claim that is not
covered by collateral in the form of cash or a qualifying security is
assigned to the risk category appropriate to the obligor or, if
relevant, the guarantor. For example, to the extent that a claim on a
private sector obligor is collateralized by the current market value of
U.S. Government securities, it would be placed in the 20 percent risk
category and the balance would be assigned to the 100 percent risk
category.
2. Guarantees. Guarantees of the OECD and non-OECD central
governments, U.S. Government agencies, U.S. Government-sponsored
agencies, state and local governments of the OECD-based group of
countries, multilateral lending institutions and regional development
banks, U.S. depository institutions, and foreign banks are also
recognized. If a claim is partially guaranteed, that is, coverage of the
guarantee is less than the face amount of a balance sheet asset or an
off-balance sheet item, the portion that is not fully covered by the
guarantee is assigned to the risk category appropriate to the obligor
or, if relevant, to any collateral. The face amount of a claim covered
by two types of guarantees that have different risk weights, such as a
U.S. Government guarantee and a state guarantee, is to be apportioned
between the two risk categories appropriate to the guarantors.
The existence of other forms of collateral or guarantees that the
risk-based capital framework does not formally recognize may be taken
into consideration in evaluating the risks inherent in an organization's
loan portfolio--which, in turn, would affect the overall supervisory
assessment of the organization's capital adequacy.
3. Recourse obligations, direct credit substitutes, residual
interests, and asset- and mortgage-backed securities. Direct credit
substitutes, assets transferred with recourse, and securities issued in
connection with asset securitizations and structured financings are
treated as described below. The term ``asset securitizations'' or
``securitizations'' in this rule includes structured financings, as well
as asset securitization transactions.
a. Definitions--i. Credit derivative means a contract that allows
one party (the ``protection purchaser'') to transfer the credit risk of
an asset or off-balance sheet credit exposure to another party (the
``protection provider''). The value of a credit derivative is dependent,
at least in part, on the credit performance of the ``reference asset.''
ii. Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in connection
with a transfer of assets (including loan servicing assets) and that
obligate the bank holding company to protect investors from losses
arising from credit risk in the assets transferred or the loans
serviced. Credit-enhancing representations and warranties include
promises to protect a party from losses resulting from the default or
nonperformance of another party or from an insufficiency in the value of
the collateral. Credit-enhancing representations and warranties do not
include:
1. Early default clauses and similar warranties that permit the
return of, or premium refund clauses covering, 1-4 family residential
first mortgage loans that qualify for a 50 percent risk weight for a
period not to exceed 120 days from the date of transfer. These
warranties may cover only those loans that were originated within 1 year
of the date of transfer;
2. Premium refund clauses that cover assets guaranteed, in whole or
in part, by the U.S. Government, a U.S. Government agency or a
government-sponsored enterprise, provided the premium refund clauses are
for a period not to exceed 120 days from the date of transfer; or
3. Warranties that permit the return of assets in instances of
misrepresentation, fraud or incomplete documentation.
iii. Direct credit substitute means an arrangement in which a bank
holding company assumes, in form or in substance, credit risk associated
with an on- or off-balance sheet credit exposure that was not previously
owned by the bank holding company (third-party asset) and the risk
assumed by the bank holding company exceeds the pro rata share of the
bank holding company's interest in the third-party asset. If the bank
holding company has no claim on the third-party asset, then the bank
holding company's assumption of any credit risk with respect to the
third party asset is a direct credit substitute. Direct credit
substitutes include, but are not limited to:
1. Financial standby letters of credit that support financial claims
on a third party that exceed a bank holding company's pro rata share of
losses in the financial claim;
2. Guarantees, surety arrangements, credit derivatives, and similar
instruments backing financial claims that exceed a bank holding
company's pro rata share in the financial claim;
3. Purchased subordinated interests or securities that absorb more
than their pro rata share of losses from the underlying assets;
4. Credit derivative contracts under which the bank holding company
assumes more
[[Page 228]]
than its pro rata share of credit risk on a third party exposure;
5. Loans or lines of credit that provide credit enhancement for the
financial obligations of an account party;
6. Purchased loan servicing assets if the servicer is responsible
for credit losses or if the servicer makes or assumes credit-enhancing
representations and warranties with respect to the loans serviced.
Mortgage servicer cash advances that meet the conditions of section
III.B.3.a.viii. of this appendix are not direct credit substitutes;
7. Clean-up calls on third party assets. Clean-up calls that are 10
percent or less of the original pool balance that are exercisable at the
option of the bank holding company are not direct credit substitutes;
and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
iv. Eligible ABCP liquidity facility means a liquidity facility
supporting ABCP, in form or in substance, that is subject to an asset
quality test at the time of draw that precludes funding against assets
that are 90 days or more past due or in default. In addition, if the
assets that an eligible ABCP liquidity facility is required to fund
against are externally rated assets or exposures at the inception of the
facility, the facility can be used to fund only those assets or
exposures that are externally rated investment grade at the time of
funding. Notwithstanding the eligibility requirements set forth in the
two preceding sentences, a liquidity facility will be considered an
eligible ABCP liquidity facility if the assets that are funded under the
liquidity facility and which do not meet the eligibility requirements
are guaranteed, either conditionally or unconditionally, by the U.S.
government or its agencies, or by the central government of an OECD
country.
v. Externally rated means that an instrument or obligation has
received a credit rating from a nationally recognized statistical rating
organization.
vi. Face amount means the notional principal, or face value, amount
of an off-balance sheet item; the amortized cost of an asset not held
for trading purposes; and the fair value of a trading asset.
vii. Financial asset means cash or other monetary instrument,
evidence of debt, evidence of an ownership interest in an entity, or a
contract that conveys a right to receive or exchange cash or another
financial instrument from another party.
viii. Financial standby letter of credit means a letter of credit or
similar arrangement that represents an irrevocable obligation to a
third-party beneficiary:
1. To repay money borrowed by, or advanced to, or for the account
of, a second party (the account party), or
2. To make payment on behalf of the account party, in the event that
the account party fails to fulfill its obligation to the beneficiary.
ix. Liquidity Facility means a legally binding commitment to provide
liquidity support to ABCP by lending to, or purchasing assets from, any
structure, program, or conduit in the event that funds are required to
repay maturing ABCP.
x. Mortgage servicer cash advance means funds that a residential
mortgage loan servicer advances to ensure an uninterrupted flow of
payments, including advances made to cover foreclosure costs or other
expenses to facilitate the timely collection of the loan. A mortgage
servicer cash advance is not a recourse obligation or a direct credit
substitute if:
1. The servicer is entitled to full reimbursement and this right is
not subordinated to other claims on the cash flows from the underlying
asset pool; or
2. For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an insignificant
amount of the outstanding principal balance of that loan.
xi. Nationally recognized statistical rating organization (NRSRO)
means an entity recognized by the Division of Market Regulation of the
Securities and Exchange Commission (or any successor Division)
(Commission) as a nationally recognized statistical rating organization
for various purposes, including the Commission's uniform net capital
requirements for brokers and dealers.
xii. Recourse means the retention, by a bank holding company, in
form or in substance, of any credit risk directly or indirectly
associated with an asset it has transferred and sold that exceeds a pro
rata share of the banking organization's claim on the asset. If a
banking organization has no claim on a transferred asset, then the
retention of any risk of credit loss is recourse. A recourse obligation
typically arises when a bank holding company transfers assets and
retains an explicit obligation to repurchase the assets or absorb losses
due to a default on the payment of principal or interest or any other
deficiency in the performance of the underlying obligor or some other
party. Recourse may also exist implicitly if a bank holding company
provides credit enhancement beyond any contractual obligation to support
assets it has sold. The following are examples of recourse arrangements:
1. Credit-enhancing representations and warranties made on the
transferred assets;
2. Loan servicing assets retained pursuant to an agreement under
which the bank holding company will be responsible for credit losses
associated with the loans being serviced. Mortgage servicer cash
advances that meet the conditions of section III.B.3.a.x. of this
appendix are not recourse arrangements;
[[Page 229]]
3. Retained subordinated interests that absorb more than their pro
rata share of losses from the underlying assets;
4. Assets sold under an agreement to repurchase, if the assets are
not already included on the balance sheet;
5. Loan strips sold without contractual recourse where the maturity
of the transferred loan is shorter than the maturity of the commitment
under which the loan is drawn;
6. Credit derivatives issued that absorb more than the bank holding
company's pro rata share of losses from the transferred assets;
7. Clean-up calls at inception that are greater than 10 percent of
the balance of the original pool of transferred loans. Clean-up calls
that are 10 percent or less of the original pool balance that are
exercisable at the option of the bank holding company are not recourse
arrangements; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
xiii. Residual interest means any on-balance sheet asset that
represents an interest (including a beneficial interest) created by a
transfer that qualifies as a sale (in accordance with generally accepted
accounting principles) of financial assets, whether through a
securitization or otherwise, and that exposes the bank holding company
to credit risk directly or indirectly associated with the transferred
assets that exceeds a pro rata share of the bank holding company's claim
on the assets, whether through subordination provisions or other credit
enhancement techniques. Residual interests generally include credit-
enhancing I/Os, spread accounts, cash collateral accounts, retained
subordinated interests, other forms of over-collateralization, and
similar assets that function as a credit enhancement. Residual interests
further include those exposures that, in substance, cause the bank
holding company to retain the credit risk of an asset or exposure that
had qualified as a residual interest before it was sold. Residual
interests generally do not include interests purchased from a third
party, except that purchased credit-enhancing I/Os are residual
interests for purposes of this appendix.
xiv. Risk participation means a participation in which the
originating party remains liable to the beneficiary for the full amount
of an obligation (e.g., a direct credit substitute) notwithstanding that
another party has acquired a participation in that obligation.
xv. Securitization means the pooling and repackaging by a special
purpose entity of assets or other credit exposures into securities that
can be sold to investors. Securitization includes transactions that
create stratified credit risk positions whose performance is dependent
upon an underlying pool of credit exposures, including loans and
commitments.
xvi. Sponsor means a bank holding company that establishes an ABCP
program; approves the sellers permitted to participate in the program;
approves the asset pools to be purchased by the program; or administers
the program by monitoring the assets, arranging for debt placement,
compiling monthly reports, or ensuring compliance with the program
documents and with the program's credit and investment policy.
xvii. Structured finance program means a program where receivable
interests and asset-backed securities issued by multiple participants
are purchased by a special purpose entity that repackages those
exposures into securities that can be sold to investors. Structured
finance programs allocate credit risks, generally, between the
participants and credit enhancement provided to the program.
xviii. Traded position means a position that is externally rated and
is retained, assumed, or issued in connection with an asset
securitization, where there is a reasonable expectation that, in the
near future, the rating will be relied upon by unaffiliated investors to
purchase the position; or an unaffiliated third party to enter into a
transaction involving the position, such as a purchase, loan, or
repurchase agreement.
b. Credit equivalent amounts and risk weight of recourse obligations
and direct credit substitutes. i. Credit equivalent amount. Except as
otherwise provided in sections III.B.3.c. through f. and III.B.5. of
this appendix, the credit-equivalent amount for a recourse obligation or
direct credit substitute is the full amount of the credit-enhanced
assets for which the bank holding company directly or indirectly retains
or assumes credit risk multiplied by a 100 percent conversion factor.
ii. Risk-weight factor. To determine the bank holding company's
risk-weight factor for off-balance sheet recourse obligations and direct
credit substitutes, the credit equivalent amount is assigned to the risk
category appropriate to the obligor in the underlying transaction, after
considering any associated guarantees or collateral. For a direct credit
substitute that is an on-balance sheet asset (e.g., a purchased
subordinated security), a bank holding company must calculate risk-
weighted assets using the amount of the direct credit substitute and the
full amount of the assets it supports, i.e., all the more senior
positions in the structure. The treatment of direct credit substitutes
that have been syndicated or in which risk participations have been
conveyed or acquired is set forth in section III.D.1 of this appendix.
[[Page 230]]
c. Externally-rated positions: credit-equivalent amounts and risk
weights of recourse obligations, direct credit substitutes, residual
interests, and asset- and mortgage-backed securities (including asset-
backed commercial paper)--i. Traded positions. With respect to a
recourse obligation, direct credit substitute, residual interest (other
than a credit-enhancing I/Ostrip) or asset- and mortgage-backed security
(including asset-backed commercial paper) that is a traded position and
that has received an external rating on a long-term position that is one
grade below investment grade or better or a short-term rating that is
investment grade, the bank holding company may multiply the face amount
of the position by the appropriate risk weight, determined in accordance
with the tables below. Stripped mortgage-backed securities and other
similar instruments, such as interest-only or principal-only strips that
are not credit enhancements, must be assigned to the 100 percent risk
category. If a traded position has received more than one external
rating, the lowest single rating will apply.
------------------------------------------------------------------------
Risk weight
Long-term rating category Examples (In percent)
------------------------------------------------------------------------
Highest or second highest AAA, AA............. 20
investment grade.
Third highest investment grade.... A................... 50
Lowest investment grade........... BBB................. 100
One category below investment BB.................. 200
grade.
------------------------------------------------------------------------
Risk weight
Short-term rating Examples (In percent)
------------------------------------------------------------------------
Highest investment grade.......... A-1, P-1............ 20
Second highest investment grade... A-2, P-2............ 50
Lowest investment grade........... A-3, P-3............ 100
------------------------------------------------------------------------
ii. Non-traded positions. A recourse obligation, direct credit
substitute, or residual interest (but not a credit-enhancing I/O strip)
extended in connection with a securitization that is not a traded
position may be assigned a risk weight in accordance with section
III.B.3.c.i. of this appendix if:
1. It has been externally rated by more than one NRSRO;
2. It has received an external rating on a long-term position that
is one grade below investment grade or better or on a short-term
position that is investment grade by all NRSROs providing a rating;
3. The ratings are publicly available; and
4. The ratings are based on the same criteria used to rate traded
positions.
If the ratings are different, the lowest rating will determine the
risk category to which the recourse obligation, direct credit
substitute, or residual interest will be assigned.
d. Senior positions not externally rated. For a recourse obligation,
direct credit substitute, residual interest, or asset-or mortgage-backed
security that is not externally rated but is senior or preferred in all
features to a traded position (including collateralization and
maturity), a bank holding company may apply a risk weight to the face
amount of the senior position in accordance with section III.B.3.c.i. of
this appendix, based on the traded position, subject to any current or
prospective supervisory guidance and the bank holding company satisfying
the Federal Reserve that this treatment is appropriate. This section
will apply only if the traded subordinated position provides substantive
credit support to the unrated position until the unrated position
matures.
e. Capital requirement for residual interests--i. Capital
requirement for credit-enhancing I/O strips. After applying the
concentration limit to credit-enhancing I/O strips (both purchased and
retained) in accordance with sections II.B.2.c. through e. of this
appendix, a bank holding company must maintain risk-based capital for a
credit-enhancing I/O strip (both purchased and retained), regardless of
the external rating on that position, equal to the remaining amount of
the credit-enhancing I/O (net of any existing associated deferred tax
liability), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the
assets transferred. Transactions that, in substance, result in the
retention of credit risk associated with a transferred credit-enhancing
I/O strip will be treated as if the credit-enhancing I/O strip was
retained by the bank holding company and not transferred.
ii. Capital requirement for other residual interests. 1. If a
residual interest does not meet the requirements of sections III.B.3.c.
or d. of this appendix, a bank holding must maintain risk-based capital
equal to the remaining amount of the residual interest that is retained
on the balance sheet (net of any existing associated deferred tax
liability), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the
assets transferred. Transactions that, in substance, result in the
retention of credit risk associated with a transferred residual interest
will be
[[Page 231]]
treated as if the residual interest was retained by the bank holding
company and not transferred.
2. Where the aggregate capital requirement for residual interests
and other recourse obligations in connection with the same transfer of
assets exceed the full risk-based capital requirement for those assets,
a bank holding company must maintain risk-based capital equal to the
greater of the risk-based capital requirement for the residual interest
as calculated under section III.B.3.e.ii.1. of this appendix or the full
risk-based capital requirement for the assets transferred.
f. Positions that are not rated by an NRSRO. A position (but not a
residual interest) maintained in connection with a securitization and
that is not rated by a NRSRO may be risk-weighted based on the bank
holding company's determination of the credit rating of the position, as
specified in the table below, multiplied by the face amount of the
position. In order to obtain this treatment, the bank holding company's
system for determining the credit rating of the position must meet one
of the three alternative standards set out in sections III.B.3.f.i.
through III.B.3.f.iii. of this appendix.
------------------------------------------------------------------------
Risk weight
Rating category Examples (In percent)
------------------------------------------------------------------------
Highest or second highest AAA, AA............. 100
investment grade.
Third highest investment grade.... A................... 100
Lowest investment grade........... BBB................. 100
One category below investment BB.................. 200
grade.
------------------------------------------------------------------------
i. Internal risk rating used for asset-backed programs. A direct
credit substitute (other than a purchased credit-enhancing I/O) is
assumed in connection with an asset-backed commercial paper program
sponsored by the bank holding company and the bank holding company is
able to demonstrate to the satisfaction of the Federal Reserve, prior to
relying upon its use, that the bank holding company's internal credit
risk rating system is adequate. Adequate internal credit risk rating
systems usually contain the following criteria:
1. The internal credit risk system is an integral part of the bank
holding company's risk management system, which explicitly incorporates
the full range of risks arising from a bank holding company's
participation in securitization activities;
2. Internal credit ratings are linked to measurable outcomes, such
as the probability that the position will experience any loss, the
position's expected loss given default, and the degree of variance in
losses given default on that position;
3. The bank holding company's internal credit risk system must
separately consider the risk associated with the underlying loans or
borrowers, and the risk associated with the structure of a particular
securitization transaction;
4. The bank holding company's internal credit risk system must
identify gradations of risk among ``pass'' assets and other risk
positions;
5. The bank holding company must have clear, explicit criteria that
are used to classify assets into each internal risk grade, including
subjective factors;
6. The bank holding company must have independent credit risk
management or loan review personnel assigning or reviewing the credit
risk ratings;
7. The bank holding company must have an internal audit procedure
that periodically verifies that the internal credit risk ratings are
assigned in accordance with the established criteria;
8. The bank holding company must monitor the performance of the
internal credit risk ratings assigned to nonrated, nontraded direct
credit substitutes over time to determine the appropriateness of the
initial credit risk rating assignment and adjust individual credit risk
ratings, or the overall internal credit risk ratings system, as needed;
and
9. The internal credit risk system must make credit risk rating
assumptions that are consistent with, or more conservative than, the
credit risk rating assumptions and methodologies of NRSROs.
ii. Program Ratings. A direct credit substitute or recourse
obligation (other than a residual interest) is assumed or retained in
connection with a structured finance program and a NRSRO has reviewed
the terms of the program and stated a rating for positions associated
with the program. If the program has options for different combinations
of assets, standards, internal credit enhancements and other relevant
factors, and the NRSRO specifies ranges of rating categories to them,
the bank holding company may apply the rating category that corresponds
to the bank holding company's position. In order to rely on a program
rating, the bank holding company must demonstrate to the Federal
Reserve's satisfaction that the credit risk rating assigned to the
program meets the same standards generally used by NRSROs for rating
traded positions. The bank holding company must also demonstrate to the
Federal Reserve's satisfaction that the criteria underlying the
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NRSRO's assignment of ratings for the program are satisfied for the
particular position. If a bank holding company participates in a
securitization sponsored by another party, the Federal Reserve may
authorize the bank holding company to use this approach based on a
programmatic rating obtained by the sponsor of the program.
iii. Computer Program. The bank holding company is using an
acceptable credit assessment computer program to determine the rating of
a direct credit substitute or recourse obligation (but not residual
interest) issued in connection with a structured finance program. A
NRSRO must have developed the computer program, and the bank holding
company must demonstrate to the Federal Reserve's satisfaction that
ratings under the program correspond credibly and reliably with the
rating of traded positions.
g. Limitations on risk-based capital requirements--i. Low-level
exposure. If the maximum contractual exposure to loss retained or
assumed by a bank holding company in connection with a recourse
obligation or a direct credit substitute is less than the effective
risk-based capital requirement for the enhanced assets, the risk-based
capital requirement is limited to the maximum contractual exposure, less
any liability account established in accordance with generally accepted
accounting principles. This limitation does not apply when a bank
holding company provides credit enhancement beyond any contractual
obligation to support assets it has sold.
ii. Mortgage-related securities or participation certificates
retained in a mortgage loan swap. If a bank holding company holds a
mortgage-related security or a participation certificate as a result of
a mortgage loan swap with recourse, capital is required to support the
recourse obligation plus the percentage of the mortgage-related security
or participation certificate that is not covered by the recourse
obligation. The total amount of capital required for the on-balance
sheet asset and the recourse obligation, however, is limited to the
capital requirement for the underlying loans, calculated as if the
organization continued to hold these loans as on-balance sheet assets.
iii. Related on-balance sheet assets. If a recourse obligation or
direct credit substitute subject to section III.B.3. of this appendix
also appears as a balance sheet asset, the balance sheet asset is not
included in an organization's risk-weighted assets to the extent the
value of the balance sheet asset is already included in the off-balance
sheet credit equivalent amount for the recourse obligation or direct
credit substitute, except in the case of loan servicing assets and
similar arrangements with embedded recourse obligations or direct credit
substitutes. In that case, both the on-balance sheet assets and the
related recourse obligations and direct credit substitutes are
incorporated into the risk-based capital calculation.
4. Maturity. Maturity is generally not a factor in assigning items
to risk categories with the exception of claims on non-OECD banks,
commitments, and interest rate and foreign exchange rate contracts.
Except for commitments, short-term is defined as one year or less
remaining maturity and long-term is defined as over one year remaining
maturity. In the case of commitments, short-term is defined as one year
or less original maturity and long-term is defined as over one year
original maturity.
5. Small Business Loans and Leases on Personal Property Transferred
with Recourse. a. Notwithstanding other provisions of this appendix A, a
qualifying banking organization that has transferred small business
loans and leases on personal property (small business obligations) with
recourse shall include in weighted-risk assets only the amount of
retained recourse, provided two conditions are met. First, the
transaction must be treated as a sale under GAAP and, second, the
banking organization must establish pursuant to GAAP a non-capital
reserve sufficient to meet the organization's reasonably estimated
liability under the recourse arrangement. Only loans and leases to
businesses that meet the criteria for a small business concern
established by the Small Business Administration under section 3(a) of
the Small Business Act are eligible for this capital treatment.
b. For purposes of this appendix A, a banking organization is
qualifying if it meets the criteria for well capitalized or, by order of
the Board, adequately capitalized, as those criteria are set forth in
the Board's prompt corrective action regulation for state member banks
(12 CFR 208.40). For purposes of determining whether an organization
meets these criteria, its capital ratios must be calculated without
regard to the capital treatment for transfers of small business
obligations with recourse specified in section III.B.5.a. of this
appendix A. The total outstanding amount of recourse retained by a
qualifying banking organization on transfers of small business
obligations receiving the preferential capital treatment cannot exceed
15 percent of the organization's total risk-based capital. By order, the
Board may approve a higher limit.
c. If a bank holding company ceases to be qualifying or exceeds the
15 percent capital limitation, the preferential capital treatment will
continue to apply to any transfers of small business obligations with
recourse that were consummated during the time that the organization was
qualifying and did not exceed the capital limit.
6. Asset-backed commercial paper programs. a. An asset-backed
commercial paper (ABCP) program means a program that primarily issues
externally rated commercial paper
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backed by assets or exposures held in a bankruptcy-remote, special
purpose entity.
b. A bank holding company that qualifies as a primary beneficiary
and must consolidate an ABCP program that is defined as a variable
interest entity under GAAP may exclude the consolidated ABCP program
assets from risk-weighted assets provided that the bank holding company
is the sponsor of the ABCP program. If a bank holding company excludes
such consolidated ABCP program assets, the bank holding company must
assess the appropriate risk-based capital charge against any exposures
of the organization arising in connection with such ABCP programs,
including direct credit substitutes, recourse obligations, residual
interests, liquidity facilities, and loans, in accordance with sections
III.B.3., III.C., and III.D. of this appendix.
c. If a bank holding company has multiple overlapping exposures
(such as a program-wide credit enhancement and multiple pool-specific
liquidity facilities) to an ABCP program that is not consolidated for
risk-based capital purposes, the bank holding company is not required to
hold duplicative risk-based capital under this appendix against the
overlapping position. Instead, the bank holding company should apply to
the overlapping position the applicable risk-based capital treatment
that results in the highest capital charge.
C. Risk Weights
Attachment III contains a listing of the risk categories, a summary
of the types of assets assigned to each category and the risk weight
associated with each category, that is, 0 percent, 20 percent, 50
percent, and 100 percent. A brief explanation of the components of each
category follows.
1. Category 1: zero percent. This category includes cash (domestic
and foreign) owned and held in all offices of subsidiary depository
institutions or in transit and gold bullion held in either a subsidiary
depository institution's own vaults or in another's vaults on an
allocated basis, to the extent it is offset by gold bullion
liabilities.\36\ The category also includes all direct claims (including
securities, loans, and leases) on, and the portions of claims that are
directly and unconditionally guaranteed by, the central governments \37\
of the OECD countries and U.S. Government agencies,\38\ as well as all
direct local currency claims on, and the portions of local currency
claims that are directly and unconditionally guaranteed by, the central
governments of non-OECD countries, to the extent that subsidiary
depository institutions have liabilities booked in that currency. A
claim is not considered to be unconditionally guaranteed by a central
government if the validity of the guarantee is dependent upon some
affirmative action by the holder or a third party. Generally, securities
guaranteed by the U.S. Government or its agencies that are actively
traded in financial markets, such as GNMA securities, are considered to
be unconditionally guaranteed.
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\36\ All other holdings of bullion are assigned to the 100 percent
risk category.
\37\ A central government is defined to include departments and
ministries, including the central bank, of the central government. The
U.S. central bank includes the 12 Federal Reserve Banks, and stock held
in these banks as a condition of membership is assigned to the zero
percent risk category. The definition of central government does not
include state, provincial, or local governments; or commercial
enterprises owned by the central government. In addition, it does not
include local government entities or commercial enterprises whose
obligations are guaranteed by the central government, although any
claims on such entities guaranteed by central governments are placed in
the same general risk category as other claims guaranteed by central
governments. OECD central governments are defined as central governments
of the OECD-based group of countries; non-OECD central governments are
defined as central governments of countries that do not belong to the
OECD-based group of countries.
\38\ A U.S. Governmnt agency is defined as an instrumentality of the
U.S. Government whose obligations are fully and explicitly guaranteed as
to the timely payment of principal and interest by the full faith and
credit of the U.S. Government. Such agencies include the Government
National Mortgage Association (GNMA), the Veterans Administration (VA),
the Federal Housing Administration (FHA), the Export-Import Bank (Exim
Bank), the Overseas Private Investment Corporation (OPIC), the Commodity
Credit Corporation (CCC), and the Small Business Administration (SBA).
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This category also includes claims collateralized by cash on deposit
in the subsidiary lending institution or by securities issued or
guaranteed by OECD central governments or U.S. government agencies for
which a positive margin of collateral is maintained on a daily basis,
fully taking into account any change in the banking organization's
exposure to the obligor or counterparty under a claim in relation to the
market value of the collateral held in support of that claim.
2. Category 2: 20 percent. a. This category includes cash items in
the process of collection, both foreign and domestic; short-term claims
(including demand deposits) on, and the portions of short-term claims
that are
[[Page 234]]
guaranteed by,\39\ U.S. depository institutions \40\ and foreign banks
\41\; and long-term claims on, and the portions of long-term claims that
are guaranteed by, U.S. depository institutions and OECD banks.\42\
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\39\ Claims guaranteed by U.S. depository institutions and foreign
banks include risk participations in both bankers acceptances and
standby letters of credit, as well as participations in commitments,
that are conveyed to U.S. depository institutions or foreign banks.
\40\ See footnote 9 of this appendix for the definition of a U.S.
depository institution. For this purpose, the definition also includes
U.S.-chartered depository institutions owned by foreigners. However,
branches and agencies of foreign banks located in the U.S., as well as
all bank holding companies, are excluded.
\41\ See footnote 10 of this appendix for the definition of a
foreign bank. Foreign banks are distinguished as either OECD banks or
non-OECD banks. OECD banks include banks and their branches (foreign and
domestic) organized under the laws of countries (other than the United
States) that belong to the OECD-based group of countries. Non-OECD banks
include banks and their branches (foreign and domestic) organized under
the laws of countries that do not belong to the OECD-based group of
countries.
\42\ Long-term claims on, or guaranteed by, non-OECD banks and all
claims on bank holding companies are assigned to the 100 percent risk
category, as are holdings of bank-issued securities that qualify as
capital of the issuing banks.
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b. This category also includes the portions of claims that are
conditionally guaranteed by OECD central governments and U.S. Government
agencies, as well as the portions of local currency claims that are
conditionally guaranteed by non-OECD central governments, to the extent
that subsidiary depository institutions have liabilities booked in that
currency. In addition, this category also includes claims on, and the
portions of claims that are guaranteed by, U.S. government-sponsored
\43\ agencies and claims on, and the portions of claims guaranteed by,
the International Bank for Reconstruction and Development (World Bank),
the International Finance Corporation, the Interamerican Development
Bank, the Asian Development Bank, the African Development Bank, the
European Investment Bank, the European Bank for Reconstruction and
Development, the Nordic Investment Bank, and other multilateral lending
institutions or regional development banks in which the U.S. government
is a shareholder or contributing member. General obligation claims on,
or portions of claims guaranteed by the full faith and credit of, states
or other political subdivisions of the U.S. or other countries of the
OECD--based group are also assigned to this category.\44\
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\43\ For this purpose, U.S. government-sponsored agencies are
defined as agencies originally established or chartered by the Federal
government to serve public purposes specified by the U.S. Congress but
whose obligations are not explicitly guaranteed by the full faith and
credit of the U.S. government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), the Farm Credit System, the Federal Home Loan Bank
System, and the Student Loan Marketing Association (SLMA). Claims on
U.S. government-sponsored agencies include capital stock in a Federal
Home Loan Bank that is held as a condition of membership in that Bank.
\44\ Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECD-based group of
countries are placed in the 100 percent risk category.
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c. This category also includes the portions of claims (including
repurchase transactions) collateralized by cash on deposit in the
subsidiary lending institution or by securities issued or guaranteed by
OECD central governments or U.S. government agencies that do not qualify
for the zero percent risk-weight category; collateralized by securities
issued or guaranteed by U.S. government-sponsored agencies; or
collateralized by securities issued by multilateral lending institutions
or regional development banks in which the U.S. government is a
shareholder or contributing member.
d. This category also includes claims \45\ on, or guaranteed by, a
qualifying securities firm \46\ incorporated in the United States or
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other member of the OECD-based group of countries provided that: the
qualifying securities firm has a long-term issuer credit rating, or a
rating on at least one issue of long-term debt, in one of the three
highest investment grade rating categories from a nationally recognized
statistical rating organization; or the claim is guaranteed by the
firm's parent company and the parent company has such a rating. If
ratings are available from more than one rating agency, the lowest
rating will be used to determine whether the rating requirement has been
met. This category also includes a collateralized claim on a qualifying
securities firm in such a country, without regard to satisfaction of the
rating standard, provided the claim arises under a contract that:
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\45\ Claims on a qualifying securities firm that are instruments the
firm, or its parent company, uses to satisfy its applicable capital
requirement are not eligible for this risk weight.
\46\ With regard to securities firms incorporated in the United
States, qualifying securities firms are those securities firms that are
broker-dealers registered with the Securities and Exchange Commission
and are in compliance with the SEC's net capital rule, 17 CFR 240.15c3-
1. With regard to securities firms incorporated in other countries in
the OECD-based group of countries, qualifying securities firms are those
securities firms that a banking organization is able to demonstrate are
subject to consolidated supervision and regulation (covering their
direct and indirect subsidiaries, but not necessarily their parent
organizations) comparable to that imposed on banks in OECD countries.
Such regulation must include risk-based capital requirements comparable
to those applied to banks under the Accord on International Convergence
of Capital Measurement and Capital Standards (1988, as amended in 1998)
(Basel Accord).
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(1) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
(2) Is collateralized by debt or equity securities that are liquid
and readily marketable;
(3) Is marked-to-market daily;
(4) Is subject to a daily margin maintenance requirement under the
standard industry documentation; and
(5) Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction.\47\
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\47\ For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities contract
or repurchase agreement subject to section 555 or 559 of the Bankruptcy
Code, respectively (11 U.S.C. 555 or 559), a qualified financial
contract under section 11(e)(8) of the Federal Deposit Insurance Act (12
U.S.C. 1821(e)(8)), or a netting contract between financial institutions
under sections 401-407 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (12 U.S.C. 4401-4407), or the Board's Regulation
EE (12 CFR Part 231).
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3. Category 3: 50 percent. This category includes loans fully
secured by first liens \48\ on 1- to 4-family residential properties,
either owner-occupied or rented, or on multifamily residential
properties,\49\ that meet certain criteria.\50\ Loans included in this
category must have been made in accordance with prudent underwriting
standards;\51\ be performing in accordance with their original terms;
and not be 90 days or more past due or carried in nonaccrual status. The
following additional criteria must also be applied to a loan secured by
a multifamily residential property that is included in this category:
all principal and interest payments on the loan must have been made on
time for at least the year preceding placement in this category, or in
the case where the existing
[[Page 236]]
property owner is refinancing a loan on that property, all principal and
interest payments on the loan being refinanced must have been made on
time for at least the year preceding placement in this category;
amortization of the principal and interest must occur over a period of
not more than 30 years and the minimum original maturity for repayment
of principal must not be less than 7 years; and the annual net operating
income (before debt service) generated by the property during its most
recent fiscal year must not be less than 120 percent of the loan's
current annual debt service (115 percent if the loan is based on a
floating interest rate) or, in the case of a cooperative or other not-
for-profit housing project, the property must generate sufficient cash
flow to provide comparable protection to the institution. Also included
in this category are privately-issued mortgage-backed securities
provided that:
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\48\ If a banking organization holds the first and junior lien(s) on
a residential property and no other party holds an intervening lien, the
transaction is treated as a single loan secured by a first lien for the
purposes of determining the loan-to-value ratio and assigning a risk
weight.
\49\ Loans that qualify as loans secured by 1- to 4-family
residential properties or multifamily residential properties are listed
in the instructions to the FR Y-9C Report. In addition, for risk-based
capital purposes, loans secured by 1- to 4-family residential properties
include loans to builders with substantial project equity for the
construction of 1-to 4-family residences that have been presold under
firm contracts to purchasers who have obtained firm commitments for
permanent qualifying mortgage loans and have made substantial earnest
money deposits. Such loans to builders will be considered prudently
underwritten only if the bank holding company has obtained sufficient
documentation that the buyer of the home intends to purchase the home
(i.e., has a legally binding written sales contract) and has the ability
to obtain a mortgage loan sufficient to purchase the home (i.e., has a
firm written commitment for permanent financing of the home upon
completion).
\50\ Residential property loans that do not meet all the specified
criteria or that are made for the purpose of speculative property
development are placed in the 100 percent risk category.
\51\ Prudent underwriting standards include a conservative ratio of
the current loan balance to the value of the property. In the case of a
loan secured by multifamily residential property, the loan-to-value
ratio is not conservative if it exceeds 80 percent (75 percent if the
loan is based on a floating interest rate). Prudent underwriting
standards also dictate that a loan-to-value ratio used in the case of
originating a loan to acquire a property would not be deemed
conservative unless the value is based on the lower of the acquisition
cost of the property or appraised (or if appropriate, evaluated) value.
Otherwise, the loan-to-value ratio generally would be based upon the
value of the property as determined by the most current appraisal, or if
appropriate, the most current evaluation. All appraisals must be made in
a manner consistent with the Federal banking agencies' real estate
appraisal regulations and guidelines and with the banking organization's
own appraisal guidelines.
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(1) The structure of the security meets the criteria described in
section III(B)(3) above;
(2) if the security is backed by a pool of conventional mortgages,
on 1- to 4-family residential or multifamily residential properties,
each underlying mortgage meets the criteria described above in this
section for eligibility for the 50 percent risk category at the time the
pool is originated;
(3) If the security is backed by privately-issued mortgage-backed
securities, each underlying security qualifies for the 50 percent risk
category; and
(4) If the security is backed by a pool of multifamily residential
mortgages, principal and interest payments on the security are not 30
days or more past due. Privately-issued mortgage-backed securities that
do not meet these criteria or that do not qualify for a lower risk
weight are generally assigned to the 100 percent risk category.
Also assigned to this category are revenue (non-general obligation)
bonds or similar obligations, including loans and leases, that are
obligations of states or other political subdivisions of the U.S. (for
example, municipal revenue bonds) or other countries of the OECD-based
group, but for which the government entity is committed to repay the
debt with revenues from the specific projects financed, rather than from
general tax funds.
Credit equivalent amounts of derivative contracts involving standard
risk obligors (that is, obligors whose loans or debt securities would be
assigned to the 100 percent risk category) are included in the 50
percent category, unless they are backed by collateral or guarantees
that allow them to be placed in a lower risk category.
4. Category 4: 100 percent. a. All assets not included in the
categories above are assigned to this category, which comprises standard
risk assets. The bulk of the assets typically found in a loan portfolio
would be assigned to the 100 percent category.
b. This category includes long-term claims on, and the portions of
long-term claims that are guaranteed by, non-OECD banks, and all claims
on non-OECD central governments that entail some degree of transfer
risk.\52\ This category includes all claims on foreign and domestic
private-sector obligors not included in the categories above (including
loans to nondepository financial institutions and bank holding
companies); claims on commercial firms owned by the public sector;
customer liabilities to the organization on acceptances outstanding
involving standard risk claims;\53\ investments in fixed assets,
premises, and other real estate owned; common and preferred stock of
corporations, including stock acquired for debts previously contracted;
all stripped mortgage-backed securities and similar instruments; and
commercial and consumer loans (except those assigned to lower risk
categories due to recognized guarantees or collateral and loans secured
by residential property that qualify for a lower risk weight). This
category also includes claims representing capital of a qualifying
securities firm.
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\52\ Such assets include all nonlocal currency claims on, and the
portions of claims that are guaranteed by, non-OECD central governments
and those portions of local currency claims on, or guaranteed by, non-
OECD central governments that exceed the local currency liabilities held
by subsidiary depository institutions.
\53\ Customer liabilities on acceptances outstanding involving
nonstandard risk claims, such as claims on U.S. depository institutions,
are assigned to the risk category appropriate to the identity of the
obligor or, if relevant, the nature of the collateral or guarantees
backing the claims. Portions of acceptances conveyed as risk
participations to U.S. depository institutions or foreign banks are
assigned to the 20 percent risk category appropriate to short-term
claims guaranteed by U.S. depository institutions and foreign banks.
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c. Also included in this category are industrial-development bonds
and similar obligations issued under the auspices of states or political
subdivisions of the OECD-based group of countries for the benefit of a
private party or enterprise where that party or enterprise, not the
government entity, is obligated to pay the principal and interest, and
all obligations of states or political subdivisions of countries that do
not belong to the OECD-based group.
d. The following assets also are assigned a risk weight of 100
percent if they have not been deducted from capital: investments in
unconsolidated companies, joint ventures, or associated companies;
instruments that qualify as capital issued by other banking
organizations; and any intangibles, including
[[Page 237]]
those that may have been grandfathered into capital.
D. Off-Balance Sheet Items
The face amount of an off-balance sheet item is generally
incorporated into risk-weighted assets in two steps. The face amount is
first multiplied by a credit conversion factor, except for direct credit
substitutes and recourse obligations as discussed in section III.D.1. of
this appendix. The resultant credit equivalent amount is assigned to the
appropriate risk category according to the obligor or, if relevant, the
guarantor, the nature of any collateral, or external credit ratings.\54\
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\54\ The sufficiency of collateral and guarantees for off-balance-
sheet items is determined by the market value of the collateral or the
amount of the guarantee in relation to the face amount of the item,
except for derivative contracts, for which this determination is
generally made in relation to the credit equivalent amount. Collateral
and guarantees are subject to the same provisions noted under section
III.B of this appendix A.
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1. Items with a 100 percent conversion factor. a. Except as
otherwise provided in section III.B.3. of this appendix, the full amount
of an asset or transaction supported, in whole or in part, by a direct
credit substitute or a recourse obligation. Direct credit substitutes
and recourse obligations are defined in section III.B.3. of this
appendix.
b. Sale and repurchase agreements and forward agreements. Forward
agreements are legally binding contractual obligations to purchase
assets with certain drawdown at a specified future date. Such
obligations include forward purchases, forward forward deposits placed,
\55\ and partly-paid shares and securities; they do not include
commitments to make residential mortgage loans or forward foreign
exchange contracts.
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\55\ Forward forward deposits accepted are treated as interest rate
contracts.
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c. Securities lent by a banking organization are treated in one of
two ways, depending upon whether the lender is at risk of loss. If a
banking organization, as agent for a customer, lends the customer's
securities and does not indemnify the customer against loss, then the
transaction is excluded from the risk-based capital calculation. If,
alternatively, a banking organization lends its own securities or,
acting as agent for a customer, lends the customer's securities and
indemnifies the customer against loss, the transaction is converted at
100 percent and assigned to the risk weight category appropriate to the
obligor, or, if applicable, to any collateral delivered to the lending
organization, or the independent custodian acting on the lending
organization's behalf. Where a banking organization is acting as agent
for a customer in a transaction involving the lending or sale of
securities that is collateralized by cash delivered to the banking
organization, the transaction is deemed to be collateralized by cash on
deposit in a subsidiary depository institution for purposes of
determining the appropriate risk-weight category, provided that any
indemnification is limited to no more than the difference between the
market value of the securities and the cash collateral received and any
reinvestment risk associated with that cash collateral is borne by the
customer.
d. In the case of direct credit substitutes in which a risk
participation \56\ has been conveyed, the full amount of the assets that
are supported, in whole or in part, by the credit enhancement are
converted to a credit equivalent amount at 100 percent. However, the pro
rata share of the credit equivalent amount that has been conveyed
through a risk participation is assigned to whichever risk category is
lower: the risk category appropriate to the obligor, after considering
any relevant guarantees or collateral, or the risk category appropriate
to the institution acquiring the participation.\57\ Any remainder is
assigned to the risk category appropriate to the obligor, guarantor, or
collateral. For example, the pro rata share of the full amount of the
assets supported, in whole or in part, by a direct credit substitute
conveyed as a risk participation to a U.S. domestic depository
institution or foreign bank is assigned to the 20 percent risk
category.\58\
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\56\ That is, a participation in which the originating banking
organization remains liable to the beneficiary for the full amount of
the direct credit substitute if the party that has acquired the
participation fails to pay when the instrument is drawn.
\57\ A risk participation in bankers acceptances conveyed to other
institutions is also assigned to the risk category appropriate to the
institution acquiring the participation or, if relevant, the guarantor
or nature of the collateral.
\58\ Risk participations with a remaining maturity of over one year
that are conveyed to non-OECD banks are to be assigned to the 100
percent risk category, unless a lower risk category is appropriate to
the obligor, guarantor, or collateral.
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e. In the case of direct credit substitutes in which a risk
participation has been acquired, the acquiring banking organization's
percentage share of the direct credit substitute is multiplied by the
full amount of the assets that are supported, in whole or in part, by
the credit enhancement and converted to a credit equivalent amount at
100 percent. The credit equivalent amount of an acquisition of
[[Page 238]]
a risk participation in a direct credit substitute is assigned to the
risk category appropriate to the account party obligor or, if relevant,
the nature of the collateral or guarantees.
f. In the case of direct credit substitutes that take the form of a
syndication where each banking organization is obligated only for its
pro rata share of the risk and there is no recourse to the originating
banking organization, each banking organization will only include its
pro rata share of the assets supported, in whole or in part, by the
direct credit substitute in its risk-based capital calculation.\59\
---------------------------------------------------------------------------
\59\ For example, if a banking organization has a 10 percent share
of a $10 syndicated direct credit substitute that provides credit
support to a $100 loan, then the banking organization's $1 pro rata
share in the enhancement means that a $10 pro rata share of the loan is
included in risk weighted assets.
---------------------------------------------------------------------------
2. Items with a 50 percent conversion factor. a. Transaction-related
contingencies are converted at 50 percent. Such contingencies include
bid bonds, performance bonds, warranties, standby letters of credit
related to particular transactions, and performance standby letters of
credit, as well as acquisitions of risk participation in performance
standby letters of credit. Peformance standby letters of credit
represent obligations backing the performance of nonfinancial or
commercial contracts or undertakings. To the extent permitted by law or
regulation, performance standby letters of credit include arrangements
backing, among other things, subcontractors' and suppliers' performance,
labor and materials contracts, and construction bids.
b. The unused portion of commitments with an original maturity
exceeding one year, including underwriting commitments, and commercial
and consumer credit commitments also are converted at 50 percent.
Original maturity is defined as the length of time between the date the
commitment is issued and the earliest date on which: (1) The banking
organization can, at its option, unconditionally (without cause) cancel
the commitment;\60\ and (2) the banking organization is scheduled to
(and as a normal practice actually does) review the facility to
determine whether or not it should be extended. Such reviews must
continue to be conducted at least annually for such a facility to
qualify as a short-term commitment.
---------------------------------------------------------------------------
\60\ In the case of consumer home equity or mortgage lines of credit
secured by liens on 1-4 family residential properties, the bank is
deemed able to unconditionally cancel the commitment for the purpose of
this criterion if, at its option, it can prohibit additional extensions
of credit, reduce the credit line, and terminate the commitment to the
full extent permitted by relevant Federal law.
---------------------------------------------------------------------------
c.i. Commitments are defined as any legally binding arrangements
that obligate a banking organization to extend credit in the form of
loans or leases; to purchase loans, securities, or other assets; or to
participate in loans and leases. They also include overdraft facilities,
revolving credit, home equity and mortgage lines of credit, eligible
ABCP liquidity facilities, and similar transactions. Normally,
commitments involve a written contract or agreement and a commitment
fee, or some other form of consideration. Commitments are included in
weighted-risk assets regardless of whether they contain ``material
adverse change'' clauses or other provisions that are intended to
relieve the issuer of its funding obligation under certain conditions.
In the case of commitments structured as syndications, where the banking
organization is obligated solely for its pro rata share, only the
organization's proportional share of the syndicated commitment is taken
into account in calculating the risk-based capital ratio.
ii. Banking organizations that are subject to the market risk rules
are required to convert the notional amount of eligible ABCP liquidity
facilities, in form or in substance, with an original maturity of over
one year that are carried in the trading account at 50 percent to
determine the appropriate credit equivalent amount even though those
facilities are structured or characterized as derivatives or other
trading book assets. Liquidity facilities that support ABCP, in form or
in substance, (including those positions to which the market risk rules
may not be applied as set forth in section 2(a) of appendix E of this
part) that are not eligible ABCP liquidity facilities are to be
considered recourse obligations or direct credit substitutes, and
assessed the appropriate risk-based capital treatment in accordance with
section III.B.3. of this appendix.
d. Once a commitment has been converted at 50 percent, any portion
that has been conveyed to U.S. depository institutions or OECD banks as
participations in which the originating banking organization retains the
full obligation to the borrower if the participating bank fails to pay
when the instrument is drawn, is assigned to the 20 percent risk
category. This treatment is analogous to that accorded to conveyances of
risk participations in standby letters of credit. The acquisition of a
participation in a commitment by a banking organization is converted at
50 percent and assigned to the risk category appropriate to the account
party obligor or, if relevant, the nature of the collateral or
guarantees.
e. Revolving underwriting facilities (RUFs), note issuance
facilities (NIFs), and other similar arrangements also are converted at
50 percent regardless of maturity.
[[Page 239]]
These are facilities under which a borrower can issue on a revolving
basis short-term paper in its own name, but for which the underwriting
organizations have a legally binding commitment either to purchase any
notes the borrower is unable to sell by the roll-over date or to advance
funds to the borrower.
3. Items with a 20 percent conversion factor. Short-term, self-
liquidating trade-related contingencies which arise from the movement of
goods are converted at 20 percent. Such contingencies generally include
commercial letters of credit and other documentary letters of credit
collateralized by the underlying shipments.
4. Items with a 10 percent conversion factor. a. Unused portions of
eligible ABCP liquidity facilities with an original maturity of one year
or less also are converted at 10 percent.
b. Banking organizations that are subject to the market risk rules
are required to convert the notional amount of eligible ABCP liquidity
facilities, in form or in substance, with an original maturity of one
year or less that are carried in the trading account at 10 percent to
determine the appropriate credit equivalent amount even though those
facilities are structured or characterized as derivatives or other
trading book assets. Liquidity facilities that support ABCP, in form or
in substance, (including those positions to which the market risk rules
may not be applied as set forth in section 2(a) of appendix E of this
part) that are not eligible ABCP liquidity facilities are to be
considered recourse obligations or direct credit substitutes and
assessed the appropriate risk-based capital requirement in accordance
with section III.B.3. of this appendix.
5. Items with a zero percent conversion factor. These include unused
portions of commitments (with the exception of eligible ABCP liquidity
facilities) with an original maturity of one year or less, or which are
unconditionally cancelable at any time, provided a separate credit
decision is made before each drawing under the facility. Unused portions
of lines of credit on retail credit cards and related plans are deemed
to be short-term commitments if the banking organization has the
unconditional right to cancel the line of credit at any time, in
accordance with applicable law.
E. Derivative Contracts (Interest Rate, Exchange Rate, Commodity-
(including precious metals) and Equity-Linked Contracts)
1. Scope. Credit equivalent amounts are computed for each of the
following off-balance-sheet derivative contracts:
a. Interest Rate Contracts. These include single currency interest
rate swaps, basis swaps, forward rate agreements, interest rate options
purchased (including caps, collars, and floors purchased), and any other
instrument linked to interest rates that gives rise to similar credit
risks (including when-issued securities and forward forward deposits
accepted).
b. Exchange Rate Contracts. These include cross-currency interest
rate swaps, forward foreign exchange contracts, currency options
purchased, and any other instrument linked to exchange rates that gives
rise to similar credit risks.
c. Equity Derivative Contracts. These include equity-linked swaps,
equity-linked options purchased, forward equity-linked contracts, and
any other instrument linked to equities that gives rise to similar
credit risks.
d. Commodity (including precious metal) Derivative Contracts. These
include commodity-linked swaps, commodity-linked options purchased,
forward commodity-linked contracts, and any other instrument linked to
commodities that gives rise to similar credit risks.
e. Exceptions. Exchange rate contracts with an original maturity of
fourteen or fewer calendar days and derivative contracts traded on
exchanges that require daily receipt and payment of cash variation
margin may be excluded from the risk-based ratio calculation. Gold
contracts are accorded the same treatment as exchange rate contracts
except that gold contracts with an original maturity of fourteen or
fewer calendar days are included in the risk-based ratio calculation.
Over-the-counter options purchased are included and treated in the same
way as other derivative contracts.
2. Calculation of credit equivalent amounts. a. The credit
equivalent amount of a derivative contract that is not subject to a
qualifying bilateral netting contract in accordance with section
III.E.3. of this appendix A is equal to the sum of (i) the current
exposure (sometimes referred to as the replacement cost) of the
contract; and (ii) an estimate of the potential future credit exposure
of the contract.
b. The current exposure is determined by the mark-to-market value of
the contract. If the mark-to-market value is positive, then the current
exposure is equal to that mark-to-market value. If the mark-to-market
value is zero or negative, then the current exposure is zero. Mark-to-
market values are measured in dollars, regardless of the currency or
currencies specified in the contract and should reflect changes in
underlying rates, prices, and indices, as well as counterparty credit
quality.
c. The potential future credit exposure of a contract, including a
contract with a negative mark-to-market value, is estimated by
multiplying the notional principal amount of the contract by a credit
conversion factor. Banking organizations should use, subject to examiner
review, the effective rather than the apparent or stated notional amount
in this calculation. The credit conversion factors are:
[[Page 240]]
Conversion Factors
[In percent]
----------------------------------------------------------------------------------------------------------------
Commodity,
Interest Exchange excluding Precious
Remaining maturity rate rate and Equity precious metals,
gold metals except gold
----------------------------------------------------------------------------------------------------------------
One year or less............................... 0.0 1.0 6.0 10.0 7.0
Over one to five years......................... 0.5 5.0 8.0 12.0 7.0
Over five years................................ 1.5 7.5 10.0 15.0 8.0
----------------------------------------------------------------------------------------------------------------
d. For a contract that is structured such that on specified dates
any outstanding exposure is settled and the terms are reset so that the
market value of the contract is zero, the remaining maturity is equal to
the time until the next reset date. For an interest rate contract with a
remaining maturity of more than one year that meets these criteria, the
minimum conversion factor is 0.5 percent.
e. For a contract with multiple exchanges of principal, the
conversion factor is multiplied by the number of remaining payments in
the contract. A derivative contract not included in the definitions of
interest rate, exchange rate, equity, or commodity contracts as set
forth in section III.E.1. of this appendix A is subject to the same
conversion factors as a commodity, excluding precious metals.
f. No potential future exposure is calculated for a single currency
interest rate swap in which payments are made based upon two floating
rate indices (a so called floating/floating or basis swap); the credit
exposure on such a contract is evaluated solely on the basis of the
mark-to-market value.
g. The Board notes that the conversion factors set forth above,
which are based on observed volatilities of the particular types of
instruments, are subject to review and modification in light of changing
volatilities or market conditions.
3. Netting. a. For purposes of this appendix A, netting refers to
the offsetting of positive and negative mark-to-market values when
determining a current exposure to be used in the calculation of a credit
equivalent amount. Any legally enforceable form of bilateral netting
(that is, netting with a single counterparty) of derivative contracts is
recognized for purposes of calculating the credit equivalent amount
provided that:
i. The netting is accomplished under a written netting contract that
creates a single legal obligation, covering all included individual
contracts, with the effect that the banking organization would have a
claim to receive, or obligation to pay, only the net amount of the sum
of the positive and negative mark-to-market values on included
individual contracts in the event that a counterparty, or a counterparty
to whom the contract has been validly assigned, fails to perform due to
any of the following events: default, insolvency, liquidation, or
similar circumstances.
ii. The banking organization obtains a written and reasoned legal
opinion(s) representing that in the event of a legal challenge--
including one resulting from default, insolvency, liquidation, or
similar circumstances--the relevant court and administrative authorities
would find the banking organization's exposure to be the net amount
under:
1. The law of the jurisdiction in which the counterparty is
chartered or the equivalent location in the case of noncorporate
entities, and if a branch of the counterparty is involved, then also
under the law of the jurisdiction in which the branch is located;
2. The law that governs the individual contracts covered by the
netting contract; and
3. The law that governs the netting contract.
iii. The banking organization establishes and maintains procedures
to ensure that the legal characteristics of netting contracts are kept
under review in the light of possible changes in relevant law.
iv. The banking organization maintains in its files documentation
adequate to support the netting of derivative contracts, including a
copy of the bilateral netting contract and necessary legal opinions.
b. A contract containing a walkaway clause is not eligible for
netting for purposes of calculating the credit equivalent amount.\61\
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\61\ A walkaway clause is a provision in a netting contract that
permits a non-defaulting counterparty to make lower payments than it
would make otherwise under the contract, or no payment at all, to a
defaulter or to the estate of a defaulter, even if the defaulter or the
estate of the defaulter is a net creditor under the contract.
---------------------------------------------------------------------------
c. A banking organization netting individual contracts for the
purpose of calculating credit equivalent amounts of derivative contracts
represents that it has met the requirements of this appendix A and all
the appropriate documents are in the banking
[[Page 241]]
organization's files and available for inspection by the Federal
Reserve. The Federal Reserve may determine that a banking organization's
files are inadequate or that a netting contract, or any of its
underlying individual contracts, may not be legally enforceable under
any one of the bodies of law described in section III.E.3.a.ii. of this
appendix A. If such a determination is made, the netting contract may be
disqualified from recognition for risk-based capital purposes or
underlying individual contracts may be treated as though they are not
subject to the netting contract.
d. The credit equivalent amount of contracts that are subject to a
qualifying bilateral netting contract is calculated by adding (i) the
current exposure of the netting contract (net current exposure) and (ii)
the sum of the estimates of potential future credit exposures on all
individual contracts subject to the netting contract (gross potential
future exposure) adjusted to reflect the effects of the netting
contract.\62\
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\62\ For purposes of calculating potential future credit exposure to
a netting counterparty for foreign exchange contracts and other similar
contracts in which notional principal is equivalent to cash flows, total
notional principal is defined as the net receipts falling due on each
value date in each currency.
---------------------------------------------------------------------------
e. The net current exposure is the sum of all positive and negative
mark-to-market values of the individual contracts included in the
netting contract. If the net sum of the mark-to-market values is
positive, then the net current exposure is equal to that sum. If the net
sum of the mark-to-market values is zero or negative, then the net
current exposure is zero. The Federal Reserve may determine that a
netting contract qualifies for risk-based capital netting treatment even
though certain individual contracts included under the netting contract
may not qualify. In such instances, the nonqualifying contracts should
be treated as individual contracts that are not subject to the netting
contract.
f. Gross potential future exposure, or Agross is
calculated by summing the estimates of potential future exposure
(determined in accordance with section III.E.2 of this appendix A) for
each individual contract subject to the qualifying bilateral netting
contract.
g. The effects of the bilateral netting contract on the gross
potential future exposure are recognized through the application of a
formula that results in an adjusted add-on amount (Anet). The
formula, which employs the ratio of net current exposure to gross
current exposure (NGR), is expressed as:
Anet = (0.4 x Agross) + 0.6(NGR x
Agross)
h. The NGR may be calculated in accordance with either the
counterparty-by-counterparty approach or the aggregate approach.
i. Under the counterparty-by-counterparty approach, the NGR is the
ratio of the net current exposure for a netting contract to the gross
current exposure of the netting contract. The gross current exposure is
the sum of the current exposures of all individual contracts subject to
the netting contract calculated in accordance with section III.E.2. of
this appendix A. Net negative mark-to-market values for individual
netting contracts with the same counterparty may not be used to offset
net positive mark-to-market values for other netting contracts with the
same counterparty.
ii. Under the aggregate approach, the NGR is the ratio of the sum of
all of the net current exposures for qualifying bilateral netting
contracts to the sum of all of the gross current exposures for those
netting contracts (each gross current exposure is calculated in the same
manner as in section III.E.3.h.i. of this appendix A). Net negative
mark-to-market values for individual counterparties may not be used to
offset net positive current exposures for other counterparties.
iii. A banking organization must use consistently either the
counterparty-by-counterparty approach or the aggregate approach to
calculate the NGR. Regardless of the approach used, the NGR should be
applied individually to each qualifying bilateral netting contract to
determine the adjusted add-on for that netting contract.
i. In the event a netting contract covers contracts that are
normally excluded from the risk-based ratio calculation--for example,
exchange rate contracts with an original maturity of fourteen or fewer
calendar days or instruments traded on exchanges that require daily
payment and receipt of cash variation margin--an institution may elect
to either include or exclude all mark-to-market values of such contracts
when determining net current exposure, provided the method chosen is
applied consistently.
4. Risk Weights. Once the credit equivalent amount for a derivative
contract, or a group of derivative contracts subject to a qualifying
bilateral netting contract, has been determined, that amount is assigned
to the risk category appropriate to the counterparty, or, if relevant,
the guarantor or the nature of any collateral.\63\ However,
[[Page 242]]
the maximum risk weight applicable to the credit equivalent amount of
such contracts is 50 percent.
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\63\ For derivative contracts, sufficiency of collateral or
guarantees is generally determined by the market value of the collateral
or the amount of the guarantee in relation to the credit equivalent
amount. Collateral and guarantees are subject to the same provisions
noted under section III.B. of this appendix A.
---------------------------------------------------------------------------
5. Avoidance of double counting. a. In certain cases, credit
exposures arising from the derivative contracts covered by section
III.E. of this appendix A may already be reflected, in part, on the
balance sheet. To avoid double counting such exposures in the assessment
of capital adequacy and, perhaps, assigning inappropriate risk weights,
counterparty credit exposures arising from the derivative instruments
covered by these guidelines may need to be excluded from balance sheet
assets in calculating a banking organization's risk-based capital
ratios.
b. Examples of the calculation of credit equivalent amounts for
contracts covered under this section III.E. are contained in Attachment
V of this appendix A.
IV. Minimum Supervisory Ratios and Standards
The interim and final supervisory standards set forth below specify
minimum supervisory ratios based primarily on broad credit risk
considerations. As noted above, the risk-based ratio does not take
explicit account of the quality of individual asset portfolios or the
range of other types of risks to which banking organizations may be
exposed, such as interest rate, liquidity, market or operational risks.
For this reason, banking organizations are generally expected to operate
with capital positions well above the minimum ratios.
Institutions with high or inordinate levels of risk are expected to
operate well above minimum capital standards. Banking organizations
experiencing or anticipating significant growth are also expected to
maintain capital, including tangible capital positions, well above the
minimum levels. For example, most such organizations generally have
operated at capital levels ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios could be required if
warranted by the particular circumstances or risk profiles of individual
banking organizations. In all cases, organizations should hold capital
commensurate with the level and nature of all of the risks, including
the volume and severity of problem loans, to which they are exposed.
Upon adoption of the risk-based framework, any organization that
does not meet the interim or final supervisory ratios, or whose capital
is otherwise considered inadequate, is expected to develop and implement
a plan acceptable to the Federal Reserve for achieving an adequate level
of capital consistent with the provisions of these guidelines or with
the special circumstances affecting the individual organization. In
addition, such organizations should avoid any actions, including
increased risk-taking or unwarranted expansion, that would lower or
further erode their capital positions.
A. Minimum Risk-Based Ratio After Transition Period
As reflected in Attachment VI, by year-end 1992, all bank holding
companies \64\ should meet a minimum ratio of qualifying total capital
to weighted risk assets of 8 percent, of which at least 4.0 percentage
points should be in the form of Tier 1 capital. For purposes of section
IV.A., Tier 1 capital is defined as the sum of core capital elements
less goodwill and other intangible assets required to be deducted in
accordance with section II.B.1.b. of this appendix. The maximum amount
of supplementary capital elements that qualifies as Tier 2 capital is
limited to 100 percent of Tier 1 capital. In addition, the combined
maximum amount of subordinated debt and intermediate-term preferred
stock that qualifies as Tier 2 capital is limited to 50 percent of Tier
1 capital. The maximum amount of the allowance for loan and lease losses
that qualifies as Tier 2 capital is limited to 1.25 percent of gross
weighted risk assets. Allowances for loan and lease losses in excess of
this limit may, of course, be maintained, but would not be included in
an organization's total capital. The Federal Reserve will continue to
require bank holding companies to maintain reserves at levels fully
sufficient to cover losses inherent in their loan portfolios.
---------------------------------------------------------------------------
\64\ As noted in section I, bank holding companies with less than
$500 million in consolidated assets would generally be exempt from the
calculation and analysis of risk-based ratios on a consolidated holding
company basis, subject to certain terms and conditions.
---------------------------------------------------------------------------
Qualifying total capital is calculated by adding Tier 1 capital and
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then
deducting from this sum certain investments in banking or finance
subsidiaries that are not consolidated for accounting or supervisory
purposes, reciprocal holdings of banking organizations' capital
securities, or other items at the direction of the Federal Reserve. The
conditions under which these deductions are to be made and the
procedures for making the deductions are discussed above in section
II(B).
B. Transition Arrangements
The transition period for implementing the risk-based capital
standard ends on December 31, 1992. Initially, the risk-based capital
guidelines do not establish a minimum level
[[Page 243]]
of capital. However, by year-end 1990, banking organizations are
expected to meet a minimum interim target ratio for qualifying total
capital to weighted risk assets of 7.25 percent, at least one-half of
which should be in the form of Tier 1 capital. For purposes of meeting
the 1990 interim target, the amount of loan loss reserves that may be
included in capital is limited to 1.5 percent of weighted risk assets
and up to 10 percent of an organization's Tier 1 capital may consist of
supplementary capital elements. Thus, the 7.25 percent interim target
ratio implies a minimum ratio of Tier 1 capital to weighted risk assets
of 3.6 percent (one-half of 7.25) and a minimum ratio of core capital
elements to weighted risk assets ratio of 3.25 percent (nine-tenths of
the Tier 1 capital ratio).
Through year-end 1990, banking organizations have the option of
complying with the minimum 7.25 percent year-end 1990 risk-based capital
standard, in lieu of the minimum 5.5 percent primary and 6 percent total
capital to total assets ratios set forth in appendix B of this part. In
addition, as more fully set forth in appendix D to this part, banking
organizations are expected to maintain a minimum ratio of Tier 1 capital
to total assets during this transition period.
Attachment I--Sample Calculation of Risk-Based Capital Ratio for Bank
Holding Companies
Example of a banking organization with $6,000 in total capital and the
following assets and off-balance sheet items:
Balance Sheet Assets:
Cash................................................... $5,000
U.S. Treasuries........................................ 20,000
Balances at domestic banks............................. 5,000
Loans secured by first liens on 1-4 family residential 5,000
properties............................................
Loans to private corporations.......................... 65,000
------------
Total Balance Sheet Assets........................... $100,000
============
Off-Balance Sheet Items:
Standby letters of credit (``SLCs'') backing general $10,000
obligation debt issues of U.S. municipalities
(``GOs'').............................................
Long-term legally binding commitments to private 20,000
corporations..........................................
------------
Total Off/Balance Sheet Items........................ $30,000
This bank holding company's total capital to total assets (leverage)
ratio would be: ($6,000/$100,000)=6.00%.
To compute the bank holding company's weighted risk assets:
1. Compute the credit equivalent amount of each off-balance sheet
(``OBS'') item.
Credit
OBS item Face value Conversion equivalent
factor amount
----------------------------------------------------------------------------------------------------------------
SLCS backing municipal GOs........................................ $10,000 x 1.00 = $10,000
Long-term commitments to private corporations..................... $20,000 x 0.50 = $10,000
2. Multiply each balance sheet asset and the credit equivalent amount of each
OBS item by the appropriate risk weight.
0% Category:
Cash.......................................................... 5,000
U.S. Treasuries............................................... 20,000
-------------
25,000 x 0 = 0
=============
20% Category:
Balances at domestic banks.................................... 5,000
Credit equivalent amounts of SLCs backing GOs of U.S. 10,000
municipalities...............................................
--------------
15,000 x .20 = $3,000
=============
50% Category:
Loans secured by first liens on 1-4 family residential 5,000 x .50 = $2,500
properties...................................................
=============
100% Category:
Loans to private corporations................................. 65,000
Credit equivalent amounts of long-term commitments to private 10,000
corporations.................................................
-------------
$75,000 x 1.00 = 75,000
------------
Total Risk-weighted Assets.................................. ........... . ........... .. 80,500
This bank holding company's ratio of total capital to weighted risk assets (risk-based capital ratio) would be:
($6,000/$80,500)=7.45%
[[Page 244]]
[Reg. Y, 54 FR 4209, Jan. 27, 1989; 54 FR 12531, Mar. 27, 1989, as
amended at 55 FR 32832, Aug. 10, 1990; 56 FR 51156, Oct. 10, 1991; 57 FR
2012, Jan. 17, 1992; 57 FR 60720, Dec. 22, 1992; 57 FR 62180, 62182,
Dec. 30, 1992; 58 FR 7980, 7981, Feb. 11, 1993; 58 FR 68739, Dec. 29,
1993; 59 FR 62993, Dec. 7, 1994; 59 FR 63244, Dec. 8, 1994; 59 FR 65926,
Dec. 22, 1994; 60 FR 8182, Feb. 13, 1995; 60 FR 45616, Aug. 31, 1995; 60
FR 46179, 46181, Sept. 5, 1995; 60 FR 39230, 39231, Aug. 1, 1995; 60 FR
66045, Dec. 20, 1995; 61 FR 47372, Sept. 6, 1996; 63 FR 42676, Aug. 10,
1998; 63 FR 46522, Sept. 1, 1998; 63 FR 58621, Nov. 2, 1998; 64 FR
10203, Mar. 2, 1999; 66 FR 59643, Nov. 29, 2001; 66 FR 67074, Dec. 28,
2001; 67 FR 3800, Jan. 25, 2002; 67 FR 16977, Apr. 9, 2002; 67 FR 34991,
May 17, 2002; 68 FR 56535, Oct. 1, 2003; 69 FR 22385, Apr. 26, 2004; 69
FR 44919, July 28, 2004; 70 FR 11834, Mar. 10, 2005; 70 FR 20704, Apr.
21, 2005; 71 FR 9902, Feb. 28, 2006]
Appendix B to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies and State Member Banks: Leverage Measure
The Board of Governors of the Federal Reserve System has adopted
minimum capital ratios and guidelines to provide a framework for
assessing the adequacy of the capital of bank holding companies and
state member banks (collectively ``banking organizations''). The
guidelines generally apply to all state member banks and bank holding
companies regardless of size and are to be used in the examination and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. The Board of Governors will review the
guidelines from time to time for possible adjustment commensurate with
changes in the economy, financial markets, and banking practices. In
this regard, the Board has determined that during the transition period
through year-end 1990 for implementation of the risk-based capital
guidelines contained in appendix A to this part and in appendix A to
part 208, a banking organization may choose to fulfill the requirements
of the guidelines relating capital to total assets contained in this
Appendix in one of two manners. Until year-end 1990, a banking
organization may choose to conform to either the 5.5 percent and 6
percent minimum primary and total capital standards set forth in this
appendix, or the 7.25 percent year-end 1990 minimum risk-based capital
standard set forth in appendix A to this part and appendix A to part
208. Those organizations that choose to conform during this period to
the 7.25 percent year-end 1990 risk-based capital standard will be
deemed to be in compliance with the capital adequacy guidelines set
forth in this appendix.
Two principal measurements of capital are used--the primary capital
ratio and the total capital ratio. The definitions of primary and total
capital for banks and bank holding companies and formulas for
calculating the capital ratios are set forth below in the definitional
sections of these guidelines.
Capital Guidelines
The Board has established a minimum level of primary capital to
total assets of 5.5 percent and a minimum level of total capital to
total assets of 6.0 percent. Generally, banking organizations are
expected to operate above the minimum primary and total capital levels.
Those organizations whose operations involve or are exposed to high or
inordinate degrees of risk will be expected to hold additional capital
to compensate for these risks.
In addition, the Board has established the following three zones for
total capital for banking organizations of all sizes:
Total Capital Ratio
[In percent]
Zone 1.................................... Above 7.0.
Zone 2.................................... 6.0 to 7.0.
Zone 3.................................... Below 6.0.
The capital guidelines assume adequate liquidity and a moderate
amount of risk in the loan and investment portfolios and in off-balance
sheet activities. The Board is concerned that some banking organizations
may attempt to comply with the guidelines in ways that reduce their
liquidity or increase risk. Banking organizations should avoid the
practice of attempting to meet the guidelines by decreasing the level of
liquid assets in relation to total assets. In assessing compliance with
the guidelines, the Federal Reserve will take into account liquidity and
the overall degree of risk associated with an organization's operations,
including the volume of assets exposed to risk.
The Federal Reserve will also take into account the sale of loans or
other assets with recourse and the volume and nature of all off-balance
sheet risk. Particularly close attention will be directed to risks
associated with standby letters of credit and participation in joint
venture activities. The Federal Reserve will review the relationship of
all on- and off-balance sheet risks to capital and will require those
institutions with high or inordinate levels of risk to hold additional
primary capital. In addition, the Federal Reserve will continue to
review the need for more explicit procedures for factoring on- and off-
balance sheet risks into the assessment of capital adequacy.
The capital guidelines apply to both banks and bank holding
companies on a consolidated basis.\1\ Some banking organizations are
[[Page 245]]
engaged in significant nonbanking activities that typically require
capital ratios higher than those of commercial banks alone. The Board
believes that, as a matter of both safety and soundness and competitive
equity, the degree of leverage common in banking should not
automatically extend to nonbanking activities. Consequently, in
evaluating the consolidated capital positions of banking organizations,
the Board is placing greater weight on the building-block approach for
assessing capital requirements. This approach generally provides that
nonbank subsidiaries of a banking organization should maintain levels of
capital consistent with the levels that have been established by
industry norms or standards, by Federal or State regulatory agencies for
similar firms that are not affiliated with banking organizations, or
that may be established by the Board after taking into account risk
factors of a particular industry. The assessment of an organization's
consolidated capital adequacy must take into account the amount and
nature of all nonbank activities, and an institution's consolidated
capital position should at least equal the sum of the capital
requirements of the organization's bank and nonbank subsidiaries as well
as those of the parent company.
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\1\ The guidelines will apply to bank holding companies with less
than $150 million in consolidated assets on a bank-only basis unless:
(1) The holding company or any nonbank subsidiary is engaged
directly or indirectly in any nonbank activity involving significant
leverage or
(2) The holding company or any nonbank subsidiary has outstanding
significant debt held by the general public. Debt held by the general
public is defined to mean debt held by parties other than financial
institutions, officers, directors, and controlling shareholders of the
banking organization or their related interests.
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Supervisory Action
The nature and intensity of supervisory action will be determined by
an organization's compliance with the required minimum primary capital
ratio as well as by the zone in which the company's total capital ratio
falls. Banks and bank holding companies with primary capital ratios
below the 5.5 percent minimum will be considered undercapitalized unless
they can demonstrate clear extenuating circumstances. Such banking
organizations will be required to submit an acceptable plan for
achieving compliance with the capital guidelines and will be subject to
denial of applications and appropriate supervisory enforcement actions.
The zone in which an organization's total capital ratio falls will
normally trigger the following supervisory responses, subject to
qualitative analysis:
For institutions operating in Zone 1, the Federal Reserve will:
--Consider that capital is generally adequate if the primary capital
ratio is acceptable to the Federal Reserve and is above the 5.5 percent
minimum.
For institutions operating in Zone 2, the Federal Reserve will:
--Pay particular attention to financial factors, such as asset quality,
liquidity, off-balance sheet risk, and interest rate risk, as they
relate to the adequacy of capital. If these areas are deficient and the
Federal Reserve concludes capital is not fully adequate, the Federal
Reserve will intensify its monitoring and take appropriate supervisory
action.
For institutions operating in Zone 3, the Federal Reserve will:
--Consider that the institution is undercapitalized, absent clear
extenuating circumstances;
--Require the institution to submit a comprehensive capital plan,
acceptable to the Federal Reserve, that includes a program for achieving
compliance with the required minimum ratios within a reasonable time
period; and
--Institute appropriate supervisory and/or administrative enforcement
action, which may include the issuance of a capital directive or denial
of applications, unless a capital plan acceptable to the Federal Reserve
has been adopted by the institution.
Treatment of Intangible Assets for the Purpose of Assessing the Capital
Adequacy of Bank Holding Companies and State Member Banks
In considering the treatment of intangible assets for the purpose of
assessing capital adequacy, the Federal Reserve recognizes that the
determination of the future benefits and useful lives of certain
intangible assets may involve a degree of uncertainty that is not
normally associated with other banking assets. Supervisory concern over
intangible assets derives from this uncertainty and from the possibility
that, in the event an organization experiences financial difficulties,
such assets may not provide the degree of support generally associated
with other assets. For this reason, the Federal Reserve will carefully
review the level and specific character of intangible assets in
evaluating the capital adequacy of state member banks and bank holding
companies.
The Federal Reserve recognizes that intangible assets may differ
with respect to predictability of any income stream directly associated
with a particular asset, the existence of a market for the asset, the
ability to sell the asset, or the reliability of any estimate of the
asset's useful life. Certain intangible assets have predictable income
streams and objectively verifiable values and may contribute to an
organization's profitability and overall financial strength. The value
of
[[Page 246]]
other intangibles, such as goodwill, may involve a number of assumptions
and may be more subject to changes in general economic circumstances or
to changes in an individual institution's future prospects.
Consequently, the value of such intangible assets may be difficult to
ascertain. Consistent with prudent banking practices and the principle
of the diversification of risks, banking organizations should avoid
excessive balance sheet concentration in any category or related
categories of intangible assets.
Bank Holding Companies
While the Federal Reserve will consider the amount and nature of all
intangible assets, those holding companies with aggregate intangible
assets in excess of 25 percent of tangible primary capital (i.e., stated
primary capital less all intangible assets) or those institutions with
lesser, although still significant, amounts of goodwill will be subject
to close scrutiny. For the purpose of assessing capital adequacy, the
Federal Reserve may, on a case-by-case basis, make adjustments to an
organization's capital ratios based upon the amount of intangible assets
in excess of the 25 percent threshold level or upon the specific
character of the organization's intangible assets in relation to its
overall financial condition. Such adjustments may require some
organizations to raise additional capital.
The Board expects banking organizations (including state member
banks) contemplating expansion proposals to ensure that pro forma
capital ratios exceed the minimum capital levels without significant
reliance on intangibles, particularly goodwill. Consequently, in
reviewing acquisition proposals, the Board will take into consideration
both the stated primary capital ratio (that is, the ratio without any
adjustment for intangible assets) and the primary capital ratio after
deducting intangibles. In acting on applications, the Board will take
into account the nature and amount of intangible assets and will, as
appropriate, adjust capital ratios to include certain intangible assets
on a case-by-case basis.
State Member Banks
State member banks with intangible assets in excess of 25 percent of
intangible primary capital will be subject to close scrutiny. In
addition, for the purpose of calculating capital ratios of state member
banks, the Federal Reserve will deduct goodwill from primary capital and
total capital. The Federal Reserve may, on a case-by-case basis, make
further adjustments to a bank's capital ratios based on the amount of
intangible assets (aside from goodwill) in excess of the 25 percent
threshold level or on the specific character of the bank's intangible
assets in relation to its overall financial condition. Such adjustments
may require some banks to raise additional capital.
In addition, state member banks and bank holding companies are
expected to review periodically the value at which intangible assets are
carried on their balance sheets to determine whether there has been any
impairment of value or whether changing circumstances warrant a
shortening of amortization periods. Institutions should make appropriate
reductions in carrying values and amortization periods in light of this
review, and examiners will evaluate the treatment of intangible assets
during on-site examinations.
Definition of Capital To Be Used in Determining Capital Adequacy of Bank
Holding Companies and State Member Banks
Primary Capital Components
The components of primary capital are:
--Common stock,
--Perpetual preferred stock (preferred stock that does not have a stated
maturity date and that may not be redeemed at the option of the holder),
--Surplus (excluding surplus relating to limited-life preferred stock),
--Undivided profits,
--Contingency and other capital reserves,
--Mandatory convertible instruments,\2\
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\2\ See the definitional section below that lists the criteria for
mandatory convertible instruments to qualify as primary capital.
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--Allowance for possible loan and lease losses (exclusive of allocated
transfer risk reserves),
--Minority interest in equity accounts of consolidated subsidiaries,
--Perpetual debt instruments (for bank holding companies but not for
state member banks).
Limits on Certain Forms of Primary Capital
Bank Holding Companies. The maximum composite amount of mandatory
convertible securities, perpetual debt, and perpetual preferred stock
that may be counted as primary capital for bank holding companies is
limited to 33.3 percent of all primary capital, including these
instruments. Perpetual preferred stock issued prior to November 20, 1985
(or determined by the Federal Reserve to be in the process of being
issued prior to that date), shall continue to be included as primary
capital.
The maximum composite amount of mandatory convertible securities and
perpetual debt that may be counted as primary capital for bank holding
companies is limited to 20 percent of all primary capital, including
these instruments. The maximum amount of equity commitment notes (a form
of mandatory convertible securities) that may be
[[Page 247]]
counted as primary capital for a bank holding company is limited to 10
percent of all primary capital, including mandatory convertible
securities. Amounts outstanding in excess of these limitations may be
counted as secondary capital provided they meet the requirements of
secondary capital instruments.
State Member Banks. The composite limitations on the amount of
mandatory convertible securities and perpetual preferred stock
(perpetual debt is not primary capital for state member banks) that may
serve as primary capital for bank holding companies shall not be applied
formally to state member banks, although the Board shall determine
appropriate limits for these forms of primary capital on a case-by-case
basis.
The maximum amount of mandatory convertible securities that may be
counted as primary capital for state member banks is limited to 16\2/3\
percent of all primary capital, including mandatory convertible
securities. Equity commitment notes, one form of mandatory convertible
securities, shall not be included as primary capital for state member
banks, except that notes issued by state member banks prior to May 15,
1985, will continue to be included in primary capital. Amounts of
mandatory convertible securities in excess of these limitations may be
counted as secondary capital if they meet the requirements of secondary
capital instruments.
Secondary Capital Components
The components of secondary capital are:
--Limited-life preferred stock (including related surplus) and
--Bank subordinated notes and debentures and unsecured long-term debt of
the parent company and its nonbank subsidiaries.
Restrictions Relating to Capital Components
To qualify as primary or secondary capital, a capital instrument
should not contain or be covered by any convenants, terms, or
restrictions that are inconsistent with safe and sound banking
practices. Examples of such terms are those regarded as unduly
interfering with the ability of the bank or holding company to conduct
normal banking operations or those resulting in significantly higher
dividends or interest payments in the event of a deterioration in the
financial condition of the issuer.
The secondary components must meet the following conditions to
qualify as capital:
--The instrument must have an original weighted-average maturity of at
least seven years.
--The instrument must be unsecured.
--The instrument must clearly state on its face that it is not a deposit
and is not insured by a Federal agency.
--Bank debt instruments must be subordinated to claims of depositors.
--For banks only, the aggregate amount of limited-life preferred stock
and subordinate debt qualifying as capital may not exceed 50 percent of
the amount of the bank's primary capital.
As secondary capital components approach maturity, the banking
organization must plan to redeem or replace the instruments while
maintaining an adequate overall capital position. Thus, the remaining
maturity of secondary capital components will be an important
consideration in assessing the adequacy of total capital.
Capital Ratios
The primary and total capital ratios for bank holding companies are
computed as follows:
Primary capital ratio:
Primary capital components/Total assets + Allowance for loan and lease
losses (exclusive of allocated transfer risk reserves)
Total capital ratio:
Primary capital components + Secondary capital components/Total assets +
Allowance for loan and lease losses (exclusive of allocated transfer
risk reserves)
The primary and total capital ratios for state member banks are
computed as follows:
Primary capital ratio:
Primary capital components--Goodwill/Average total assets + Allowance
for loan and lease losses (exclusive of allocated transfer risk
reserves)--Goodwill
Total capital ratio:
Primary capital components + Secondary capital components--Goodwill/
Average total assets + Allowance for loan and lease losses (exclusive of
allocated transfer risk reserves)--Goodwill
Generally, period-end amounts will be used to calculate bank holding
company ratios. However, the Federal Reserve will discourage temporary
balance sheet adjustments or any other ``window dressing'' practices
designed to achieve transitory compliance with the guidelines. Banking
organizations are expected to maintain adequate capital positions at all
times. Thus, the Federal Reserve will, on a case-by-case basis, use
average total assets in the calculation of bank holding company capital
ratios whenever this approach provides a more meaningful indication of
an individual holding company's capital position.
For the calculation of bank capital ratios, ``average total assets''
will generally be defined as the quarterly average total assets figure
reported on the bank's Report of Condition. If warranted, however, the
Federal Reserve may calculate bank capital ratios based upon total
assets as of period-end. All
[[Page 248]]
other components of the bank's capital ratios will be based upon period-
end balances.
Criteria for Determining the Primary Capital Status of Mandatory
Convertible Securities of Bank Holding Companies and State Member Banks
Mandatory convertible securities are subordinated debt instruments
that are eventually transformed into common or perpetual preferred stock
within a specified period of time, not to exceed 12 years. To be counted
as primary capital, mandatory convertible securities must meet the
criteria set forth below. These criteria cover the two basic types of
mandatory convertible securities: ``equity contract notes''--securities
that obligate the holder to take common or perpetual preferred stock of
the issuer in lieu of cash for repayment of principal, and ``equity
commitment notes''--securities that are redeemable only with the
proceeds from the sale of common or perpetual preferred stock. Both
equity commitment notes and equity contract notes qualify as primary
capital for bank holding companies, but only equity contract notes
qualify as primary capital for banks.
Criteria Applicable to Both Types of Mandatory Convertible Securities
a. The securities must mature in 12 years or less.
b. The issuer may redeem securities prior to maturity only with the
proceeds from the sale of common or perpetual preferred stock of the
bank or bank holding company. Any exception to this rule must be
approved by the Federal Reserve. The securities may not be redeemed with
the proceeds of another issue of mandatory convertible securities. Nor
may the issuer repurchase or acquire its own mandatory convertible
securities for resale or reissuance.
c. Holders of the securities may not accelerate the payment of
principal except in the event of bankruptcy, insolvency, or
reorganization.
d. The securities must be subordinate in right of payment to all
senior indebtedness of the issuer. In the event that the proceeds of the
securities are reloaned to an affiliate, the loan must be subordinated
to the same degree as the original issue.
e. An issuer that intends to dedicate the proceeds of an issue of
common or perpetual preferred stock to satisfy the funding requirements
of an issue of mandatory convertible securities (i.e. the requirement to
retire or redeem the notes with the proceeds from the issuance of common
or perpetual preferred stock) generally must make such a dedication
during the quarter in which the new common or preferred stock is
issued.\3\ As a general rule, if the dedication is not made within the
prescribed period, then the securities issued may not at a later date be
dedicated to the retirement or redemption of the mandatory convertible
securities.\4\
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\3\ Common or perpetual preferred stock issued under dividend
reinvestment plans or issued to finance acquisitions, including
acquisitions of business entities, may be dedicated to the retirement or
redemption of the mandatory convertible securities. Documentation
certified by an authorized agent of the issuer showing the amount of
common stock or perpetual preferred stock issued, the dates of issue,
and amounts of such issues dedicated to the retirement or redemption of
mandatory convertible securities will satisfy the dedication
requirement.
\4\ The dedication procedure is necessary to ensure that the primary
capital of the issuer is not overstated. For each dollar of common or
perpetual preferred proceeds dedicated to the retirement or redemption
of the notes, there is a corresponding reduction in the amount of
outstanding mandatory securities that may qualify as primary capital. De
minimis amounts (in relation to primary capital) of common or perpetual
preferred stock issued under arrangements in which the amount of stock
issued is not predictable, such as dividend reinvestment plans and
employee stock option plans (but excluding public stock offerings and
stock issued in connection with acquisitions), should be dedicated by no
later than the company's fiscal year end.
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Additional Criteria Applicable to Equity Contract Notes
a. The note must contain a contractual provision (or must be issued
with a mandatory stock purchase contract) that requires the holder of
the instrument to take the common or perpetual stock of the issuer in
lieu of cash in satisfaction of the claim for principal repayment. The
obligation of the holder to take the common or perpetual preferred stock
of the issuer may be waived if, and to the extent that, prior to the
maturity date of the obligation, the issuer sells new common or
perpetual preferred stock and dedicates the proceeds to the retirement
or redemption of the notes. The dedication generally must be made during
the quarter in which the new common or preferred stock is issued.
b. A stock purchase contract may be separated from a security only
if: (1) The holder
[[Page 249]]
of the contract provides sufficient collateral \5\ to the issuer, or to
an independent trustee for the benefit of the issuer, to assure
performance under the contract and (2) the stock purchase contract
requires the purchase of common or perpetual preferred stock.
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\5\ Collateral is defined as: (1) Cash or certificates of deposit;
(2) U.S. government securities that will mature prior to or simultaneous
with the maturity of the equity contract and that have a par or maturity
value at least equal to the amount of the holder's obligation under the
stock purchase contract; (3) standby letters of credit issued by an
insured U.S. bank that is not an affiliate of the issuer; or (4) other
collateral as may be designated from time to time by the Federal
Reserve.
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Additional Criteria Applicable to Equity Commitment Notes
a. The indenture or note agreement must contain the following two
provisions:
1. The proceeds of the sale of common or perpetual preferred stock
will be the sole source of repayment for the notes, and the issuer must
dedicate the proceeds for the purpose of repaying the notes.
(Documentation certified by an authorized agent of the issued showing
the amount of common or perpetual preferred stock issued, the dates of
issue, and amounts of such issues dedicated to the retirement or
redemption of mandatory convertible securities will satisfy the
dedication requirement.)
2. By the time that one-third of the life of the securities has run,
the issuer must have raised and dedicated an amount equal to one-third
of the original principal of the securities. By the time that two-thirds
of the life of the securities has run, the issuer must have raised and
dedicated an amount equal to two-thirds of the original principal of the
securities. At least 60 days prior to the maturity of the securities,
the issuer must have raised and dedicated an amount equal to the entire
original principal of the securities. Proceeds dedicated to redemption
or retirement of the notes must come only from the sale of common or
perpetual preferred stock.\6\
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\6\ The funded portions of the securities will be deducted from
primary capital to avoid double counting.
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b. If the issuer fails to meet any of these periodic funding
requirements, the Federal Reserve immediately will cease to treat the
unfunded securities as primary capital and will take appropriate
supervisory action. In addition, failure to meet the funding
requirements will be viewed as a breach of a regulatory commitment and
will be taken into consideration by the Board in acting on statutory
applications.
c. If a security is issued by a subsidiary of a bank or bank holding
company, any guarantee of the principal by that subsidiary's parent bank
or bank holding company must be subordinate to the same degree as the
security issued by the subsidiary and limited to repayment of the
principal amount of the security at its final maturity.
Criteria for Determining the Primary Capital Status of Perpetual Debt
Instruments of Bank Holding Companies
1. The instrument must be unsecured and, if issued by a bank, must
be subordinated to the claims of depositors.
2. The instrument may not provide the noteholder with the right to
demand repayment of principal except in the event of bankruptcy,
insolvency, or reorganization. The instrument must provide that
nonpayment of interest shall not trigger repayment of the principal of
the perpetual debt note or any other obligation of the issuer, nor shall
it constitute prima facie evidence of insolvency or bankruptcy.
3. The issuer shall not voluntarily redeem the debt issue without
prior approval of the Federal Reserve, except when the debt is converted
to, exchanged for, or simultaneously replaced in like amount by an issue
of common or perpetual preferred stock of the issuer or the issuer's
parent company.
4. If issued by a bank holding company, a bank subsidiary, or a
subsidiary with substantial operations, the instrument must contain a
provision that allows the issuer to defer interest payments on the
perpetual debt in the event of, and at the same time as the elimination
of dividends on all outstanding common or preferred stock of the issuer
(or in the case of a guarantee by a parent company at the same time as
the elimination of the dividends of the parent company's common and
preferred stock). In the case of a nonoperating subsidiary (a funding
subsidiary or one formed to issue securities), the deferral of interest
payments must be triggered by elimination of dividends by the parent
company.
5. If issued by a bank holding company or a subsidiary with
substantial operations, the instrument must convert automatically to
common or perpetual preferred stock of the issuer when the issuer's
retained earnings and surplus accounts become negative. If an operating
subsidiary's perpetual debt is guaranteed by its parent, the debt may
convert to the shares of the issuer or guarantor and such conversion may
be triggered when the issuer's or parent's retained earnings and surplus
accounts become negative. If issued by a nonoperating subsidiary of a
bank holding company or bank, the instrument must convert automatically
to common or preferred stock of the issuer's parent when the
[[Page 250]]
retained earnings and surplus accounts of the issuer's parent become
negative.
[Reg. Y, 50 FR 16066, Apr. 24, 1985, as amended at 51 FR 40969, Nov. 12,
1986. Redesignated and amended at 54 FR 4209, Jan. 27, 1989; 55 FR
32832, Aug. 10, 1990; 58 FR 474, Jan. 6, 1993]
Appendix C to Part 225--Small Bank Holding Company Policy Statement
Policy Statement on Assessment of Financial and Managerial Factors
In acting on applications filed under the Bank Holding Company Act,
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. When bank holding companies incur debt and rely upon
the earnings of their subsidiary banks as the means of repaying such
debt, a question arises as to the probable effect upon the financial
condition of the holding company and its subsidiary bank or banks.
The Board believes that a high level of debt at the parent holding
company impairs the ability of a bank holding company to provide
financial assistance to its subsidiary bank(s) and, in some cases, the
servicing requirements on such debt may be a significant drain on the
resources of the bank(s). For these reasons, the Board has not favored
the use of acquisition debt in the formation of bank holding companies
or in the acquisition of additional banks. Nevertheless, the Board has
recognized that the transfer of ownership of small banks often requires
the use of acquisition debt. The Board, therefore, has permitted the
formation and expansion of small bank holding companies with debt levels
higher than would be permitted for larger holding companies. Approval of
these applications has been given on the condition that small bank
holding companies demonstrate the ability to service acquisition debt
without straining the capital of their subsidiary banks and, further,
that such companies restore their ability to serve as a source of
strength for their subsidiary banks within a relatively short period of
time.
In the interest of continuing its policy of facilitating the
transfer of ownership in banks without compromising bank safety and
soundness, the Board has, as described below, adopted the following
procedures and standards for the formation and expansion of small bank
holding companies subject to this policy statement.
1. Applicability of Policy Statement
This policy statement applies only to bank holding companies with
pro forma consolidated assets of less than $500 million that (i) are not
engaged in significant nonbanking activities either directly or through
a nonbank subsidiary; (ii) do not conduct significant off-balance sheet
activities (including securitization and asset management or
administration) either directly or through a nonbank subsidiary; and
(iii) do not have a material amount of debt or equity securities
outstanding (other than trust preferred securities) that are registered
with the Securities and Exchange Commission. The Board may in its
discretion exclude any bank holding company, regardless of asset size,
from the policy statement if such action is warranted for supervisory
purposes.\1\
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\1\ [Reserved]
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While this policy statement primarily applies to the formation of
small bank holding companies, it also applies to existing small bank
holding companies that wish to acquire an additional bank or company and
to transactions involving changes in control, stock redemptions, or
other shareholder transactions. \2\
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\2\ The appropriate Reserve Bank should be contacted to determine
the manner in which a specific situation may qualify for treatment under
this policy statement.
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2. Ongoing Requirements
The following guidelines must be followed on an ongoing basis for
all organizations operating under this policy statement.
A. Reduction in parent company leverage: Small bank holding
companies are to reduce their parent company debt consistent with the
requirement that all debt be retired within 25 years of being incurred.
The Board also expects that these bank holding companies reach a debt to
equity ratio of .30:1 or less within 12 years of the incurrence of the
debt.\3\ The bank holding company must also
[[Page 251]]
comply with debt servicing and other requirements imposed by its
creditors.
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\3\ The term debt, as used in the ratio of debt to equity, means any
borrowed funds (exclusive of short-term borrowings that arise out of
current transactions, the proceeds of which are used for current
transactions), and any securities issued by, or obligations of, the
holding company that are the functional equivalent of borrowed funds.
Subordinated debt associated with trust preferred securities
generally would be treated as debt for purposes of paragraphs 2.C.,
3.A., 4.A.i, and 4.B.i. of this policy statement. A bank holding
company, however, may exclude from debt an amount of subordinated debt
associated with trust preferred securities up to 25 percent of the
holding company's equity (as defined below) less goodwill on the parent
company's balance sheet in determining compliance with the requirements
of such paragraphs of the policy statement. In addition, a bank holding
company subject to this Policy Statement that has not issued
subordinated debt associated with a new issuance of trust preferred
securities after December 31, 2005 may exclude from debt any
subordinated debt associated with trust preferred securities until
December 31, 2010. Bank holding companies subject to this Policy
Statement may also exclude from debt until December 31, 2010, any
subordinated debt associated with refinanced issuances of trust
preferred securities originally issued on or prior to December 31, 2005,
provided that the refinancing does not increase the bank holding
company's outstanding amount of subordinated debt. Subordinated debt
associated with trust preferred securities will not be included as debt
in determining compliance with any other requirements of this policy
statement.
The term equity, as used in the ratio of debt to equity, means the
total stockholders' equity of the bank holding company as defined in
accordance with generally accepted accounting principles. In determining
the total amount of stockholders' equity, the bank holding company
should account for its investments in the common stock of subsidiaries
by the equity method of accounting.
Ordinarily the Board does not view redeemable preferred stock as a
substitute for common stock in a small bank holding company.
Nevertheless, to a limited degree and under certain circumstances, the
Board will consider redeemable preferred stock as equity in the capital
accounts of the holding company if the following conditions are met: (1)
The preferred stock is redeemable only at the option of the issuer and
(2) the debt to equity ratio of the holding company would be at or
remain below .30:1 following the redemption or retirement of any
preferred stock. Preferred stock that is convertible into common stock
of the holding company may be treated as equity.
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B. Capital adequacy: Each insured depository subsidiary of a small
bank holding company is expected to be well-capitalized. Any institution
that is not well-capitalized is expected to become well-capitalized
within a brief period of time.
C. Dividend restrictions: A small bank holding company whose debt to
equity ratio is greater than 1.0:1 is not expected to pay corporate
dividends until such time as it reduces its debt to equity ratio to
1.0:1 or less and otherwise meets the criteria set forth in Sec. Sec.
225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of Regulation Y.\4\
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\4\ Dividends may be paid by small bank holding companies with debt
to equity at or below 1.0:1 and otherwise meeting the requirements of
Sec. Sec. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) if the
dividends are reasonable in amount, do not adversely affect the ability
of the bank holding company to service its debt in an orderly manner,
and do not adversely affect the ability of the subsidiary banks to be
well-capitalized. It is expected that dividends will be eliminated if
the holding company is (1) not reducing its debt consistent with the
requirement that the debt to equity ratio be reduced to .30:1 within 12
years of consummation of the proposal or (2) not meeting the
requirements of its loan agreement(s).
---------------------------------------------------------------------------
Small bank holding companies formed before the effective date of
this policy statement may switch to a plan that adheres to the intent of
this statement provided they comply with the requirements set forth
above.
3. Core Requirements for All Applicants
In assessing applications or notices by organizations subject to
this policy statement, the Board will continue to take into account a
full range of financial and other information about the applicant, and
its current and proposed subsidiaries, including the recent trend and
stability of earnings, past and prospective growth, asset quality, the
ability to meet debt servicing requirements without placing an undue
strain on the resources of the bank(s), and the record and competency of
management. In addition, the Board will require applicants to meet the
following requirements:
A. Minimum down payment: The amount of acquisition debt should not
exceed 75 percent of the purchase price of the bank(s) or company to be
acquired. When the owner(s) of the holding company incurs debt to
finance the purchase of the bank(s) or company, such debt will be
considered acquisition debt even though it does not represent an
obligation of the bank holding company, unless the owner(s) can
demonstrate that such debt can be serviced without reliance on the
resources of the bank(s) or bank holding company.
B. Ability to reduce parent company leverage: The bank holding
company must clearly be able to reduce its debt to equity ratio and
comply with its loan agreement(s) as set forth in paragraph 2A above.
Failure to meet the criteria in this section would normally result
in denial of an application.
4. Additional Application Requirements for Expedited/Waived Processing
A. Expedited notices under Sec. Sec. 225.14 and 225.23 of
Regulation Y: A small bank holding company proposal will be eligible for
the expedited processing procedures set forth in Sec. Sec. 225.14 and
225.23 of Regulation Y if the bank holding company is in compliance with
the ongoing requirements of this policy statement, the bank holding
company meets the core requirements for all applicants noted above, and
the following requirements are met:
[[Page 252]]
i. The parent bank holding company has a pro forma debt to equity
ratio of 1.0:1 or less.
ii. The bank holding company meets all of the criteria for expedited
action set forth in Sec. Sec. 225.14 or 225.23 of Regulation Y.
B. Waiver of stock redemption filing: A small bank holding company
will be eligible for the stock redemption filing exception for well-
capitalized bank holding companies contained in Sec. 225.4(b)(6) if the
following requirements are met:
i. The parent bank holding company has a pro forma debt to equity
ratio of 1.0:1 or less.
ii. The bank holding company is in compliance with the ongoing
requirements of this policy statement and meets the requirements of
Sec. Sec. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of
Regulation Y.
[62 FR 9343, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 2006]
Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Tier 1 Leverage Measure
I. Overview
a. The Board of Governors of the Federal Reserve System has adopted
a minimum ratio of tier 1 capital to total assets to assist in the
assessment of the capital adequacy of bank holding companies (banking
organizations).\1\ The principal objectives of this measure is to place
a constraint on the maximum degree to which a banking organization can
leverage its equity capital base. It is intended to be used as a
supplement to the risk-based capital measure.
---------------------------------------------------------------------------
\1\ Supervisory ratios that related capital to total assets for
state member banks are outlined in Appendix B of this part.
---------------------------------------------------------------------------
b. The tier 1 leverage guidelines apply on a consolidated basis to
any bank holding company with consolidated assets of $500 million or
more. The tier 1 leverage guidelines also apply on a consolidated basis
to any bank holding company with consolidated assets of less than $500
million if the holding company (i) is engaged in significant nonbanking
activities either directly or through a nonbank subsidiary; (ii)
conducts significant off-balance sheet activities (including
securitization and asset management or administration) either directly
or through a nonbank subsidiary; or (iii) has a material amount of debt
or equity securities outstanding (other than trust preferred securities)
that are registered with the Securities and Exchange Commission. The
Federal Reserve may apply the tier 1 leverage guidelines at its
discretion to any bank holding company, regardless of asset size, if
such action is warranted for supervisory purposes.\2\
---------------------------------------------------------------------------
\2\ [Reserved]
---------------------------------------------------------------------------
c. The tier 1 leverage guidelines are to be used in the inspection
and supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. The Board will review the guidelines from
time to time and will consider the need for possible adjustments in
light of any significant changes in the economy, financial markets, and
banking practices.
II. The Tier 1 Leverage Ratio
a. The Board has established a minimum ratio of Tier 1 capital to
total assets of 3.0 percent for strong bank holding companies (rated
composite ``1'' under the BOPEC rating system of bank holding
companies), and for bank holding companies that have implemented the
Board's risk-based capital measure for market risk as set forth in
appendices A and E of this part. For all other bank holding companies,
the minimum ratio of Tier 1 capital to total assets is 4.0 percent.
Banking organizations with supervisory, financial, operational, or
managerial weaknesses, as well as organizations that are anticipating or
experiencing significant growth, are expected to maintain capital ratios
well above the minimum levels. Moreover, higher capital ratios may be
required for any bank holding company if warranted by its particular
circumstances or risk profile. In all cases, bank holding companies
should hold capital commensurate with the level and nature of the risks,
including the volume and severity of problem loans, to which they are
exposed.
b. A banking organization's tier 1 leverage ratio is calculated by
dividing its tier 1 capital (the numerator of the ratio) by its average
total consolidated assets (the denominator of the ratio). The ratio will
also be calculated using period-end assets whenever necessary, on a
case-by-case basis. For the purpose of this leverage ratio, the
definition of tier 1 capital as set forth in the risk-based capital
guidelines contained in appendix A of this part will be used. As a
general matter, average total consolidated assets are defined as the
quarterly average total assets (defined net of the allowance for loan
and lease losses) reported on the organization's Consolidated Financial
Statements (FR Y-9C Report), less goodwill; amounts of mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships that, in the aggregate, are in excess of 100 percent
of Tier 1 capital; amounts of nonmortgage servicing assets and purchased
credit card relationships that, in the aggregate, are in excess of 25
percent of Tier 1 capital; amounts of credit-enhancing interest-only
strips that are in excess of 25 percent of Tier 1 capital; all other
identifiable intangible assets; any investments in subsidiaries or
associated companies that the Federal Reserve determines should be
deducted from
[[Page 253]]
Tier 1 capital; deferred tax assets that are dependent upon future
taxable income, net of their valuation allowance, in excess of the
limitation set forth in section II.B.4 of appendix A of this part; and
the amount of the total adjusted carrying value of nonfinancial equity
investments that is subject to a deduction from Tier 1 capital. \3\
---------------------------------------------------------------------------
\3\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. of appendix A of this part.
---------------------------------------------------------------------------
c. Whenever appropriate, including when an organization is
undertaking expansion, seeking to engage in new activities or otherwise
facing unusual or abnormal risks, the Board will continue to consider
the level of an individual organization's tangible tier 1 leverage ratio
(after deducting all intangibles) in making an overall assessment of
capital adequacy. This is consistent with the Federal Reserve's risk-
based capital guidelines and long-standing Federal Reserve policy and
practice with regard to leverage guidelines. Organizations experiencing
growth, whether internally or by acquisition, are expected to maintain
strong capital position substantially above minimum supervisory levels,
without significant reliance on intangible assets.
[Reg. Y, 59 FR 65926, Dec. 22, 1994, as amended by 60 FR 39231, Aug. 1,
1995; 63 FR 30370, June 4, 1998; 63 FR 42676, Aug. 10, 1998; 66 FR
59651, Nov. 29, 2001; 67 FR 3803, Jan. 25, 2002; 70 FR 11838, Mar. 10,
2005; 71 FR 9902, Feb. 28, 2006]
Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Market Risk Measure
Section 1. Purpose, Applicability, Scope, and Effective Date
(a) Purpose. The purpose of this appendix is to ensure that bank
holding companies (organizations) with significant exposure to market
risk maintain adequate capital to support that exposure. \1\ This
appendix supplements and adjusts the risk-based capital ratio
calculations under appendix A of this part with respect to those
organizations.
---------------------------------------------------------------------------
\1\ This appendix is based on a framework developed jointly by
supervisory authorities from the countries represented on the Basle
Committee on Banking Supervision and endorsed by the Group of Ten
Central Bank Governors. The framework is described in a Basle Committee
paper entitled ``Amendment to the Capital Accord to Incorporate Market
Risks,'' January 1996. Also see modifications issued in September 1997.
---------------------------------------------------------------------------
(b) Applicability. (1) This appendix applies to any bank holding
company whose trading activity \2\ (on a worldwide consolidated basis)
equals:
---------------------------------------------------------------------------
\2\ Trading activity means the gross sum of trading assets and
liabilities as reported in the bank holding company's most recent
quarterly Y-9C Report.
---------------------------------------------------------------------------
(i) 10 percent or more of total assets; \3\ or
---------------------------------------------------------------------------
\3\ Total assets means quarter-end total assets as reported in the
bank holding company's most recent Y-9C Report.
---------------------------------------------------------------------------
(ii) $1 billion or more.
(2) The Federal Reserve may additionally apply this appendix to any
bank holding company if the Federal Reserve deems it necessary or
appropriate for safe and sound banking practices.
(3) The Federal Reserve may exclude a bank holding company otherwise
meeting the criteria of paragraph (b)(1) of this section from coverage
under this appendix if it determines the organization meets such
criteria as a consequence of accounting, operational, or similar
considerations, and the Federal Reserve deems it consistent with safe
and sound banking practices.
(c) Scope. The capital requirements of this appendix support market
risk associated with an organization's covered positions.
(d) Effective date. This appendix is effective as of January 1,
1997. Compliance is not mandatory until January 1, 1998. Subject to
supervisory approval, a bank holding company may opt to comply with this
appendix as early as January 1, 1997. \4\
---------------------------------------------------------------------------
\4\ A bank holding company that voluntarily complies with the final
rule prior to January 1, 1998, must comply with all of its provisions.
---------------------------------------------------------------------------
Section 2. Definitions
For purposes of this appendix, the following definitions apply:
(a) Covered positions means all positions in an organization's
trading account, and all foreign exchange \5\ and commodity positions,
whether or not in the trading account.\6\ Positions include on-balance-
sheet assets and liabilities and off-balance-sheet items. Securities
subject to repurchase and lending agreements are included as if still
owned by the lender. Covered positions exclude all positions in a
banking organization's trading account that, in form or in substance,
act as liquidity facilities that provide liquidity support to asset-
backed commercial paper. Such excluded positions are subject to the
risk-based capital requirements set forth in appendix A of this part.
---------------------------------------------------------------------------
\5\ Subject to supervisory review, a bank may exclude structural
positions in foreign currencies from its covered positions.
\6\ The term trading account is defined in the instructions to the
Call Report.
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(b) Market risk means the risk of loss resulting from movements in
market prices.
[[Page 254]]
Market risk consists of general market risk and specific risk
components.
(1) General market risk means changes in the market value of covered
positions resulting from broad market movements, such as changes in the
general level of interest rates, equity prices, foreign exchange rates,
or commodity prices.
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements and includes
event and default risk as well as idiosyncratic variations.
(c) Tier 1 and Tier 2 capital are defined in appendix A of this
part.
(d) Tier 3 capital is subordinated debt that is unsecured; is fully
paid up; has an original maturity of at least two years; is not
redeemable before maturity without prior approval by the Federal
Reserve; includes a lock-in clause precluding payment of either interest
or principal (even at maturity) if the payment would cause the issuing
organization's risk-based capital ratio to fall or remain below the
minimum required under appendix A of this part; and does not contain and
is not covered by any covenants, terms, or restrictions that are
inconsistent with safe and sound banking practices.
(e) Value-at-risk (VAR) means the estimate of the maximum amount
that the value of covered positions could decline due to market price or
rate movements during a fixed holding period within a stated confidence
level, measured in accordance with section 4 of this appendix.
Section 3. Adjustments to the Risk-Based Capital Ratio Calculations
(a) Risk-based capital ratio denominator. An organization subject to
this appendix shall calculate its risk-based capital ratio denominator
as follows:
(1) Adjusted risk-weighted assets. Calculate adjusted risk-weighted
assets, which equals risk-weighted assets (as determined in accordance
with appendix A of this part) excluding the risk-weighted amounts of all
covered positions (except foreign-exchange positions outside the trading
account and over-the-counter derivative positions) \7\ and receivables
arising from the posting of cash collateral that is associated with
securities borrowing transactions to the extent the receivables are
collateralized by the market value of the borrowed securities, provided
that the following conditions are met:
---------------------------------------------------------------------------
\7\ Foreign-exchange positions outside the trading account and all
over-the-counter derivative positions, whether or not in the trading
account, must be included in adjusted risk-weighted assets as determined
in appendix A of this part.
---------------------------------------------------------------------------
(i) The transaction is based on securities includable in the trading
book that are liquid and readily marketable,
(ii) The transaction is marked to market daily,
(iii) The transaction is subject to daily margin maintenance
requirements, and
(iv)(A) The transaction is a securities contract for the purposes of
section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified
financial contract for the purposes of section 11(e)(8) of the Federal
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract
between or among financial institutions for the purposes of sections
401-407 of the Federal Deposit Insurance Corporation Improvement Act of
1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE (12 CFR Part
231); or
(B) If the transaction does not meet the criteria set forth in
paragraph (iv)(A) of this section, then either:
(1) The bank has conducted sufficient legal review to reach a well-
founded conclusion that:
(i) The securities borrowing agreement executed in connection with
the transaction provides the bank the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and to
liquidate or set off collateral promptly upon an event of counterparty
default, including in a bankruptcy, insolvency, or other similar
proceeding of the counterparty; and
(ii) Under applicable law of the relevant jurisdiction, its rights
under the agreement are legal, valid, binding, and enforceable and any
exercise of rights under the agreement will not be stayed or avoided; or
(2) The transaction is either overnight or unconditionally
cancelable at any time by the bank, and the bank has conducted
sufficient legal review to reach a well-founded conclusion that:
(i) The securities borrowing agreement executed in connection with
the transaction provides the bank the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and to
liquidate or set off collateral promptly upon an event of counterparty
default; and
(ii) Under the law governing the agreement, its rights under the
agreement are legal, valid, binding, and enforceable.
(2) Measure for market risk. Calculate the measure for market risk,
which equals the sum of the VAR-based capital charge, the specific risk
add-on (if any), and the capital charge for de minimis exposures (if
any).
(i) VAR-based capital charge. The VAR-based capital charge equals
the higher of:
(A) The previous day's VAR measure; or
(B) The average of the daily VAR measures for each of the preceding
60 business days multiplied by three, except as provided in section 4(e)
of this appendix;
[[Page 255]]
(ii) Specific risk add-on. The specific risk add-on is calculated in
accordance with section 5 of this appendix; and
(iii) Capital charge for de minimis exposure. The capital charge for
de minimis exposure is calculated in accordance with section 4(a) of
this appendix.
(3) Market risk equivalent assets. Calculate market risk equivalent
assets by multiplying the measure for market risk (as calculated in
paragraph (a)(2) of this section) by 12.5.
(4) Denominator calculation. Add market risk equivalent assets (as
calculated in paragraph (a)(3) of this section) to adjusted risk-
weighted assets (as calculated in paragraph (a)(1) of this section). The
resulting sum is the organization's risk-based capital ratio
denominator.
(b) Risk-based capital ratio numerator. An organization subject to
this appendix shall calculate its risk-based capital ratio numerator by
allocating capital as follows:
(1) Credit risk allocation. Allocate Tier 1 and Tier 2 capital equal
to 8.0 percent of adjusted risk-weighted assets (as calculated in
paragraph (a)(1) of this section). \8\
---------------------------------------------------------------------------
\8\ An institution may not allocate Tier 3 capital to support credit
risk (as calculated under appendix A of this part).
---------------------------------------------------------------------------
(2) Market risk allocation. Allocate Tier 1, Tier 2, and Tier 3
capital equal to the measure for market risk as calculated in paragraph
(a)(2) of this section. The sum of Tier 2 and Tier 3 capital allocated
for market risk must not exceed 250 percent of Tier 1 capital allocated
for market risk. (This requirement means that Tier 1 capital allocated
in this paragraph (b)(2) must equal at least 28.6 percent of the measure
for market risk.)
(3) Restrictions. (i) The sum of Tier 2 capital (both allocated and
excess) and Tier 3 capital (allocated in paragraph (b)(2) of this
section) may not exceed 100 percent of Tier 1 capital (both allocated
and excess). \9\
---------------------------------------------------------------------------
\9\ Excess Tier 1 capital means Tier 1 capital that has not been
allocated in paragraphs (b)(1) and (b)(2) of this section. Excess Tier 2
capital means Tier 2 capital that has not been allocated in paragraph
(b)(1) and (b)(2) of this section, subject to the restrictions in
paragraph (b)(3) of this section.
---------------------------------------------------------------------------
(ii) Term subordinated debt (and intermediate-term preferred stock
and related surplus) included in Tier 2 capital (both allocated and
excess) may not exceed 50 percent of Tier 1 capital (both allocated and
excess).
(4) Numerator calculation. Add Tier 1 capital (both allocated and
excess), Tier 2 capital (both allocated and excess), and Tier 3 capital
(allocated under paragraph (b)(2) of this section). The resulting sum is
the organization's risk-based capital ratio numerator.
Section 4. Internal Models
(a) General. For risk-based capital purposes, a bank holding company
subject to this appendix must use its internal model to measure its
daily VAR, in accordance with the requirements of this section. \10\ The
Federal Reserve may permit an organization to use alternative techniques
to measure the market risk of de minimis exposures so long as the
techniques adequately measure associated market risk.
---------------------------------------------------------------------------
\10\ An organization's internal model may use any generally accepted
measurement techniques, such as variance-covariance models, historical
simulations, or Monte Carlo simulations. However, the level of
sophistication and accuracy of an organization's internal model must be
commensurate with the nature and size of its covered positions. An
organization that modifies its existing modeling procedures to comply
with the requirements of this appendix for risk-based capital purposes
should, nonetheless, continue to use the internal model it considers
most appropriate in evaluating risks for other purposes.
---------------------------------------------------------------------------
(b) Qualitative requirements. A bank holding company subject to this
appendix must have a risk management system that meets the following
minimum qualitative requirements:
(1) The organization must have a risk control unit that reports
directly to senior management and is independent from business trading
units.
(2) The organization's internal risk measurement model must be
integrated into the daily management process.
(3) The organization's policies and procedures must identify, and
the organization must conduct, appropriate stress tests and backtests.
\11\ The organization's policies and procedures must identify the
procedures to follow in response to the results of such tests.
---------------------------------------------------------------------------
\11\ Stress tests provide information about the impact of adverse
market events on a bank's covered positions. Backtests provide
information about the accuracy of an internal model by comparing an
organization's daily VAR measures to its corresponding daily trading
profits and losses.
---------------------------------------------------------------------------
(4) The organization must conduct independent reviews of its risk
measurement and risk management systems at least annually.
(c) Market risk factors. The organization's internal model must use
risk factors sufficient to measure the market risk inherent in all
covered positions. The risk factors must address interest rate risk,
\12\ equity price
[[Page 256]]
risk, foreign exchange rate risk, and commodity price risk.
---------------------------------------------------------------------------
\12\ For material exposures in the major currencies and markets,
modeling techniques must capture spread risk and must incorporate enough
segments of the yield curve--at least six--to capture differences in
volatility and less than perfect correlation of rates along the yield
curve.
---------------------------------------------------------------------------
(d) Quantitative requirements. For regulatory capital purposes, VAR
measures must meet the following quantitative requirements:
(1) The VAR measures must be calculated on a daily basis using a 99
percent, one-tailed confidence level with a price shock equivalent to a
ten-business day movement in rates and prices. In order to calculate VAR
measures based on a ten-day price shock, the organization may either
calculate ten-day figures directly or convert VAR figures based on
holding periods other than ten days to the equivalent of a ten-day
holding period (for instance, by multiplying a one-day VAR measure by
the square root of ten).
(2) The VAR measures must be based on an historical observation
period (or effective observation period for an organization using a
weighting scheme or other similar method) of at least one year. The
organization must update data sets at least once every three months or
more frequently as market conditions warrant.
(3) The VAR measures must include the risks arising from the non-
linear price characteristics of options positions and the sensitivity of
the market value of the positions to changes in the volatility of the
underlying rates or prices. An organization with a large or complex
options portfolio must measure the volatility of options positions by
different maturities.
(4) The VAR measures may incorporate empirical correlations within
and across risk categories, provided that the organization's process for
measuring correlations is sound. In the event that the VAR measures do
not incorporate empirical correlations across risk categories, then the
organization must add the separate VAR measures for the four major risk
categories to determine its aggregate VAR measure.
(e) Backtesting. (1) Beginning one year after a bank holding company
starts to comply with this appendix, it must conduct backtesting by
comparing each of its most recent 250 business days' actual net trading
profit or loss \13\ with the corresponding daily VAR measures generated
for internal risk measurement purposes and calibrated to a one-day
holding period and a 99th percentile, one-tailed confidence level.
---------------------------------------------------------------------------
\13\ Actual net trading profits and losses typically include such
things as realized and unrealized gains and losses on portfolio
positions as well as fee income and commissions associated with trading
activities.
---------------------------------------------------------------------------
(2) Once each quarter, the organization must identify the number of
exceptions, that is, the number of business days for which the magnitude
of the actual daily net trading loss, if any, exceeds the corresponding
daily VAR measure.
(3) A bank holding company must use the multiplication factor
indicated in Table 1 of this appendix in determining its capital charge
for market risk under section 3(a)(2)(i)(B) of this appendix until it
obtains the next quarter's backtesting results, unless the Federal
Reserve determines that a different adjustment or other action is
appropriate.
Table 1--Multiplication Factor Based on Results of Backtesting
------------------------------------------------------------------------
Multiplication
Number of exceptions factor
------------------------------------------------------------------------
4 or fewer.............................................. 3.00
5....................................................... 3.40
6....................................................... 3.50
7....................................................... 3.65
8....................................................... 3.75
9....................................................... 3.85
10 or more.............................................. 4.00
------------------------------------------------------------------------
Section 5. Specific Risk
(a) Modeled specific risk. A bank holding company may use its
internal model to measure specific risk. If the organization has
demonstrated to the Federal Reserve that its internal model measures the
specific risk, including event and default risk as well as idiosyncratic
variation, of covered debt and equity positions and includes the
specific risk measures in the VAR-based capital charge in section
3(a)(2)(i) of this appendix, then the organization has no specific risk
add-on for purposes of section 3(a)(2)(ii) of this appendix. The model
should explain the historical price variation in the trading portfolio
and capture concentration, both magnitude and changes in composition.
The model should also be robust to an adverse environment and have been
validated through backtesting which assesses whether specific risk is
being accurately captured.
(b) Partially modeled specific risk. (1) A bank holding company that
incorporates specific risk in its internal model but fails to
demonstrate to the Federal Reserve that its internal model adequately
measures all aspects of specific risk for covered debt and equity
positions, including event and default risk, as provided by section 5(a)
of this appendix, must calculate its specific risk add-on in accordance
with one of the following methods:
(i) If the model is susceptible to valid separation of the VAR
measure into a specific risk portion and a general market risk portion,
then the specific risk add-on is equal to the previous day's specific
risk portion.
(ii) If the model does not separate the VAR measure into a specific
risk portion and a
[[Page 257]]
general market risk portion, then the specific risk add-on is the sum of
the previous day's VAR measures for subportfolios of covered debt and
equity positions that contain specific risk.
(2) If a bank holding company models the specific risk of covered
debt positions but not covered equity positions (or vice versa), then
the bank holding company may determine its specific risk charge for the
included positions under section 5(a) or 5(b)(1) of this appendix, as
appropriate. The specific risk charge for the positions not included
equals the standard specific risk capital charge under paragraph (c) of
this section.
(c) Specific risk not modeled. If a bank holding company does not
model specific risk in accordance with section 5(a) or 5(b) of this
appendix, then the organization's specific risk capital charge shall
equal the standard specific risk capital charge, calculated as follows:
(1) Covered debt positions. (i) For purposes of this section 5,
covered debt positions means fixed-rate or floating-rate debt
instruments located in the trading account or instruments located in the
trading account with values that react primarily to changes in interest
rates, including certain non- convertible preferred stock, convertible
bonds, and instruments subject to repurchase and lending agreements.
Also included are derivatives (including written and purchased options)
for which the underlying instrument is a covered debt instrument that is
subject to a non-zero specific risk capital charge.
(A) For covered debt positions that are derivatives, an organization
must risk-weight (as described in paragraph (c)(1)(iii) of this section)
the market value of the effective notional amount of the underlying debt
instrument or index portfolio. Swaps must be included as the notional
position in the underlying debt instrument or index portfolio, with a
receiving side treated as a long position and a paying side treated as a
short position; and
(B) For covered debt positions that are options, whether long or
short, an organization must risk-weight (as described in paragraph
(c)(1)(iii) of this section) the market value of the effective notional
amount of the underlying debt instrument or index multiplied by the
option's delta.
(ii) An organization may net long and short covered debt positions
(including derivatives) in identical debt issues or indices.
(iii) An organization must multiply the absolute value of the
current market value of each net long or short covered debt position by
the appropriate specific risk weighting factor indicated in Table 2 of
this appendix. The specific risk capital charge component for covered
debt positions is the sum of the weighted values.
Table 2--Specific Risk Weighting Factors for Covered Debt Positions
------------------------------------------------------------------------
Weighting
Remaining maturity factor
Category (contractual) (in
percent)
------------------------------------------------------------------------
Government.......................... N/A.................... 0.00
Qualifying.......................... 6 months or less....... 0.25
Over 6 months to 24 1.00
months.
Over 24 months......... 1.60
Other............................... N/A.................... 8.00
------------------------------------------------------------------------
(A) The government category includes all debt instruments of central
governments of OECD-based countries \14\ including bonds, Treasury
bills, and other short-term instruments, as well as local currency
instruments of non-OECD central governments to the extent the
organization has liabilities booked in that currency.
---------------------------------------------------------------------------
\14\ Organization for Economic Cooperation and Development (OECD)-
based countries is defined in appendix A of this part.
---------------------------------------------------------------------------
(B) The qualifying category includes debt instruments of U.S.
government-sponsored agencies, general obligation debt instruments
issued by states and other political subdivisions of OECD-based
countries, multilateral development banks, and debt instruments issued
by U.S. depository institutions or OECD banks that do not qualify as
capital of the issuing institution. \15\ This category also includes
other debt instruments, including corporate debt and revenue instruments
issued by states and other political subdivisions of OECD countries,
that are:
---------------------------------------------------------------------------
\15\ U.S. government-sponsored agencies, multilateral development
banks, and OECD banks are defined in appendix A of this part.
---------------------------------------------------------------------------
(1) Rated investment-grade by at least two nationally recognized
credit rating services;
(2) Rated investment grade by one nationally recognized credit
rating agency and not rated less than investment grade by any other
credit rating agency; or
(3) Unrated, but deemed to be of comparable investment quality by
the reporting organization and the issuer has instruments listed on a
recognized stock exchange, subject to review by the Federal Reserve.
(C) The other category includes debt instruments that are not
included in the government or qualifying categories.
(2) Covered equity positions. (i) For purposes of this section 5,
covered equity positions means equity instruments located in the trading
account and instruments located in the trading account with values that
react primarily to changes in equity prices, including voting or non-
voting common stock, certain convertible bonds, and commitments to buy
or sell equity instruments. Also included are derivatives (including
written or purchased options) for which the underlying is a covered
equity position.
[[Page 258]]
(A) For covered equity positions that are derivatives, an
organization must risk weight (as described in paragraph (c)(2)(iii) of
this section) the market value of the effective notional amount of the
underlying equity instrument or equity portfolio. Swaps must be included
as the notional position in the underlying equity instrument or index
portfolio, with a receiving side treated as a long position and a paying
side treated as a short position; and
(B) For covered equity positions that are options, whether long or
short, an organization must risk weight (as described in paragraph
(c)(2)(iii) of this section) the market value of the effective notional
amount of the underlying equity instrument or index multiplied by the
option's delta.
(ii) An organization may net long and short covered equity positions
(including derivatives) in identical equity issues or equity indices in
the same market. \16\
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\16\ An organization may also net positions in depository receipts
against an opposite position in the underlying equity or identical
equity in different markets, provided that the organization includes the
costs of conversion.
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(iii)(A) An organization must multiply the absolute value of the
current market value of each net long or short covered equity position
by a risk weighting factor of 8.0 percent, or by 4.0 percent if the
equity is held in a portfolio that is both liquid and well-diversified.
\17\ For covered equity positions that are index contracts comprising a
well-diversified portfolio of equity instruments, the net long or short
position is to be multiplied by a risk weighting factor of 2.0 percent.
---------------------------------------------------------------------------
\17\ A portfolio is liquid and well-diversified if: (1) it is
characterized by a limited sensitivity to price changes of any single
equity issue or closely related group of equity issues held in the
portfolio; (2) the volatility of the portfolio's value is not dominated
by the volatility of any individual equity issue or by equity issues
from any single industry or economic sector; (3) it contains a large
number of individual equity positions, with no single position
representing a substantial portion of the portfolio's total market
value; and (4) it consists mainly of issues traded on organized
exchanges or in well-established over-the-counter markets.
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(B) For covered equity positions from the following futures-related
arbitrage strategies, an organization may apply a 2.0 percent risk
weighting factor to one side (long or short) of each equity position
with the opposite side exempt from charge, subject to review by the
Federal Reserve:
(1) Long and short positions in exactly the same index at different
dates or in different market centers; or
(2) Long and short positions in index contracts at the same date in
different but similar indices.
(C) For futures contracts on broadly-based indices that are matched
by offsetting positions in a basket of stocks comprising the index, an
organization may apply a 2.0 percent risk weighting factor to the
futures and stock basket positions (long and short), provided that such
trades are deliberately entered into and separately controlled, and that
the basket of stocks comprises at least 90 percent of the capitalization
of the index.
(iv) The specific risk capital charge component for covered equity
positions is the sum of the weighted values.
[61 FR 47373, Sept. 6, 1996, as amended at 62 FR 68068, Dec. 30, 1997;
64 FR 19038, Apr. 19, 1999; 65 FR 75859, Dec. 5, 2000; 69 FR 44921, July
28, 2004; 71 FR 8937, Feb. 22, 2006]
Appendix F to Part 225--Interagency Guidelines Establishing Information
Security Standards
Table of Contents
I. Introduction
A. Scope
B. Preservation of Existing Authority
C. Definitions
II. Standards for Safeguarding Customer Information
A. Information Security Program
B. Objectives
III. Development and Implementation of Customer Information Security
Program
A. Involve the Board of Directors
B. Assess Risk
C. Manage and Control Risk
D. Oversee Service Provider Arrangements
E. Adjust the Program
F. Report to the Board
G. Implement the Standards
I. Introduction
These Interagency Guidelines Establishing Information Security
Standards (Guidelines) set forth standards pursuant to sections 501 and
505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805). These
Guidelines address standards for developing and implementing
administrative, technical, and physical safeguards to protect the
security, confidentiality, and integrity of customer information.
A. Scope. The Guidelines apply to customer information maintained by
or on behalf of bank holding companies and their nonbank subsidiaries or
affiliates (except brokers, dealers, persons providing insurance,
investment companies, and investment advisors), for which the Board has
supervisory authority.
[[Page 259]]
B. Preservation of Existing Authority. These Guidelines do not in
any way limit the authority of the Board to address unsafe or unsound
practices, violations of law, unsafe or unsound conditions, or other
practices. The Board may take action under these Guidelines
independently of, in conjunction with, or in addition to, any other
enforcement action available to the Board.
C. Definitions. 1. Except as modified in the Guidelines, or unless
the context otherwise requires, the terms used in these Guidelines have
the same meanings as set forth in sections 3 and 39 of the Federal
Deposit Insurance Act (12 U.S.C. 1813 and 1831p-1).
2. For purposes of the Guidelines, the following definitions apply:
a. Board of directors, in the case of a branch or agency of a
foreign bank, means the managing official in charge of the branch or
agency.
b. Customer means any customer of the bank holding company as
defined in Sec. 216.3(h) of this chapter.
c. Customer information means any record containing nonpublic
personal information, as defined in Sec. 216.3(n) of this chapter,
about a customer, whether in paper, electronic, or other form, that is
maintained by or on behalf of the bank holding company.
d. Customer information systems means any methods used to access,
collect, store, use, transmit, protect, or dispose of customer
information.
e. Service provider means any person or entity that maintains,
processes, or otherwise is permitted access to customer information
through its provision of services directly to the bank holding company.
f. Subsidiary means any company controlled by a bank holding
company, except a broker, dealer, person providing insurance, investment
company, investment advisor, insured depository institution, or
subsidiary of an insured depository institution.
II. Standards for Safeguarding Customer Information
A. Information Security Program. Each bank holding company shall
implement a comprehensive written information security program that
includes administrative, technical, and physical safeguards appropriate
to the size and complexity of the bank holding company and the nature
and scope of its activities. While all parts of the bank holding company
are not required to implement a uniform set of policies, all elements of
the information security program must be coordinated. A bank holding
company also shall ensure that each of its subsidiaries is subject to a
comprehensive information security program. The bank holding company may
fulfill this requirement either by including a subsidiary within the
scope of the bank holding company's comprehensive information security
program or by causing the subsidiary to implement a separate
comprehensive information security program in accordance with the
standards and procedures in sections II and III of this appendix that
apply to bank holding companies.
B. Objectives. A bank holding company's information security program
shall be designed to:
1. Ensure the security and confidentiality of customer information;
2. Protect against any anticipated threats or hazards to the
security or integrity of such information; and
3. Protect against unauthorized access to or use of such information
that could result in substantial harm or inconvenience to any customer.
III. Development and Implementation of Information Security Program
A. Involve the Board of Directors. The board of directors or an
appropriate committee of the board of each bank holding company shall:
1. Approve the bank holding company's written information security
program; and
2. Oversee the development, implementation, and maintenance of the
bank holding company's information security program, including assigning
specific responsibility for its implementation and reviewing reports
from management.
B. Assess Risk. Each bank holding company shall:
1. Identify reasonably foreseeable internal and external threats
that could result in unauthorized disclosure, misuse, alteration, or
destruction of customer information or customer information systems.
2. Assess the likelihood and potential damage of these threats,
taking into consideration the sensitivity of customer information.
3. Assess the sufficiency of policies, procedures, customer
information systems, and other arrangements in place to control risks.
C. Manage and Control Risk. Each bank holding company shall:
1. Design its information security program to control the identified
risks, commensurate with the sensitivity of the information as well as
the complexity and scope of the bank holding company's activities. Each
bank holding company must consider whether the following security
measures are appropriate for the bank holding company and, if so, adopt
those measures the bank holding company concludes are appropriate:
a. Access controls on customer information systems, including
controls to authenticate and permit access only to authorized
individuals and controls to prevent employees from providing customer
information to unauthorized individuals who may seek to obtain this
information through fraudulent means.
[[Page 260]]
b. Access restrictions at physical locations containing customer
information, such as buildings, computer facilities, and records storage
facilities to permit access only to authorized individuals;
c. Encryption of electronic customer information, including while in
transit or in storage on networks or systems to which unauthorized
individuals may have access;
d. Procedures designed to ensure that customer information system
modifications are consistent with the bank holding company's information
security program;
e. Dual control procedures, segregation of duties, and employee
background checks for employees with responsibilities for or access to
customer information;
f. Monitoring systems and procedures to detect actual and attempted
attacks on or intrusions into customer information systems;
g. Response programs that specify actions to be taken when the bank
holding company suspects or detects that unauthorized individuals have
gained access to customer information systems, including appropriate
reports to regulatory and law enforcement agencies; and
h. Measures to protect against destruction, loss, or damage of
customer information due to potential environmental hazards, such as
fire and water damage or technological failures.
2. Train staff to implement the bank holding company's information
security program.
3. Regularly test the key controls, systems and procedures of the
information security program. The frequency and nature of such tests
should be determined by the bank holding company's risk assessment.
Tests should be conducted or reviewed by independent third parties or
staff independent of those that develop or maintain the security
programs.
D. Oversee Service Provider Arrangements. Each bank holding company
shall:
1. Exercise appropriate due diligence in selecting its service
providers;
2. Require its service providers by contract to implement
appropriate measures designed to meet the objectives of these
Guidelines; and
3. Where indicated by the bank holding company's risk assessment,
monitor its service providers to confirm that they have satisfied their
obligations as required by paragraph D.2. As part of this monitoring, a
bank holding company should review audits, summaries of test results, or
other equivalent evaluations of its service providers.
E. Adjust the Program. Each bank holding company shall monitor,
evaluate, and adjust, as appropriate, the information security program
in light of any relevant changes in technology, the sensitivity of its
customer information, internal or external threats to information, and
the bank holding company's own changing business arrangements, such as
mergers and acquisitions, alliances and joint ventures, outsourcing
arrangements, and changes to customer information systems.
F. Report to the Board. Each bank holding company shall report to
its board or an appropriate committee of the board at least annually.
This report should describe the overall status of the information
security program and the bank holding company's compliance with these
Guidelines. The reports should discuss material matters related to its
program, addressing issues such as: risk assessment; risk management and
control decisions; service provider arrangements; results of testing;
security breaches or violations and management's responses; and
recommendations for changes in the information security program.
G. Implement the Standards.
1. Effective date. Each bank holding company must implement an
information security program pursuant to these Guidelines by July 1,
2001.
2. Two-year grandfathering of agreements with service providers.
Until July 1, 2003, a contract that a bank holding company has entered
into with a service provider to perform services for it or functions on
its behalf satisfies the provisions of section III.D., even if the
contract does not include a requirement that the servicer maintain the
security and confidentiality of customer information, as long as the
bank holding company entered into the contract on or before March 5,
2001.
Supplement A to Appendix F to Part 225--Interagency Guidance on Response
Programs for Unauthorized Access to Customer Information and Customer
Notice
I. Background
This Guidance \1\ interprets section 501(b) of the Gramm-Leach-
Bliley Act (``GLBA'') and the Interagency Guidelines Establishing
Information Security Standards (the ``Security Guidelines'')\2\ and
describes response programs, including customer notification procedures,
that a financial institution should
[[Page 261]]
develop and implement to address unauthorized access to or use of
customer information that could result in substantial harm or
inconvenience to a customer. The scope of, and definitions of terms used
in, this Guidance are identical to those of the Security Guidelines. For
example, the term ``customer information'' is the same term used in the
Security Guidelines, and means any record containing nonpublic personal
information about a customer, whether in paper, electronic, or other
form, maintained by or on behalf of the institution.
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\1\ This Guidance is being jointly issued by the Board of Governors
of the Federal Reserve System (Board), the Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller of the Currency (OCC),
and the Office of Thrift Supervision (OTS).
\2\ 12 CFR part 30, app. B (OCC); 12 CFR part 208, app. D-2 and part
225, app. F (Board); 12 CFR part 364, app. B (FDIC); and 12 CFR part
570, app. B (OTS). The ``Interagency Guidelines Establishing Information
Security Standards'' were formerly known as ``The Interagency Guidelines
Establishing Information Security Standards.''
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A. Interagency Security Guidelines
Section 501(b) of the GLBA required the Agencies to establish
appropriate standards for financial institutions subject to their
jurisdiction that include administrative, technical, and physical
safeguards, to protect the security and confidentiality of customer
information. Accordingly, the Agencies issued Security Guidelines
requiring every financial institution to have an information security
program designed to:
1. Ensure the security and confidentiality of customer information;
2. Protect against any anticipated threats or hazards to the
security or integrity of such information; and
3. Protect against unauthorized access to or use of such information
that could result in substantial harm or inconvenience to any customer.
B. Risk Assessment and Controls
1. The Security Guidelines direct every financial institution to
assess the following risks, among others, when developing its
information security program:
a. Reasonably foreseeable internal and external threats that could
result in unauthorized disclosure, misuse, alteration, or destruction of
customer information or customer information systems;
b. The likelihood and potential damage of threats, taking into
consideration the sensitivity of customer information; and
c. The sufficiency of policies, procedures, customer information
systems, and other arrangements in place to control risks.\3\
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\3\ See Security Guidelines, III.B.
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2. Following the assessment of these risks, the Security Guidelines
require a financial institution to design a program to address the
identified risks. The particular security measures an institution should
adopt will depend upon the risks presented by the complexity and scope
of its business. At a minimum, the financial institution is required to
consider the specific security measures enumerated in the Security
Guidelines,\4\ and adopt those that are appropriate for the institution,
including:
---------------------------------------------------------------------------
\4\ See Security Guidelines, III.C.
---------------------------------------------------------------------------
a. Access controls on customer information systems, including
controls to authenticate and permit access only to authorized
individuals and controls to prevent employees from providing customer
information to unauthorized individuals who may seek to obtain this
information through fraudulent means;
b. Background checks for employees with responsibilities for access
to customer information; and
c. Response programs that specify actions to be taken when the
financial institution suspects or detects that unauthorized individuals
have gained access to customer information systems, including
appropriate reports to regulatory and law enforcement agencies.\5\
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\5\ See Security Guidelines, III.C.
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C. Service Providers
The Security Guidelines direct every financial institution to
require its service providers by contract to implement appropriate
measures designed to protect against unauthorized access to or use of
customer information that could result in substantial harm or
inconvenience to any customer.\6\
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\6\ See Security Guidelines, II.B. and III.D. Further, the Agencies
note that, in addition to contractual obligations to a financial
institution, a service provider may be required to implement its own
comprehensive information security program in accordance with the
Safeguards Rule promulgated by the Federal Trade Commission (``FTC''),
16 CFR part 314.
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II. Response Program
Millions of Americans, throughout the country, have been victims of
identity theft.\7\ Identity thieves misuse personal information they
obtain from a number of sources, including financial institutions, to
perpetrate identity theft. Therefore, financial institutions should take
preventative measures to safeguard customer information against attempts
to gain unauthorized access to the information. For example, financial
institutions should place access controls on customer information
systems and conduct background checks for employees who are authorized
to access customer information.\8\
[[Page 262]]
However, every financial institution should also develop and implement a
risk-based response program to address incidents of unauthorized access
to customer information in customer information systems \9\ that occur
nonetheless. A response program should be a key part of an institution's
information security program.\10\ The program should be appropriate to
the size and complexity of the institution and the nature and scope of
its activities.
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\7\ The FTC estimates that nearly 10 million Americans discovered
they were victims of some form of identity theft in 2002. See The
Federal Trade Commission, Identity Theft Survey Report, (September
2003), available at http://www.ftc.gov/os/2003/09/synovatereport.pdf.
\8\ Institutions should also conduct background checks of employees
to ensure that the institution does not violate 12 U.S.C. 1829, which
prohibits an institution from hiring an individual convicted of certain
criminal offenses or who is subject to a prohibition order under 12
U.S.C. 1818(e)(6).
\9\ Under the Guidelines, an institution's customer information
systems consist of all of the methods used to access, collect, store,
use, transmit, protect, or dispose of customer information, including
the systems maintained by its service providers. See Security
Guidelines, I.C.2.d (I.C.2.c for OTS).
\10\ See FFIEC Information Technology Examination Handbook,
Information Security Booklet, Dec. 2002 available at http://
www.ffiec.gov/ffiecinfobase/html--pages/infosec--book--frame.htm.
Federal Reserve SR 97-32, Sound Practice Guidance for Information
Security for Networks, Dec. 4, 1997; OCC Bulletin 2000-14,
``Infrastructure Threats--Intrusion Risks'' (May 15, 2000), for
additional guidance on preventing, detecting, and responding to
intrusions into financial institution computer systems.
---------------------------------------------------------------------------
In addition, each institution should be able to address incidents of
unauthorized access to customer information in customer information
systems maintained by its domestic and foreign service providers.
Therefore, consistent with the obligations in the Guidelines that relate
to these arrangements, and with existing guidance on this topic issued
by the Agencies,\11\ an institution's contract with its service provider
should require the service provider to take appropriate actions to
address incidents of unauthorized access to the financial institution's
customer information, including notification to the institution as soon
as possible of any such incident, to enable the institution to
expeditiously implement its response program.
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\11\ See Federal Reserve SR Ltr. 00-04, Outsourcing of Information
and Transaction Processing, Feb. 9, 2000; OCC Bulletin 2001-47, ``Third-
Party Relationships Risk Management Principles,'' Nov. 1, 2001; FDIC FIL
68-99, Risk Assessment Tools and Practices for Information System
Security, July 7, 1999; OTS Thrift Bulletin 82a, Third Party
Arrangements, Sept. 1, 2004.
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A. Components of a Response Program
1. At a minimum, an institution's response program should contain
procedures for the following:
a. Assessing the nature and scope of an incident, and identifying
what customer information systems and types of customer information have
been accessed or misused;
b. Notifying its primary Federal regulator as soon as possible when
the institution becomes aware of an incident involving unauthorized
access to or use of sensitive customer information, as defined below;
c. Consistent with the Agencies' Suspicious Activity Report
(``SAR'') regulations,\12\ notifying appropriate law enforcement
authorities, in addition to filing a timely SAR in situations involving
Federal criminal violations requiring immediate attention, such as when
a reportable violation is ongoing;
---------------------------------------------------------------------------
\12\ An institution's obligation to file a SAR is set out in the
Agencies' SAR regulations and Agency guidance. See 12 CFR 21.11
(national banks, Federal branches and agencies); 12 CFR 208.62 (State
member banks); 12 CFR 211.5(k) (Edge and agreement corporations); 12 CFR
211.24(f) (uninsured State branches and agencies of foreign banks); 12
CFR 225.4(f) (bank holding companies and their nonbank subsidiaries); 12
CFR part 353 (State non-member banks); and 12 CFR 563.180 (savings
associations). National banks must file SARs in connection with computer
intrusions and other computer crimes. See OCC Bulletin 2000-14,
``Infrastructure Threats--Intrusion Risks'' (May 15, 2000); Advisory
Letter 97-9, ``Reporting Computer Related Crimes'' (November 19, 1997)
(general guidance still applicable though instructions for new SAR form
published in 65 FR 1229, 1230 (January 7, 2000)). See also Federal
Reserve SR 01-11, Identity Theft and Pretext Calling, Apr. 26, 2001; SR
97-28, Guidance Concerning Reporting of Computer Related Crimes by
Financial Institutions, Nov. 6, 1997; FDIC FIL 48-2000, Suspicious
Activity Reports, July 14, 2000; FIL 47-97, Preparation of Suspicious
Activity Reports, May 6, 1997; OTS CEO Memorandum 139, Identity Theft
and Pretext Calling, May 4, 2001; CEO Memorandum 126, New Suspicious
Activity Report Form, July 5, 2000; http://www.ots.treas.gov/BSA (for
the latest SAR form and filing instructions required by OTS as of July
1, 2003).
---------------------------------------------------------------------------
d. Taking appropriate steps to contain and control the incident to
prevent further unauthorized access to or use of customer information,
for example, by monitoring, freezing, or closing affected accounts,
while preserving records and other evidence;\13\ and
---------------------------------------------------------------------------
\13\ See FFIEC Information Technology Examination Handbook,
Information Security Booklet, Dec. 2002, pp. 68-74.
---------------------------------------------------------------------------
e. Notifying customers when warranted.
2. Where an incident of unauthorized access to customer information
involves customer information systems maintained by an institution's
service providers, it is the
[[Page 263]]
responsibility of the financial institution to notify the institution's
customers and regulator. However, an institution may authorize or
contract with its service provider to notify the institution's customers
or regulator on its behalf.
III. Customer Notice
Financial institutions have an affirmative duty to protect their
customers' information against unauthorized access or use. Notifying
customers of a security incident involving the unauthorized access or
use of the customer's information in accordance with the standard set
forth below is a key part of that duty. Timely notification of customers
is important to manage an institution's reputation risk. Effective
notice also may reduce an institution's legal risk, assist in
maintaining good customer relations, and enable the institution's
customers to take steps to protect themselves against the consequences
of identity theft. When customer notification is warranted, an
institution may not forgo notifying its customers of an incident because
the institution believes that it may be potentially embarrassed or
inconvenienced by doing so.
A. Standard for Providing Notice
When a financial institution becomes aware of an incident of
unauthorized access to sensitive customer information, the institution
should conduct a reasonable investigation to promptly determine the
likelihood that the information has been or will be misused. If the
institution determines that misuse of its information about a customer
has occurred or is reasonably possible, it should notify the affected
customer as soon as possible. Customer notice may be delayed if an
appropriate law enforcement agency determines that notification will
interfere with a criminal investigation and provides the institution
with a written request for the delay. However, the institution should
notify its customers as soon as notification will no longer interfere
with the investigation.
1. Sensitive Customer Information
Under the Guidelines, an institution must protect against
unauthorized access to or use of customer information that could result
in substantial harm or inconvenience to any customer. Substantial harm
or inconvenience is most likely to result from improper access to
sensitive customer information because this type of information is most
likely to be misused, as in the commission of identity theft. For
purposes of this Guidance, sensitive customer information means a
customer's name, address, or telephone number, in conjunction with the
customer's social security number, driver's license number, account
number, credit or debit card number, or a personal identification number
or password that would permit access to the customer's account.
Sensitive customer information also includes any combination of
components of customer information that would allow someone to log onto
or access the customer's account, such as user name and password or
password and account number.
2. Affected Customers
If a financial institution, based upon its investigation, can
determine from its logs or other data precisely which customers'
information has been improperly accessed, it may limit notification to
those customers with regard to whom the institution determines that
misuse of their information has occurred or is reasonably possible.
However, there may be situations where the institution determines that a
group of files has been accessed improperly, but is unable to identify
which specific customers' information has been accessed. If the
circumstances of the unauthorized access lead the institution to
determine that misuse of the information is reasonably possible, it
should notify all customers in the group.
B. Content of Customer Notice
1. Customer notice should be given in a clear and conspicuous
manner. The notice should describe the incident in general terms and the
type of customer information that was the subject of unauthorized access
or use. It also should generally describe what the institution has done
to protect the customers' information from further unauthorized access.
In addition, it should include a telephone number that customers can
call for further information and assistance.\14\ The notice also should
remind customers of the need to remain vigilant over the next twelve to
twenty-four months, and to promptly report incidents of suspected
identity theft to the institution. The notice should include the
following additional items, when appropriate:
---------------------------------------------------------------------------
\14\ The institution should, therefore, ensure that it has
reasonable policies and procedures in place, including trained
personnel, to respond appropriately to customer inquiries and requests
for assistance.
---------------------------------------------------------------------------
a. A recommendation that the customer review account statements and
immediately report any suspicious activity to the institution;
b. A description of fraud alerts and an explanation of how the
customer may place a fraud alert in the customer's consumer reports to
put the customer's creditors on notice that the customer may be a victim
of fraud;
c. A recommendation that the customer periodically obtain credit
reports from each nationwide credit reporting agency and have
[[Page 264]]
information relating to fraudulent transactions deleted;
d. An explanation of how the customer may obtain a credit report
free of charge; and
e. Information about the availability of the FTC's online guidance
regarding steps a consumer can take to protect against identity theft.
The notice should encourage the customer to report any incidents of
identity theft to the FTC, and should provide the FTC's Web site address
and toll-free telephone number that customers may use to obtain the
identity theft guidance and report suspected incidents of identity
theft.\15\
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\15\ Currently, the FTC Web site for the ID Theft brochure and the
FTC Hotline phone number are http://www.consumer.gov/idtheft and 1-877-
IDTHEFT. The institution may also refer customers to any materials
developed pursuant to section 151(b) of the FACT Act (educational
materials developed by the FTC to teach the public how to prevent
identity theft).
---------------------------------------------------------------------------
2. The Agencies encourage financial institutions to notify the
nationwide consumer reporting agencies prior to sending notices to a
large number of customers that include contact information for the
reporting agencies.
C. Delivery of Customer Notice
Customer notice should be delivered in any manner designed to ensure
that a customer can reasonably be expected to receive it. For example,
the institution may choose to contact all customers affected by
telephone or by mail, or by electronic mail for those customers for whom
it has a valid e-mail address and who have agreed to receive
communications electronically.
[66 FR 8636, Feb. 1, 2001, as amended at 70 FR 15751, 15753, Mar. 29,
2005; 71 FR 5780, Feb. 3, 2006]
PART 226_TRUTH IN LENDING (REGULATION Z)--Table of Contents
Subpart A_General
Sec.
226.1 Authority, purpose, coverage, organization, enforcement and
liability.
226.2 Definitions and rules of construction.
226.3 Exempt transactions.
226.4 Finance charge.
Subpart B_Open-End Credit
226.5 General disclosure requirements.
226.5a Credit and charge card applications and solicitations.
226.5b Requirements for home equity plans.
226.6 Initial disclosure statement.
226.7 Periodic statement.
226.8 Identification of transactions.
226.9 Subsequent disclosure requirements.
226.10 Prompt crediting of payments.
226.11 Treatment of credit balances.
226.12 Special credit card provisions.
226.13 Billing error resolution.
226.14 Determination of annual percentage rate.
226.15 Right of rescission.
226.16 Advertising.
Subpart C_Closed-End Credit
226.17 General disclosure requirements.
226.18 Content of disclosures.
226.19 Certain residential mortgage and variable-rate transactions.
226.20 Subsequent disclosure requirements.
226.21 Treatment of credit balances.
226.22 Determination of annual percentage rate.
226.23 Right of rescission.
226.24 Advertising.
Subpart D_Miscellaneous
226.25 Record retention.
226.26 Use of annual percentage rate in oral disclosures.
226.27 Language of disclosures.
226.28 Effect on State laws.
226.29 State exemptions.
226.30 Limitation on rates.
Subpart E_Special Rules for Certain Home Mortgage Transactions
226.31 General rules.
226.32 Requirements for certain closed-end home mortgages.
226.33 Requirements for reverse mortgages.
226.34 Prohibited acts or practices in connection with credit secured by
a consumer's dwelling.
226.35 [Reserved]
Subpart F_Electronic Communication
226.36 Requirement for electronic communication.
Appendix A to Part 226--Effect on State Laws
Appendix B to Part 226--State Exemptions
Appendix C to Part 226--Issuance of Staff Interpretations
Appendix D to Part 226--Multiple Advance Construction Loans
Appendix E to Part 226--Rules For Card Issuers That Bill On a
Transaction-By-Transaction Basis
Appendix F to Part 226--Annual Percentage Rate Computations for Certain
Open-End Credit Plans
Appendix G to Part 226--Open-End Model Forms and Clauses
Appendix H to Part 226--Closed-End Model Forms and Clauses
[[Page 265]]
Appendix I to Part 226--Federal Enforcement Agencies
Appendix J to Part 226--Annual Percentage Rate Computations For Closed-
End Credit Transactions
Appendix K to Part 226--Total Annual Loan Cost Rate Computations for
Reverse Mortgage Transactions
Appendix L to Part 226--Assumed Loan Periods for Computations of Total
Annual Loan Cost Rates
Supplement I to Part 226--Official Staff Interpretations
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
Source: Reg. Z, 46 FR 20892, Apr. 7, 1981, unless otherwise noted.
Subpart A_General
Sec. 226.1 Authority, purpose, coverage, organization, enforcement and
liability.
(a) Authority. This regulation, known as Regulation Z, is issued by
the Board of Governors of the Federal Reserve System to implement the
Federal Truth in Lending Act, which is contained in title I of the
Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.).
This regulation also implements title XII, section 1204 of the
Competitive Equality Banking Act of 1987 (Pub. L. 100-86, 101 Stat.
552). Information-collection requirements contained in this regulation
have been approved by the Office of Management and Budget under the
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB number
7100-0199.
(b) Purpose. The purpose of this regulation is to promote the
informed use of consumer credit by requiring disclosures about its terms
and cost. The regulation also gives consumers the right to cancel
certain credit transactions that involve a lien on a consumer's
principal dwelling, regulates certain credit card practices, and
provides a means for fair and timely resolution of credit billing
disputes. The regulation does not govern charges for consumer credit.
The regulation requires a maximum interest rate to be stated in
variable-rate contracts secured by the consumer's dwelling. It also
imposes limitations on home equity plans that are subject to the
requirements of Sec. 226.5b and mortgages that are subject to the
requirements of Sec. 226.32. The regulation prohibits certain acts or
practices in connection with credit secured by a consumer's principal
dwelling.
(c) Coverage. (1) In general, this regulation applies to each
individual or business that offers or extends credit when four
conditions are met: (i) The credit is offered or extended to consumers;
(ii) the offering or extension of credit is done regularly;\1\ (iii) the
credit is subject to a finance charge or is payable by a written
agreement in more than 4 installments; and (iv) the credit is primarily
for personal, family, or household purposes.
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\1\ The meaning of regularly is explained in the definition of
creditor in Sec. 226.2(a).
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(2) If a credit card is involved, however, certain provisions apply
even if the credit is not subject to a finance charge, or is not payable
by a written agreement in more than 4 installments, or if the credit
card is to be used for business purposes.
(3) In addition, certain requirements of Sec. 226.5b apply to
persons who are not creditors but who provide applications for home
equity plans to consumers.
(d) Organization. The regulation is divided into subparts and
appendices as follows:
(1) Subpart A contains general information. It sets forth: (i) The
authority, purpose, coverage, and organization of the regulation; (ii)
the definitions of basic terms; (iii) the transactions that are exempt
from coverage; and (iv) the method of determining the finance charge.
(2) Subpart B contains the rules for open-end credit. It requires
that initial disclosures and periodic statements be provided, as well as
additional disclosures for credit and charge card applications and
solicitations and for home equity plans subject to the requirements of
Sec. Sec. 226.5a and 226.5b, respectively.
(3) Subpart C relates to closed-end credit. It contains rules on
disclosures, treatment of credit balances, annual percentage rate
calculations, rescission requirements, and advertising.
(4) Subpart D contains rules on oral disclosures, Spanish language
disclosure in Puerto Rico, record retention,
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effect on state laws, state exemptions, and rate limitations.
(5) Subpart E contains special rules for mortgage transactions.
Section 226.32 requires certain disclosures and provides limitations for
loans that have rates and fees above specified amounts. Section 226.33
requires disclosures, including the total annual loan cost rate, for
reverse mortgage transactions. Section 226.34 prohibits specific acts
and practices in connection with mortgage transactions.
(6) Several appendices contain information such as the procedures
for determinations about state laws, state exemptions and issuance of
staff interpretations, special rules for certain kinds of credit plans,
a list of enforcement agencies, and the rules for computing annual
percentage rates in closed-end credit transactions and total annual loan
cost rates for reverse mortgage transactions.
(e) Enforcement and liability. Section 108 of the act contains the
administrative enforcement provisions. Sections 112, 113, 130, 131, and
134 contain provisions relating to liability for failure to comply with
the requirements of the act and the regulation. Section 1204(c) of title
XII of the Competitive Equality Banking Act of 1987, Pub. L. 100-86, 101
Stat. 552, incorporates by reference administrative enforcement and
civil liability provisions of sections 108 and 130 of the act.
[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 52 FR 43181, Nov. 9,
1987; 54 FR 13865, Apr. 6, 1989; 54 FR 24686, June 9, 1989; 60 FR 15471,
Mar. 24, 1995; 66 FR 65617, Dec. 20, 2001]
Sec. 226.2 Definitions and rules of construction.
(a) Definitions. For purposes of this regulation, the following
definitions apply:
(1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
(2) Advertisement means a commercial message in any medium that
promotes, directly or indirectly, a credit transaction.
(3) [Reserved] \2\
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\2\ [Reserved]
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(4) Billing cycle or cycle means the interval between the days or
dates of regular periodic statements. These intervals shall be equal and
no longer than a quarter of a year. An interval will be considered equal
if the number of days in the cycle does not vary more than 4 days from
the regular day or date of the periodic statement.
(5) Board means the Board of Governors of the Federal Reserve
System.
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. Sec. 226.15
and 226.23, and for purposes of Sec. 226.31, the term means all
calendar days except Sundays and the legal public holidays specified in
5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther
King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
(7) Card issuer means a person that issues a credit card or that
person's agent with respect to the card.
(8) Cardholder means a natural person to whom a credit card is
issued for consumer credit purposes, or a natural person who has agreed
with the card issuer to pay consumer credit obligations arising from the
issuance of a credit card to another natural person. For purposes of
Sec. 226.12(a) and (b), the term includes any person to whom a credit
card is issued for any purpose, including business, commercial, or
agricultural use, or a person who has agreed with the card issuer to pay
obligations arising from the issuance of such a credit card to another
person.
(9) Cash price means the price at which a creditor, in the ordinary
course of business, offers to sell for cash the property or service that
is the subject of the transaction. At the creditor's option, the term
may include the price of accessories, services related to the sale,
service contracts and taxes and fees for license, title, and
registration. The term does not include any finance charge.
(10) Closed-end credit means consumer credit other than open-end
credit as defined in this section.
(11) Consumer means a cardholder or a natural person to whom
consumer credit is offered or extended. However, for purposes of
rescission under Sec. Sec. 226.15
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and 226.23, the term also includes a natural person in whose principal
dwelling a security interest is or will be retained or acquired, if that
person's ownership interest in the dwelling is or will be subject to the
security interest.
(12) Consumer credit means credit offered or extended to a consumer
primarily for personal, family, or household purposes.
(13) Consummation means the time that a consumer becomes
contractually obligated on a credit transaction.
(14) Credit means the right to defer payment of debt or to incur
debt and defer its payment.
(15) Credit card means any card, plate, coupon book, or other single
credit device that may be used from time to time to obtain credit.
Charge card means a credit card on an account for which no periodic rate
is used to compute a finance charge.
(16) Credit sale means a sale in which the seller is a creditor. The
term includes a bailment or lease (unless terminable without penalty at
any time by the consumer) under which the consumer:
(i) Agrees to pay as compensation for use a sum substantially
equivalent to, or in excess of, the total value of the property and
services involved; and
(ii) Will become (or has the option to become), for no additional
consideration or for nominal consideration, the owner of the property
upon compliance with the agreement.
(17) Creditor means: (i) A person (A) who regularly extends consumer
credit \3\ that is subject to a finance charge or is payable by written
agreement in more than 4 installments (not including a downpayment), and
(B) to whom the obligation is initially payable, either on the face of
the note or contract, or by agreement when there is no note or contract.
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\3\ A person regularly extends consumer credit only if it extended
credit (other than credit subject to the requirements of Sec. 226.32)
more than 25 times (or more than 5 times for transactions secured by a
dwelling) in the preceding calendar year. If a person did not meet these
numerical standards in the preceding calendar year, the numerical
standards shall be applied to the current calendar year. A person
regularly extends consumer credit if, in any 12-month period, the person
originates more than one credit extension that is subject to the
requirements of Sec. 226.32 or one or more such credit extensions
through a mortgage broker.
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(ii) For purposes of Sec. Sec. 226.4(c)(8) (discounts), 226.9(d)
(Finance charge imposed at time of transaction), and 226.12(e) (Prompt
notification of returns and crediting of refunds), a person that honors
a credit card.
(iii) For purposes of subpart B, any card issuer that extends either
open-end credit or credit that is not subject to a finance charge and is
not payable by written agreement in more than 4 installments.
(iv) For purposes of subpart B (except for the credit and charge
card disclosures contained in Sec. Sec. 226.5(a) and 226.9 (e) and (f),
the finance charge disclosures contained in Sec. Sec. 226.6(a) and
226.7 (d) through (g) and the right of rescission set forth in Sec.
226.15) and subpart C, any card issuer that extends closed-end credit
that is subject to a finance charge or is payable by written agreement
in more than 4 installments.
(18) Downpayment means an amount, including the value of any
property used as a trade-in, paid to a seller to reduce the cash price
of goods or services purchased in a credit sale transaction. A deferred
portion of a downpayment may be treated as part of the downpayment if it
is payable not later than the due date of the second otherwise regularly
scheduled payment and is not subject to a finance charge.
(19) Dwelling means a residential structure that contains 1 to 4
units, whether or not that structure is attached to real property. The
term includes an individual condominium unit, cooperative unit, mobile
home, and trailer, if it is used as a residence.
(20) Open-end credit means consumer credit extended by a creditor
under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on
an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer
during the term of the plan (up to any limit set by the creditor) is
generally made available to the extent that any outstanding balance is
repaid.
[[Page 268]]
(21) Periodic rate means a rate of finance charge that is or may be
imposed by a creditor on a balance for a day, week, month, or other
subdivision of a year.
(22) Person means a natural person or an organization, including a
corporation, partnership, proprietorship, association, cooperative,
estate, trust, or government unit.
(23) Prepaid finance charge means any finance charge paid separately
in cash or by check before or at consummation of a transaction, or
withheld from the proceeds of the credit at any time.
(24) Residential mortgage transaction means a transaction in which a
mortgage, deed of trust, purchase money security interest arising under
an installment sales contract, or equivalent consensual security
interest is created or retained in the consumer's principal dwelling to
finance the acquisition or initial construction of that dwelling.
(25) Security interest means an interest in property that secures
performance of a consumer credit obligation and that is recognized by
State or Federal law. It does not include incidental interests such as
interests in proceeds, accessions, additions, fixtures, insurance
proceeds (whether or not the creditor is a loss payee or beneficiary),
premium rebates, or interests in after-acquired property. For purposes
of disclosure under Sec. Sec. 226.6 and 226.18, the term does not
include an interest that arises solely by operation of law. However, for
purposes of the right of rescission under Sec. Sec. 226.15 and 226.23,
the term does include interests that arise solely by operation of law.
(26) State means any state, the District of Columbia, the
Commonwealth of Puerto Rico, and any territory or possession of the
United States.
(b) Rules of construction. For purposes of this regulation, the
following rules of construction apply:
(1) Where appropriate, the singular form of a word includes the
plural form and plural includes singular.
(2) Where the words obligation and transaction are used in this
regulation, they refer to a consumer credit obligation or transaction,
depending upon the context. Where the word credit is used in this
regulation, it means consumer credit unless the context clearly
indicates otherwise.
(3) Unless defined in this regulation, the words used have the
meanings given to them by state law or contract.
(4) Footnotes have the same legal effect as the text of the
regulation.
(5) Where the word ``amount'' is used in this regulation to describe
disclosure requirements, it refers to a numerical amount.
[Reg. Z, 46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981, as
amended at 47 FR 7392, Feb. 19, 1982; 48 FR 14886, Apr. 6, 1983; 54 FR
13865, Apr. 6, 1989; 60 FR 15471, Mar. 24, 1995; 61 FR 49245, Sept. 19,
1996; 69 FR 16773, Mar. 31, 2004]
Sec. 226.3 Exempt transactions.
This regulation does not apply to the following:\4\
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\4\ The provisions in Sec. 226.12 (a) and (b) governing the
issuance of credit cards and the liability for their unauthorized use
apply to all credit cards, even if the credit cards are issued for use
in connection with extensions of credit that otherwise are exempt under
this section.
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(a) Business, commercial, agricultural, or organizational credit.
(1) An extension of credit primarily for a business, commercial or
agricultural purpose.
(2) An extension of credit to other than a natural person, including
credit to government agencies or instrumentalities.
(b) Credit over $25,000 not secured by real property or a dwelling.
An extension of credit not secured by real property, or by personal
property used or expected to be used as the principal dwelling of the
consumer, in which the amount financed exceeds $25,000 or in which there
is an express written commitment to extend credit in excess of $25,000.
(c) Public utility credit. An extension of credit that involves
public utility services provided through pipe, wire, other connected
facilities, or radio or similar transmission (including extensions of
such facilities), if the charges for service, delayed payment, or any
discounts for prompt payment are filed with or regulated by any
government unit. The financing of durable goods or home improvements by
a public utility is not exempt.
[[Page 269]]
(d) Securities or commodities accounts. Transactions in securities
or commodities accounts in which credit is extended by a broker-dealer
registered with the Securities and Exchange Commission or the Commodity
Futures Trading Commission.
(e) Home fuel budget plans. An installment agreement for the
purchase of home fuels in which no finance charge is imposed.
(f) Student loan programs. Loans made, insured, or guaranteed
pursuant to a program authorized by title IV of the Higher Education Act
of 1965 (20 U.S.C. 1070 et seq.).
[46 FR 20892, Apr. 7, 1981, as amended at 48 FR 14886, Apr. 6, 1983; 49
FR 46991, Nov. 30, 1984]